Major central bank rundown
The following are a list of central banks with their current state of play. In the title, you can find the link for each central bank’s official website and its next scheduled meeting.
Reserve Bank of Australia, Governor Phillip Lowe, 0.10%, Meets 01 December (updated 04/11)
At the last meeting, the Reserve Bank of Australia lowered rates to 0.10% from 0.25% as expected. This was a widely flagged move and in addition to the rate cut, there was an additional $AUD 100bln of bond purchases of 5-10yr maturities for 6 months. All of this was expected. In addition to the above, the RBA said that the cash rate will not be raised for the next 3 years. The Board also said that it is prepared to do more if necessary and is prepared to buy bonds in any quantity to keep the 3yr yield target which was lowered to 0.10%. You can read the full statement here.
Some other points to note:
- The conditions for an increasing cash rate are higher inflation, rising employment, and higher wages.
- RBA said recent economic data has been encouraging and the near-term outlook is better than it was three years ago.
- Unemployment is expected to remain high but peak below 8%, and sees unemployment ending 2022 at around 6%. This is better than the previous forecast of unemployment peaking at 10%.
In the press conference afterwards, Governor Lowe said that negative rates were extraordinarily unlikely, but that the RBA was not out of firepower yet. However, Lowe said that all that can be done on rates has been done and the focus now is on quantitative easing. In the statement, one of the key takeaways is that a controlled COVID-19 containment has been the single biggest factor to a less-bad-than-feared contraction of 4% projected for 2020. See here.
Also of note, is that Australia’s Government announced an aggressive stimulus package on October 06. There is now a large fiscal deficit plan in place to support the country and, according to analysts, there will be few ‘losers’ in stocks. This will help the ASX200 catch up with its Asian peers since a rebound started in March of this year. Medium-term buyers have been rewarded for staying the course from October.
Remember that the Australian economy is closely tied to China’s economy. Approximately 30% of Australia’s GDP comes from its trade with China. Therefore, expect the AUD to be pushed or pulled along with the US-China trade sentiment. If Trump had won the US election, AUD might have been dragged lower as trade tensions between the US and China would have ramped up. There is also a very strong correlation between the S&P500 and the value of the AUD. A falling S&P500 tends to weaken the AUD and vice versa, so keep an eye on the latest US stock moves when considering the next path for AUD.
European Central Bank, President Christine Lagarde, 0.00%, Meets December 10
At its latest meeting, the ECB kept rates unchanged and PEPP bond purchases the same, but recognised that risks were tilted to the downside at the last ECB rate meeting this week. The ECB recognises that future actions need to be taken and will use ‘all instruments’ flexibly with a particular focus on the PEPP bond purchases. President Lagarde foresaw Q3 GDP surprising to the upside but said Q4 was more challenging and November would be very negative. The bottom line is that the ECB has set expectations for further bond purchases in December’s meeting to add to the existing +€1.3 trillion already agreed. However, in terms of the EURUSD pair, we may still see EURUSD buyers because ‘bad news’ can be supportive for the EUR against the USD as it shows that the ECB will ‘do whatever it takes’ to support the Eurozone. This is why we saw the EURUSD rise in June earlier this year when the bonds were increased by €600 billion. See full statement here.
Bank of Canada, Governor Stephen Poloz, 0.25%, Meets December 09
The bank of Canada left its rates unchanged at their last meeting. The QE program is going to be continued and gradually reduced from the current $5bln a week to at least $4bln a week. The interest rates will remain at its effective lower bound until economic slack is absorbed so that the 2% inflation is achieved. Interest rates are not expected to rise now until 2023. Governor Macklem was against negative interest rates saying that the bar for using them would be very high. The bond purchases will shift to the longer end including 3-, 5-, 10-, 15-, and some 30-year bonds. There is scope to do more with the QE program if needed. Note that weaker oil typically weighs on the CAD because around 17% of all Canadian exports are oil-related. However, the negative correlation between USD/CAD and oil has broken down recently. Canada’s top export is Crude Petroleum at over $66 billion and around 15.5% of Canada’s total exports. All in all, a pretty uneventful last rate statement from the Bank of Canada from a trading perspective. USDCAD popped higher on the release, but that was mainly to do with risk-off flows into the USD at the time. You can read the full statement here. It can be expected that USDCAD will drift lower into December on seasonal dollar outflows heading into year-end.
Federal Reserve, Chair: Jerome Powell, 0.00%-0.25%. Meets December 16
The September Fed meeting had been a disappointment for the markets as it showed that the Fed is less accommodative than the market was anticipating. Yield curve control was mentioned as a monetary policy tool, but most participants considered the tool to only provide modest benefits. Furthermore, there were many participants who pointed to potential costs associated with yield caps. The reluctance to use yield curve control supported the USD. The November 05 meeting came right in the middle of the US elections so, in a way, it was a token meeting as the Fed had no intention of announcing any new policy measures at that time so as to not skew the pitch over the elections. They changed very little. There was a fairly predictable call for more fiscal stimulus which was only natural given the timing of the meeting. The Fed is set to keep rates low for the foreseeable future and no rate hikes are planned until 2023. Jerome Powell remains committed to using ‘powerful tools’ to support the economy and thinks the Fed can do plenty to support the economy. The latest FOMC minutes have indicated that the Fed will do something in December whether it is increasing the pace of asset purchases, shifting purchases to longer maturities, or by conducting purchases of the same pace and composition over a longer horizon. Something is coming. Needless to say, the December meeting will be of keen interest, as we will see how the Fed is going to respond to vaccine optimism gaining pace. You can read November’s full statement here.
Bank of England, Governor Andrew Bailey, 0.10%, Meets December 17
Brexit, COVID-19, and a slowing economy all continue to weigh on the GBP. The BoE kept interest rates unchanged at 0.10%. The November meeting took place amid the US election drama so it was easy to overlook. The meeting took account all of the recent lockdown restrictions announced by the UK Gov’t up to and including October 31 (the day the lockdown was announced). The Bank of England kept interest rates unchanged at 0.10%, but increased asset purchases more than expected to £875. Asset purchases were expanded by £150bln vs the £100bln expected. However, the reaction out of the meeting was a rising pound despite the increase in asset purchases (normally GBP negative). Why? This was due to a lukewarm sentence on negative rates. The Bank of England said that ‘participants attach some weight to the possibility of a negative bank rate’. Investors had been hoping for a more enthusiastic move towards negative rates. However, given the fact that the BoE has asked commercial banks to report back to them on the profitability on negative rates they would most likely wait to hear back from them before deciding on negative rates one way or the other. The deadline for hearing back was after the last meeting, so this makes sense why the BoE were pretty neutral. Furthermore, the Chief Economist, Andy Haldane is not overly keen on negative rates and this makes sense as their value is far from clear from other central banks that have used them. You can read the full report here.
One interesting aside is that the Bank of England’s last rate meeting was very positive regarding Brexit. The minutes said, ‘Household spending and GDP are expected to pick up in 2021 Q1, as restrictions loosen. The level of activity in the first quarter is expected to remain materially lower than in 2019 Q4. UK trade and GDP are also likely to be affected during an initial period of adjustment over the first half of next year, as ‘the United Kingdom leaves the Single Market and Customs Union on 1 January and is assumed to move immediately to a free trade agreement with the European Union’. It seems even the BoE is assuming a deal with Brexit will be done. If it doesn’t expect heavy GBP selling, it will wrong-foot the Bank of England.
Brexit remains the big mover and shaker for the GBP and ongoing event risk. A major trigger for a sentiment shift on the GBP in terms of monetary policy will factor around the willingness of the BoE to use negative rates. If they open that door, then we can expect GBP selling. Of course, all of this takes place underneath the spectre of Brexit.
Swiss National Bank, Chair: Thomas Jordan, -0.75%, Meets December 17
The SNB interest rates are the world’s lowest at -0.75% and haven’t changed at a scheduled meeting since 2009. In September the SNB left rates unchanged. The inflation forecast was higher than in June’s forecast and rising oil prices was the cited reason. The forecast for 2020 was -0.6% (vs -0.7% forecast in June) and +0.1% for 2021 and +0.2% for 2022.The SNB also said that they would publish data on FX market interventions quarterly rather than annually. This will complement the weekly sight deposits data and is – in large part – a move against the US and the claim that the SNB is a currency manipulator. The CHF was once again labelled as ‘highly valued’ at the meeting. A strengthening Franc hurts the Swiss export economy and a number of large institutions, like UBS Group, Raiffeisen Bank International AG, and Bank J. Safra Sarasin had been calling for a rate cut for autumn of last year. So far these calls have not been heeded. The Swiss are always mindful of the EURCHF exchange rate because a strong CHF hurts the Swiss export economy. The SNB want a weaker CHF. The rest of the world wants CHF as a place of safety in a crisis, so we have this constant tug of war going on. No changes are expected for December’s meeting. Read the full statement here.
Bank of Japan, Governor Haruhiko Kuroda, -0.10%, Meets December 18
The Bank of Japan is another very bearish bank and the latest meeting saw no major shift. They kept monetary policy as expected and rates unchanged at -0.10%. The yield curve control is maintaining its flexible target with 10yr JGB yields at around 0%. Projections were revised lower this year, but higher next year. The fiscal median forecast was -5.5% from -4.7% this year, and 3.6% from 3.3% for next year. Core CPI was -0.6% from -0.5% for this year, but 0.4% from 0.3% for next year. In the big picture, inflation in Japan continues to miss the 2% target and the BoJ have stated that they will ‘keep very low-interest rate levels for an extended period of time’. All in all, the BoJ remained on the fence at this last meeting. No changes are expected for December’s meeting. You can read the full statement here.
Reserve Bank of New Zealand, Governor Adrian Orr, 0.25%, Meets December 31
The RBNZ kept the asset purchase programme maintained at $NZD100 billion and introduced the new Funding for Lending Programme as planned. Furthermore, the RBNZ maintained projections that the Official Cash Rate would remain at 0.25% until March 2021. At first glance, all appears to be as expected. However, the detail shows revisions for inflation and employment. Inflation is now expected to rise to 0.9% in Dec 2021 vs the previous forecast of 0.3%. Employment was projected to still weaken further in the near term, but then pick up into next year. However, it is not just a more optimistic outlook that caused the market to buy NZD. It is also the fact that the last RBNZ meeting was really designed to launch the Funding for Lending Programme. The whole principle of these programmes is that if rates do go negative, banks can easily pass those savings onto customers. Here is an extract from the RBNZ’s statement:
“Members noted that the effectiveness of an FLP would depend on financial institutions passing on declines in their funding costs to borrowers, and agreed to monitor pass-through to lending rates closely. Members agreed with the staff assessment that an FLP would be an effective way to provide additional monetary stimulus and that it was the best tool to deploy at this time given the Committee’s principles for alternative monetary policy instruments.”
So, the RBNZ has needed to keep up some sense of why this is an important move at the meeting. In theory, they can still cut rates to negative and have deliberately kept that option open. However, the message given by Governor Orr is clearly that the rate is to remain at 0.25% until March 2021 and he has resisted calls to cut rates earlier this year. The investment bank ANZ reduced their calls and saw a cut to 0.10% in May and -0.25% in Aug 2021. ASN no longer expects negative interest rates at all and that seems the most likely route now. At the time, we flagged a EURNZD short trade out of the event. Eamonn Sheridan had the lowdown first; the ‘unconstrained OCR track’ now views that around 100bps less stimulus is necessary. So, it was no surprise that the Assistant Governor Hawkesby confirmed on November 12 that less stimulus is required going forward for the RBNZ. On November 24 the NZD saw another spike higher as New Zealand PM Arden requested Governor Orr to consider house prices at monetary policy meetings. The bottom-line impact of this was seen in the New Zealand 10-year bond yields which spiked to highs on November 09 as the RBNZ was seen as even less likely to need negative rates.
An NZDUSD long bias into December looks good from seasonal USD outflows and the RBNZ’s shift away from negative rates. It’s definitely worth taking a look at.