A little later today the Bank of Japan is expected to release its Monetary Policy Statement, followed by a Press Conference with BoJ Governor Kuroda. The releases are tentative, which means they can occur at any time – so traders of Yen pairs may wish to check the news frequently today for the announcement.
With the LDP retaining a strong majority in the Japanese Lower House Elections on Sunday, Prime Minister Abe has a mandate for continuing his flagship stimulus program – Abenomics. While the victory is an implicit vote of support for Abe’s ‘three arrows’ policies, the Bank of Japan is not expected to make any changes today. Given that their recent expansion in monetary easing was both large in scope and quantity and that monetary policy is usually lagged in effect, the BoJ is likely to wait to see if the enacted measures filter through to increased inflation.
However, with the new victory of the LDP it is now more likely that if the BoJ wishes to act, that it can do so without facing public backlash. With the Japanese economy in recession and inflation failing to live up to expectations so far, there is room for further stimulus to reach goals of longer term 2% inflation. While the CPI spiked higher earlier in the year, this was mainly due to a sales tax increase – one which was later blamed for triggering a new recession. Since the sales tax increase, the Year on Year change has remained technically elevated – but once the one-off increase is filtered out, the situation is one of declining CPI inflation – with bond yields indicating that the market is not yet taking the threat of inflation seriously:
The FOMC proceeded with removing the phrase ‘a considerable time’ in its Wednesday meeting, replacing it with a less time dependent ‘the Committee judges that it can be patient in beginning to normalize the stance of monetary policy’. The market read the change as mildly hawkish, with major currencies such as the Euro, Pound and Australian Dollar falling by between half to a full cent against the US dollar. The reaction took some time to crystallise, with the Australian dollar initially rallying over half a cent – perhaps due to the ambiguity of the change.
As usual, there was some dissent within the committee:
- Richard W. Fisher: who believed that, while the Committee should be patient in beginning to normalize monetary policy, improvement in the U.S. economic performance since October has moved forward, further than the majority of the Committee envisions, the date when it will likely be appropriate to increase the federal funds rate.
- Narayana Kocherlakota: who believed that the Committee’s decision, in the context of ongoing low inflation and falling market-based measures of longer-term inflation expectations, created undue downside risk to the credibility of the 2 percent inflation target.
- Charles I. Plosser: who believed that the statement should not stress the importance of the passage of time as a key element of its forward guidance and, given the improvement in economic conditions, should not emphasize the consistency of the current forward guidance with previous statements.
The FOMC made no change to reinvestment of the proceeds from its asset portfolio, keeping the balance sheet fairly constant over time as profits are recycled in to new purchases. One change which was considered dovish was the change in staff economic projections. The median expected Fed funds rate according to staff ‘dot plots’ moved lower (Source: Federal Reserve):
The number of participants expecting the first rate rise to occur in 2015 rose by 1, which was simply the result of the lone 2014 voter shifting out to 2015:
It has been two months since the last FOMC statement, and the US dollar strength that followed has been a roller-coaster ride for traders – causing dramatic falls in commodities and commodity exporter currencies such as the Ruble and Australian dollar. Because of the fall in oil prices in particular, expectations for inflation and future inflation have been falling globally – supporting safe haven bond prices and sparking calls for further easing. UK inflation, released yesterday, showed that inflation had fallen to just 1.0% – putting an end to speculation of a rate hike.
Many are expecting to see a hawkish Fed today – ignoring market volatility in order to normalise policy; there are also growing calls for a dovish Fed stance to calm markets, which have been reacting to US tightening with growing fear and increasing spreads or risk premiums. Much of the debate still surrounds the use of the phrase ‘considerable time’ in the FOMC statement, with a change in language expected to indicate near term intentions of the Fed to raise interest rates.
In the lead-up to the FOMC statement, the BLS also releases US CPI for last month – a surprise result is likely to drive trading sentiment for the hours up until the FOMC announcement. Economists expect that CPI will come in negative at -0.1%, while the Core CPI rate is expected to remain slightly positive at 0.1% – weak results but the FOMC may choose to ‘look through’ the inflation as a temporary effect of lower oil prices. Inflation may fall further tonight with plummeting oil prices, however Core CPI has remained firmly anchored thus far:
Perhaps the most closely watched release will the staff member’s economic projections – the FOMC releases a ‘dot-plot’ of the expected path of interest rates. In recent releases, the projections have grown more confident than market implied forecasts, indicating a year of substantial rate tightening according to the last publication. Traders will be looking for any significant change to staff expectations as a clue to policy intentions next year.
Other than removing the ‘considerable time’ wording in the statement, other possible changes could involve the rundown of the Fed’s enormous balance sheet. Currently the Fed reinvests maturing assets, however if the Fed believes the market can handle a smaller presence in the bond market they may discuss altering what is done with maturing bonds. It is likely that the FOMC will discuss the recently implemented reverse repo program – however this is not usually a market moving feature. Whatever the changes made, a press conference is scheduled for Chairwoman Janet Yellen to speak about any changes to policy or the statement half an hour after the statement is released – this can be used to explain why any wording has been changed and what it means for policy.
Also of note today, the UK releases its monthly employment data. The Claimant Count is expected to show a decline in line with last month, at -19,800, with a slight decrease in the Unemployment Rate from 6.0% to 5.9%. The Pound rallied strongly last night as Mark Carney stated that they would ‘look through’ low inflation due to oil prices. New Zealand GDP will also feature strongly, and will follow around two hours after the FOMC Press Conference; economists expect the growth rate of GDP to be unchanged, at 0.7% quarter on quarter.
Russia and the Ruble are firmly in crisis mode, after a laconic 100 basis point increase in the CBR’s interest rate failed to satisfy market participants. Since the central bank meeting, the Ruble has plummeted by over 20% against the US Dollar and the CBR has been forced to raise interest rates drastically to 17.00%, up from 10.50%.
Since the surprise rate increase, which sparked a short covering rally, sellers have come in force to the market as banks have moved to stop providing liquidity due to the risks involved. Because of the lower liquidity, spreads on Ruble pairs are much wider than normal and market movements are excessively volatile. Many brokers and banks have now ceased to provide a market for the currency as confidence wanes in the oil exporter’s ability to manage its monetary affairs.
USD/RUB rose to above 76, reaching even 80 on some platforms – indicating the lack of liquidity in the market. This year’s falls in the Ruble have been driven largely by falling oil prices and international sanctions. When an emerging market economy faces a depreciating currency it can cause a crisis in two ways; firstly, when a managed exchange rate regime is overwhelmed by persistent market pressure selling that currency and; secondly due to the tendency of emerging market economies to take on debt issuance in foreign currencies – predominantly in US dollars.
While the Ruble has already succumbed to the first form of crisis, in that the managed exchange rate has given way to a more freely floating currency. The second form of crisis has not yet occurred, but Credit Default Spreads indicate that the Russian default rate has increased substantially – in excess of 30% according to market implied rates. This is occurring because Russia has a large portion of its external debt based in US dollars, making the coupon and principal payments more expensive as the Ruble falls lower – a vicious cycle which results in further selling of the Ruble. While the country does have substantial FX reserves with which it might make payments, the market is clearly taking the risk quite seriously. Echoes of the 1998 Russian crisis come to mind, and all eyes are on this currency pair, for which the market is drying up.
There will be a strong focus on the UK and the Pound today as there are three successive news events scheduled which could cause a strong reaction in GBP based pairs.
The Bank of England’s Bank Stress Tests and Financial Stability Report are the first data publications to be released today (09:00 server time), and perhaps the most closely watched. The Stability Report comes out only twice per year and can cause a significant market reaction. Bank Stress Test results may affect financial sector equities more directly than the British Pound, however because London acts as a financial centre the results can affect sentiment towards the currency. Following the release of the Stability Report, the BoE Governor Mark Carney will hold a press conference to discuss the document; this occurs two hours later at 11:00 Server time and could spark volatility.
Half an hour after the Carney Press Conference, the Office for National Statistics releases last month’s CPI Inflation figures. The CPI data should be particularly notable, as the previous Inflation Report signalled that inflation could dip below 1% in the next few months – such a weak reading would be expected to put further pressure on the Pound, which has already declined over 1500 pips this year since peaking against the USD in July. Analysts, however, are predicting a number slightly above 1% with a survey of economists expecting a reading of 1.2% – down 0.1% from last release.
Sunday’s Japanese election resulted in an as expected win for the incumbent Prime Minister Shinzo Abe and his LDP party. The LDP won 325 seats of a possible 475 in the lower house, securing a strong majority and ensuring that Abe maintains support for his stimulus program known as Abenomics. While the vote does secure a mandate for further easing measures, the market appears to have already priced in the win prior to the weekend – meaning that the Yen actually rallied slightly on the news on light profit taking – falling 100 pips from the close last week to hit a low around 117.75 against the US Dollar.
WTI also gapped lower by over $1 per barrel, touching as low as $56.50. The fall is likely to hurt the Ruble today, as other commodity exporters like Australia have seen their currencies hit in early trading; the AUD is down half a cent from last week at just above the 0.8200 support level.
Chinese industrial production will be released today at 07:30 server time, with the year on year figure expected to come in at 7.6% – down from the previous months 7.7%. Chinese data has been showing signs of weakness recently, even as equity markets rallied in bubble like euphoria, with industrial production one which has been on a fairly steady downwards trend since the initial GFC recovery.
Industrial production is an important number for the Australian dollar, as Chinese industrial inputs are typically resource heavy and reflective of Australian exports. With Iron Ore prices tumbling and the Australian dollar lacking any substantial demand, those with a long AUD bias will be hoping for a strong number.
However, a particularly weak number would indicate that the economy is rebalancing, particularly if it is accompanied by a lower Fixed Asset Investment figure and a higher Retail Sales number. China has been trying to rebalance away from its investment driven growth model towards a consumer based economy – a big part of that is lowering Investment and increasing consumption indicators such as retail sales. While considered a positive for the Chinese economy, the Australian dollar is unlikely to benefit from a move away from resource intensive production.
The market was un-phased overnight when the uptake of the second round of T-LTRO’s was announced by the ECB. Analysts had cut forecasts down to 130 billion this week from 150 billion, and the estimate turned out to be precise – the ECB allotted 129.8 billion between 306 bidders. As the result came in almost exactly as expected, there was little movement or volatility; however some banks are now increasing the chance of QE next year in Europe after the combined uptake from both LTRO’s was less than satisfactory. The Euro ended the day down around half a cent.
The Swiss National Bank kept interest rates between 0 and 0.25% with no other major changes to policy – keeping the 1.2000 floor in EUR/CHF intact and stating:
“With interest rates at zero, the minimum exchange rate is the key instrument to avoid an undesirable tightening of monetary conditions”
However, Chairman Jordan did discuss other unconventional measures including negative interest rates and said that it would defend the exchange rate cap with utmost determination. After the release EUR/CHF fell a quarter of a cent towards the exchange rates recent low’s at 1.2010.
The Russian central bank hiked interest rates 100 basis points overnight in an attempt to prevent further currency depreciation, however the range of market expectations reached as high as 250 basis points causing the market to react negatively to the news. USD/RUB continued to sell off after the increase, reaching a high of 56.60. Market participants were looking for a more substantial intervention to halt Ruble depreciation. The News was little helped by oil prices continuing to slide lower – with WTI now below the $60 per barrel level:
Tonight’s Targeted Long Term Refinancing Operation, or T-LTRO, by the ECB is likely to be a pivotal data point for traders over the next 6 weeks, as it is likely to determine whether the ECB is forced to come up with a new easing program. The question surrounds whether the T-LTRO allotment will be large enough for the ECB to meet its target of around 1 trillion Euros in balance sheet expansion under the current measures.
It is looking unlikely that the current measures can expand the ECB’s balance sheet to around 3 trillion Euros, with repayments of old borrowings offsetting a large portion of new stimulus measures in a ‘two steps forward, one step backward process’. Since this year’s easing measures were announced, the ECB’s balance sheet has actually contracted – sparking calls for QE using sovereign bonds.
The previous T-LTRO failed to generate strong interest from European banks, with an uptake of only 82.6 billion; this was partly blamed on banks waiting for the AQR (Asset Quality Review). Market expectations for this second round allotment of the T-LTRO have been falling, despite the AQR now being out of the way; expectations have fallen from 150 billion to 130 billion ahead of the announcement today.
It isn’t clear whether a poor uptake today will cause a strengthening or weakening in the Euro, as the results can be read in a number of ways. If the uptake is poor, this would reduce the amount of balance sheet expansion that occurs in the near term, but increases the pressure on the ECB to come up with a program such as QE at the next meeting. Conversely, if the uptake is strong this would be expected to increase easing in the near term but reduce calls for a QE program in the coming months. Because it isn’t very clear, the market could take this result in a number of ways depending on which program is preferred – traders should be prepared for volatility while the market reacts and assesses the outcome.
As the ECB is moving to a 6-week cycle in 2015, the result of tonight may fuel speculation through to late January. If the result is particularly bad or good it may spark a trend in Euro pairs until the next ECB meeting.
Also of note tonight will be the Swiss central bank’s quarterly meeting. The central bank is expected the keep rates at less than 0.25%, though with inflation currently negative and the EUR/CHF exchange rate being pressured downwards to the 1.2000 floor held by the SNB the central bank may release a fairly dovish statement to appease the market. This could include discussion of the exchange rate cap on the Franc, or unconventional policies including negative interest rates.
Comments in the RBNZ’s rate statement sparked a sharp rally in the New Zealand dollar this morning, exacerbating this week’s US dollar squeeze and pulling up the Australian dollar. The Kiwi central bank held rates at 3.50%, which was the expected outcome, however the statement wording was changed to indicate that interest rate rises were once again on the horizon:
“Nevertheless, we expect some further policy tightening will be necessary to keep future average inflation near the 2 percent target mid-point and ensure that the economic expansion can be sustained.”
This differs from the previous statement which talked of a period of assessment with no explicit tightening bias:
“CPI inflation is currently at a low level despite above-trend growth. However, inflation is expected to increase as the expansion continues. A period of assessment remains appropriate before considering further policy adjustment.”
The New Zealand dollar rallied two cents on the announcement, reaching highs of 0.7870:
The Australian dollar’s rally was helped along by the RBNZ statement as well as the release of some much better than expected employment data today. Economists were expecting a net increase of 15,200 employed people and the Unemployment Rate to move higher to 6.3%. The unemployment rate was announced at 6.3% as expected, however the employment change beat expectations dramatically at 42,700 new jobs.
The Aussie dollar spiked higher by half a cent on the news, however a closer look at the data revealed a large contribution from part time jobs and only a small increase in net full time jobs. The AUD later fell back nearly the full amount of its rally as the in depth data filtered through.← Older posts