Major central bank rundown

The central banks are listed below with their current state of play. The link for each central bank is included in the title of the bank and the next scheduled meeting is in the title too.

Reserve Bank of Australia, Governor Phillip Lowe, 0.10%, Meets 05 May

Falling behind the curve?

Once again, there were no surprises at the last RBA rate decision earlier this month. The Cash rate and the 3-year yield target were both kept at 0.10%. The level of bond purchases was unchanged too. The RBA was nearly through their first $100 billion AUD earlier this month and was starting through the second tranche of $100 billion.

Once again the RBA recognised that the domestic economy was recovering more quickly than expected.GDP increased by a strong 3.1% in December boosted by a lift in household consumption. Household and business balance sheets were seen to be in good order to support spending. Inflation expectations have also lifted from record lows nearer to the bank’s target of inflation in the 2-3% range. The board recognised that the recovery in Australia had been stronger than expected. The unemployment rate has fallen to 5.8% in February. At the previous RBA meeting the board had seen unemployment around 6.0%, so 5.8% is at the lower end of what they had been expecting. However, the RBA still stated that unemployment is too high and that spare capacity will keep wage pressure subdued and therefore not generate a longer-term rise in inflation. The three-year bond target remains the RBA target. Later in the year, the RBA will consider whether to keep the 2024 bond target or shift to the next maturity. Bond purchases are continuing as per schedule with the RBA ready to make further bond purchases if necessary.

The takeaway

The risk for the RBA is that they are being overly cautious. For this meeting and the one prior, the economic recovery has continued to improve. However, the RBA has kept to the script that there will be no interest rate rises until inflation is in the target range, and that will not occur until 2024. Similar to the Fed, any rise in inflation in the near term is thought to be due to short-term factors only. Any further improvement in the labour market will be a big tick for the RBA and is worth watching out for at the next labour data point on May 13. A strong rise in labour data can help the RBA change their forward guidance and lift the AUD. This will be especially needful after the last labour point for the RBA showed an uptick in the headline number, but that was mainly part-time jobs that were added.

April 06 minutes

This was further underscored by the RBA minutes that were released on April 06. In these minutes the RBA board noted how Australia had higher levels of employment and participation than the level at the end of 2019. This was attributed in part to the JobKeeper programme. The main impact felt in Australia had been less hours worked and wages restrained rather than a decline in jobs. So, a clue here. If hours rise, unemployment falls, and wages too (RBA target-ing 3%) that is bullish AUD. Always pays to read the small print.

The housing market was booming in Australia, like most players, but there was no evidence seen of risky lending behaviour, so no concern there at this stage. The main interest was from first-time buyers.

European Central Bank, President Christine Lagarde, -0.50%, Meets June 10

Pressured by slow vaccine roll-out

At their last meeting this month the ECB kept interest rates unchanged as expected. They also kept the size of the bond purchases (PEPP) unchanged at €1.85 trillion.  QE purchases are continuing at the speed of €20 billion a month, but the differences were in the emphasis of the last meeting. At the meeting previous to this one the Governing Council was divided about the then rise in bond yields. Some were seeing economic recovery. One notable Haw was ECB’s Knot who since that meeting said that the PEPP programme could start to be tapered back in Q3 and finished by March 2022.

The Hawks were quiet

However, after the April 22 meeting, the GC Hawks were quiet. There were no calls for a reduction in the PEPP program. Why? This is all to do with the rising COVID-19 cases in Europe which threaten the return to consumption, This was underscored by Christine Lagarde who said the Governing Council did not consider reducing PEPP purchases and that it is premature to discuss tapering. The burden was placed onto the data. The reduction of PEPP is seen as data-dependent. Christine Lagarde also said that it would be nice for the ECB to move in tandem with the Fed, but Lagarde noted that the inflation situation and expectations were to on the same page.

There were no exciting upgrades to future GDP which was probably sensible by the ECB with the uncertainties reigning. This was always going to be a ‘nothing’ meeting and in that sense, it did not disappoint. However, a few things to squeeze out of this lemon for us.

Firstly, the risk here is that investors keep looking through the current malaise to better times ahead? If they do then keep looking at the German 10-year bund yield. If that keeps rising then we may see some euro strength come in ahead of the next ECB rate meeting in June.

Bank of Canada, Governor Tiff Macklem, 0.25%, Meets June 09

Bullish shift

Interest rates were unchanged on April 21 at 0.25% but bond purchases were reduced from $4 billion per week to $3 billion per week. On top of this, the BoC brought forward interest rate hikes from 2023 to 2022 as they are expecting the economic slack to now be absorbed sooner than anticipated in the last central bank meeting.

The tone of the last BoC meeting was more optimistic and this was notable due to the concerns going into the meeting, namely that rising COVID-19 cases may cause the BoC to pause tapering. They didn’t. Part of that reason was probably due to the fact that the BoC was under some pressure to cut asset purchases as the central bank now owns more than 40% of outstanding bonds. Macklem said that if the BoC owned 50% that could have unsettling market consequences. So, in that sense, a taper was needed. This does not take away from the bullish message but provides some context for it.

The Bank of Canada, like other central banks, see inflation rising higher in the near term. However, they see this as temporary. Concerns remain about low wage workers, but these concerns should be fine as the latest jobs date from Canada has been very strong and around 90% of jobs are back.

The housing market once again came under the eye of the BoC. Low interest rates encourage house purchases and have resulted in a hot property market. This can encourage speculation and risky lending on one hand, but discourage first-time buyers on the other. So, not a great combination. The BoC is keeping a close eye on the housing market, as are most other central banks. They won’t want to get involved with controlling this, but if the BoC do then that will be a tailwind for CAD. Expect more from the BoC at some stage. Remember that the RBNZ was seen as pressured to control the housing market and that boosted the NZD (They were seen to be having to hold rates to prevent a housing bubble). As soon as the New Zealand Gov’t intervened, and took that off the RBNZ hands, then the NZD fell. So, be aware of this dynamic in terms of the CAD and the BoC. It’s a great template of response.

Personal savings are up, so remember the survey conducted in November last year. The BoC is working on a boost per capita to consumption of $500, if the outlook around COVID-19 rapidly improves then more of those savings will come online.

The BoC are decidedly more optimistic, and it is now reasonable to expect broad CAD strength.

Some charts to consider

The medium-term outlook for the USD remains bearish for now, so USDCAD shorts would be reasonable looking to fade rallies. An argument can also be made for CADCHF and CADJPY longs as the global recovery hopes should mean oil finds dip buyers (supporting CAD) and both the SNB and BoJ both have a very loose monetary policy.

Remember that stronger oil supports the CAD as around 17% of all Canadian exports are oil-related. There is a 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.

Federal Reserve, Chair: Jerome Powell,  0.125%. Meets June 15

Federal Reserve holds to the script of ‘no rate rises until 2024’

At the last Federal Reserve meeting, Jerome Powell tried to stay as neutral as possible. Interest rates were left unchanged. The pay of QE stayed at $80 bln, and the IOER rate was left unchanged. Going into the event there was a genuine question whether the Fed would start to signal the start of talking about tapering. The Fed is ready to allow things to run a little hot before moving on tapering or rates. The explicit comments that were made were as follows:

• It’s not time to talk about tapering. The Fed will signal in advance when they do.

• Activity has only just picked up.

• Recovery is quicker than expected, by still incomplete.

• Labour market conditions continue to improve.

• The Fed doesn’t see wages rising yet. They would see that in a tight labour market.

• The Fed doesn’t need to get all the way to their goals to taper.

• One good employment reading in March is not enough. Need to see more than that.

• Inflation is to be transitory due to base effects, supply bottlenecks, pent-up demand, and energy prices.

The takeaway

In theory, this is just more of the same and keeps the mainstream USD bearish case alive. However eventually, the Fed is going to taper. That is going to be USD positive and gold negative. In the 2013 taper tantrum gold lost about 20% of its value. So, looking for decent places to short gold makes sense. The vaccines are working, economies are returning, so the US economic recovery can reasonably be expected. When will that be? Taper in June? Or the month after? Eventually, it is coming. So, a dollar bounce can be expected.

Bank of England, Governor Andrew Bailey, 0.10%, Meets May 06

Prior to the latest BoE meeting on March 18, there was a tail risk of a rate hike coming into the markets. The GBP has been strongly supported over the last few weeks and the last meeting continues to provide a reason for optimism regarding GBP strength.  The major headlines for the Bank Of England struck me as pretty neutral. However, the minutes and the statement in full read pretty upbeat.  At the last Bank of England meeting, the Monetary Policy Committee (MPC) voted unanimously to keep interest rates at 0.10% and bond purchases were unchanged at £20 billion per month as expected. There had been thoughts prior to the meeting that perhaps the BoE would be more positive as the UK’s vaccination program is coming along well. Over half of the UK adult population has now received at least one dose. Furthermore, the latest US phase III AstraZeneca trial shows that the vaccine has a 100% efficacy in preventing severe disease.  As the BoE looked overseas there was a general upbeat tone. Global GDP growth is stronger than expected. The BoE expected that the US fiscal stimulus package should provide further global support. The BoE report had considered only around a $1 trillion package according to their minutes. See here at the top of page 5 (confusingly labeled page 2, but is actually page 5 of the PDF). So, this much larger than expected package was expected to boost the UK’s economy as well as the globe. There was no worry about the rising bond yields and that was just seen as a natural consequence to improved conditions (don’t tell that to the Fed). There was also a note about the cost of shipping containers rising, but that prices had somewhat stabilised recently. This was all before the latest Suez crisis, so that is arguably a greater issue to world trade as shipping containers have to take a two-week-long detour around the bottom of S. Africa.

Domestically the BoE were pretty upbeat too.  UK GDP which fell by 2.9% was less weak than expected, but GDP Is still around 10% below its 2019 Q4 level. 2021 Q2 could see ‘slightly stronger’ consumption growth, but unsure if this will impact the medium-term forecast. (so this is being downplayed). CPI expected to turn to around 2% in the Spring as the impact of lower oil prices fall away. However, the latest UK CPI reading was lower than expected. Non-essential retail and outdoor hospitality to open no earlier than April 12 and entertainment and non-self-contained accommodation no earlier than May 17. A Bank of England survey saw that 15% of households would be spending more after restrictions eased and 40% said they would spend less. Economist Andy Haldane sees the change of a ‘rip roaring’ UK economy with a large build-up of UK savings at around £150 billion.

One area of potential concern is that the volumes of UK trade in goods have fallen substantially in January. Exports and imports fell around 19% and 21% respectively (some disruption around the UK-EU transition period end was cited). Yes, a no-deal Brexit has been avoided. However, EU-UK trade is being hampered, and to what extent this will continue is an area that warrants further research.

The takeaway of this report is that the Bank of England has signs of hope on the horizon. If they start to materialise further then that should support the GBP against weaker currencies like the euro with present market conditions. Any news of tapering and the GBP will see strength out of the meeting.

Swiss National Bank,  Chair: Thomas Jordan, -0.75%, Meets March 25

The SNB interest rates are the world’s lowest at-0.75% due to the highly valued Franc. 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 if the EURCHF chart is anything to go by. However, we are seeing some CHF weakness naturally creep in as the world begins to tentatively imagine a COVID-19 free world and the potential for safe-haven CHF holdings to drop. A quick glance at CHF pairs shows this to be the case.

Earlier this week in March the SNB left rates unchanged. The inflation forecast was revised ever so slightly higher due to strong oil prices.  The forecast for 2021 is +0.2% & +0.4% for 2022. Growth for 2021 is still seen between 2.5% -3.0%. The statement once again struck a tone of optimism vs ‘who knows what will really happen’ with upside and downside risks stated.

The SNB 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 the opening paragraph, and sentence number two, reads: ‘Despite the recent weakening, the Swiss franc remains highly valued’. 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.

The bottom line here is no real change from the last meeting. However, note that a currency like CAD could offer some decent upside against CHF over the coming months as the BoC prepare to taper. 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.

Bank of Japan, Governor Haruhiko Kuroda, -0.10%, Meets July 16

The Bank of Japan is a very bearish bank and there is no sign of exiting from its easy monetary policy.  but the latest meeting saw a small shift in their policy.  At the last BoJ policy meeting this week there were no surprises. In fact, it was easy to overlook since there was so little anticipation for the event. The headlines were as expected with Interest rates remaining at 0.10%. In a similarly unmoved fashion, the Yield Curve Control (YCC) was maintained to target 10-year JGB yields at 0.0%. The vote on YCC was made by 8-1 votes with Kataoka the dissenter.  The general outlook is that the economy is seen to be improving, but the pace of the rebound is seen as moderate. There was a mandatory explanation regarding the uncertainties surrounding COVID-19, but the general financial system was considered stable by the Bank of Japan. This was reflected in that the GDP projections were revised higher:

• Fiscal 2021 median forecast raised to 4.0% from 3.9%.

• Fiscal 2022 median forecast raised to 2.4% from 1.8.

• Fiscal 2023 median forecast raised to 1.3%.

Before we get excited, although GDP was revised up marginally, inflation was also revised down this year. So what the right hand gives, the left takes away.

• Fiscal 2021 median forecast cut to 0.1% from 0.5%.

• Fiscal 2022 median forecast raised to 0.8% from 0.7%.

• Fiscal 2023 median forecast at 1.0%.

The only thing to say is that there is no change to the perspective that the Bank of Japan is ready to step in to support Japanese equity markets if they are needed to. Aside from this, there is no change expected for the foreseeable future. Be aware that the JPY continues to operate as a safe haven currency and in times of financial stress and worry the JPY tends to find buyers. The AUDJPY is the go-to risk-on / risk-off currency pair.

Reserve Bank of New Zealand, Governor Adrian Orr,  0.25%,  Meets May 24

Once again there were no major changes in the latest RBNZ meeting. The interest rate was kept at 0.25% and the Large Scale Asset Purchase (LSAP, $100 billion by June 2022) and Funding for Lending Programme (FLP) were kept unchanged. The RBNZ recognised the global growth outlook has improved with a commitment to monetary and fiscal stimulus as well as the progression of vaccination programmes. The planned trans-Tasman travel arrangements were seen as supportive for income and employment in the tourism sector. The reduced Gov’t bond issuance was seen as placing less upward pressure on New Zealand bonds and provides less scope for further LSAP purchases. However, the changes in LSAP levels (reductions) were not seen as a change in monetary policy, but more to do with market functioning. Nevertheless, it is to be welcomed and is a sign of better global conditions. The RBNZ noted that New Zealand’s commodity export prices have been benefiting from strong global demand. The weak USD, reflationary trade, and ‘buy everything’ mood over the last months are assistance to New Zealand’s broad commodity exports.

The RBNZ still see risks ahead

These include the fact that any spike in inflation higher is likely to be temporary. The short-term data highly variable due to the impact from COVID-19 and the global recovery is uneven. Trans-Tasman travel is seen as two-way, so some NZD spending will be abroad in Australia. There is some time expected before the targets of maximum employment and inflation above 2% is met. The RBNZ is prepared to use negative interest rates if necessary. However, this is unlikely to happen at this point in time.

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