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 was 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 were stating 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 hat 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 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 labor 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 decline in jobs. So, a clue here. If hours rise, unemployment falls, and wages too (RBA targeting 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. the chart to watch is AUDCAD as sellers take out the daily trend line as teh BoC takes a hawkish shift (see below)
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 Hakws 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 threatens 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. 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 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 in 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
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 that 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 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, as 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 are 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 were 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. See here. The BoC are 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 on line.
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 very loose monetary policy.
Remember that stronger oil supports the CAD as around 17% of all Canadian exports are oil related. There is 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’
The rateAt 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 mades 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 don’t see wages rising yet. They would see that in a tight labour market
- The Fed do not need to get all the away 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.
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 make sense.
The vaccines are working, economies are returning, so the US economic recovery can reasonable be expected. When will that be? Taper in June? Or the month after? Eventually it is coming. So, a dollar bounce can be expected.
Part 2 to follow tomorrow