When Swiss National Bank meets for its Monetary Policy Assessments and the announcement of the Swiss Libor Rate, the affair is usually playing second place to more major banks such as the ECB and Federal Reserve. In the wake of the disastrous January meeting – in which the SNB suddenly revoked its support of an exchange rate cap – traders are unlikely to be caught unawares again at the first meeting since the event. The SNB will announce its decisions at 11:30 server time today, with a press conference to discuss any changes made.
After the SNB made its surprise move on January 15th, the Swiss Franc appreciated rapidly as traders caught long tried to liquidate their holdings at the same time. The move saw the central bank red-faced as the exchange rate appreciated beyond all expectations. Since the event, USDCHF has retraced almost the entire move of well over 1000 pips:
While a return to an exchange rate cap or a managed exchange rate would be a bold move given the circumstances, it is not impossible. According to rumour and analyst expectations, the more likely move would be to take the deposit rate further in to negative territory. If that were to be the case, there is a chance that – despite the dramatic movements since mid-January – the Swiss Franc would continue to sell off past its pre-SNB value and completely erase the movement. The deposit rate currently stands at -0.75%, so a move lower would mean a decrease to at least -1.0%.
Whether the SNB makes a move to further ease policy or not, traders will be looking for clarification as to what, if anything, is the official policy stance towards the currency now; if the SNB looks to give traders some insight in to this, they may need to further explain what motivated their previous decision. Traders may wish to make note of this meeting, in case the SNB decides to change policy again.
The FOMC meets to today to release its Statement on monetary policy – the first such release since January. The March meeting holds greater importance due to the simultaneous release of the FOMC’s Economic Projections and the Press Conference which is scheduled to follow half an hour after the release. The Statement and Projections are revealed to the public at 21:00 server time, with Janet Yellen’s Press Conference set to begin at 21:30 server time.
Traditionally meetings that are accompanied by a press conference are an opportunity for changes to be implemented; there is a possibility to discuss and elaborate on what the change in policy or wording in the statement is supposed to mean. Because of this implied importance, market participants are more inclined to pay attention.
In the meeting today analysts are expecting a reasonable chance of a change to the statement wording, with expectations surrounding the removal of the word “patient” when describing the Fed’s policy stance towards interest rates. In December the FOMC decided to change the release to remove the phrase “considerable time” to indicate that the decision would be more data dependent rather than time dependent.
When Yellen was pressed about what time frame expected for rate increases, she explained that the current policy stance was unlikely to change for the next couple of meetings. With this being the second meeting since that discussion, expectations are that Yellen will begin to prepare the market for a rate increase by removing ‘patient’ from the statement altogether.
What has been clouding the Fed’s path in recent months has been the sudden and dramatic surge in the US Dollar on a trade weighted basis, with the accompanying collapse in energy prices:
However the Fed has indicated that it is comfortable raising interest rates in an environment of low inflation:
“If economic conditions continue to improve, as the Committee anticipates, and the Committee is reasonably confident that inflation will move back over the medium term toward 2 per cent, then it will soon be the case that an increase in the target range could be warranted at any meeting.”
This is despite inflation being in negative territory – and the lowest it has been since the GFC, when the Fed was cutting rates to zero to prevent a further collapse of the economy:
Indications are that the Fed would be comfortable with this move in a low inflation environment, as it is a move towards normalisation from a period of extraordinary stimulus rather than the start of a rapid tightening cycle to slow down an overheating economy. With the weight of expectations that the Fed will press ahead with its policy moves, the US dollar has been a natural beneficiary. Any deviation from the expected course could see a dramatic move in dollar pairs as shorts are squeezed. Other features of the release that will be closely watched will be the FOMC’s ‘dot’ plot and economic projections. The dot-plot reveals the FOMC’s view of the future path of interest rates, and any changes can shift bond market pricing.
The RBNZ will meet tonight at 23:00 server time to announce the Official Cash Rate for New Zealand. The cash rate currently stands at 3.50% with the RBNZ expected to hold steady again at this meeting, which would be the sixth consecutive month that the central bank has held rates at this level after indicating at previous meetings that further tightening could be warranted.
At the January 29th announcement, Governor Wheeler’s statement was altered to remove its tightening bias:
The high exchange rate, low global inflation, and falling oil prices are causing traded goods inflation to be very weak. Non-tradables inflation remains moderate, despite buoyant domestic demand and an improving labour market. Headline annual inflation is expected to be below the target band through 2015, and could become negative for a period before moving back towards 2 percent, albeit more gradually than previously anticipated.
In the current circumstances, we expect to keep the OCR on hold for some time. Future interest rate adjustments, either up or down, will depend on the emerging flow of economic data.
This wording is decidedly less hawkish than that of the preceding month – from the December statement:
With output projected to grow at or above capacity, CPI inflation is expected to approach the 2 percent midpoint of the Reserve Bank’s target range in the latter part of the forecast period. Some further increase in the OCR is expected to be required at a later stage. Further policy adjustments will depend on data emerging over the assessment period.
The change in the wording sparked a sell-off in the New Zealand dollar of almost 300 pips in the days that followed.
Since the last release, data has been mixed for New Zealand and commodity producers in general – with the RBA cutting interest rates by 25 basis points in February before both the RBA and BoC decided to hold rates steady this month. New Zealand data has changed little since the last meeting; Employment growth was strong at 1.2, however the Unemployment Rate ticked up quite sharply from 5.3% to 5.7%.
Because of this softness in the data and the ongoing commodity price sell-off, expectations are for another month of holding rates at the same level of 3.50%. As interest rates are not predicted to move, interest will be centred around any wording changes and the outlook on inflation. The Kiwi has been surprisingly resilient since the last meeting, despite the downgrade of forward guidance – so the market may be anticipating that the rhetoric towards oil price falls softens, as the bank looks through to an improving inflation outlook. Traders will likely be looking for a confirmation that the bank has changed its bias since the last statement.
The ECB meets today to announce its Monetary Policy Decisions at 15:30 server time; it is the first meeting since the central bank announced its long awaited Quantitative Easing program in January because the ECB is on a six-week meeting schedule as of 2015, as they consider the crisis to have eased somewhat. The meeting offers the ECB a chance to outline the finer details of its easing program after a month of preparation – the program is set to begin in March, with rumours of the 9th being the inception date.
There is no other policy change expected at this meeting, with all interest rates projected to be left on hold when released at 14:45 server time. What we are expecting to gather is the details or ‘modalities’ of the program such as:
- The Target: Explicitly it might be said that the ECB has a balance sheet target, but previous QE programs have been sold on the premise of reducing longer term borrowing costs to stimulate the economy, stimulating credit demand and forcing people out further on the risk spectrum. As yields in much of Europe are already negative, or at least very low, the scope for further reductions is limited; asset markets are also considered frothy in the wake of several waves of stimulus measures from developed economies, and in this light further encouragement of risk-taking may not be warranted. Most likely the ECB’s goal here will focus on inflation, growth and the balance sheet rather than yields or risk assets.
- The Assets: Given the small size of eligible assets available, as well as the concurrently running ABS and covered bond purchase program – the ECB will need to provide additional clarification about how it intends to meet its additional 50 billion Euros-per-month target without distorting markets too much. However, if the ECB’s QE is anything like that in the US – bond demand may actually fall and yields rise when the program begins, as bond holders seek the returns of risk assets and unload their holdings. Should this be the case, the ECB may have no problems achieving its purchase targets, but there are some sellers who are legally or traditionally bound to hold on to their fixed income allocation and would be very reluctant sellers to the ECB.
There are also other issues for the ECB to cover, such as the method of purchase and the risk sharing element of the program. The event is not expected to cause dramatic EUR volatility, given that the QE program is a known event and there is no expectation for other policy changes. However this meeting is important for overall direction in the market as it marks a new era in the Euro saga and will provide crucial details about a program that will be with us and in the headlines for the next 2 years.
The Bank of Canada will announce today whether it will continue to decrease its overnight interest rate, after reducing the rate to 0.75% at the last meeting. The Rate Statement and Overnight Rate are scheduled for release at 17:00 server time and are to be released simultaneously.
Since the last rate cut of 25 basis points on January 21st, the market initially upped bets on the BoC to continue with another rate cut this month; however, improving data and rebounding oil prices have seen those bets pared back drastically – with futures markets and analysts shifting expectations from ‘almost-definitely’ back to only a 1 in 4 chance of a cut.
Canadian data has shown improvements in employment and inflation, with GDP also slightly beating market expectations last month. Developments outside of the country are equally important in the turnaround of market sentiment as a number of important policy changes have taken place to calm volatility:
- Europe officially announced its long awaited QE program.
- Greece has temporarily found an extension to its bailout program, quelling fears of an exit from the Euro.
- A number of other central banks have cut interest rates, including fellow commodity exporter Australia and commodity consumer China, easing monetary conditions worldwide.
- The Yellen Fed has not appeared in a rush to raise rates, with the FOMC revealing a dovish approach to rate increase.
The RBA’s decision to hold rates steady rather than cut a further 25 basis points may signal that the fear of a crash in commodity exporting countries is coming to a halt – if only temporarily. The Bank of Canada may take cues from its partner down under and leave rates on hold again to maintain plenty of room for accommodation should conditions worsen again. For now oil prices are low, but have recovered powerfully from earlier lows – the Canadian Dollar tracks movements in Oil quite strongly:
While the weight of expectations has now shifted towards a month of holding steady, the RBA announcement yesterday showed that central banks are not afraid of disappointing analysts or the market. Traders of CAD based pairs should be aware that there could be significant volatility around the release – especially if the bank decides to move pro-actively rather than waiting for a further deterioration in the data.
The RBA is expected to announce another rate cut today at its monthly Cash Rate Announcement; the anticipation for a decrease in the cash rate of 25 basis points comes after rate decrease of the same magnitude at the last meeting, somewhat surprising economists who saw a continued period of stability. The RBA announces its decision at 05:30 server time.
The previous announcement took some by surprise as the move was not expressly telegraphed in advance. Previously Governor Stevens had emphasised that changes to policy would likely be preceded by changes to the rate statement – December’s statement did not provide any obvious clues:
“Looking ahead, continued accommodative monetary policy should provide support to demand and help growth to strengthen over time. Inflation is expected to be consistent with the 2–3 per cent target over the next two years.
In the Board’s judgement, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target. On present indications, the most prudent course is likely to be a period of stability in interest rates.”
However, a deterioration in commodity prices likely forced the board’s hand during the 2 month period between meetings – in the February statement, Stevens focused on this decline and the pass through effects on CPI:
“Commodity prices have continued to decline, in some cases sharply. The price of oil in particular has fallen significantly over the past few months. These trends appear to reflect a combination of lower growth in demand and, more importantly, significant increases in supply. The much lower levels of energy prices will act to strengthen global output and temporarily to lower CPI inflation rates…
The CPI recorded the lowest increase for several years in 2014. This was affected by the sharp decline in oil prices at the end of the year and the removal of the price on carbon. Measures of underlying inflation also declined a little, to around 2¼ per cent over the year. With growth in labour costs subdued, it appears likely that inflation will remain consistent with the target over the next one to two years, even with a lower exchange rate.”
Given the dovish statement and the renewed round of easing worldwide, the majority of economists surveyed now expect a rate cut today to 2.00% – this is backed up by rate markets pricing a high probability of another decline, at above 50%. Expectations of today’s policy change have filtered through to the exchange rate, with the AUD declining one and a half cents overnight down to 0.7760.
While there is good reason for the market to expect a further rate cut – positioning and expectations are decidedly to the downside for the Australian dollar and interest rates, so if the RBA were to hold today it would be likely to catch the market off guard, potentially creating a short squeeze.
Whether the RBA cuts or not, there will be much to learn from posturing and forward guidance in the statement. Whether the RBA returns to a period of interest rate stability or continues to stress further easing of policy measures will be taken very seriously by traders, and is potentially as important as whether the rate cut occurs today. Traders may wish to pay attention to the policy statement rather than focusing solely on the rate decision, as this will be a key indicator for future policy action.
Over today and tomorrow, Federal Reserve Chairwoman Janet Yellen will testify before the Senate Banking Committee and House Financial Services Committee in her Semi-Annual Monetary Policy Report. The testimony takes place at 17:00 server time on both Tuesday and Wednesday. The prepared statement by Yellen is not likely to be a major source of volatility, however when the floor is opened to questions by the committee, some volatility can be expected – particularly on questions surrounding inflation and the first interest rate increase.
The FOMC minutes from January’s meeting were on the dovish side of the spectrum – this has been aided by the addition of new voting committee members who skew the FOMC towards being more patient with rate increases. However, given that the Fed has been preparing the public for coming rate increases both in its staff projections as well as changes to its FOMC statement, this board change is unlikely to hold off rate rises for too long.
Futures and rate markets are pricing the first rate increase in the second half of the year, with the probability of a rate increase falling in September or October. Meanwhile, analyst forecasts point to the possibility of an earlier rate increase, showing a majority forecast around the June meeting. It isn’t clear yet which expectation is more correct – as forecasts of rate increases have constantly been pushed back since the onset of the GFC, and market implied rates may be too depressed due to the energy price declines of the last 6 months.
While the Fed has a dual mandate, Yellen may try and focus on the employment side of its responsibility when setting policy and answering questions during the testimony. Central bankers know and stress that policy works with a lag effect, and that wage pressures are a possible consequence of the normalisation of employment levels. With the US coming closer to full employment, Yellen may comment that the FOMC needs to begin planning for this eventuality after the temporary dip in prices from energy components of CPI.
Whatever Yellen’s stance, it is sure to generate a fair amount of attention and market volatility. It has been said recently that never has so much kicking and screaming occurred over a 25 basis point rate hike before – the Fed may take the position that it is better rip the Band-Aid off quickly, rather than prolong the tantrum. Such a move might bring sharp volatility in the near term, but clear the air of fear over further rate increases and allow policy to normalize. Yellen’s testimony will also shape market reactions to this week’s CPI data – which is expected to continue to dip in to deflation.
The ECB is set to release the inaugural Monetary Policy Meeting Accounts for its January meeting – meaning traders will finally get an insight in to the policy decisions and meeting discussion after a decade of undisclosed meetings. The ECB will release the minutes of the previous meeting at 14:30 server time today.
As this is the first ‘Accounts’ release, the exact format and content of the minutes is yet to be fully revealed – however there are some details that we do know:
- The minutes will be anonymous, meaning the decision makers will not be publicly named or have comments personally attributed to them.
- The document is expected to be in excess of 10 pages.
- The minutes are not an exact account of the meeting, but cherry picked discussion that the ECB considers important – for this reason the ECB is likely to use the accounts as a communication channel.
- The only named board members will be Peter Praet and Benoit Coeure – who will provide summaries on the Euro Zone’s economy and markets.
The Accounts should give an insight in to the discussion, debate, dissent and concern within the voting members. It will also reveal any debate of the size and scope of the ECB’s new QE program, which will be important for future changes should the economy either deteriorate further or improve sharply. Due to the fact that these are the first accounts that will be released to the public, it is likely that there is some volatility surrounding the event. Traders and algorithms will not have a previous statement to compare to, and may take some time to assess the content; the length, also, will mean that there is a substantial amount of information to parse in order to reach a trading bias.
Today sees the release of another central bank meeting minutes – the FOMC will disclose the minutes from their January monetary policy statement at 21:00 server time. The FOMC maintained they could be ‘patient’ at the January meeting, but made sure to remove the phrase ‘a considerable time’ from the wording to indicate a shift to data – rather than time – dependent policy action. The committee also judged that the US economy was improving and upgraded their view of growth and that disinflation would be temporary.
The meeting was also the first with a new set of voting members; regional presidents Williams, Evans, Lacker and Lockhart rotated in to the committee – which alters the mix of voters towards the dovish side of the spectrum. The minutes from this meeting will be the market’s first insight in to these new members’ views and concerns, which will be of interest to traders.
The minutes may not provide any dramatic surprises given that the Fed remained very much on hold at this meeting, however details of the new members will be an interesting addition to the mix. Traders will also be looking out for the meaning behind the word ‘Patient’ and a time frame for the first rate increase. The FOMC may also have discussed inflation with a similar stance to the Bank of England last week – viewing the dip as transitory and actually beneficial for the broader economy.
Any discussion here of the lag effect between of monetary policy could affect pricing in rate markets, as this could confirm that rate rises will occur despite low inflation as the Fed looks ahead and through the temporary dip. While inflation is low, wage expectations have sky-rocketed higher in recent months – a survey which has historically led actual wage increases by several months. Indications are that the employment improvement in the US could finally filter through to wage increases, which can drive inflation higher:
Also of note today will be the release of the Bank of Japan’s Monetary Policy Statement – expected to remain at the same stimulus level of 80 trillion per year in monetary base expansion. The consensus opinion is quite broadly held between analysts that the BoJ will not make any changes today – which is underlined by rumoured remarks last week that further stimulus would be ‘counterproductive’ for now – news that caused a dramatic 150 pip decline in Yen based pairs as traders rushed back in to the Asian currency.
With all surveyed analysts expecting the stimulus to remain on hold, a surprise will likely be needed to cause a dramatic currency move. The BoJ releases its statement at an arbitrary time today when the 2 day meeting is concluded – traders should keep an eye on news wires for any updates.
When the RBA cut the Australian cash rate from 2.50% to 2.25% on the 3rd of this month, it took analysts by surprise – those surveyed largely expected the cash rate to remain on hold. Market implied expectations, however, were more accurate – pricing a strong chance of a rate cut which was subsequently shown to be correct. The minutes will be released at 02:30 server time today.
With analysts now having to shift their understanding of how the RBA sees the Australian economy evolving, the Monetary Policy Meeting Minutes from that meeting take on greater importance than usual. Economists and traders will be looking for several indications:
- Whether further rate cuts are likely in the coming months, or if this cut will be followed by another ‘period of interest rate stability’.
- How the RBA sees Australian growth and inflation developing over the course of 2015 and beyond.
- How international economic conditions are affecting the RBA’s decision making process – including easing in Canada and Europe and the expected outperformance of the US.
- The bank’s position on the Australian dollar, and whether it is still above estimates of fair value, or whether their assessment has softened at all since the last meeting given the declines
Much of the impact of the February rate cut is already in the price of the AUD, so the meeting minutes are not likely to be an earth shattering event. What the minutes will affect is interest rate expectations in rate markets, and the trend in the AUD towards the next meeting. If the minutes are particularly indicative of further rate cuts or escalating concerns for the domestic economy then this would be expected to filter through in to a weaker AUD. Conversely, if the minutes indicate no panic at the RBA then the Aussie could find some relief. Interest rates and the level of the AUD have previously been highly correlated: