The Central bank rundown
The central banks are listed below with their current state of play. The link for each central bank is included under the title of the bank and the next scheduled meeting is in the title too.
Reserve Bank of Australia, Governor Phillip Lowe, 0.25%, Meets 06 October
The RBA at their last meeting on September 01 kept rates unchanged and the 3yr yield target at 25bps. The RBA decided to increase the size of their term funding facility to assist in the provision of low-interest loans for small to medium-sized businesses. The RBA seemed unconcerned about the recent AUD strength and largely kept pat from the last meeting. You can read the last decision here. Some analysts anticipate an RBA cut coming up for their next meeting, so definitely an area to watch if we see unemployment rates trending lower.
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. 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 as well in deciding the next path for AUD. Any further souring in the US-China risk tone will weaken the outlook for AUD, so bear that in mind. Not to mention the recent tensions between Australia and China directly after Australia’s PM called for an independent enquiry into the COVID-19 breakout.
European Central Bank, President Christine Lagarde, 0.00%, Meets October 29
The ECB revised their growth projections higher this week for 2020 to -8.0% and inflation expectations for 2021 were revised upwards to 1.0%. President Lagarde also seems relatively unfazed by the recent euro strength. This more optimistic response supported the EURUSD out of the ECB meeting and it was the risk-off tone later on Thursday which brought the pair down via USD risk-off flows. Overall the ECB took a more hawkish response than was anticipated last week. This was especially so after ECB’s lane inferred that the ECB was not ‘indifferent to the EURUSD’ rate. The strong euro hurts eurozone exporters, so the expectations were for some ECB jawboning. In the end, the bottom line from the ECB is that they are a touch more optimistic than the last meeting, but overall remain in wait and see mode. EURGBP longs look attractive for buyers as the return of Brexit fears hammered the GBP this week.
Bank of Canada, Governor Stephen Poloz, 0.25%, Meets October 28, 2020
The bank of Canada left their rates unchanged this week in a fairly uneventful rate statement. Not only did the BOC keep rates unchanged at 0.25bps, but the QE purchasing of Canadian Gov’t bonds is set to remain at levels of at least C$5 billion per week. The BoC saw the Canadian economy developing broadly in line with June’s projections. It noted that the bounce back in Q3 activity looked to be faster than anticipated in July. The statement also mentioned that the rebound in the United States had been stronger than expected. This is good news for Canada as the US is Canada’s major trading partner. You can read the full statement here. On Thursday Governor Macklem said that Canada had recovered 2 out of the 3 million of lost jobs, but it would probably take longer to recover the last 1 million. All in all pretty uneventful last rate statement from the Bank of Canada from a trading perspective.
Federal Reserve, Chair: Jerome Powell, 0.00%-0.25%. Meets September 16
Fed Powell spoke at the remote Jackson Hole Symposium and is targeting a 2% inflation target ‘on average’. This is the shift to an ‘average inflation targeting regime’. This average inflation target has been a negative for the USD as it means inflation can run hot for a little while without the Fed acting and raising rates. It gives some leeway. However, with the Fed recognising that downward risks to employment and inflation have increased the outlook for US interest rates remain that the Fed will stay on hold for the near term. The main impact of this policy is likely to be that this puts pressure on other central banks to take their own dovish steps.
The FOMC left rates unchanged at their last meeting and the Fed’s board members have been opposed to negative interest rates. With negative rates in place with the SNB and the BOJ, there has been scope for the Fed to see the rates in action. The verdict? They have been found wanting in the Fed’s board eyes. Next week, watch out for either yield curve control or any hint that negative rates may be acceptable at the next Fed meeting next week for the most negative USD reaction. The OIS curve for Fed Fund Futures are pointing towards rates remaining unchanged over the next 12 months, and that in keeping with Fed members reticence to pull rates negative. Remember that if the Fed’s hand are pushed to try negative rates then gold should strongly rally higher and break out to make, or at least test, record highs. Best trade of next week is to look for a dovish Fed for strong gold longs.
Bank of England, Governor Andrew Bailey, 0.10%, Meets September 17
Brexit, Covid-19, and a slowing economy are all weighing on the GBP. The BoE kept interest rates unchanged at 0.10% in their last meeting. Their asset purchase programme was kept at £745 billion. Both of these decisions were unanimous with 9-0 votes from the Monetary Policy Committee (MPC). The last minutes kept the door open for interest-rate cuts down the line and the OIS curve is seeing interests rates lower over a 12 month period. The BoE is currently reviewing the impact of negative interest rates. On September 04 BoE’s Saunders considers it quite likely that additional monetary easing will be appropriate. He also said that he is not ‘theologically opposed’ to negative rates. So, all eyes on the coming meeting for any further clues for the next direction from the BoE. The BoE was less confident in the UK’s recovery at the last meeting with the MPC not seeing the economy regain its end of 2019 size until the end of 2021. Rising COVID-19 cases, Brexit concerns, and a slowing UK economy are all expected to weigh on the GBP near term. A surprise shift to lower rates next week will sink the GBP further in short order. Be prepared. EURGBP should take out recent highs if the BoE does shift rates lower.
Swiss National Bank, Chair: Thomas Jordan, -0.75%, Meets September 24
The SNB interest rates are the world’s lowest at-0.75% and haven’t changed at a scheduled meeting since 2009. In June the SNB left rates unchanged and GDP growth for 2020 is forecast at -6% vs previous of -1.5%. CPI for 2020 was at -0.7% vs previous of -0.3%. The CHF was labelled as ‘highly valued’ at the meeting. Read the full report here. With the strengthening Franc hurting the Swiss export economy 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.
On September 04 Governor Jordan says the Franc is a safe haven and that the size of the Swiss balance sheet has increased due to intensive intervention use. 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. Here is a table showing the recent increases in insight deposits.
Bank of Japan, Governor Haruhiko Kuroda, -0.10%, Meets September 17
The Bank of Japan is another very bearish bank (they all are at the moment, but the BoJ has been for ages). 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’. In July the bank stated it will ‘actively purchase exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) for the time being so that their amounts outstanding will increase at annual paces with the upper limit of about 12 trillion yen and about 180 billion yen, respectively’. Interest rates were kept unchanged at -0.1%. Yield curve control (the policy that the Fed may (or may not) adopt was maintained. The BOJ stated that they will purchase a necessary amount of Japanese government bonds (JGBs) without setting an upper limit so that 10-year JGB yields will remain at around zero percent. While doing so, the yields may move upward and downward to some extent mainly depending on developments in economic activity and prices. You can read the full statement here.
Reserve Bank of New Zealand, Governor Adrian Orr, 0.25%, Meets September 23
The RBNZ had been keeping markets guessing over its use of negative interest rates. However, that uncertainty was dialled back after the August meeting. The RBNZ launched a set of bearish policies. The RBNZ extended its asset purchases programme by raising it $40 billion to $100 billion. They also extended its length from 12 to 22 months. The real bearish outlook for the NZD came when the RBNZ indicated that it was open to negative interest rates. On September 02 RBNZ Governor Orr repeated that the RBNZ was actively preparing a package of additional tools to use if needed, including negative wholesale rates, more QE, direct lending to banks and ongoing forward guidance. The RBNZ is widely expected to keep its OCR unchanged in the immediate future. However, the OIS curve would now suggest the odds of further easing will gradually increase as the months pass. You can read the full statement here.