Major central bank rundown
It has been a very busy week with the SNB, BoE, BoJ and the Fed all meeting this week. So this weekend is a great time for a catch up on the largest central bank moves. The central banks are listed below with their current state of play. The link for each central bank is included in the title of the bank and the next scheduled meeting is in the title too. The link to the latest statement is at the bottom of each section, so there is no excuse for not being up to date.
Reserve Bank of Australia, Governor Phillip Lowe,0.10%, Meets 05 October
Sticking to the recovery script
Despite the surge in the delta variant Governor Lowe said on September 10 that the economic recovery had been delayed, but not derailed. However, he did add that it was difficult to understand markets pricing in hikes in 2022 and 2023 and said that interest rates were unlikely to rise before 2024.
The delay in the economic recover was reflected in the last meeting
On September 10 the RBA surprisingly kept to their plan to taper (reduce) purchases to $4 billion a week. However, the time that tapering was to continue was extended out to mid-Feb 2022. So, the effect of this is that there will be more tapering for longer. The RBA repeated that their experience is that once the virus is contained the economy bounces back quickly. The question, of course, is whether it back be contained or not as cases are still rising. The RBA conceded that they expect the bounce back to be slower than earlier in the year, so the expectations seem reasonably set from the RBA.
AUD: Watch for mean reversion
The AUD has seen shorts building and they are now looking very stretched. The obvious trade to look for here is some mean reversion. It is very easy to not expect mean reversion when you are trading, especially when there are multiple reasons for AUD weakness, but it happens more often than you may realise. Therefore, in particular look for any bullish signals for the AUD to send it higher quickly. The main trigger would be either a sharp decline in COVID-19 cases and or some recovery from China. The latest slow down from China's economy and sharp falls in the Iron ore markets have been weighing heavily on the AUD.
The takeaway
Central bank divergence between the RBA and the RBNZ. Although this divergence looks set for some mean reversion now, a deeper pullback should still find sellers as long as the broad outlooks stay unchanged.
You can read the full statement here.
European Central Bank, President Christine Lagarde, -0.50%, Meets October 28
Holding meeting, despite policy change.
The meeting on September 09 kept interest rates unchanged. The size of the bond purchases (PEPP) were unchanged at €1.85 trillion and APP purchases are continuing at the speed of €20 billion a month. However, the pace of the PEPP bond purchases have changed. The Governing Council decided that the pace of asset purchases under the PEPP programme could be slightly reduced. The PEPP purchases are now to be conducted at a 'moderately lower pace' verses the previous decision of a 'significantly higher pace'.
Does this mean the ECB are tapering?
No. In the press conference it was clarified that the tweak to the PEPP purchases are not considered 'tapering' by the ECB. However, to a certain extent this is semantics as the ECB are recognising that less support is needed. The ECB are wanting to simply avoid overkill with too much APP purchases and not signal a material shift in policy outlook. Further PEPP discussion will take place in December. There was little new here at the meeting and the ECB is remaining on a 'wait and see' stance. Moving forward the focus remains on incoming data and the December meeting.
What comes after the PEPP programme expires in 2022?
If you cast your mind back to the July 23 meeting there were expectations that, after the ECB's strategic review, the ECB would be revealing a more dovish hand.This was hinted at in the run up to that last meeting by Christine Lagarde who said that the PEPP could 'change' into something else. Well, at this latest meeting they did not discuss what would come next after the PEPP programme ends. So, this is at least on hold for now, but Lagarde has recently reminded markets that the eurozone is 'not out of the woods yet'.
The takeaway
Optimistic, but with a holding stance. Lagarde summarised that the eurozone economy rebounded by 2.2% in Q3 and is on track for strong growth in Q3. Consumer spending is increasing, but there are still 2 million fewer people employed than before the pandemic. So, there is nothing tradeable here for now. Just accept the euro has. Weak bearish outlook.However, incoming data remains key as does the voice of the ECB board members. In particular look out for any hawkish comments from Lagarde, de Guindos, and Lane to boost the euro for a quick sentiment based trade intraday. Aside from that you would favour EURUSD downside after the Fed's latest shift this week.( See below)
You can read the full statement here.
Christine Lagarde's press conference link here.
Bank of Canada, Governor Tiff Macklem, 0.25%, Meets October 27
At the last meeting the BoC held rates at 0.25% .Asset purchases remained at $2 bln and they see lifting rates around the second half of 2022. There were far more concerns sounding from the BoC at their last meeting than there had been at the start of the year. The bank stressed the problem of supply chain disruptions, slack in low wage workers, and the uncertainty of supply chain bottle necks.However, the BoC still see the economy strengthening in the second half of 2021 with consumption, business investing , and government spending all contributing positively to growth.
Inflation
Like the Fed the BoC see it as transitory. The BoC gave a caveat to this by once again saying that, 'the factors pushing up inflation are transitory, but their persistence and magnitude are uncertain and will be monitored closely'. So, higher inflation is not going to be totally ignored.
COVID-19
The BoC 'continues to expect the economy to strengthen in the second half of 2021, although the fourth wave of COVID-19 infections and ongoing supply bottlenecks could weigh on the recovery'.
The takeaway
Nothing much to note here aside from the fact that CAD should remain supported against weaker currencies. Any deeper dips lower on Evergrande fears/collapse should offer good value in the near term on CADJPY
You can read the full statement here
Remember stronger oil supports the CAD as around 17% of all Canadian exports are oil related.. Canada's top export is Crude Petroleum at over $66 billion and around 15.5% of Canada's total exports.
Federal Reserve, Chair: Jerome Powell,0.125%. Meets 03 November
Sufficient progress on inflation and employment 'all but met'
At the latest Fed meeting interest rates were unchanged and the path of QE stayed at $120 bln per month. The statement revealed that 'If progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted'. This sets up a November taper.
Powell went further in the presser
The Fed delivered a surprise in the press conference as Jerome Powell said that if the economy remains on track then the tapering of asset purchases could be concluded by the middle of next year. This was towards the hawkish end of expectations and Jerome Powell said there was broad support on the committee for the timing and the pace of the taper. With current asset purchases at
The dot plot
Greg had a helpful post up on this straight after the meeting.
The dot plot for the September 2021 FOMC meeting shows:
- 0 Fed officials see hikes in 2021 versus zero in the June meeting
- 9 Fed officials see hikes and 2022 vs 7 in the June meeting.
- 17 Fed officials see hikes in at 2023 versus 13 in the June meeting.D
The bottom line
The Fed has now set up a November taper and plans to have tapering completed by the middle of 2022.The next jobs report is going to be very important on October 08. A good jobs print and expect the USD to surge in anticipation of a November taper. However, one note of caution is that the USD has been pretty flat after this latest meeting when otherwise it would have been reasonable to expect more USD strength. So, just bear that in mind. However, a strong jobs print should be ok for at least a intraday pop higher in the USD if not more. Keep an eye on US 10 year yields if you look to go long USDJPY. You want to see US10 year yields moving higher to confirm the USDJPY upside bias.
