Europe Steps Away from the Edge; Will FOMC Ease Anyway?
Greece’s elections did not yield the doomsday scenario G20 leaders were afraid of, signaling that the coordinated easing package is not on the way. With US economic growth slowing, will the Federal Reserve announce more quantitative easing anyway? We think not. Accordingly, with a thin docket this week, attention lies on the globe’s major central banks, with the Reserve Bank of Australia, the Bank of Japan, and the Bank of England due to release their respective board meeting minutes this week as well.
06/19 Tuesday // 01:30 GMT: AUD Reserve Bank of Australia Minutes
At its June meeting, the Reserve Bank of Australia cut its key interest rate by 25-basis points to 3.50% from 3.75%. While this was in line with the forecast provided by Bloomberg News, the Credit Suisse Overnight Index Swaps were pricing in a 56.0% chance of a 50-bps cut; so to say that the RBA surprised at least part of the market is an understatement. The RBA’s decision preceded two other key data releases for Australia, the first quarter GDP reading and the May labor market release, both of which were much better than expected, providing ample reason for the RBA to only cut by 25-bps.
However, given global growth concerns as well as concerns over China’s growth (China being Australia’s largest two-way trading partner), we expect the RBA to maintain a dovish tone in its minutes and signal that another rate cut could be on the way. Similarly, Prime Minister Julia Gillard’s new fiscal policies clearly give more scope to handle the economy to the RBA, paving the way for further accommodative policies in the future. The key pairs to watch are AUDJPY and AUDUSD.
06/19 Tuesday // 08:30 GMT: GBP Consumer Price Index (MAY)
Price pressures in the United Kingdom remain elevated, and this is in no doubt due to the exceptionally loose monetary policy maintained by the Bank of England over the past three-years (the key interest rate has been on hold at 0.50% since March 2009). According to a Bloomberg News survey, the May Consumer Price Index reading will show that price pressures have remained relatively sticky. On a monthly-basis, the rate of inflation declined from 0.6% to 0.1%, while on a yearly-basis price pressures look to have increased from 2.1% in April to 2.3% in May. The Core reading shows a similar trend, with the Core Consumer Price Index expected to increase from 2.1% to 2.3%.
Nonetheless, with commodity and energy prices falling, as well as global growth issues raging, we expect that the Consumer Price Index, with a weaker reading, could fuel easing hopes from the BoE, which as of last week announced a major liquidity package to help credit for smaller businesses. The key pairs to watch are EURGBP, GBPJPY, and GBPUSD.
06/20 Wednesday // 08:30 GMT: GBP Bank of England Minutes
In a surprise move, the BoE kept its Asset Purchase Program on hold at £325 billion as well as its key rate on hold at 0.50% at its June meeting, but it’s clear that the BoE’s Monetary Policy Committee is split. In recent weeks, various dovish officials such as Adam Posen and David Miles have trumpeted the call for more quantitative easing; suggesting that the BoE’s June meeting produced a 7-2 vote split. If this is the case, which we believe it will be, we could see the Asset Purchase Program expanded in the very near future. At minimum, we should expect to see a heightened discussion for more easing. On Thursday, Governor Mervyn King, alongside UK Treasury officials, announced that a major liquidity package would be unveiled in the coming weeks to help small businesses. We believe that this could be noted in the minutes as well.
Overall, given the high degree of speculation for a looser monetary policy, these dilutive efforts and the signaling by the BoE of liquidity injections should hurt the British Pound, regardless of the Euro-zone crisis and whatever flows it may be seeing stemming from those concerns. The key pairs to watch are the EURGBP, GBPJPY, and GBPUSD.
This is the most important event on the docket. The Federal Reserve has its most important policy meeting of the year thus far, when the Federal Open Market Committee meets on Wednesday. At this meeting, Chairman Ben Bernanke will release the Fed’s revised economic projections as well as hold his quarterly press conference, in which the hopes for more quantitative easing in the very near-term should be dashed. Calls have been high for a QE3 package, especially among the Fed’s more dovish members such as Charles Evans (who last week stated that he would support any form of more accommodation), but it’s important to note that the Fed voting bloc has been a bit more conservative lately.
At his Congressional testimony a few weeks ago, Chairman Bernanke made it clear that the Fed would not fill the void created by the US’ irresponsible fiscal policy, and that the Fed could only do so much to achieve its dual mandate of price stability (with inflation near 2%) and maximum employment. Accordingly, we do not expect a full-blown QE3 package; but instead, we expect that the FOMC will announce an extension of Operation Twist. Similar to how markets reacted in September when Twist was announced, this could lead to a major US Dollar rally. The key pairs to watch are AUDUSD, EURUSD, and USDJPY.
06/20 Wednesday // 22:45 GMT: NZD Gross Domestic Product (1Q)
The New Zealand economy appears to be slowing, no doubt in part due to weakening growth prospects out the Asian-Oceanic region. Unlike the Australian economy, which posted a huge (+5.0 standard deviations above expectations) first quarter GDP print, the New Zealand economy is expected to show modest growth, albeit at a slower pace. According to a Bloomberg News survey, the New Zealand economy grew at a 0.4% quarterly rate in the first quarter, while y/y growth will come in at 1.3%. Respectively, this means that growth was slightly stronger in the first quarter q/q, at 0.4% from 0.3% in the fourth quarter of 2011, but will represent an overall decline from the same time last year, with the y/y reading falling from 1.8%.
The Reserve Bank of New Zealand last week kept rates on hold and noted both headwinds and tailwinds to the economy, but if growth is slowing as the forecasts suggest, we could see the RBNZ take on a more dovish tone in the near-future as well as some commentary suggesting that the relatively strong New Zealand Dollar is hurting exporters. The key pairs to watch are NZDJPY and NZDUSD.
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--- Written by Christopher Vecchio, Currency Analyst
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