If there’s anything we’ve learned from the latest ECB decision, it’s that a dovish move ain’t always followed by a bearish forex reaction. We’re really right smack in the middle of unprecedented times here, people! Here are some additional takeaways from this week’s batch of central bank statements.
1. RBNZ cuts rates, Kiwi soars
Yet another dovish move followed by a forex rally! RBNZ Governor Graeme Wheeler and his merry band of policymakers decided to cut interest rates by 0.25% from 2.75% to 2.50% in this week’s central bank statement, citing concerns about the slowdown in emerging economies and the potential impact of higher U.S. borrowing costs.
RBNZ officials also noted that the downturn in trade activity has dampened economic growth and that the rise in immigration has contributed to labor market slack. On a more upbeat note, head honcho Wheeler predicted that the rebound in export prices, the pickup in confidence, and the rise in domestic demand spurred by a growing population would shore up growth prospects in the coming year.
Because of that, the Kiwi jumped after the announcement, as the upbeat growth outlook led forex market watchers to predict that the RBNZ might not cut interest rates again anytime soon.
2. SNB holds fire… for now
Since the recent ECB decision turned out to be a major letdown, the folks over at the SNB decided to take it easy with their dovish bias as well. Recall that SNB head Thomas Jordan and his policymaking peers stood ready to intervene in the forex market in order to keep the franc weak in case EUR/CHF falls much further.
In their actual policy statement, SNB officials just stuck with their usual jawboning spiel, reiterating that the Swiss central bank has enough monetary policy ammunition in its arsenal and that – surprise, surprise – the Swiss franc is still significantly overvalued. Nothing new to see here so franc traders were able to breathe easy.
3. BOE more worried about weak inflation
There weren’t any surprises from the BOE as well since the central bank decided to keep interest rates on hold at 0.50% and asset purchases unchanged at 375 billion GBP as expected. Policymakers have already expressed their shift to a less dovish stance in their previous rate statement so forex traders were already on the lookout for cautious remarks this time.
As it turns out, BOE Governor Mark Carney is already paying close attention to the recent commodity price declines, which underscores their downbeat inflation outlook. Keep in mind that the slump in consumer price levels spurred by the oil price slide earlier on has been one of the reasons why the BOE toned down their hawkish vibes, so another leg lower could push rate hike expectations much further back.
4. Expectations, expectations, expectations
As you’ve probably noticed, market expectations have played a significant role in determining how forex pairs have been reacting to these central bank events. Unlike announcements that come off as a huge surprise, policy changes that have long been priced in by everyone and his momma tend to be accompanied by profit-taking activity and strong reversals during the actual event.
And nope, forex market participants didn’t just magically turn into jedis overnight, acquiring forecasting skills that allow them to see way off into the future. These strong expectations have been built up for months, as more economic clues emerge and policymakers themselves drop some hints, feeding into existing biases ahead of the actual event.
Of course, as I always say, higher expectations usually mean greater room for disappointment. Think about it as having a friend who keeps raving about how the movie you’re about to see is so dope, only to end up exiting the cinema feeling utterly unimpressed and wishing you just stayed home with your BFF Netflix instead.
To top it off, expectations for future policy moves might have a larger impact on price action. I mean, are you REALLY going to watch another Transformers movie again? Didn’t think so!
5. The Fed force awakens
Speaking of movies, jedis, and market expectations, forex junkies will finally get their front row seats to the blockbuster event of the year next week… which is the December FOMC statement. Totally geeking out about what Yellen has to say! Move over, Star Wars!
Fed liftoff expectations have been the talk of the town for the past few months, as economic data and policymakers’ testimonies have mostly supported a hawkish bias, but the latest central bank announcement takeaways suggest that we might be in for a not-so-straightforward forex reaction once more. I could use some words of wisdom from Yoda on this one but practice my wookie growl I shall, just in case!