FX5: Monetary Policy Decisions This Weeks Focus

Monday March 14: Five-things the markets are talking about

(U.S & Canadian clocks moved forward over the weekend; London/NY time difference now four-hours)

Both investors and dealers expected a lot from ECB’s Draghi last week and he certainly managed not to disappoint by delivering far more QE and lower rates than the market had been expecting.

This week, the main focus will shift back stateside with the Federal Open Market Committee (March 16) meeting. Nevertheless, there are also rate decisions from Bank of Japan (March 14), Bank of England (March 17) and Swiss National Bank (March 17).

Along with aforementioned monetary policy decisions there are a handful of other economic releases expected to make an impact in capital markets. These include U.S. and Canadian CPI and retail sales, U.S. industrial production and OPEC’s monthly update. Overseas, there are the Aussie and U.K employment announcements, reports that should have an influence on their respective currencies.

1. China: More disappointing data

China’s economic data out over the weekend was largely disappointing. Industrial output growth was the most underwhelming, falling to its lowest levels since 2009, even as the key power generation component returned to positive of +0.3% vs. -3.7% prior.

Retail sales were also soft at an eight-month low, and while fixed urban asset investment beat consensus, the growth came from fiscal policy infused public sector. Property market recovery remains unwavering, with property investment growth rising to +3% from +1% and construction up a healthy +13.7%.

China’s Stats Bureau attempted to write off the decline in output to seasonal factors and weak global demand along with reduced activity in sectors with overcapacity – namely steel and coal.

Remarks from PBoC Governor Zhou and the new securities bureau (CSRC), chief Liu supported sentiment. Zhou said the latest economic targets are in line with “potential growth rate” and also promised not to rely on exports – and implicitly weaker Yuan – for GDP growth. Zhou reiterated China monetary policy would remain prudent with a “slight easing bias”.

2. Merkel battered on migrant policy

Voters punished German Chancellor Merkel’s conservatives in three German regional elections on Sunday, giving a thumbs-down to her open-door refugee policy and turning in droves to the anti-immigrant Alternative for Germany (AfD).

The result is a big setback for Merkel, who has led Europe’s largest economy for a decade, and could narrow her room to manoeuvre as she tries to convince her EU partners to seal a deal with Turkey to stem the tide of migrants.

Merkel’s Christian Democrats (CDU) lost ground in all three states – Baden-Wuerttemberg and Rhineland-Palatinate in the west and Saxony-Anhalt in the east – which were together widely seen as offering a verdict on Merkel’s liberal migrant policy.

The triple contest was the biggest of Merkel’s third-term and the ‘broadest electoral test’ before the next German federal ballot in 18-months’ time.

3. U.S rate curve backs up ahead of FOMC

U.S. yields rose Friday, with the yield on the two-year note reaching a two-month high, as investors lightened debt holdings ahead of the FOMC rate decision.

U.S 10’s reached the highest level in more than a month, trading just shy of +2% (+1.975%). Few expect the Fed to raise interest rates this week, but many believe that easing market turmoil, a strong labor market and some signs of an uptick in inflation of late would give Chair Yellen room to tighten monetary policy further in the months ahead.

It seems that investors are positioning themselves for a “hawkish” Fed. Futures indicate a +46% likelihood of a rate increase from the Fed at its June policy meeting, while the odds for a rate increase at the December meet are currently +74%. Both have risen from +12% in February. Note, in late January fixed income had priced out any rate increase by the Fed for this year.

Traders believe that U.S 10-year yield will rise to +2% or above if data this week continues to show the worlds largest economy has found ‘sustainable traction.’

4. Commodities remain active

Copper rose +0.3% in London, rebounding from earlier losses, while Gold ($1,258) gained +0.5% after retreating -1.8% on Friday. The yellow metal is far from being out of favor as speculators continue to hold the biggest net “long” position in related futures and options in more than 12-months (CFTC).

In the oil market, WTI crude futures declined -1% to $38.11 a barrel following four-consecutive weeks of gains. Again applying pressure on crude is Iran – it plans to up its output numbers to +4m barrels a day before their energy minister would ever consider joining other suppliers in seeking ways to rebalance the global crude market. Until then, “they (other major producers) should leave us alone”

5. Bank of Japan (BoJ)

In January, the BoJ’s Governor Kuroda shocked global markets with a -0.1% setting on excess reserves. While few expect the BoJ to take those rates deeper into the red, latest contraction in Japan’s GDP and worries about another sales tax hike on the long-term horizon should keep Kuroda’s finger on the trigger and the markets tuned in to every BoJ policy statement.

Japan PM Abe’s advisor Hamada stated that he did not believe the BoJ would ease further at this evenings meet.

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell