The high number of fundamental data and central bank statements due this week contribute to the surge of volatility in the forex market. Among them, which is the most important issue to note?

The high number of fundamental data and central bank statements due this week contribute to the surge of volatility in the forex market. But, among them, which is the most important issue to note? The following lists five hottest issue on the market now, from the Japan bland election effect to the much anticipated The Fed FOMC.

 

1. Post Election, Japan Remain Dormant

Prime Minister Shinzo Abe's coalition victory in Japan snap election on Sunday marks the beginning of another tumultuous moments for the country. Number one challenge for PM Abe is on how to get out of under-zero growth suffered by Japan since April tax hike. Nikkei reported that there is around 2-3 trillion Yen fiscal package ready to be announced by the end of the month. Meanwhile, Japan consumer sentiment that is an early indicator for inflation and domestic demands has dived for the fourth time in November as prices rose while companies remain reluctant to lift wages.

Under PM Abe guidance, Abenomics has successfully depreciate the Yen till below 200, but it is still unable to spur exports. The reason believed to be multinational companies' relocation of production site abroad which erased the need for made in Japan products to be shipped directly from Japan. On the other hand, rising imported raws due to the Yen depreciation hurts small and medium enterprises. Yesterday's Tankan report underlines the divergence with the rising Non-Manufacture Tankan index even as Manufacture Tankan index dropped below expectation.

Japan
The aforementioned circumstances captured the fact that two of the three Abenomics arrows (fiscal stimulus and monetary easing) has failed to reach their target. Thus, the last hope left on the third arrow: structural reform that will target largely non-economic issues such as evaluation on employment regulation, improvement on female labor participation, and reactivation of nuclear power plants that was shut down in the aftermath of Fukushima nuclear crisis.
  

2. Oil Prices Plunge As Double-edged Sword

World oil prices plunge is now like a double-edged sword; it hurts even as it heals. Oil consumer countries are largely benefit from the lower price, but the same factor could drive inflation lower where it is needed to go up, notably in the US, UK, Europe, and Japan. At the same time, investors are leaving oil shares and increase USD-denominated assets on their portfolio. Most of oil-producing countries are in the developing markets; consequently, investors distances themselves from the regions and hit those countries further.

Dolar
Russia, for instance, has seen its currency skydived until the central bank saw it fit to increase benchmark interest rates as much as 6.5% to 17% to stall Ruble depreciation. It spread risk aversion on the market and drive further capital flight from emerging markets today. US Dollar becomes increasingly dominant while emerging market currencies are dropping like flies.


3. Risky Eurozone

Euro sell-off this year apparently has reach its peak. Oversold is being tought of as the motor behind Euro comeback in the last few days in which EURUSD climbs although the economy remain underperforming. European Central Bank has found stronger demands for Quantitative Easing to prop up the economy, but as long as there is no significant action, then bearish Euro will always be at risk of correction.

GrafikEuro Performance Graph January-December 2014

Euro performance chart above denotes how Euro (dark blue line) has depreciated as much as 10% in the last one year. Till November 2014 Euro was under pressure, but the pressures has somehow lighten in December as depreciation tend to stay around the same range.

 

4. UK Busy Schedule

This week, almost a dozen economic data is scheduled to be published Pekan ini, setengah lusin data ekonomi dijadwalkan akan dipublikasikan di Inggris. Bank of England has just published the result of test stress, in which three out of eight banks failed to pass. HSBC, Barclays, Santander UK, Standard Chartered and the Nationwide passed the test, while Lloyds and RBS would have failed had they did not start to raise their capital at the time of the test. The one left, Co-Operative bank, proven to lack capital adequacy required and has submitted plan to overcome the problem to the BoE. Beside of that, BoE chief Mark Carney is expected to speak in a press conference later. In the coming days too, we will wait for job market data reports, BoE meeting minutes, as well as UK retail sales data that usually hold high influence on Poundsterling movements.

BoE test stress is a bit harsher than the previous ECB test stress, and the result too, is relatively more favorable. Nevertheless, UK economic condition currently is dragged by Eurozone slowdown, and BoE is expected to delay rate hike till 2016. Consequently, GBPUSD movements are back to the divergence of the direction of monetary policy taken by the Bank of England and US the Fed.

 

5. Bullish Dollar Depends On FOMC

Undeniably, the star of the week is US the Fed's Federal Open Market Commitee that will be the last one in 2014. FOMC has always been the trigger of major price movement among major pairs, and this one is not expected to deviate from the usual. According to John Kicklighter from DailyFX, there are two things that market players are looking for, that is:

 

A change on the interest rate consensus

Latest interest forecast from the FOMC marked benchmark lending rate on 1.38% to the end of 2015, which means the Fed has to hike rates starting from mid-2015. By observing the current inflation and the impact of worldwide slowdown on the US economy, FOMC members possibly will revise their forecast.

 

A change on the considerable time

Fed chief Janet Yellen and FOMC statement have made use of considerable time repeatedly to describe the timing of when they will start hiking rates. However, recently several figures such as Dallas Fed chief Richard Fischer, have been calling for FOMC to erase the words. If it is not changed, then first Fed rate hike estimates on the market will remain on mid-2015; but if it is taken out, then the market will respond to whatever words put in place of it.