Trading FX by the Minutes
Though the “resolved” Greek crisis has been unceremoniously shoved to the sidelines, for investors, uncertainty hasn’t yet been eliminated. No real surprise there, of course. Investors, exhausted by the relentlessness of the Greek saga, are aching for some new news. In that spirit, this week, we will examine some opportunities waiting in the wings. Specifically, we’ll look at policy developments that could steer sentiment for some of the other major FX currencies.
Bank of England
We begin with Mark Carney, the Governor of the Bank of England. Last week, he said that rate hikes might be moving closer, albeit gradually and to a limited extent. As always, though, it’s a matter of timing. Will it be sooner, rather than later? Experts can’t seem to find consensus on this point. One outgoing policymaker from the BoE warns that a delay could have negative repercussions, i.e. a sharper, less gradual rise. Data, of course, will drive the timing. The BoE’s forecasts are generally positive with consistent, above trend growth and stabilized domestic price inputs. What investors will want to see from the minutes is whether the BoE’s protocol reflects Carney’s latest rhetoric. If it does, that could propel the Pound Sterling higher.
Reserve Bank of Australia
Next, we turn to the Reserve Bank of Australia which is set to release the minutes of the latest policy meeting. That will provide the protocol of the RBA members and give investors an idea which way the wind is blowing. In May, the RBA surprised markets with an interest rate cut. Governor Glenn Stevens has said that the central bank would continue to monitor events closely with a view to further rate cuts. However, they also will need to reflect on the impact of the latest rate cut on the Aussie Dollar which has been under pressure. Of course, one major factor is China as the largest buyer of Aussie-made goods. Chinese growth has continued to be lackluster, though last week 2nd quarter GDP figures surprised to the upside both on an annual and quarterly basis. Since the May rate cut, the RBA has taken a wait-and-see stance. Will the status quo continue? What will be key is to see the divide or rift among the RBA members. That will provide the best clue as to whether the RBA plans to keep rates on hold or if members might be leaning toward another rate cut.
Bank of Japan
Last but not least, we look to the Bank of Japan. Last week, the BOJ said that it was lowering its expectations on future growth. Nonetheless, there would be no additional easing. But there was also some good news from Governor Haruhiko Kuroda. The BOJ remains convinced that inflation is on track to hit the central bank’s 2% target, given an uptick in domestic consumption. The BOJ minutes, the official protocol of the BOJ members, will be quite revealing. If it shows an upbeat BOJ, that could provide support to the Yen. However, a “gloomier” BOJ could keep the Yen under pressure.
Down to Business
Overall, we have an array of three central banks with three differing policies. Moving from one of the spectrum to the other we first have the Bank of Japan, which is expected to remain dovish. Then we have the Reserve Bank of Australia, which we expect at the mid-point with a more or less neutral stance. The Bank of England, expected to be at the hawkish end of the spectrum, rounds out the divergence. Any change in the foregoing expectations could tilt the Yen, Aussie and Sterling quite substantially, either way. This is what will dominate the FX arena even as the Greek symphony plays in the background.
Chart of the Week – USD/NZD
On the Plate
RBA Meeting Minutes(Tuesday)- If the RBA minutes reveal the RBA is no longer natural it may tilt the Aussie either way.
BoJ Meeting Minutes(Tuesday)- If the BoJ becomes more dovish the Yen could slide lower.
Aussie CPI(Wednesday) – If Aussie inflation heats and the RBA a day earlier is natural , the Aussie could gain ground.
Bank of England Minutes(Wednesday)- If the minutes reveal a growing consensus that rates should rise the Sterling could benefit. If consensus of BoE members hasn’t changed, the effect might be muted.