With the European Central Bank (ECB) and People’s Bank of China (PBoC) dominating proceedings last week, central banks again proved their ability to move markets. ECB’s Draghi made it clear in his ‘dovish’ press conference last Thursday that the governing council stands ready to adjust its asset purchase program (QE) according to their needs. Draghi indicated that Euro policy makers are “open to a whole menu of measures” and that cutting the deposit rate remains on the table. The markets interpretation – more QE is on its way, as early as December, and reason enough for the single unit to take an early dive outright to end last week (€1.1033).
Chinese policy makers were more about action, rather than potential. The PBoC slashed both the one-year rate and system-wide RRR (required reserve ratio) by -25bps and -50bps respectively. Policy makers also removed the ceiling on bank deposit rates. Interestingly, the decision to cut came on the eve of China’s Communist Plenum. China’s leaders gather to formulate its five-year plan where it will formally announce its growth targets going forward. Technically, it seems that China’s leaders are desperately trying to manage market expectations when it comes to their growth rates. Currently, the +7% GDP rate is a massive psychological level that both Chinese authorities and capital markets have, up until now, become fixated on. On the weekend, Premier Li said +7% is “not” a hard target that should be “defended to the death”, and that the +6.9% growth reported in Q3 still represents a reasonable range. Even the PBoC’s Deputy Governor insisted that China can sustain growth of 6-7% for the next 3-5 years and that their Q3’s +6.9% adequately reflects Chinas economic fundamentals.
Central banks remain ‘front and center’ this week. But, will they have the same impact? With the proactive moves of the ECB (verbal) and PBoC, perhaps the Bank of Japan (BoJ) will feel less reluctant to take action when it meets this Friday? Speculation that the Fed may raise rates has to date been taking some pressure off BoJ officials by keeping the yen soft (¥121.06). Nevertheless, they are capable of a surprise. The odds from fixed income dealers would suggest inaction from the BoJ this time around (+40%). The BoJ is also is due to revise its economic and inflation forecasts on the same day. Also meeting this week is the Reserve Bank of New Zealand (RBNZ) and the Federal Reserve in the U.S. Neither central bank is expected change proceedings. Currently, the probability of the Fed keeping the rate unchanged in October is +97%. Although some Fed members have said that a U.S rate hike this month was a possibility, dealers believe an FOMC meet with a press conference, like this Decembers, as having a better chance for U.S policy makers to deliver a rate change up. The Fed will publish its rate statement on Wednesday at 2:00 pm EDT. Expect the market to focus on any wording changes on inflation or on China – that could raise the chances or further lower the chances for a December liftoff.
The rise in doubts over a Fed lift-off is having an impact. The dollar has managed to give back some of the gains seen in the wake of the ECB’s dovish guidance and China’s rate cut with the prudent investor preferring to book some profit on the dollars recent advances ahead of the FOMC meet. The EUR (€1.1033) has rebounded from its Draghi-inspired sell-off to trade +0.3% higher. The pound (£1.5330) is lagging this morning with dealers noting that weekend commentary from Bank of England (BoE) Governor Carney that a U.K interest rate hike was a “possibility, but not a certainty.” The yen starts the week on firmer footing (¥120.06) as another Japanese government advisor played down the probability that BoJ would ease its policy further this week. Any inaction by the BoJ will likely pressure the dollar even further, however, with the possibility of a BoJ easing remaining on the table, the yens rise will be limited.