Major central bank rundown
It’s time for your central bank catch up. The link to the latest statement is at the bottom of each section, so just click there to read the central bank’s statement in full. Remember, there is no substitute for actually reading a central bank statement yourself and it will almost certainly be of great benefit to your trading. However, here is a summary analysis of the position of the major central banks.
Reserve Bank of Australia, Governor Phillip Lowe, 3.60%, Meets 4 April
RBA: Past peak inflation?
Expectations were that the RBA would hike by 25bps which it did bringing rates to 3.60%. However, it gave a more dovish outlook via its forward guidance by saying that ‘the Board expects further tightening of monetary policy will be needed’. This was instead of the prior, more hawkish guidance which said that ‘the Board expects further tightening of monetary policy will be needed over the months ahead’. The RBA also showed confidence regarding inflation showing signs of peaking has now seen a reduction in peak rate expectations.
The RBA thinks it has reached peak inflation and is citing monthly CPI data suggesting that inflation has peaked. Remember going into the meeting we pointed out that the headline and core inflation readings were still climbing and there was not an obvious sign of peaking.
This is significant that the RBA sees signs of inflation peaking and is the main reason for the dovish reaction to the latest decision. Also, note that Short Term Interest Rate Markets reacted strongly to the last meeting reducing expectations for higher rates and saw a terminal rate peaking at around 4%.
Has inflation really peaked?
Shortly after the meeting Westpac’s Bill Evans forecasts, in contrast to STIR markets, that the RBA will still need to hike in April and May. Bill Evans noted the inflation outlook is still too high and it is too soon to pause in April. So, this means that incoming inflation data will be absolutely crucial for the Australian Dollar moving forward. High inflation prints will once again prompt calls for a more aggressive RBA that would lift the AUDNZD pair. So, incoming inflation data is very important and it could be argued that the RBA has prematurely called a peak in inflation.
What to look for now
The main point to take from the RBA monetary policy statement is that the RBA still sees the need for further rate hikes, but it is uncertain about how tight the labour market is, how households will manage with higher rates, and the actual level inflation will settle at. Furthermore, the RBA is uncertain about the path of the global economy and how other central banks’ hiking actions will impact it. So, moving forward, look for AUD moves on any surprise labour or inflation data. Also, keep an eye on Chinese data and US monetary policy. See the full RBA statement here.
European Central Bank, President Christine Lagarde, 3.50%, Meets 16 March
More rate hikes are still to come, but how many?
The last ECB decision saw a hike by 50 bps as expected taking the rate up to 3.50%. Now, what was interesting was the shift in forward guidance from the ECB. In December’s meeting, the ECB had raised expectations of three back-to-back 50bps hikes with one in February, one in March, and one in April. Expectations for the March meeting are that the ECB will hike by 50bps. There is a near 100% chance of a 50bps hike according to STIR markets. See the Financial Source Interest Rate tool here below:
April is no longer seen as a definite hike. Instead, the ECB will ‘evaluate the subsequent path of its monetary policy’. It was reported that only a small minority felt it was too soon to commit to a March hike worry 50bps. Some policymakers saw the terminal rate at 3.50%, while others saw further hikes through the summer to even higher levels. The 3.50% terminal rate level is roughly in line with what the market is expecting with STIR markets seeing a 3.42% peak for July.
Going forward incoming data will continue to be very important for the ECB and especially surrounding growth and inflation data. These couple of lines were telling from Lagarde: ‘Any decision is the fruit of a compromise, and the beauty of the Governing Council is that all governors are passionate about the rationale, the analysis, the hard econometric work that is behind what we do. And some take particular views; others, other views’.
The main takeaway
Like last time there is nothing really tradable over the medium term for the EUR. The difficulty here with trading the EUR is that there are so many uncertainties from geo-political factors to the USD, and the outlook for the Eurozone and whether it can avoid a coming recession. This means trading the euro is best left until there is some very clear catalyst. That may come from the next interest rate decision this week depending on the forward guidance that the ECB gives. Read the full ECB decision here. Read the ECB press conference here.
Bank of Canada, Governor Tiff Macklem, 4.50%, Meets April 12
Holding rates steady at 4.50% as expected
In its January meeting, the BoC said that it ‘expects to hold the policy rate at its current level while it assesses the impact of the cumulative interest rate increases’. So, going into the March meeting STIR markets and economists were united in seeing no change from the meeting in terms of rates. This was the case with rates staying at 4.50%. However, the meeting was always going to be first and foremost about the forward guidance and that was where the dovish hint came from.
The BoC made a dovish tilt by dropping the statement that the economy ‘remained in excess demand’. In January the BoC said, ‘with persistent excess demand putting continued upward pressure on many prices, Governing Council decided to increase the policy interest rate’. However, at the March 8 meeting, the BoC dropped that expression about ‘persistent excess demand’ putting pressure on prices.
What to look for going forward
Canadian jobs data will continue to be important as the BoC noted that the labour market remains very tight. When central banks are setting their policy high employment means inflation pressure. Inflation of course will be important. Both the headline and core inflation continue to move lower step by step from the last summer’s peak. The key tradable opportunities, therefore, will come from any out-of-consensus prints in either employment data or inflation data in the coming days before the next BoC meeting. The CAD at an index level remains within a 3 month range. Also, keep an eye on oil prices. Higher oil prices support CAD and the oil market is projected to tighten through 2023. Read the BoC’s full statement here.
Federal Reserve, Chair: Jerome Powell, 4.375%. Meets 22 March
Is the Fed about to reach the peak?
It’s possible. In February the Fed took a marked shift in tone from the December meeting. The Fed hiked by 25bps as expected, but it was always going to be the forward guidance that mattered with this decision. Would the Fed push back against STIR markets which saw a terminal rate sub 5% and two cuts into the end of the year? Or would the Fed affirm a very hawkish stance that it ended 2022 on? In the event, the Fed took a step towards STIR market pricing and away from the Dot Plot hawkishness from December. This was a dovish meeting.
The Fed is winning the battle against inflation
This was the message from Powell in the press conference. Powell said, ‘Can say for the first time that disinflationary process has begun, and see it in the goods sector’. This is good news. Furthermore, Powell took some hope over the possibility of a soft landing as disinflation has taken place with US labour market data still strong. Excellent news for bulls.
However, there was caution from Powell too. He said that, ‘Reducing inflation is likely to require below trend growth and some softening in labour market and that history cautions against prematurely loosening policy’. So, two-way comments from Powell. The fact that they were two-way though is the message. Powell is seeing a world where inflation is beaten back and the Fed can stop hiking.
What does this mean?
Simply, it means that US labour data, Tuesday’s CPI, and US Retail sales on Wednesday are crucial. If the Fed looks like getting close to tackling inflation then the USD can weaken on the anticipation of a long-awaited Fed Pivot. However, will it come? Expect the Fed to give more aggressive dot plot projections on Wednesday, but remember that a terminal rate of around 5.6% is already priced in by STIR markets. The Fed will need to project rates up above 6% to surprise markets. Read the latest Fed statement here.
Bank of England, Governor Andrew Bailey, 4.00%, Meets March 23
Last hike from the BoE?
Heading into the prior meeting, the Bank of England was expected to hike interest rates by 50bps to 4%. Remember that in December’s BoE meeting the Monetary Policy Committee vote showed a vote split of 6-3. Two members wanted to keep rates at 3%, but one member wanted to raise interest rates even higher to 3.75%. The members wanting to keep rates unchanged favoured focusing on growth. The members wanting to raise rates even higher were focused on bringing down inflation. In the prior report, it was expected that this dynamic would be a source of tension for the BoE at its next rate meeting on February 2. In the end, the BoE hiked with a 7-2 vote split. Two voters, Tenreyro and Dhingra, both voted for no rate hikes like they did last time and wanted rates to stay at 3.50%. Interestingly, Catherine Mann, was not a hawkish dissenter this time and was happy to join the other MPC members for a 50bps hike. So, the vote split this time showed a more dovish shift compared to December’s decision.
Is this the last hike from the BoE?
It could be. Bank of England’s Governor Bailey said that it is too soon to say this is the last rate hike from the Bank of England. However, policymakers did abandon the word ‘forcefully’ from its guidance and opted to say that, if there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required’.
Labour and Inflation will remain the focus
The main focus for the BoE continues to be on how wage growth is doing and how the service sector is being impacted by those rising wages. Although inflation for goods has been coming down, there is still inflationary pressure in the service sector, and the BoE wants to be able to address that as needed. In other words, another rate hike/hikes could need to come if services inflation rises sharply. For now, the Bank of England will hope that it has won the inflation battle. Headline inflation still sits over 10%. So, yes inflation has been falling, but it is still 5 times over the Bank of England’s 2% target for the headline. Read the BoE full statement here.
Swiss National Bank, Chair: Thomas Jordan, 1.00%, Meets March 23
In December’s meeting, the Swiss National Bank hiked rates by 50bps as expected to bring interest rates in Switzerland up to 1%. The SNB, like central banks around the world, has been responding to an uptick in its domestic inflationary pressures. The December headline inflation print for Switzerland is at 2.8% for December and that is well down from the August peak of 3.5%. However, January’s and February’s prints both started moving higher to 3.3% and 3.4% respectively.
However, December’s reading for the core inflation rate showed an uptick to 2% which is in line with the high summer reading of 2%. On balance, there is nothing happening in Switzerland that is very different to the rest of the world and Short Term Interest Rate Markets are now pricing in a peak of 1.73% for this year and expectations that the SNB will not hike areas in its March meeting. Check out the helpful Implied Interest Rate Curve from the Financial Source Interest Rate Tracker widget. The SVB bank crisis has hugely impacted these expectations for rates now:
So, this means that if the SNB does hike by 50bps in March the SNB could signal the end of its hiking cycle for now.
The recent CHF strength could start to see a top on the CHF index as the SNB looks set to peak with its current hiking cycle. If you look at the chart below around the level marked this is the area that could potentially be a top. However, that will very much depend on the path of inflation and the SNB moving forward.
The SNB’s current December conditional forecasts for inflation can be seen below.
With the SNB rate possibly peaking in March a retracement lower in the CHF could be a potential play against another currency that has a strong reason for gains. You can read the SNB’s full statement here.
Bank of Japan, Governor Haruhiko Kuroda, -0.10%, Meets 28 April
BoJ fails to live up to yield curve end speculation
At the end of last year, the BoJ unexpectedly tweaked the Yield Curve Control band to +/- 0.50% in order to increase bond purchases to JPY 9 trillion in Q1 2023. At the time the BoJ played down the significance of this move, saying it was to improve market functioning and encourage a smoother formation of the entire yield curve. However, speculation is still firmly in place that the BoJ is preparing to exit its ultra-loose monetary policy in April this year when Kuroda retires and Kazoo Ueda leads the BoJ. This was Governor Kuroda’s last central bank meeting and there had been some speculation that perhaps he would surprise markets by signalling the eventual exit of Japan’s ultra-loose monterey policy. In the end, the meeting was entirely uneventful and as expected.
No exit surprise from Kuroda
The interest rate levels were kept at -0.10 and the BoJ committed to keeping 10-year Japanese bonds within a range of +0.5 and -0.5 around 0. The JGBs currently sit right at the top of that upper range as investors keep testing the upper limit wondering when the BoJ will stop defending the level.
Governor Kuroda has kept the yield control in place as he leaves office. Inflation in Japan is relatively low compared to inflation levels around the world even though the last reading in January was the highest in Japan since 1981 with a y/y reading of 4.3%. The BoJ, however, still doesn’t see the current inflationary pressures as sustainable, so it doesn’t want to hike rates to contain inflation like many other central banks around the world. To underscore the point BoJ’s Kuroda said after the meeting that BoJ’s Kuroda says it is premature to debate the specifics of any exit from monetary easing, policy rate and balance sheet are the main things to consider when the debate begins. The exit should only be considered when the 2% inflation target is sustainably achieved. Most analysts still expect the BoJ to exit its ultra-loose monetary policy. If/when it does expect the JPY to strengthen. You can read the full BoJ statement here.
Reserve Bank of New Zealand, Governor Adrian Orr, 4.75%, Meets 5 April
RBNZ: Considered larger 75 bps hike
In the last RBNZ meeting on February 22, markets were expecting a 50 bps rate hike. The surge in inflation had shown some signs of topping with January’s print coming in the same as the prior.
The QoQ reading was at 1.4% for January which was at the lower end of the recent range.
However, the RBNZ did not take comfort from these possible signs of inflation topping and hiked by 50bps (as expected) and maintained its views for a terminal rate of 5.50%. The committee considered a hike of 75 bps and this was noted as a potential catalyst for sending AUDNZD lower prior to the event. The recent impact of Cyclone Gabrielle was seen as unlikely to impact the medium-term monetary policy outlook although some short-term prices spikes were expected as a direct impact in the near term.
Inflation is still too high
The recent pullback in inflation pressures was noted, but the RBNZ still considered core consumer inflation too high. The annual CPI projection was, therefore, revised higher to 4.2% for March 2024, which was down from the previous 3.8%.
The RBNZ is not slowing from its interest rate hiking cycle in contrast to the speculation before the meeting. This allowed the NZD to strengthen against the AUD immediately out of the meeting sending the AUDNZD lower at the time of the decision. This was also helped by some weaker Australian wage data released around the same time as the RBNZ decision.
Going forward inflation data will be key and any big jumps lower in NZD inflation data will allow sudden weakness to creep into the NZD. This would be the best opportunity for short-term traders to look out for. Next NZD inflation data is out on April 19th and Food inflation on March 12th. Another opportunity for NZD weakness would be if the labour market shows signs of loosening (i.e. job losses). You can read the full RBNZ statement here.