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    IronFX Daily Commentary | Chinese yuan may join IMF’s reserve basket | 30/11/2015

    30.11.2015, 10am

    • Chinese yuan may join IMF’s reserve basket The Executive Board of the International Monetary Fund is broadly expected to include the yuan in its Special Drawing Rights (SDR) basket at a meeting later in the day. The inclusion would represent recognition that the yuan’s status is rising along with China’s place in global markets. Many emerging market economies have strong trade linkages with China and the addition of yuan would mean that their central banks could have an alternative to dollars and euros in their FX reserves. However, even if the IMF gives the go-ahead, the yuan won't be added to the SDR basket until September 2016. The pace of flows related to the yuan’s rise as a reserve currency will be gradual in our view, and much will depend on the weighting the yuan will be assigned. In the preliminary report in July, IMF staff estimated the yuan would have a weight of about 14% to 16%. While there is little uncertainty of the expected approval, the main focus will be the final weight the yuan will get.

    • Today’s highlights: During the European day, the German flash CPI for November is coming out. The forecast is for the CPI rate to have risen to 0.1% mom, from 0.0% mom in October. Even though this is just a moderate improvement, a rise in the inflation rate of Eurozone’s growth engine could indicate a rise in the bloc’s CPI rate to be released on Wednesday. This could support the EUR at least temporarily.

    • From Sweden, we get the GDP data for Q3. Expectations are for the quarterly growth rate to decline, while the annual rate is forecast to rise. Following Friday’s slowdown in retail sales, a mixed GDP report could give additional reasons to the Riksbank to reconsider the magnitude of its current policy approach.

    • In the US, pending home sales for October are due to be released. Expectations are for the figure to rise1.0% mom, a rebound from -2.3% in September. This may add to the recent strong housing data and support the greenback further. The Chicago Purchasing Managers’ index for November is also due out.

    • As for the rest of the week, we have a very eventful schedule ahead of us with several central bank meetings, important economic indicators including the US nonfarm payrolls, and an OPEC meeting. On Tuesday, the RBA meets to decide on its benchmark interest rate. At their last meeting, Bank officials kept the Bank’s key policy rate unchanged as was broadly expected and they noted that the prospects for an improvement in economic conditions had firmed a little over recent months. As a result they remained on hold, though the outlook for inflation may afford scope for further easing of policy, should that be appropriate. However, following the recent comments by the RBA Governor Glenn Stevens that the markets should “chill out” on prospects for another rate cut, we don’t expect the Bank to act at this week’s meeting.

    • On Wednesday, the highlight will be the Bank of Canada rate decision. At their last meeting, Bank officials decided to keep the benchmark rate unchanged as was widely expected, but in the statement accompanying the decision, they warned that lower oil and other commodities prices will weigh more than expected on Canada’s economy. This has led to a modest downward revision to the Bank’s growth forecast for 2016 and 2017. Having that in mind and that oil prices have continued trading lower since then, I would expect the Bank to lower rates in the foreseeable future, if not at this meeting. I expect them to maintain their dovish stance and to repeat that the “the past depreciation of CAD is roughly offsetting disinflationary pressures from economic slack, which has increased this year.” This could add selling pressure to the loonie.

    • As for indicators, Eurozone’s preliminary CPI for November is due to be released. Expectations are for the bloc’s inflation to have accelerated from October. Although this could prove EUR supportive, the market reaction could stay muted as investors will most likely remain focused on the ECB meeting the following day.

    • From the US, we get the ADP employment report for November, as usual two days ahead of the NFP release. The ADP report is expected to show that the private sector gained 189k jobs, more than it did in the previous month, when the print hit 182k. Although this would still be short of the crucial 200k level, Fed officials have stated over the previous weeks that now that the labor market is improving, a below 200k reading could still warrant a rate hike.

    • On Thursday, all eyes will be on the ECB policy meeting in what is going to probably be the most highly anticipated Bank meeting after the US Fed gathering in mid-December. The market is already pricing in a 10bps deposit rate cut, with some participants calling for an even more aggressive 20bps reduction. An increase in the size of the Bank’s monthly purchases, as well as an extension in the duration of the program is thought to be a closed deal. As such, the Bank will have to deliver measures over and above current market expectations to avoid an upward movement in the euro, in our view. In the last few weeks, ECB President Mario Draghi and several Bank officials have already prepared the market for another rate cut and an increase of the current stimulus package. If the ECB only delivers a rate cut with no increase of the size, this could disappoint investors and we could see the common currency strengthening. We should bear in mind however the well know rhetoric of ECB’s Draghi to do whatever it takes to support Eurozone’s economy and by that, he could always surprise the markets and bring EUR/USD closer to parity.

    • Finally on Friday, the main event will be the US employment report for November. The report is expected to show a 200k increase in payrolls, down from the astonishing print of 271k in October. The unemployment rate is expected to remain unchanged at 5%. While the payrolls number is expected to decline significantly, it is still expected to achieve the 200k barrier. It is reasonable to assume that despite the decrease, if the forecast is met, the strong employment data will raise the likelihood for a Fed rate lift-off. Canada’s employment report for October is also coming out.

    • Besides the employment reports, members of the OPEC will meet on Friday to decide on a strategy to protect their market share and to stabilize the oil price. If the members decide to reduce their output, we could see oil prices moving higher.

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