Ever heard of the saying, “Birds of the same feather flock together”? Well, it turns out that it isn’t exactly true in Forex jungle. Because hawks, doves, and everything else in between flocked together this week, giving us on a wild ride on the charts!
So before you take-off to your weekend getaways, let me first give you a recap of what central bankers had to say this past week.
Hawks Down Under
On Tuesday, the Reserve Bank of Australia (RBA) surprised the markets with a 0.25% rate hike that brought the country’s official cash rate up to 4.75%. Most were taken off guard as the most recent CPI report came in lower than expected. But apparently, the 0.1% increase in consumer prices during the third quarter to 0.7% was enough to ruffle the RBA’s hawkish feathers.
According to the RBA statement, the decision was primarily because it wants to tame inflation and keep it within the RBA’s target range of 2.00%-3.00%. The report also showed that Governor Glenn Stevens and his buds in The Land Down Under don’t see the rate hike hurting the economy’s swagger. They maintained their GDP forecast from December 2010 to June 2011 at 3.5% while eyeing a 3.75% by the end of next year.
Some naysayers feel that the RBA’s statement reflects the central bank’s willingness to holler more hikes. With that said and given the looming pessimism over the U.S. economy, it seems like this won’t be the last time we’ll see AUD/USD above parity.
But don’t be so sure to bet your pips on the Aussie just yet. If economic reports in the coming months show that the rate hike has done its job calming inflation or if it has taken a toll on economic growth, we could see the RBA shed some of its hawkish feathers.
Also remember that the Aussie, being a higher-yielding currency, is vulnerable to market sentiment. If risk aversion kicks in again, we may just see the com-doll lose its charm on the charts.
U.S. Federal Reserve Doves
Next up, let’s take a look at a central bank that decided to take a different route and ADDED more stimulus to its economy. I’m talking of course about the Federal Reserve!
Finally, after weeks of speculation, the Fed made its decision regarding another round of quantitative easing. Earlier this week, the Fed announced that it would buy an additional 600 billion USD worth of Treasuries divided over the next 8 months.
Fed officials weren’t really feeling the current state of economic recovery, pointing to lackluster employment and inflation figures. Unemployment has remained above 9.40% for a year and a half now, while inflation has largely remained subdued. This combination of poor unemployment and weak demand certainly isn’t a recipe for recovery for any nation.
Judging from the recent reactions to the decision, we may see dollar weakness continue in the short term. Remember, more quantitative easing and low interest rates effectively make the dollar an unattractive investment. Look for traders to continue selling the dollar, and look for alternative higher-yielding options.
In-betweens: BOE and ECB
Now let’s take a look at a couple of central banks that are still sitting on the fence.
The BOE decided to leave its asset purchase program unchanged at 200 billion GBP and keep its benchmark rate at 0.5%. Judging from the recent streak of strong U.K. economic data, it seems like the BOE can start thinking about withdrawing some of their stimulus. Then again, the central bank just probably wants to play it safe as the U.K. braces itself for a round of budget cuts.
Meanwhile, the ECB held rates at their record low of 1.00% and also kept their wait-and-see stance. Although sovereign debt problems are still present all over the euro zone, ECB President Jean-Claude Trichet mentioned that the central bank is already considering some tightening measures. Once they get those debt roadblocks out of the way, the ECB might soon join the likes of the RBA (oh hey, that rhymes!).
For now, it looks like there’s a bullish bias for both GBP and EUR since their central banks are slightly inclined towards tightening their monetary policies. Unless new problems pop up like ugly zits, the fundamentals of the U.K. and euro zone support their respective currency’s rise.
That’s all forex folks! I hope you enjoyed catching up on those central bank activities this week. Just a little something to keep in mind while trading next week!