It’s NFP week again, forex fanatics! Time to dig up your favorite trading strategies and put your game face on! But before you obsess over the U.S. non-farm payrolls, you should know that there are TWO other economic themes that might dominate market sentiment this week:
4 major central banks will announce their interest rate decisions
Yep, you read that right. We have FOUR interest rate decisions heading our way next week! A currency’s interest rate is one of the most important factors in determining its perceived value, so interest rate decisions are usually closely watched by forex junkies.
The Reserve Bank of Australia (RBA) will fire the first salvo on Tuesday at 3:30 am GMT. Analysts aren’t expecting the central bank to change its 4.25% cash rate, but they say that a rate cut isn’t off the table either.
The Reserve Bank of New Zealand (RBNZ) will follow RBA on Wednesday at 8:00 pm GMT. Many expect the central bank’s rates to remain at a record low of 2.50%, but we might still see volatility as next week’s statement will also be the first time since December that the RBNZ will release a full update on its economic forecasts.
The euro region will get its action on Thursday at 12:00 pm GMT when the U.K.’s Monetary Policy Committee (MPC) releases its rate decision. Thanks to encouraging speeches of some MPC members and even BOE Governor Mervyn King himself, market players believe that the central bank will be on a wait-and-see mode this month and keep its rates at 0.50%.
Last but definitely not the least is the European Central Bank (ECB)’s rate decision on Thursday at 1:30 pm GMT. After launching its second LTRO last week and with the outcome on the Greek debt crisis on a knife’s edge, investors aren’t expecting the central bank to change its 1.00% cash rate.
Greek debt drama approaches its climax
If you missed the latest development in the debt drama because you’ve been living in your parents’ basement watching LBJ lose another Heat game, then here’s a short review.
Recall that a couple of weeks ago European leaders agreed to give Greece a second bailout package worth 130 billion EUR in exchange for new provisions. One of the provisions is that Greece’s private sector investors would have to accept a 53.5% loss on their principal AND swap their old Greek bonds for new ones that have longer maturities and lower coupon rates.
Since investors might be reluctant to take losses on their Greek bonds, the Greek government has been hinting at using collective action clauses (CACs), or provisions in the Greek law that could force all bondholders to take part in the exchange if a predetermined majority already agrees to it.
The problem with using this strategy is that it might trigger a credit event that might place Greece in default status, which will then require Greece to pay an additional $3.25 billion to the country’s outstanding credit default swaps (CDS) investors. Yikes!
On Thursday at 8:00 pm GMT we’ll know just how many investors participated in the exchange. Word on the street is that if 75% to 90% of bondholders participated, Greece would talk to European leaders to decide if the second bailout deal should proceed.
If less than 75% participated, then Greece could invoke its CACs or the EU leaders could simply call the second bailout deal off. Either scenario would trigger a credit event, and will most likely inspire fears of debt contagion in the region. Duhn duhn duhn.
Of course, if both economic themes are too risky or volatile for you, then you can always sit by the sidelines and just take note of the price action. Or you could also stick around on Friday at 1:30 pm GMT when the good ol’ NFP report is scheduled for release.
In any case, make sure you pay close attention to your favorite pairs during these events as we’ll probably see interesting price action. Oh, and don’t forget to place stop losses! You’ll never know when a wild spike in prices might hit your trades!