This week, both the RBA and the BOE released the minutes of their monetary policy meetings. Although we already know how their respective rate statements turned out, taking a peek at what exactly transpired during their meeting could shed more light on the rationale behind their decisions.
Aside from that, monetary policy meeting minutes also usually reveal whether policymakers are generally hawkish, dovish, or divided when it comes to their economic assessment and outlook. Think of it as a sneak preview of their upcoming monetary policy decisions!
Let’s start off with the more hawkish central bank from the Land Down Under:
Reserve Bank of Australia
Recall that the RBA Governor Glenn Stevens and his men decided to surprise the markets by keeping rates on hold instead of cutting by 25 basis points during their latest policy decision. Talk about doing the unexpected!
The minutes of their meeting revealed that RBA officials believed that the economic threats posed by the euro zone debt crisis are no longer as serious as they were before. They also pointed out that growth and inflation are in line with their expectations, although they mentioned that a rate cut could still be possible if demand weakens significantly.
For now, it seems that the Australian economy is supported by a lot of macroeconomic factors, particularly from China. The Asian giant, and not to mention Australia’s number one trade partner, just printed an improvement in its manufacturing PMI and enjoyed a 0.5% RRR cut by the PBoC. This means that, even though growth has moderated, Australia can still count on strong demand from China to boost its export activity.
Bank of England
In contrast, the BOE had a much more somber outlook for its economy, as evidenced by its decision to expand its asset purchase program by another 50 billion GBP in its last monetary policy statement.
As I had pointed out in a previous article, the BOE’s decision to ease its policy was fully supported. Let’s run through the checklist:
1. Weak economic growth – check!
2. Softer inflationary pressures – check!
3. Previous asset purchase program nearing its expiry – check!
Sadly, the U.K.’s problems aren’t just domestic; it has to deal with problems outside its borders as well. As a matter of fact, some of the BOE’s very own members believe that the euro zone debt crisis is actually the biggest threat to the economy. And they aren’t the only ones that subscribe to this thought, either. Moody’s seems to be thinking the same thing, as it recently slapped a negative outlook on British bonds.
With that in mind, it’s understandable why BOE members Adam Posen and David Miles wanted to expand the central bank’s asset purchase program by 75 billion GBP and not just 50 billion GBP. The minutes of their latest meeting revealed that these two believe inflation will fall below the 2% target and that aggressive loosening of monetary policy is necessary to avoid a long-term slump in domestic demand.
From the looks of it, the BOE may have to get busy again later in the year as BOE Deputy Governor Charlie Bean (not to be confused with the Mr. Bean), sees sluggish growth for the rest of 2012.
Still, there are those that believe that the 50 billion GBP expansion is enough as growth may pick up later in the year and inflationary risks haven’t been fully eliminated.
From the tone of their meeting, it seems that the BOE is open to further easing. I repeat, open but not quite ready. It looks their decision will depend highly on how their economy performs in the next few months and whether threats to the global economy remain.
And now the million-dollar question: How can we take advantage of all this information?
It’s all about proper pairing! According to our lesson on Fundamental Analysis, the trick is to match a strong currency (or one that’s expected to strengthen) with a weak currency (or one that’s expected to weaken).
That being said, a position trade on GBP/AUD with a downside bias might be worth a look. However, if you’re uncomfortable with playing unusual crosses, you can also replicate this trade on dollar pairs, as demonstrated in our lesson on trading synthetic pairs.