This mix of overt and subtle withdrawal of market support is a key macro driver of recent increased volatility. Aside from Euro-Greek fiasco this week, there has been a handful of Central Bank rate announcements, growth projections, press conferences and minutes for the investor to digest.
Having calmed investors for the past half-dozen years with low interest rates, bond-buying (QE) and other interventions aimed at shoring up weak economies, some global monetary policy makers are preparing to exit capital markets in a number of ways.
To date, traders and investors have been overly reliant on policy makers for direction, and its time for them to prepare to be weaned off. Perhaps more so than ever, it’s important for capital market participants to have their finger on Central Banks pulses as market volatility increases.
Reserve Bank of Australia (RBA)
On June 16, the RBA released the minutes of its June 2nd meeting where it surprised the investors with a more neutral policy stance against expectations of renewed easing bias.
The RBA minutes straddled both sides of the fence, stating the “Board’s assessment was that the stance of monetary policy should be accommodative” and also adding “members judged that it was appropriate to leave the cash rate unchanged and to assess information on economic and financial conditions as it became available.”
Governor Stevens continues to point to a period of waiting to assess development, which suggest that the RBA could be sitting on the sidelines for the remainder of this year. The Governor has always been prepared to talk down the currency at every opportunity. The Aussie dollar remains at the mercy of China growth and commodity prices.
Bank of England (BoE)
Tuesday’s U.K CPI data was a bust for the pound hawk, however Wednesday’s BoE minutes; U.K jobs data and earnings have been a boon for the long sterling positions. The pound has since spike to multi-month highs after the U.K ILO unemployment level came in at a seven-year low and average earnings rose +2.7% vs. +2.55% expected.
Earlier, the MPC minutes for the June meeting showed that all nine members voted to keep the Bank of England’s (BoE) benchmark interest rate at +0.5% and also voted unanimously to keep monthly QE at £375b.
Nevertheless, the minutes did have a “hawkish” tint with inflation expected to rise notably by late 2015. The two officials (Weale and McCafferty) who voted for a rate hike as early as last December again sit on the “finely balanced” fence. Fixed income dealers have brought forward the first BoE rate hike by two-months and are pricing in a rate lift off for the end of Q2, 2016.
Federal Open Market Committee (FOMC)
On Wednesday, the FOMC had little in the way of real surprises, but as is often the case trading picked up after the Fed left rates unchanged.
The USD was never going to find much support after the FOMC lowered growth forecasts over the rest of 2015 and also revised down their interest rate projections for 2016 and 2017 by -25bp. Perhaps more importantly, the committee offered no consensus on the number of rate increases for this year. A large percentage of the market had been expecting the Fed to clearly signpost the timing of rate liftoff stateside.
The Fed has successfully muddied the first rate hike timing schedule, which is pressuring those investors who had been expecting a stronger commitment by the Fed for a September rate increase to unwind or pare back on their long dollar positions.
Technically, the dollars rally has stalled since mid-March mostly on uncertainty over the Fed’s intentions and this weeks meeting confirm that investors can expect heightened market volatility across all asset classes even more so going forward. As well as unwinding dollar positions, investors have had to unwind their own market complacency factor.
The Feds statement should be eyed as short-term negative for the dollar, but a long-term plus. U.S rates will eventually end higher, but investors must now adjust to the fact that they are to get there more slowly than previously anticipated.
Swiss National Bank (SNB)
The first Central Bank to make a major policy shift was the Swiss National Bank, which rocked markets last January by unexpectedly scrapping its three-year policy of capping the CHF at €1.20. Their underhanded actions certainly lost them some street credibility, but it has put investors and traders on edge whenever an announcement is being made.
On Thursday, the SNB kept interest rate policy steady, as expected, but noted the threat of possible safe-haven flows stemming from the Greek crisis. The accompanying rate statement reiterated that the CHF currency rate remained high (€1.0443) and overvalued. The Central Bank expects to remain active in the forex market if necessary. Governor Jordan said that he saw the CHF weakening over time, however, with global uncertainty remaining high, the situation in Greece could jeopardize the Swiss recovery.
Nevertheless, with the CHF currency continuing to serve as safe-haven due to the situation in Greece will always have traders on edge – the SNB has proven unpredictable.
Bank of Japan (BoJ)
On Friday, the BoJ stayed on course without any additional dissent. In the accompanying statement it maintained its monetary base at the annual pace of ¥80t (as expected) and maintained its overall economic assessment. The only change made was a slight boost to the BoJ’s assessment of the housing market, which policy makers now seen as “starting to pick up”. Governor Kuroda expects CPI to hit +2% in H1 of FY16, and expects pricing to rise toward +2% target as oil price effect fades. As expected, the Governor reiterated that Bank would continue easing until +2% inflation was stable and that they would adjust policy as needed.
For the USD/JPY bull, the Bank of Japan (BoJ) policies are still divergent even if the Fed’s rate-hike timing remains vague.
It’s worth nothing that the BoJ has reduced the number of its official meetings each year to just 8 from 14, but increased the number of instances when it publishes its GDP/CPI projections from 2 to 4.