“Wait and See” For Fed, While Riksbank Shakes It Up

Central banks are making it rather boring for speculators at the moment. The majority of G7 policy makers have upped the dovish rhetoric by talking their own books and successfully walking their respective currencies lower. However, most of these underperforming currencies are trading in a confined range, and certainly in an orderly fashion that is making it rather boring. Many of these central banks have been reluctant to preempt the Fed, who, under Ms. Yellen’s guidance, has managed to successfully send out mixed messages about the Fed’s first-rate hike in nearly a decade.

Will that all change today? Later this afternoon (Wednesday 2pm EST) the Federal Open Market Committee (FOMC) will announce its latest monetary policy update. It’s expected that U.S policy makers will put out a statement that will once again not include a rate hike. Nevertheless, investors will be looking ahead to any new hints of rate liftoff from the FOMC decision. The lack of press conference and staff targets does not make it any easier for Ms. Yellen and company to make any bold moves, and this despite all members insisting that all meetings are “live”. The Fed has only their statement to guide markets. Assuming rates on hold, the best-case scenario for the investor is that the Fed will clarify how close it is to tightening after last months surprise hold. It’s unlikely that much will be change from the September statement, maybe a tweak or two on developing international factors.

Sweden’s Riksbank expands its QE bond-buying program by SEK65B: Nowadays, it’s inflation and outside variables that are the ‘go-to’ phrases for central bankers. Therefor, it’s not much of a surprise that Sweden’s Central Bank has cited risks to their inflation and “considerable uncertainty” about the global economy that has warranted a change to their QE program. Mind you, a dovish European Central Bank (ECB) and the imminent risk for SEK (€9.3632) appreciation require the Riksbank to be proactive. Governor Stefan Ingves reiterated that they could cut the Repo Rate further (-0.35% which they kept on hold this time around, but instead extended their QE program further out-Q2 2016) and would maintain a high level of “preparedness to act quickly”. The governor also stressed that they could intervene in FX market if necessary. Fixed income is pricing in another -10bps cut to the RR in December. EUR/SEK was +0.5% higher near €9.44 level on the announcement, but has since reversed.

New Zealand: Despite the significance of the Fed’s decision today, Australasian central banks have been front and center in the overnight session. The NZD (N$0.6732) is slightly weaker, but remains range bound ahead of the Reserve Bank of New Zealand (RBNZ) rate decision two-hours after today’s FOMC announcement. Median market expectations are for Governor Wheeler to remain on hold (+2.75%), but with a +16% chance of a rate cut. Despite New Zealand inflation remaining very subdued, which certainly justifies a lower rate policy, the significant recovery in global diary prices recently would suggest that the RBNZ has time on its side. (All Blacks by 12 on Sat)

Asian data opens the door for more possible easing: Other data overnight would suggest that policy implications for both the Bank of Japan (BoJ) and the Reserve Bank of Australia (RBA) have been tilted in favor of further easing. In Japan, retail sales disappointed (+ 0.7% vs. +1.1%e, y/y), while down-under it was softer than expected Q3 CPI data (+0.5% vs. +0.7% q/q, +1.5% vs. +1.7% y/y) that has fixed income dealers adjusting their rate curves. The probability of the RBA easing next week is now trading above +50%. USD/JPY managed to print its best levels on their retail sales release (¥120.50), while the Aussie fell to a new three-week low (A$0.7115) before consolidating ahead of the Fed decision. There are a number of independent reports out of Japan that are speculating that the BoJ will likely have to push back the date of achieving its +2% CPI target beyond the H1 of 2016 currently expected.

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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