Central bank rundown
Good morning, afternoon and good evening one and all! It's time for your central bank catch up. So, if you have been out of the loop, or just want a quick refresher, then grab a coffee and let me get you up to speed. We will look at the remaining four major central banks tomorrow.
The link to the latest statement is at the bottom of each section, so just click there to read the bank's central statement. Remember, there is no substitute for actually reading a central bank statement yourself and it will almost certainly be of great benefit to your trading.
Finally, some advance notice. On Thursday and Friday of this coming week I will be covering the North America session over Thanksgiving. So, will see you then as I keep the seat warm over the holiday. Right ho - read on below for your latest central bank run down.
Reserve Bank of Australia, Governor Phillip Lowe,0.10%,Meets 07 December
In the October 05 meeting the RBA indicated that they had hit rock bottom, that peak 'bleakness' had been reached.The impact from falling Iron ore prices, China's slowdown in growth, the Evergrande crisis, as well as the delta variant locking down parts of the country all left their mark on the Australian economy. In November's meting the RBA's decision tried to balance a few things as they did concede that interest rates could now rise in 2023. Remember that the RBA had previously stated that interest rates would not rise until 2024.
- Firstly, as expected, they kept rates unchanged at 0.10 bps
- Asset purchases remain being purchased at the same rate of $4 bln per week.
- They finished their yield target of 0.10 bps for the April 2024 Australian Government bond.
This was all pretty much expected. The 2024 yield target was a slight ambiguity going into the last meeting. If you remember they stopped intervening in the bond market a few days before hand. So, the speculation was that they had given up defending the curve, which they had of course. Sensibly, the RBA did not want to be fighting the sharp rise in front end yields. Was it a hawkish action? Yes, but their dovish rhetoric kept the AUD subdued.
Where now from here for the RBA?
Well, that all depends on two things according to the RBA:Inflation & wages
The RBA consider that inflation, or rather underlying inflation, is at an ok level. Underlying inflation is at 2.1%headline inflation is at 3% being driven higher by petrol, homes, and supply chain issues. The inflation forecasts are for underlying inflation to 2.25% over 2021/2022 & underlying inflation to 2.50% in 2023. In this regard 'The Board is prepared to be patient, with the central forecast being for underlying inflation to be no higher than 2½ per cent at the end of 2023 and for only a gradual increase in wages growth' . Remember, too that the RBA is also prepared to look through inflation of 3% or more if wages growth is not being seen at the same time.
The cash rate will not rise until - 'actual inflation is sustainably within the 2 to 3 per cent target range. This will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently'. The latest wage data this week did not give any reason to think that the RBA would shift to hiking rates more quickly. See Eamonn's run down here.
The key point
The AUD will be sensitive to four things now. Ideally, to get a clear direction on a trade it would be good to have as many as these factors as possible all pointing in the right direction.
- Global growth
- Commodities - Iron Ore, Coal, Gold and copper prices
Finally, consider positioning from the COT report to see what leveraged funds and asset managers are doing. AUD looks very vulnerable to good news. Therefore, expect the AUD to rally hard on any better than expected wages news. Also keep a close eye on Iron ore prices. A recovery here will be a lift for the AUD as around 1/4 of Australia's exports are Iron ore.
European Central Bank, President Christine Lagarde, -0.50%, Meets December 02
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'.
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 that the euro has a weak bearish outlook and the current negative sentiment around rising covid-19 cases is making hard for the ECB to shift from an accommodative stance and supply chain bottlenecks continue to dog markets. Look for a surprise Calrida appointment to boost the EURUSD. Clarida will be more accommodative than Powell, so a surprise Clarida appointment should be a nice fast run up higher in the EURUSD.
Bank of Canada, Governor Tiff Macklem, 0.25%, Meets December 08
This meeting saw a hawkish shift from the BoC. 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.The hawkish tilt was that QE has now been ended by the BoC and rate hikes are now expected sometime in the middle quarters of 2022. Prior to the meeting the expectations were for the BoC to reduce QE from CAD$2 billion per week to CAD1$ billion per week and interest rate hikes were not expected until the second half of 2022.
As with central banks the BoC expressed its concern for rising inflation. The BoC is now 'closely watching inflation expectations and labour costs to ensure that the temporary forces pushing up prices do not become embedded in ongoing inflation'. The causes for the inflation by the BoC is seen as increased demand for goods, but shortage in labour and production & distribution alongside surging energy prices. The latest inflation data was not a massive cause for concern this week as it was on expectations unlike the UK and US prints. So, no drama from Canadian inflation to force the BoC's hands yet.
The output gap
The BoC were correct in their assessment at the last meeting that they still saw the economy strengthening in the second half of 2021 with consumption, business investing , and government spending all contributing positively to growth. The narrowing in the negative output gap validated this outlook. The output gap is the difference between GDP and the potential GDP. It gives you a snapshot of how the economy is performing compared to its possible performance. The current gap is less than it was in Q2 (-3 to -2%) and is now at -2.25 and -1.25%. The gap is expected to close around the middle quarters of 2022.
It was good news for the CAD out of the meeting and this should result in some CAD strength over the medium term. Like last time, and now especially with the BoJ such a low yielding currency, CAD strength over the JPY on deeper pullbacks makes sense. However, mark this point - a lot of good news was priced in for the CAD going into the last meeting.
So, it would be prudent to wait for a decent pullback in CAD before considering longs. Don't forget that the Canadian dollar is one of the so called petro currencies alongside the Russian ruble (RUB) and the Norwegian krona (NOK). 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. If it is good news for oil then it is good news for the CAD. The recent oil weakness on talk of emergency reserves flooding the market, albeit temporarily, is a near term drag on the CAD. However, here is one obvious candidate on the CADJPY chart for a medium term long.
Federal Reserve, Chair: Jerome Powell,0.125%. Meets 15 December
Flexible, but patient
At the last federal reserve meeting the signalled taper of $15 billion per month occurred.The Committee decided to begin reducing the monthly pace of its net asset purchases by $10 billion for Treasury securities and $5 billion for agency mortgage-backed securities. All as expected and the taper was well flagged in advance. You can see my interview with Yahoo Finance here as I interviews over the release.
The main question going into the meeting was how would the Fed manage inflation concerns around the pace of the taper. Would the Fed adjust the tapering speed? Could interest rates be increased even while tapering was still running? So, this meeting was always going to be about tone rather than actual monetary policy decision.
The Fed basically recognised it as an issue and moved away from the pure 'transitory' narrative. This was done by changing the statement to read that inflation was now 'expected' to be transitory & that the word 'transitory' did not appear in the press conference.The Fed took a step back from transitory in the statement as it means 'different things to different people'. This means that some see transitory as 1 year and others 6 months. Transitory is dependent on your timescale which does vary from person to person.
This is a key sticking point. Jerome Powell does not think that the Fed is behind the curve, but stated that needs to see more progress on jobs. He considers jobs back to 'pre-Delta' path as 'good progress'. Jerome Powell dodged the question 'is a 2022 hike appropriate ?However he did recognise that maximum employment could be reached by the middle of next year. So, that is potentially more hawkish and keeps jobs data front and centre.
The reaction to Jerome Powell's speech was telling in the aftermath of the decision even though the decision itself was not obviously bullish or bearish. Yields started to fall around the world and, after the BoE pushed back on rate hikes as well as a dovish RBA in the same week the yields of bonds around the world started to fall. Markets began to re-price aggressive expectations of early rate hikes to combat inflation. One of the key beneficiaries of this drop in yields ought to be gold. If real yields fall (which they should with falling yields, but inflationary pressures) then gold could be a big beneficiary. Since then the market is trying to make up its mind on whether central banks will be forced to act or not.
The strength of gold around the year end means that gold could be about to embark on a really strong run higher if yields drop and the USD drops along with inflation staying high. See here on my talk this year about trading gold into year end.