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 bank’s central statement. 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 major central banks’ positions.
Reserve Bank of Australia, Governor Phillip Lowe, 2.35%, Meets 4 October
Taking it meeting by meeting now
The RBA switched to a meeting-by-meeting basis in a copy of the Fed’s move in July. Once again the RBA repeated that it is ‘not on a pre-set path’. The RBA hiked by 50bps as expected and the RBA repeated that they expect to take further action in the future. Inflation was recognised again as being the highest it has been since the early 90s. The key focus remains for the RBA on household spending and they are uncertain about how that will react to the combination of higher interest rates and the highest inflation Australia has seen since the 1990s.
Balancing risks
The RBA stated that the future rate path is uncertain because of global pressures. High inflation is cutting into spending power across the globe, most countries are tightening monetary policy, Russia’s actions in the Ukraine, and China’s Zero Covid policy are all significant factors. However, the path from here is highly uncertain. One positive area the RBA looked at was the labour market. The RBA recognised that the unemployment rate was the lowest it has been for 50 years at 3.4% for July. So, the labour jobs’ miss in the middle of August was only seen as a blip in an otherwise healthy trend. The RBA expects some increase in the unemployment rate as economic growth slows and recognises that the full force of higher interest rates has not yet made its way into mortgage payments.
The takeaway
It is a mixed outlook for the AUD and hard to pick a clear direction. The recent strains on China’s economy have been weighing on the AUD and the various stimulus packages have had little impact on lifting the China 50. The property sector is suffering from very poor sentiment and that, combined with China’s Zero Covid policy, is weighing on expectations for China’s economic activity going forward. You can see the pressure China’s 50 has been under on the weekly chart.
The AUD is closely impacted by the outlook for China’s economy. So, with the AUD outlook unclear it is probably best to only look for short-term opportunities in the near term. See the full RBA statement here.
European Central Bank, President Christine Lagarde, 0.75%, Meets 27 October
Avoids 2023 recession projections for now
Slowing eurozone growth is continuing to weigh on the euro and the risk of fragmentation from highly indebted countries like Italy and Greece still remains.
The ECB hiked rates by 75bps, committed to return inflation to target, and stressed it was data-dependent on its future decisions. After the event, ECB sources did not rule out another 75bps hike at October’s meeting, but growth concerns are likely to be a key focus going forward.
Growth was the focus of the statement
The decision was never going to be about the amount the ECB hiked. Whether it was a 75bps hike or a 100bps hike the focus was always going to be on the future growth outlook of the eurozone. The ECB still expects the eurozone economy to grow, although the amount has been revised lower to 3.1% in 2022, 0.9% in 2023, and 1.9% in 2024. The Governing Council intends to continue reinvesting the principal payments from maturing securities purchased for as long as necessary to maintain ample liquidity conditions and an appropriate monetary policy stance. This was as expected and if the ECB had decided to halt the APP purchases it would have been bullish.
The press conference
In the press conference, a more downbeat picture emerged. President Lagarde mentioned that the downside scenario sees negative growth in 2023 and gas rationing. However, this was the ‘downside’ scenario and not the ‘base case’. The weakness in the euro was not really addressed, but that was a message. President Lagarde said that the ECB does not target the FX rate, the next hike may not necessarily be 75bps and rates are not currently at neutral.
The main takeaway
Nothing really tradable. Yes, it keeps downside risks open in case the energy crisis saps German manufacturers’ profits and brings negative 2023 growth, but there was nothing unexpected here. If there was anything it was slightly more hawkish. However, there is still a EURCHF downside bias, but there are significant risks with this outlook. You can read the ECB full statement here. Combined statement with press conference here.
Bank of Canada, Governor Tiff Macklem, 3.25%, Meets October 26
In July’s BoC meeting the Bank of Canada front-loaded some of its interest rate hikes by a surprise 100bps. Even in July a lot of the expectations for higher interest rates were well priced in. In the September meeting, the Bank of Canada hiked by 75 bps to 3.25% as expected and is still assessing how much further rates will need to go in order to return inflation to target. The Bank of Canada does recognise that policy rates will still need to rise further to achieve the 2% inflation target. The current level of inflation in Canada is 7.6% and core inflation remains high in the 5-5.5% band.
Domestic growth remains strong
Canadian GDP grew by 3.3% in Q2 which was weaker than the BoC projected. However, the BoC noted that domestic demand was very strong. Consumption grew by 9.15% and business investment was up near to 12%. The housing market is cooling, as anticipated with higher mortgage rates, and down from the ‘unsustainable levels’ during the pandemic. The domestic labour market is tight, but the BoC does expect the economy to moderate in the second half of the year. So, in summary, a pretty strong domestic picture.
The bottom line
One thing to note is that the BoC was less concerned about both domestic and international inflation. You can read that when you compare the statement here with the prior statement and see the more worrying lines about inflation being dropped.
There is no obvious trade outlook here aside from looking at short-term CAD catalysts. If anything, less concern over inflation could result in some CAD pullbacks, but it is a low conviction perspective and it is probably best to remain neutral on CAD. However, any sharp pullback in the domestic economy should provide short CAD opportunities on a short-term perspective. The next meeting is on October 26, 2022. You can read the full BoC statement here.
Federal Reserve, Chair: Jerome Powell, 2.375%. Meets 21 September
USD peak bullishness, Federal Reserve kept to expectations
Heading into the last Fed meeting we were expecting the key focus to be on growth. The first line of the rate statement recognised that growth was slowing when it stated that, ‘recent indicators of spending and production have softened’. However, there was not much of a reaction to this statement as it also said that the committee ‘anticipates that ongoing increases in the target range will be appropriate’.
The Press Conference saw the moves into USD selling
It was the press conference where Jerome Powell showed the shift. The meetings would now be conducted on a ‘meeting by meeting basis’ to consider incoming data. Ok, it seems innocuous enough of a statement, but the context is key. In June there were signs of a slowing US economy, but the Fed stressed tackling inflation. Now the Fed recognises a slowing economy and is being more ‘data dependent’. Translated this means that the Fed will consider the pace of hikes and terminal rate depending on how the US economy fares. The day after the Fed meeting the US entered a technical recession with two consecutive quarters of contracting GDP numbers.
This was the extra fuel that USD bears needed as the more signs of slowing growth then the more likely the Fed are to be less aggressive in hiking rates. This will mean that the USD can continue to retrace some of the recent gains.
This was the extra fuel that USD bears needed as the more signs of slowing growth then the more likely the Fed are to be less aggressive in hiking rates. This will mean that the USD can continue to retrace some of the recent gains.
The takeaway
The main takeaway from the last meeting is that US growth metrics are going to be very important for the USD going forward. However, at the Jackson Hole Symposium Jerome Powell reversed the implications of July’s meeting by stressing the Fed would get tough on inflation. This allowed US10Y to push higher and lift the USDJPY even higher. However, are we now at peak bullishness? You can check out also the USDJPY sell outlook that looked very attractive from a seasonal point of view. Read the full Fed statement here.
Bank of England, Governor Andrew Bailey, 1.75%, Meets 15 Sep 2022
BoE takes the largest hike in 27 years to 1.75%
The decision was 8-1 with the majority in favour of the 50bps hike. The one dissenter Tenreyro favoured a smaller 25 bps hike. However, the majority decision was carried and the rate rises to 1.75% from 1.25%. This was the biggest increase in rates in 27 years and the BoE reminded markets it is prepared to act ‘forcefully’ if necessary to bring in inflation. Going into this meeting it was always going to be about the growth forecast from the BoE. That turned out to be the case as the BoE revised inflation projections at the same time as bringing forward recession projections for the UK. Inflation is going to be higher and growth is slowing faster. Stagflation is biting in the UK and this should weaken the GBP medium term.
Inflation bites harder
Inflation has now been revised higher to 13% in 2022 Q4. The BoE projects inflation to stay at ‘much higher levels’ throughout much of 2023 before falling to the 2% target in two years’ time. The BoE projects firms will increase their selling prices markedly reflecting the sharp rise in their labour, fuel, and material costs, so inflation pressures are growing and made worse by the Russian/Ukraine energy crisis.
Growth slows faster
The UK is projected to now fall into a recession in Q4 of this year. That recession is due to last for 5 quarters. Real household post-tax income is projected to fall sharply in 2022 and 2023, furthermore, consumption growth turns negative. Unemployment is also set to rise in 2023, but not by much. The BoE recognises that the risks around its projections are ‘exceptionally large’ and that ‘there is a range of plausible paths for the economy, which have CPI inflation and medium-term activity significantly higher or lower than in the baseline projections.’ It is also mainly due to the energy crisis with UK income hit far worse than the energy crisis from the 1970s. However, we do now have a large energy package which should relieve some of the pressures from higher energy prices for at least the next 2 years. Unemployment is also set to rise in 2023. Here are the updated GDP forecasts: 2022 GDP is now lower at 3.5% (May forecast 3.75%). 2023 GDP to be negative at -1.5% (May forecast -0.25%). That negative outlook 2024 GDP -0.25% (May forecast +0.25%).
Key implications
The BoE has now moved to a meeting-by-meeting basis and the incoming growth data will be very important for the GBP. So, expect more GBP volatility on top-tier releases. Secondly, this latest BoE meeting should mean any large GBP rallies to find sellers as the BoE is now expected to cut rates in 2023. However, a lot of bad news is priced into the GBP, so a relief rally cannot be ruled out from current prices. You can read the full BoE policy report here.
Swiss National Bank, Chair: Thomas Jordan, -0.25%, Meets September 22
The latest SNB decision was a shock one. For years the SNB has been battling against deflation and trying to keep the CHF from strengthening. No economists going into the SNB meeting expected the SNB to move on rates. This was because no one thought the SNB would hike rates before the ECB did. However, the central bank announced on June 16 that, ‘the SNB is tightening its monetary policy and is raising the SNB policy rate and the interest rate on sight deposits at the SNB by half a percentage point to −0.25% to counter increased inflationary pressure’. The move by the SNB before the ECB is a significant shift. The SNB no longer has the reference to the CHF being ‘highly valued’ and the need for FX intervention to address it. This hike was all about one thing, fighting inflation.
SNB gets tough on inflation
The SNB acted to combat spreading inflation in a bid to keep inflation out of Swiss goods and services. The second line of the SNB’s statement stated, ‘the tighter monetary policy is aimed at preventing inflation from spreading more broadly to goods and services in Switzerland’. Linked to this is the idea that the Swiss, like the RBA and the BoE and the Fed, do not want to see a ‘wage-price’ spiral.
Although the SNB revised its inflation forecast higher it still sees it dropping around the middle of next year.
Inflation tackler
All of this means the SNB is tackling inflation on the front foot and it doen’t want inflation to go into wages. With inflation at 2.9% in May the SNB is trying to slow that down as quickly as possible. This does open up a USDCHF sell bias for now. If the US starts to show falling inflation then USDCHF could move sharply lower. Look at the large monthly reversal candle on the USDCHF. You can read the full SNB statement here.
Bank of Japan, Governor Haruhiko Kuroda, -0.10%, Meets 22 September
There has been a shift in the pressure for the BoJ, but not its policy. The Yen has seen a serious amount of depreciation this year as the yield differentials between the JGB and US treasuries have kept the JPY weak. The weakness in the JPY has been amplified by the rise in oil prices. See here for four things to know when trading the JPY. There has also been growing speculation that the BoJ may have to exit its very loose monetary policy stance as the weakness in the yen begins to hurt the Japanese domestic market. However, in the July meeting, the BoJ stated that, ‘it also expects short- and long-term policy interest rates to remain at its present or lower levels’. So, interest rates remain at -0.10%. The Yield Curve Control (YCC) was maintained to target 10-year JGB yields at around 0.0% & the vote on YCC was made by 8-1 votes with the only dissenter being Mr Katoaka once again.
The BoJ look vulnerable to a change of direction
Going into the last two BoJ meetings the obvious concern was the JPY weakness. JPY weakness has been extreme recently as the US10Y yields kept pushing higher on US inflation fears. However, the key aspect of this is whether there will be action from the BoJ. For years Japan has struggled to see any inflation, so with inflation rising around the world, it was interesting to see that the BoJ now does expect consumer inflation to rise. It also notes that short-term inflation expectations have risen. However, this is mainly attributed to energy prices and commodity gains. Both of these factors are expected to fade and medium-term inflation is expected to fall back lower again.
The excessive FX moves are now a risk to the BoJ
One standout factor to look out for is any FX intervention from Japan. The BoJ and the Japanese Gov’t let markets know that they are concerned about the JPY weakness. So, at some point, there could be a large amount of JPY strength if the Japanese Gov’t suddenly intervenes. This means traders should be very careful about staying short of the JPY as a sharp retracement could occur unannounced. The fall of US yields last week on expectations of a less aggressive Fed should help the USDJPY pair to drift lower now in medium term. You can read the full BoJ statement here.
Reserve Bank of New Zealand, Governor Adrian Orr, 3.00%, Meets 05 October
RBNZ: Slowing growth ahead?
The RBNZ took a decidedly hawkish tilt this week as the central bank raises its official cash rates. The terminal rate has now been increased to 4.1% in December 2023 and that is up from 3.95% projected at the prior meeting. The December 2022 projection is also up to 3.69% from the prior reading of 3.41%. So, with the RBNZ hiking by 50bps this week to 3% the RBNZ is pressing on to tackle high inflation.
What about growth
Slowing growth hints did make it into the last July statement as the RBNZ said, ‘Members noted that while there are near-term upside risks to consumer price inflation, there are also medium-term downside risks to economic activity’. The main message then from the RBNZ was that price pressures remain persistent enough to carry on with its rate hiking outlook from May.
With the global macroeconomic environment slowing down Governor Orr recognised in the August meeting that there could be below potential growth in New Zealand due to subdued consumer spending. The RBNZ recognised that house prices have dropped from recent high levels and he expected that to continue over the coming year.
And inflation?
At the last print in July headline inflation for New Zealand was at 7.3%. The RBNZ recognised that domestic inflationary pressures had increased since May to further bring forward the timing of OCR increases. The RBNZ reaffirmed its commitment to bring consumer inflation back down to the 1-3% range. Monetary conditions need to continue to tighten and the RBNZ agreed that maintaining the current pace of tightening remains the best means.
The takeaway
This was a hawkish meeting. The RBNZ increased its rate projections for the future expecting them to peak at 4.1%. It kept its commitment to hiking rates in order to contain consumer inflation and this should keep the NZD being bought on dips. The best opportunity would come from any signs that the RBA is turning more dovish. In this instance, a potential AUDNZD short trade can open up. However, it would need a fresh catalyst to justify entering a medium-term AUDNZD short. You can read the full RBNZ statement here.
