Central bank rundown as GBPJPY upside opens up

Bank of England, Governor Andrew Bailey, 0.10%, Meets August 05

Up until this weeks meeting there had been two up beat central bank meetings from the Bank of England. It could have been anticipated that this would really have increased the odds of a hawkish twist from the BoE. Heading into the Bank of England meeting Sonia futures were pricing in a more optimistic Bank of England with interest rates projected to rise next year. However. The actual meeting itself was a disappointment. The only dissenter to the headline prints was Andy Haldane who voted to taper asset purchases. The vote was 8-1 in favour of tapering. However, this was Andy Haldane’s very last MPC meeting, and a lack of hawkish comment left the GBP stop sell off fairly quickly out of the meeting.

Inflation was considered transitory, so no need to raise rates quickly. The high inflation print from May was acknowledged as being ‘above the 2% target’ (it was 2.1%).

Growth expectations were revised higher by 1.5% with a strong recovery noted in the consumer facing services for which restrictions were loosened in April.The hot housing market, which could have had the BoE act to contain,was merely seen as ‘strong’. So, no worries there from the BoE.

The meeting as a whole was a very holding affair and August is now seen as the key date for the MPC to ‘fully assess the economic outlook’. Perhaps the BoE will taper next time?One thing for certain is that it now needs Vlieghe and Ramsden to quickly fill the absence of Haldane’s hawkish shoes if the BoE are going to move towards tapering. Ramsden and Saunders have stepped up, but Vlieghe said this week that he wants to keep monetary policy as is for at least several quarters. However, will he change his mind?

You can read the full statement here

GBPJPY longs continue to make sense and a break of 156.00 would open up 160.00. Buying into the BoE makes sense as long as risk tone is positive.

GBPJPY upside looks promising

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

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 accroding to the EURCHF chart The SNB hate this and repeat, as they did in the latest meeting, that the ‘Swiss franc remains highly valued’. However, recent prices mean the EURCHF long term floor does look in place.

On their June 17 meeting the SNB left rates unchanged. The inflation forecasts were revised higher again. The reasons cited had increased too from the previous meeting. In the March meeting it was only oil related products that were mentioned. In the June meeting it expanded to ‘higher prices for oil products and tourism-related services, as well as for goods affected by supply bottlenecks’. The new forecast stands at 0.4% for 2021, and 0.6% for both 2022 and 2023. The conditional inflation forecast is based on the assumption that the SNB policy rate remains at −0.75% over the entire forecast horizon. Watch out for high inflation to possibly prompt the SNB into action, but note that we are no where near that now.

In terms of growth the SNB was far more upbeat. In the March meeting they projected growth of 2.5% -3%. In the June meeting they noted that the economic indicators had improved significantly of late. Growth for 2021 is now seen at around 3.5 mainly due to the lower than expected decline in GDP in Q1. The statement struck a tone of optimism vs ‘who knows what will really happen. However, a more optimistic note was found in the statement.

The SNB will 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.

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 SNB are still content to be the lowest of the central bank pack and dissuade would be investors by charging them for holding CHF. EURCHF for a 6-12 month hold is worth considering and just checking in with the ECB and SNB policy shifts. The ECB may be about to become more bearish, so that could be a dip in the EURCHF worth buying into. Let the reader understand.

Bank of Japan, Governor Haruhiko Kuroda, -0.10%, Meets September 21

The Bank of Japan still remains a very bearish bank and there is no sign of exiting from its easy monetary policy.The latest meeting saw no surprises and everything was expected in the July 16 policy meeting. For years Japan has struggled to see any inflation, so with inflation rising around the world it was interesting to see that the BoJ expect consumer inflation to remain around 0% for the time being. Short term inflation rises seen as transitory, of course.

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. The only dissenter was Mr Katoaka who said that it was desirable to further strengthen monetary easing by lowering short and long-term interest rates, with a view to encouraging firms to make active business fixed investment for the post-COVID-19 era.

The general outlook is that the economy will recover at a slightly slower pace than expected in the June meeting due to the COVID-19 induced lockdowns that Japan has experienced. So, the growth outlook for real GDP was tweaked a little with the 2021 median forecast being reduced from 3.8% to 4.0%. However, the 2022 forecast was revised higher to 2.7% from 2.4% and the 2023 median forecast unchanged at 1.3%

The new funding scheme announced to help firms adapt to greener climate demands in the future was put into place. These may include (1) green loans/bonds, (2) sustainability-linked loans/bonds with performance targets related to efforts on climate change, and (3) transition finance.

Core CPI was revised higher again, but this time more substantially than June’s projections. 2021’s forecast was revised up to 0.6% from 0.1% and the 2022 forecast up to 0.9% from 0.8%. 2023’s forecast was unchanged. So, that gives us a sense of a 12 month inflation hike.Remember, that low inflation has dogged the BoJ for years so it will be interesting to see how the BoJ cope with rising inflation if and when it comes.

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.

Fed vs BoJ favours USDJPY upside

Longer term the Fed will move before the BoJ. It may only take one goods job report from the US. So, look for decent areas of support for medium term USDJY buying and just check the US 10 year yields keep moving higher. 108.00 looks an obvious area.

You can read the full statement here.

Fed

Reserve Bank of New Zealand, Governor Adrian Orr,0.25%,Meets August 18

Coming into the meeting expectations were building for a more bullish RBNZ. The RBNZ delivered. The official cash rate remained the same at 0.25%, but the headline surprise was that the RBNZ agreed to halt additional asset purchases under the LSAP agreement by July 23. This was the move that opened up NZD strength immediately on the decision.

This means that the RBNZ can be considered as setting up for a sooner rate hike than previously projected. Remember in the prior meeting a rate hike was signalled for 2022. This can be considered even sooner now and the ANZ investment bank now see the RBNZ raising rates in August. The ASB bank had previously called for a November hike this year, but now too have brought that forward to an August hike. The rising business conditions mean that the RBNZ have confidence about the recovery and there are also now more concerns about inflation than in the prior meeting. The Committee stated that they now expect near-term spikes in headline CPI inflation in the June and September quarters. These reflect factors that are either one-off in nature, such as high oil prices, or expected to be temporary in duration, such as supply shortfalls and higher transport costs. The RBNZ showed some uncertainty here too in recognising that they were unsure how the medium term outlook for inflation would be impacted. The jury is out. However, you can see that halting the LSAP programme shows that the RBNZ does not want to be guilty of over stimulating the economy if inflation is about to rip higher. Interest rate hikes will contain the inflation

The takeaway

Like last month this keeps open up a central bank divergence between the RBA and the RBNZ. The RBA are on hold after their last interest rate meeting and want to see unemployment move down to 4%. The RBNZ, by contrast, now see a rate hike in 2022 and some see it as soon as next month. The bond yield spread has moved lower and this makes a sell on rallies for the AUDNZD the obvious trade. If risk tone remains positive a NZDJPY long also makes sense as does a NZDUSD long as long as the Fed don’t look like tapering. NZDJPY or AUDNZD shorts should be preferred. 

Read the full report here

ECB

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