March central bank overview part 2

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 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 expecte. 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 labelled 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 UK trade in goods volumes have fallen substantially in January. Exports and imports fell around 19% and 21% respectively. (Some disruption around the UK-EU transition period end were cited). This is one area that I don’t have a proper handle on. 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 I unclear on, but warrant further research. Any helpful info that you have, please leave for readers below.

The takeaway of this report is that the Bank of Englandhas 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. EURGBP remains a sell on rallies higher for now.

You can read the full statement here

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 we show this to be the case.

Earlier this week on 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.

Read the full statement here.

For more details on the sight deposits check out SNBCHF.com, This site called the removal of the floor back in 2015, so well worth checking out.

The bottom line here is no real change from 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.

Central banks

Bank of Japan, Governor Haruhiko Kuroda, -0.10%, Meets March 19

The Bank of Japan met March 19. The Bank of Japan is another very bearish bank, but the latest meeting saw a small shift in their policy.The BoJ kept rates unchanged at -0.10%. The Yield Curve Control is expanding its flexible target to be +/- 25bps vs +20 bps prior, but the 10 yr JGB yield target remains at 0.0%. The ETF target was removed and the BoJ is only to buy ETF’s linked with the TOPIX. This resulted in the Nikkei falling on the news, although these adjustments were not a big surprise to the markets. All in all there is not a major shift here, as the BoJ remain prepared to step in to support equity markets if needed. Kuroda said that the domestic economy remains in a severe state, but the trend is picking up.

You can read the statement here.

Reserve Bank of New Zealand, Governor Adrian Orr, 0.25%,Meets April 14

There were no major changes in the latest RBNZ meeting and Governor Orr did his part to try and talk down the NZD. The key issue for New Zealand is if their economy accelerates sharply that will benefit the NZD. Too much NZD strength hurts New Zealand exporters, so the RBNZ have an interest in trying to discourage NZD strength. However, the reality is that the market looked through the dovishness from the meeting as expected. Interest rates were kept unchanged at 0.25% as expected.Annual CPI now seen at 1.5% and TWI at 74.9% vs 71.5% expected. No additional stimulus required, but current monetary policy assumed to be staying at the same level for a ‘prolonged period’. Large Scale Asset Purchases (LSAP) were kept the same at $100 billion.

The RBNZ statement recognised the uptick in activity both globally and within New Zealand. However, the statement acknowledged the problem with the strength of the NZD. This was always going to be the RBNZ’s challenge with this meeting. How do you recognise a strengthening economy without rapidly strengthening the NZD. Well, it is done by stressing the uncertainties that are ahead. So, it is unsurprising that the RBNZ said that the economic outlook was still considered uncertain by the RBNZ.

One of the helpful developments for the RBNZ was the police shift that took away from the RBNZ the mandate to keep house prices from rising too quickly. Earlier in the year this had been made their mandate and supported NZD higher as markets knew the RBNZ would be pressured to raise interest rates. That pressure went with the Gov’t announcement a few days ago that aims to contain the rising house prices. See here. This dragged the NZD lower as a key pressure was now removed from the RBNZ and the dovish leaning can now be more easily enjoyed. House prices around the world have been supported by low mortgage rates, so this may be a pattern that other Govt’s follow.

You can read the statement here. 

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