Central banks, currencies to guide stocks this week

Macro indicators will take centre stage this week as the domestic company earnings season trickle forth.

The view turns outward this week.

With the US reporting season winding down in a generally optimistic tone and with the Australian earnings season yet to kick into second gear, global factors and particularly the actions of central banks will dominate trading on our currency and equity markets.

It is entirely possible we will see the Australian dollar begin to kick higher, possibly towards US94c, particularly if American data this week is weaker than expected.  Once again, speculation will centre, not on whether the tapering of economic stimulus will occur, but on the timing.

The state of the US housing market will get an airing tonight and Tuesday with the release of pending home sales data and the Case Schiller Index respectively.

It won’t be until Wednesday night, however, when the Federal Open Markets Committee meeting takes place, that investors will gain some insights into the future of the Federal Reserve’s monetary stimulus extravaganza which could set the tone for market direction.

After last week’s shock result from HSBC’s manufacturing survey, which contracted further in June rather than showing signs of recovery, China’s official PMI release will be crucial for Australian stocks and the currency (see Carr's Call: Four danger signals for domestic investors).

Elsewhere, the European Central Bank and Bank of England will provide some guidance on outlook on Thursday night while Friday will feature crucial US employment data, the non-farm payroll.

The sensitivity of equity markets to currency movements was amplified Friday when Japanese stocks tumbled almost 3% as the yen pushed higher.

With the Reserve Bank anxious for the Australian dollar to ease, this week’s movements will provide a riveting backdrop to next week’s crucial RBA rate decision.