Bank of England, Governor Andrew Bailey, 0.10%, Meets November 04
There was no change to interest rates and the split was 7-2 in favour of not altering the current target of £875 billion in bond purchases. Saunders and Ramsden were the dissenters as would be pretty much expected from their more hawkish stances. During the August BoE meeting the bank was optimistic without prompting an initial hawkish response from markets. In this latest September meeting the Bank of England was able to prompt a hawkish response. Take a look at the drop lower in Sonia futures as markets price in higher interest rates coming.
Inflation is now a worry for the BoE.
They did not say as much, but the inference is clear. First of all the 3.1% print in August was marked out as the highest since November 2011. The BoE also noted that,’CPI inflation is expected to rise further in the near term, to slightly above 4% in 2021 Q4, owing largely to developments in energy and goods prices’. The phrase that caught my attention was this one – ‘The MPC’s remit is clear that the inflation target applies at all times’. All times. So, now. This inflation worry translated to the Bank saying that ‘ some modest tightening of monetary policy over the forecast period was likely to be necessary to be consistent with meeting the inflation target sustainably in the medium term. Some developments during the intervening period appear to have strengthened that case’.
The end of the furlough scheme is still concern for the BoE. The BoE are focusing on ‘the extent, impact and duration of any change in unemployment; as well as the degree and persistence of any difficulties in matching available jobs with workers’. So this means that jobs data will be in key focus going forward for the GBP
The medium term outlook for the GBP remains bullish. Pairing the GBP against the CHF and the JPY make sense, just watch the risk tome does not result in significant strength for the safe haven currencies.
The other entry option is from market with a hidden bullish divergence on the weekly chart
The argument against GBPJPY longs is that the Evergrande crisis can return to spook markets at anytime and is not an insignificant risk. The other option would be to pair the GBP with the EUR as long as the ECB have a neutral/weak bias.
You can read the the full statement here.
Swiss National Bank,Chair: Thomas Jordan, -0.75%, Meets December 16
This is interesting as the SNB is showing signs of growing impatience with the strong CHF. The SNB interest rates remain the world’s lowest at-0.75%. This is due to the highly valued franc (CHF) which has seen signifiant gains over the last few years due to safe haven demand.
The SNB want a lower CHF
At their latest meeting they repeated their willingness to intervene in the FX market in order to counter upward pressure on the Swiss franc. However, at this last meeting the SNB were explicit about the highly valued franc. Previously they had said that they were willing to intervene ‘as necessary while taking the overall currency situation into consideration’. The shift underscores that the SNB hates a strong CHF and their patience is fractionally thinner. It’s probably been the Evergrande crisis spooking investors into the CHF that has peaked their attention. As an aside see here for an interview I did on the Evergrande crisis if you would like a refresher/primer.As an export driven economy they hate a strong CHF and are doing their best to make it as unattractive as possible. The market generally ignores this and keeps buying CHF on risk aversion which has been here in one form or another since around 2008/2009
On their September 23 meeting the SNB left rates unchanged. The inflation forecasts were revised higher again to 0.5% for 2021 from 0.4%.The new forecast stands at 0.4% for 2021, and 0.7% for 2022, but then back to 0.6%or 2023.
In terms of growth the SNB was not as upbeat as the previous meeting . In the March meeting they projected growth of 2.5% -3%. In the June meeting they noted that the economic indicators had improved significantly of late. Growth for 2021 in June was seen at 3.5% mainly due to the lower than expected decline in GDP in Q1. The SNB now expects GDP growth of around only 3% for 2021. In June, the SNB had still been assuming higher growth. The downward revision, according to the SNB,is primarily attributable to the development of consumer-related industries such as the trade industry and hospitality, which performed less dynamically than expected.
The bottom line and the EURCHF outlook
The SNB will continue to intervene in the FX markets. The Swiss are always mindful of the EURCHF exchange rate because a strong CHF hurts the Swiss export economy. This is why there has been a shift in language about countering ‘upward pressure on the Swiss Franc’. 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.
Read the full statement here.
For more details on the sight deposits check out SNBCHF.com, This site called the removal of the floor back in 2015, so well worth checking out.
The SNB are still content to be the lowest of the central bank pack and dissuade would be investors by charging them for holding CHF. EURCHF for a 6-12 month hold is still worth considering, if not even more so now with the SNB’s patience wearing thin with a strong CHF.
Bank of Japan, Governor Haruhiko Kuroda, -0.10%, Meets Oct 27
The Bank of Japan still remains a very bearish bank and there is no sign of it exiting from its easy monetary policy.The latest meeting saw no surprises and everything was as expected. 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. The only dissenter was once again Mr Katoaka.
The general outlook is that although the level of Japan’s economic activity is ‘expected to be lower than that prior to the pandemic for the time being, the economy is likely to recover, with the impact of COVID-19 waning gradually, mainly due to progress with vaccinations, and supported by an increase in external demand, accommodative financial conditions, and the government’s economic measures’.
For years Japan has struggled to see any inflation, so with inflation rising around the world it was interesting to see that the BoJ expect consumer inflation to remain around 0% for the time being.
The fed’s shift this week means USDJPY upside should be favoured.
In the last central bank report I said that longer term the Fed will move before the BoJ. The USDJPY pair has now broken higher after the Fed’s more hawkish shift this week. Check out the symmetrical pattern below. Also check out the explanation of how the US 10 year yields tracks the USDJPY pair in yesterday’s article.
If you need a hand trading this technical pattern, here is how to do it as I outlined here. A return to test the pattern would be a great possible entry. Much focus will be on October 08 jobs, so stay tuned!
You can read the full statement here.
Reserve Bank of New Zealand, Governor Adrian Orr,0.25%,Meets October 06
The latest RBNZ decision was a tricky one. Most of the projections for the decision were made obsolete by the news that the first case of COVID-19 had been discovered in Auckland. This sent New Zealand into a level 4 alert and three day nationwide lockdown and Auckland into a seven day lockdown. New Zealand has an elimination strategy to get rid of COVID which means any signs of cases rising will mean further lockdowns.
The RBNZ had to balance conflicting pressures. Firstly, the new COVID situation. Secondly, a very hot housing, employment and inflation situation. At the meeting prior to this one the outlook for inflation was unclear. However, clarity emerged with the latest inflation reading coming in at 3.3% y/y which was the highest reading in 19 quarters. Also remember that unemployment is very low at 4.0% vs the expected 4.5% level. So, the economy is running hot.
The RBNZ had to decide which pressure they would react to; Covid or a hot economy? They reacted to both. They responded o COVID pressures by not hiking rates and kept them uchanged at 0.25%. The RBNZ also reminded markets that they could decide to re-start the LSAP QE program (this stopped on July 23 this year) if necessary. The RBNZ said that the inflation and employment outlook would be reviewed on an ongoing basis with a view to raising interest rates over time. Both employment and housing are seen as ‘above maximum sustainable levels.
The bit that matters
Despite the hold on rates this was seen as a minor hiccup on a strong projection higher. The projections for the cash rate were all revised higher from the previous meeting showing the underlying confidence that the RBNZ has.They project interest rates at 0.59% by December (previously it was 0.25%, 1.38% for September 2022 (previously 0.49%),& 1.62% in December 2022 (previously 0.67%).
The key point to note is that RBNZ are actually optimistic about the future and see the OCR rising. One rate hike this year and 100bps next. Not bad at all. Governor Orr really saw the recent COVID case as a bump in the road. Orr said at the meeting that lockdown is a concern but is less concerned than he would have been last year. The cherry on the top was when the Assistant Governor said that the bank would have hiked by 50 bps, but they avoiding doing it as it would make communication difficult as COVID cases were back again.
This should mean the NZD keeps an upside bias. A surprise rate hold and the first COVID-19 case in months could not send the NZD sharply lower. This means that the NZD remains a buy on dip against weaker currencies. The RBNZ are expecting 100bps rise next year, so that should keep the dip buyers motivated. Something like the NZDJPY pair makes sense as long as the risk tone stays positive. Another alternative would be the EURNZD as a short depending on the ECB’s next move. The key issue here is how well the New Zealand Government can contain the virus.