Will Yellen and the Fed Change the Record?

  • Singapore’s MAS flatfoots market
  • Central banks want to recalibrate rate policies
  • Will the Fed change record?
  • Can the “big” dollar be contained by FOMC’s decision?

Central banks that are unwilling to commit to something monetary, either through action or verbally, are in danger of keeping their own domestic currencies supported.

Monetary authorities are in the midst of a currency war whether they want to be or not. The proactive and aggressive bankers are successfully manipulating their currencies lower; the reactionary policymakers are being exposed.

In January, the Reserve Bank of Australia has continued to use the power of oratory, while the European Central Bank (ECB) and Bank of Japan launched quantitative easing (QE) programs. The Bank of Canada made a surprise rate cut, and Danmarks Nationalbank (Denmark) and the Swiss National Bank (SNB) imposed negative deposits on their constituencies. All of these different monetary policy strategies are designed to weaken the appeal of each nation’s respective currencies and give exporters a lift.

Rate Policy Recalibration

It’s not just the “big boys” who are managing to make some waves. The ECB with its QE is pressuring Tier II central banks to adjust their policies accordingly, or be left behind. Most of the decisions are not necessarily a complete surprise, but the timing of implementation is taking the market by surprise. However, there are a few central bankers wary of losing credibility that prefer to proceed with caution.

Yesterday, the central bank of the Republic of Hungary, the Magyar Nemzeti Bank or MNB, had no room to cut rates (2.1%) as to do so would have eroded its credibility. This is in total contrast to the SNB and Governor Thomas Jordan’s actions a few weeks ago. Despite the SNB’s credibility in policy setting having been tarnished after the franc flash crash, the central bank’s reputation in aggressively acting on FX and interest rates will always be feared by the market. Yesterday’s market rumors that Swiss authorities were intervening had the EUR bear rapidly unwinding various short-EUR positions, allowing the single unit to move further away from its 11-year low (€1.1098). Hungary’s policymakers are not keen to surprise financial markets by delivering a rate cut without prepping the market first. The MNB kept its forecast unchanged at a flat rate by the end of March 2016. Its officials will wait until its policy-setting committee gives some indication that they see room to reduce the base rate. The fixed-income market, which uses forward-rate agreements, expects the base rate to fall to +1.75% within six months.

A primary objective of various policymakers is to try to keep the market abreast of new developments. Capital markets are not very fond of the unexpected, especially when it comes to monetary policy. The Federal Reserve’s and the Bank of England’s more transparent approaches seem to be far more appealing to investors. Nevertheless, investors are now more aware than ever about global rates, regional inflation, and monetary policy. Over the past 12 hours alone, various central banks have been front and center and demonstrated a willingness to keep the markets well informed.

Central Banks Keep up-to-Date

The CNB, or Czech National Bank, indicated this morning that disinflation pressures were coming from abroad, and that domestic economic growth and rising wages were starting to generate slight price pressures. The Bank of Thailand (BoT), meanwhile, noted that its decision to keep policy steady was again not unanimous among its rate-setting committee (the vote was five to two). It reiterated that interest rates remained accommodative for growth as the economy continued to recover, aided by lower oil prices (fourth-quarter gross domestic product appears to be improving quarter-over-quarter). Inflation could break the lower end of the target, but it was not seen as deflationary. Policymakers have also indicated that the BoT’s key rate was not the main factor for capital flows and that it would use other tools to manage them.

Malaysia’s central bank, Bank Negara Malaysia, has stated that its monetary policy remained accommodative and saw sufficient liquidity. Policymakers noted that 2015 inflation is to be lower than previously expected.

Singapore Fires a Shot in Global Currency War

The overnight surprise came from the Monetary Authority of Singapore (MAS) with a surprise easing of its currency policy to fend off deflationary pressures. Authorities reduced the slope of the SGD’s nominal effective exchange rate (NEER) appreciation to around +1%, which in effect is an easing of monetary policy. Last night’s decision leaves the door ajar to another easing of the SGD NEER at the MAS’s next official announcement in three months. Outright, the SGD lost close to -1.5% to the USD, and is expected to make further inroads toward the SGD$1.39-1.40 handle over the coming months.

What of the Fed?

Apart from the aforementioned currency moves, the USD is little changed as capital markets head stateside. Investors seem to be happy to wade to the sidelines ahead of today’s Fed policy announcement (no post-meeting press conference). Currently, consensus expects modest changes to the statement, including a possible removal of the “considerable time” chant. The market will be looking for clues on whether the Fed will lose its nerve to hike mid-2015.

The Fed had been expected to begin raising rates this summer, obviously backed by the U.S.’s underlying strength. But it’s not as clear-cut as before: Analysts and investors are raising doubts, supported by some softer domestic data (yesterday’s horrid consumer durable headline -3.4%), and a deflationary global backdrop. The next two months of U.S. data are important and are a potential signal for a June hike. All the markets want is a heads-up that the Federal Open Market Committee is about to deviate from its path of hiking overnight interest rates. Any clues, hints, or innuendo that a rate hike is being pushed further down the curve will halt the “big” dollar’s advance. Chair Janet Yellen and company needs to continue to support their transparent monetary approach. The market should be expecting Fed policymakers to continue to take baby steps to achieve their objective of policy normalization.

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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