Central Bank Watch: December 2020

Author: Giles Coghlan | Category: Central Banks

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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. This is Part 1. Part 2 will follow immediately after. 

Reserve Bank of Australia, Governor Phillip Lowe,0.10%,Meets 01 December (updated 04/11)

At the last meeting the Reserve Bank of Australia lowered rates to 0.10% from 0.25% as expected. This was a widely flagged move and in addition to the rate cut there was an additional $AUD 100bln of bond purchases of 5-10yr maturities for 6 months. All of this was expected. In addition to the above the RBA said that the cash rate will not be raised for the next 3 years. The Board also said that it is prepared to do more if necessary and is prepared to buy bonds in any quantity to keep the 3yr yield target which was lowered to 0.10%.You can read the full statement here.

Some other points to note:

  • The conditions for raising cash rate are: higher inflation, rising employment and higher wages.
  • RBA said recent economic data has been encouraging and near term outlook better than it was three years ago.
  • Unemployment is expected to remain high but peak below 8% and sees end 2022 unemployment at around 6%. This is better than the previous forecast of unemployment peaking at 10%.


In the press conference afterwards Governor Lowe said that negative rates were extraordinarily unlikely, but that the RBA was not out of firepower yet. However, Lowe said that all that can be done on rates has been done now and the focus now is on quantitative easing. In the statement one of the key takeaways is that a controlled COVID-19 containment has been the single biggest factor to a less worse than feared contraction of 4% projected for 2020. See here.

Of other note is that Australia's Government announced an aggressive stimulus package on October 06. There is now a large fiscal deficit plan in place to support the country and, according to analysts, there will be few 'losers' in stocks, This will help the ASX200 catch up with its Asian peers since a rebound started in March of this year. Medium term buyers have been rewarded for staying the course from October.

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. If Trump wins the US election then that should drag AUD lower as trade tensions between US and China will ramp up. 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

European Central Bank, President Christine Lagarde, 0.00%, Meets December 10

At the latest meeting the ECB kept rates unchanged and PEPP bond purchases the same, but recognised that risks were tilted to the downside at the last ECB rate meeting this week. The ECB recognise that future actions needs to be taken and will use 'all instruments' flexibly with a particular focus on the PEPP bond purchases. President Lagarde foresaw Q3 GDP surprising to the upside, but said Q4 was more challenging and November would be very negative. The bottom line is that the ECB has set expectations for further bond purchases in December's meeting to add to the existing €1.3+ trillion already agreed. However, in terms of the EURUSD pair we may still see EURUSD buyers as 'bad news' can be supportive for the EUR against the USD as it shows that the ECB will 'do whatever it tales' to support the eurozone. This is why we saw the EURUSD rise in June earlier this year when the bonds were increased by €600 billion.


See full statement here.

Bank of Canada, Governor Stephen Poloz, 0.25%, Meets December 09, 2020

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The bank of Canada left their rates unchanged at their last meeting. The QE program is going to be continued and gradually reduced from the current $5bln a week to at least $4bln a week. The interest rates will remain at its effective lower bound until economic slack is absorbed so that the 2% inflation is achieved. Interest rates are not expected to rise now until 2023.Governor Macklem was against negative interest rates saying that the bar for using them would be very high. The bond purchases will shift to the longer end including 3,5,10, 15 and some 30 year bonds. There is scope to do more with the QE program if needed. Note that weaker oil typically weighs on the CAD as around 17% of all Canadian exports are oil related. However, the 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. All in all pretty uneventful last rate statement from the Bank of Canada from a trading perspective. USDCAD popped higher on the release, but that was mainly to do with risk off flows into the USD at the time. You can read the full statement here. I expect USDCAD to drift lower into December on seasonally dollar outflows heading into year end.

Federal Reserve, Chair: Jerome Powell,0.00%-0.25%. Meets December 16


The September Fed meeting had been a disappointment for the markets as it showed that the Fed is less accommodative than the market was anticipating. Yield curve control was mentioned as a monetary policy tool, but most participants considered the tool to only provide modest benefits. Furthermore, there were many participants who pointed to potential costs associated with yield caps. The reluctance to use yield curve control supported the USD. The November 05 meeting came right in the middle of the US elections so it was a token meeting in some ways as the Fed were not going to announce any new policy measures at that time so as to not skew the pitch over the elections. They changed very little. There was a fairly predictable call for more fiscal stimulus which was only natural given the timing of the meeting. The Fed is set to keep rates low for the foreseeable future and no rate hikes are planned until 2023. Jerome Powell remains committed to using 'powerful tools' to support the economy and thinks the Fed can do plenty to support the economy. The latest FOMC minutes have indicated that the Fed will do something in December whether it is increasing the pace of asset purchases, shifting purchases to longer maturities, or by conducting purchases of the same pace and composition over a longer horizon. Something is coming. Needless to say, of keen interest will be the December meeting and how the Fed is going to respond now vaccine optimism is gaining pace.You can read November's full statement here.

Part 2 to follow....

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