Central Banks Take Center Stage

We had an interesting week last week and this morning was no different, the AUD bulls disappointed by the RBA’s decision to stand pat on the outlook, though today’s disappointment may seem rather trivial when it comes to what lies ahead for the markets, with the FOMC and ECB monetary policy meeting minutes due out later in the week and that’s without forgetting U.S nonfarm payrolls and wage growth.

There may be a lack of volatility in the global equity markets, but there’s certainly never a dull moment in the FX world, with the shift in sentiment towards monetary policy raising the stakes in the coming weeks, macroeconomic data and central bank commentary all the more relevant, the markets looking to second guess the timing of possible moves by the BoE, the ECB and the FED and we’re not just looking at rate hikes, but a tapering to the ECB’s asset purchase program and the FED’s sell off of the balance sheet.

1. So, we had the RBA’s interest rate decision this morning, which kept interest rates at a record low. What is your view on RBA monetary policy and the Australian economy?

• Answer: We saw the AUD fall more than half a cent this morning, with the RBA rate statement providing no evidence of an imminent shift in outlook towards monetary policy.

The markets had priced in a more hawkish rate statement, but with household debt outpacing wage growth, which the RBA forecasts to remain tepid over the near-term, a shift in policy remains out of reach.

The hawkish sentiment came off the back of surprisingly hawkish commentary from both the BoE Governor Carney and ECB President Draghi.

Adding to the RBA’s dilemma are concerns over AUD appreciation and the impact on trade terms, any upside in the AUD considered a negative despite an improving global economic outlook.

Ahead of the RBA’s decision and release of the rate statement, retail sales figures out of Australia saw a second consecutive monthly rise, which appeared to give the RBA little incentive to take a more hawkish stance, any lift in rates certainly a negative for household disposable incomes, with household debt on an upward trend.

We would expect the RBA to look towards wage growth and a slowing in the pace of household debt before considering a shift in policy, with AUD strength always a factor to consider, with the Australian economy heavily dependent upon trade.

Trade figures out of Australia later in the week will be of particular importance, though even with positive numbers, the RBA is unlikely to want to cause an appreciation in the AUD, the economy still reliant on trade.

2. You mentioned that there had been a shift in the ECB’s position on monetary policy, which had led to the EUR rally of last week, what can we expect from the monetary policy meeting minutes due out later in the week?

• Answer: We saw the EUR rally last week off the back of Draghi’s upbeat assessment of the Eurozone economy and view that inflationary pressures are expected to begin building, supported by the ECB’s prudent monetary policy.

 With Draghi’s tone considered somewhat more hawkish than during the last ECB press conference in June, the release of the monetary policy meeting minutes on Thursday will likely contain language that will drive the EUR. We will be looking for some guidance on when a tapering to the asset purchasing program will begin, the hawkish sentiment towards the Eurozone economy suggesting that we could be looking at a sooner than previously forecasted tapering.

EUR strength has always been a concern for Draghi, so while there may be a change in language within the minutes, with the ECB policy statement last month having already removed reference to the possibility of lower rates, a reinforcement of the need for accommodative monetary policy may be expected from the ECB president.

Draghi’s latest comments are a material shift, supported by macroeconomic data out of the Eurozone, with Monday’s PMI figures continuing to be a positive, suggesting that it would be unlikely for Draghi to revert back to his more dovish stance, barring a market event.

3. Following on from the ECB, what do you think that the FOMC minutes will contain and how do you see the economy in general?

• Answer: Thursday’s FOMC meeting minutes will give the markets an opportunity to, not only assess how great a divide there is between the doves and the hawks on inflation, but also a chance to gauge where the FOMC sits with regards to the timing of beginning to sell down the balance sheet and, perhaps more importantly, whether there are any pre-requisites that need to be considered in the coming months.

We’ve heard from a number of FOMC members including the FED Chair and sentiment towards a final rate hike is certainly mixed, which supports the market’s current view of a December move, assuming economic indicators don’t point to slow down in the 3^rd.

Inflation remains the key hurdle but, should labour market conditions continue to tighten and wage growth accelerate, we would expect the doves to begin making a shift.

Recent economic data out of the U.S has reflected improving private sector growth, though Thursday’s service sector numbers will be of far more relevance to the economy, monetary policy and the Dollar.

For indicators suggest that the U.S economy will continue to expand going into the 3^rd quarter, supported by a positive outlook towards the global economy.

While the FOMC meeting minutes will be of importance, this week’s service sector PMI, nonfarm payrolls and, more importantly, wage growth will be the key drivers.

The labour market has continued to tighten and wage growth will likely follow, which will support consumer spending and the economy as a whole.