Central bank biases continue to be the main forex market drivers, so lets quickly check out the most recent developments from the RBA, BOJ, BOE & the FOMC!
Reserve Bank of Australia (RBA)
The RBA held the cash rate at 2.25%, which was a little bit of a surprise as some expected a cut to 2.00% to stem weakening trade numbers and low inflation, mainly driven by falling energy/commodity prices. Despite holding policy as-is, they left the door open for a future rate cut by saying, “Further easing of policy may be appropriate over the period ahead, in order to foster sustainable growth in demand and inflation consistent with the target.” Also keep in mind that RBA Governor Stevens has noted that AUD/USD at .7500 is an exchange rate level that is likely suitable to achieve exchange rate growth, which may need that rate cut from the RBA to get over that last couple of hundred of pips to get there.
One road block to another rate cut is the Australian housing market, which has been on fire and on its way to possibly reaching bubble-like conditions; a rate cut would likely support the housing market and push prices higher. But recent data shows slowing demand from mortgage investors, which gives the RBA room to breathe for a rate cut at their next monetary policy meeting on May 5th.
Bank of Japan (BOJ)
The BOJ kept its monetary easing policy unchanged this week, but dissent continued among the ranks with Board member Mr. Takahide Kiuchi calling for a reduction of the bond purchases target to ¥45 trillion per year (currently ¥80 trillion per year). He cited concerns over unintended consequences like a destabilized bond market or financial market bubbles, the latter may be a scenario not to far away as the Japanese equity market continues to march on higher (Nikkei just reach 20,000 for the first time in 15 years).
With an 8-1 vote to keep policy as-is, it’s highly unlikely we’ll see a reduction in the asset purchasing program anytime soon. On the contrary, with persistent low inflation, there are calls for an expansion of the asset purchasing program to hopefully speed up the process to reach their seemingly out-of-this-world 2% inflation target, lowering the probability we’ll see a monetary policy induced Japanese yen rally any time soon.
Bank of England (BOE)
On the Thursday, the Bank of England’s Monetary Policy Committee held the official bank rate at 0.50% and their asset-purchasing program at £375B per month. This of course was no surprise thanks to the low inflation conditions that seem to be holding back major central banks who see improving economic conditions from even considering tightening up monetary policy.
Not only are the BOE’s monetary policy and economic outlook important to the British pound’s next step, but we also have to consider the upcoming Parliamentary Election scheduled for May 7. Political leadership changes are potentially big deal for a country’s currency (remember Shinzo Abe and Abenomics?), so it’s no wonder to see the BOE delaying the start of their next meeting to May 8, a day after the Parliamentary elections, which pushes the next monetary policy announcement to May 11. For now, Sterling’s will likely remain volatile but without direction until the political picture clears up.
Federal Reserve (The Fed)
The recently released minutes from the last FOMC meeting showed differences between voting members on their economic assessment and what would be an appropriate process to begin removing policy accommodation. Some members viewed June as an appropriate time to begin normalization, while others considered the recent fall in energy prices and the rising dollar as a potential deterrent to keeping the economy from reaching appropriate conditions.
Keep in mind that the March 18 meeting was before that nasty drop in the most recent Non-farm payrolls report, which is likely to be a big topic of discussion at their meeting on April 28 – 29, considering that stable employment is one of their mandates. But also consider that one jobs report is not a game changer and that the continual improvement in the weekly jobless claims numbers is a good sign that it may just be one-off event. Until we start to see a string of really bad news on the jobs and/or inflation front, it’s likely we’ll continue to see the Greenback keep chugging along higher on rate hike speculation.