Forex Snapshot: Major Central Banks’ Monetary Policy Biases

Having trouble keeping track of where central banks stand these days? I’ve got you covered in today’s edition of Piponomics, as I present to you a rundown of their monetary policy biases so far. Better keep this summary handy when you’re trying to figure out long-term forex price action!

European Central Bank (ECB): Super dovish

With the euro zone’s long laundry list of economic and fiscal woes, it’s no surprise that the ECB bags “The Most Downbeat” award among the major central banks. Dovish Draghi and his gang of policymakers just announced a massive quantitative easing program last month, on top of cutting several rates in a couple of instances last year.

Recent economic data suggests that the worst isn’t over for the euro zone, as inflation and spending figures could see further downside. However, the ECB seems to have already used up all the tools in its monetary policy shed and may refrain from taking any additional action while waiting for the impact of their QE program to kick in.

Swiss National Bank (SNB): Dovish

Another dovish one among the bunch is the SNB, which decided to implement negative deposit rates last year. While their announcement of lowering deposit rates further this year was overshadowed by their chaos-causing decision to scrap the franc peg, SNB head Thomas Jordan and his men remain inclined to adjust policy to keep the Swiss economy afloat.

This week’s set of economic data came in mostly in the red, as Switzerland reported weaknesses in manufacturing and trade activity. Instead of improving to the estimated 54.5 figure, their manufacturing PMI dropped from 54.0 to 48.2 and indicated industry contraction. Meanwhile, their trade surplus contracted from a downgraded 3.80 billion CHF figure to 1.52 billion CHF, lower than the projected 2.17 billion CHF reading.

Bank of Canada (BOC): Dovish

It looks like the slump in oil prices really started to bother BOC policymakers! During their policy statement last month, the BOC surprised most forex market watchers by announcing an interest rate cut as a precaution against further price declines and downward growth pressures.

Data from Canada supports the BOC’s downbeat outlook, as their latest Ivey PMI reading posted a sharp drop from 55.4 to 45.4 mostly due to the oil price decline. This suggests that the business sector could be in for darker days, which might then weigh on hiring and spending later on. While the recent BOC rate cut could cushion some of the blows, the Canadian central bank seems ready to take further action if necessary.

Reserve Bank of Australia (RBA): Dovish

After several central banks have already expressed a shift to a more dovish tone, forex market participants were no longer so surprised to hear about the RBA interest rate cut this week. In their accompanying statement, Governor Stevens mentioned that the downturn in trade revenues and the weak employment outlook led them to lower rates.

Furthermore, Stevens pointed to several dark clouds on the horizon, as he said that export demand and profits could continue to tumble. It doesn’t help that data from China, Australia’s number one trading buddy, has also been falling short of expectations lately.

Bank of Japan (BOJ): Stubbornly cautious

The BOJ has been weirdly mum about its monetary policy bias, as policymakers still have their fingers crossed in hoping that the Japanese economy can do much better. Although they downgraded their inflation forecasts in their January policy statement, Governor Kuroda announced an upgrade in their growth forecast and assured that the economy will benefit from lower energy prices.

For now, consumers in Japan are still reeling from the effect of the sales tax hike last year, as household spending and retail sales have come in below expectations. Business conditions are also looking bleak, with industrial production and core machinery orders falling.

Reserve Bank of New Zealand (RBNZ): Cautious

In their latest rate statement, the RBNZ decided to drop the hawkish vibe and mention that their next policy move could either be a rate hike or a rate cut. Governor Wheeler cautioned that inflation is likely to fall below their target level and possibly post negative readings at some point.

For now though, it seems that the RBNZ is still 50-50 when it comes to potential interest rate changes, as they’re also trying to avoid stoking a housing price bubble. Data from New Zealand has shown a few green shoots anyway, as the dairy auction has been showing consecutive price increases while the latest employment report printed impressive readings.

Bank of England (BOE): Cautious

Another central bank that has veered away from an upbeat bias is the BOE, which has backpedaled from its forecast to hike rates before the U.K. general elections and admitted that inflationary prospects are looking grim. In fact, the two hawks that had voted to increase interest rates late last year decided to join the more cautious members in agreeing to keep rates on hold for now.

Interestingly enough, U.K. officials seem to be taking the downturn in inflation well, as Governor Carney mentioned that this might actually spur stronger consumer spending. U.K. data has been more or less stable, with industry PMIs coming in mostly better than expected, suggesting that the economy might stay resilient.

U.S. Federal Reserve (Fed): Hawkish

When it comes to policy biases, the Fed is a rose among the thorns since it appears to be the only one sticking to a hawkish bias. The FOMC even decided to drop the “considerable time” phrase when discussing how long rates would remain low and added that they “can be patient” in considering policy normalization.

Bear in mind, however, that last month’s set of reports from the U.S. suggests that the economy may be starting to feel the impact of the fall in oil prices. Inflation and consumer spending have fallen short of estimates while the jobs data indicated weak spots in its underlying figures.

Whew! There you have it, ladies and gents! Got any long-term forex trade ideas based on these monetary policy biases? Don’t be shy to share your opinions in our comments section below!

  • Kevin LaCoste

    I found this really useful! Have you thought of doing a central bank summary every 3 months?

    • Cool beans! Thanks for the positive feedback and I’m really glad you found this useful. I’ll keep that in mind and try to come up with another roundup later on, especially if there are changes in their biases. See you around!