RBA, BOE Rate Decisions in Focus Amid Shifting Central Bank Rhetoric

2012-04-02 08:00:00 Christopher Vecchio, CFA, Senior Strategist

Last week’s price action was fairly cut and dry: rally to start the week (Mutual Fund Monday); pullback on Tuesday (Turnaround Tuesday); and then mostly sideways-to-downside trading as the end of the fiscal year in Japan coupled with the end of the first quarter across the rest of the globe brought about some profit taking. Is this move lower constructive or corrective?

I lean towards the latter, for now, given the fact that we’ve seen open interest on the S&P 500 decline in tandem with price – this is an indication of a technically strong market. In order to help clarify what has been an increasingly distorted macroeconomic picture (extended low rates, infinite amounts of quantitative easing, conflicting data reports, etc.), three major central banks will kick off April with their monthly rate decisions. While the European Central Bank usually takes the spotlight, our attention this week is on the Reserve Bank of Australia and the Bank of England, given the volatile price action surrounding the Australian Dollar and British Pound recently.

04/02 Monday // 14:00 GMT: USD ISM Manufacturing (MAR)

The US economy has been strengthening the past few months, and the ISM manufacturing survey for March should confirm this progress. According to a Bloomberg News survey, the gauge is forecasted to print 53.0 from 52.4 in February, a modest increase. But for February, the ISM manufacturing survey showed an increasing rate of expansion from October through January. While a print of 53.0 would be good news, the main concern lies within the prices paid component, which is expected to show a rise to 63.0 from 61.5 over the same periods. A strong reading will be bullish for high yielding currencies and risk-correlated assets, bearish the US Dollar.

04/03 Tuesday // 04:30 GMT: AUD Reserve Bank of Australia Rate Decision

The Australian economy is starting to show signs of trouble and China’s deteriorating growth outlook is not lending any help. With that said, the Credit Suisse Overnight Index Swaps point towards a 47.0 percent chance of a rate cut at the meeting on Tuesday, which means that nearly half of the market will be surprised by the decision. Bottom line: expect volatility, and look for language contained in the statement released after the meeting. Even if there is no rate cute, dovish language will likely prompt a sell-off. Key commentary will focus on the housing sector, labor market, and the Chinese growth picture. I’m expecting a bearish reaction by AUDJPY and AUDUSD.

04/03 Tuesday // 18:00 GMT: USD Fed Release Minutes from March 13 FOMC Meeting

The Federal Open Market Committee minutes tend to be a hit-or-miss type of event; they either stoke massive volatility or none at all. Considering the gravity of the March 13 meeting – one in which mentions of quantitative easing were absent and the statement was broadly neutral (or relatively hawkish compared to recent decisions) – these upcoming minutes are likely to produce significant price action. While there are many things to be considered in the minutes, traders only need to look for mentions of more easing. If the FOMC indicates it is willing to extend more easing (either outright MBS purchases or a sterilized bond purchase program) I would anticipate a bearish US Dollar reaction (bullish Australian Dollar, Euro, Yen). However, should officials indicate they are moving towards normalizing policy, I expect the US Dollar to strengthen up until the nonfarm payrolls report on Friday.

04/04 Wednesday // 11:45 GMT: EUR European Central Bank Rate Decision

The European Central Bank isn’t expected to make a policy change at this week’s meeting, according to a Bloomberg News survey. With rates expected to remain on hold at 1.00 percent (confirmed by a 0.0 percent chance of a rate change according to the Credit Suisse OIS), the key here will be to listen to the post-meeting press conference in which President Mario Draghi will discuss the economic and monetary conditions affecting the Euro-zone now. Markets have been relatively calm the past few weeks (although they are off their mid-/late-February highs) but any chatter – or lack thereof – about another liquidity program should generate the most interest. A supportive ECB will boost the Euro; a statement that indicates the ECB is leaning away from further support should be bearish the Euro.

04/06 Friday // 12:30 GMT: USD Change in Nonfarm Payrolls and Unemployment Rate (MAR)

Is this the most important US nonfarm payrolls report in recent memory? It very well could be. After an unseasonably warm winter in which the US economy averaged job growth of 246K from December through February, the markets’ collective attention is to see if the US economy can maintain its relatively robust recovery. The job growth experienced from December through February was the strongest period of labor market growth since February through April 2011, when the US economy averaged 239K jobs added per month. While I am expecting a disappointing print – surveys are expecting 205K against 227K in February – NFPs need to show job growth of 223K or greater to maintain the labor market’s current pace of expansion.

Rate Hike Probabilities / Basis-Points Expectations