Central banks
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
Reserve Bank of Australia, Governor Phillip Lowe,0.10%,Meets August 03
Trouble down under
On the face of it there was not much change in July. No rate hikes expected until actual inflation is within the 2-3% range and supportive monetary conditions (low rates etc) are to be maintained in order to support a return to full employment and for inflation to be consistent with this target. The labour market is still, like June's meeting, not expected to be tight enough to spur higher age growth (and therefore inflation with it) until 2024. The economic recovery is still regarded as stronger than 'earlier expected and is forecast to continue. The three year yield target remained the same keeping to the April 2024 bond as its 3 year yield target instead of pushing it further down the line to the November 2024 bond. Bond purchases were extended until mid November, but reduced by $1 billion a week. So, a more confident meeting on balance from the RBA.
The takeaway
The central scenario remains that the condition for a lift in the cash rate will not be met until 2024". The data the RBA want to see is inflation in the 2-3% range and spurred on by wages growth that exceeds 3%. Atemporary spike in inflation is not stated to be enough to move the RBA for now.
COVID-19 resurgence
Headwinds now remain for the Australian dollar right now as the nation struggles to manage the rising delta variant. Australia's New South Wales Premier says that he will tighten COVID-19 lockdown rules in the worst impacted areas of Sydney. The sharp rise of the Delta variant has resulted in a number of strict lockdowns in Australia and that looks set to continue. The RBA are meeting next week and Westpac see that the RBA may now increase their tapering levels to $6 billion per week
You can read the full statement here.
You can read Governor Lowe's speech after the RBA statement here.
This is especially the case with the recent dip on Iron ore prices this last week.
There is a distinct bias for AUDCAD selling over the course of the next month.
European Central Bank, President Christine Lagarde, -0.50%, Meets September
Dovish tilt in the context.
The meeting on July 23 kept interest rates kept unchanged and both the size of the bond purchases (PEPP) were unchanged at €1.85 trillion and AP purchases are continuing at the speed of €20 billion a month. Going into the ECB 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 the meeting by Christine Lagarde who said that the PEPP could 'change' into something else. However, on Friday July 16 a sources report said that, due to disagreement, the bond purchases would be left unchanged/not mentioned until September's meeting. This would have marked a shift from the June 10th meeting wherea sources piece revealed that three ECB board members were in favour of bond tapering.
'Marginal' disagreement
Christine Lagarde noted in the press conference that there was some 'marginal disagreement'.It was not surprising as within the GC are fiscal conservatives like Germany and the more liberally minded Italians, so getting agreement was always going to be tough. Germany's Weidmann & Belgium's Wunsch opposed the ECB's new guidance according to Bloomberg/sources as it signalled a commitment to lower rates for longer. In addition to these two members sources note that several more voiced objections due to the length of commitment and a lack of clarity. The ECB will accept an overshoot of inflation which they expect to be temporarily higher. Remember, they now have a symmetric 2% target. Some members wanted to aim for 'at least 2% inflation', not just 2% inflation.
The takeaway?
The ECB did not deny the dovish expectations, only disappointed with a lack of action at their last meeting. It looks like setting up for a lower for longer message in September, but with internal disagreement. The path of least resistance is to see it as euro bearish until proven otherwise.
You can read the full statement here.
Christine Lagarde's press conference link here.
The EURGBP pair looks weak as the BoE meets next week and both Ramsden & Saunders are more hawkish now.
Bank of Canada, Governor Tiff Macklem, 0.25%, Meets September 08
At the last meeting the BoC held rates at 0.25% but the surprise this month was that the central bank was a little more neutral than many market participants were expecting. Yes, they cut asset purchases from $3 bln top $2 bln and they still see lifting rates around 2022 however, the adjustment was expected. The BoC note the 'continued progress towards recovery and the Bank's increased confidence in the strength of the Canadian economic outlook'.The last BoC meeting had been a holding meeting after the hawkish surprise they gave in April and this was far more neutral in tone.
Inflation
Like the Fed the BoC see it as transitory. The BoC gave a caveat to this by saying that, 'the factors pushing up inflation are transitory, but their persistence and magnitude are uncertain and will be monitored closely'
Growth
The BoC expects growth of around 6% in 2021 (lower than previously forecast), 4½% in 2022 (revised higher) and 3¼% in 2023. Consumption is expected to lead the domestic recovery and International demand to underpin an exports recovery.
COVID-19
The broad view was one of vaccine confidence with a touch of uncertainty concerning the delta variant and spreading where vaccination rates were low, However, Canada has vaccinated around
The takeaway
Nothing much to note aside from the fact that CAD should remain supported. As long as the AUD remains weak then AUDCAD downside makes sense for the month ahead.
You can read the full statement here
Remember too that stronger oil supports the CAD as around 17% of all Canadian exports are oil related. There is 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.
Federal Reserve, Chair: Jerome Powell,0.125%. Meets August 26-28
Powell edges towards tapering
In the June meeting 7 members were looking for hikes in 2022 and 13 members in 2023. This was a significant jump from the March meeting where only 4 members saw a hike in 2022 and 7 members saw hikes in 2023. This resulted in the US10 year yields jumping higher and gave the USD a bullish boost. At the meeting this week there were no economic projections due, so that left Powell with an open hand to maintain his regular dovish hand. He achieved this with gold moving lower out of the meeting. However, there was some edging towards tapering.
Substantial further progress?
This is the test for the Fed. Question: What does it mean? Answer: Whatever the Fed wants it to mean and it is not worth the effort trying to ascertain what economic criteria has to be met for this to be fulfilled This is clearly more a 'gut feel' thing and the Fed will have met that test when they say it has been met. It will be easier to tell with hindsight, than foresight. One outstanding area is jobs with the US still 6 million jobs lower than pre-pandemic levels. However, jobs is clearly a key area. In fact Powell said there is 'still some ground to cover' for jobs. However, it is a slight concession that things are looking more positive. One good jobs print with a decent participation rate and that will have animal spirits running and USDJPY soaring higher. Especially as Powell said it should 'not take long to reach a strong labour market.
The path of QE stayed at $120 bln per month and guidance was unchanged. The Fed finally launched its standing repo facility. The pandemic was referenced, but vaccine optimism continued to steer the mood. The defat strain was acknowledged by Powell, but not feared. Inflation was recognised as transitory with the chance it may be more tricky. In which case the Fed has tools to address it. Powell said that the Fed were still some way away from raising interest rates and that ideally the bank would not raise rates until tapering had been concluded.
Federal Reserve statement change -
The takeaway
In the end Powell has edged closer to allowing the FOMC board to start tapering. If it is not announced in August then most economists see September as the time to at least announce tapering. This means that any dips lower in the USD may be transitory and the June 15/16 spike in the DXY seems justified.
Full unannotated statement on Federal Reserve website here.
If the USD remains weak and real yields low, then gold buying makes sense from $1810. However, a note of caution, if bonds start selling off gain and or the USD gains then gold longs don't make sense. So as long as real yields are low and the USD is weak then gold buying is on the cards. Don't go chasing gold though. Only enter where it makes sense.
Part 2 of the central bank rundown to follow tomorrow
