Thursday, 16 March 2017

BoJ, SNB, Bank Of England Meetings

Hot on the heels of the FOMC meeting, today we have not one, not two but three major central bank meetings!

I discussed the outlook for the BoJ meeting in yesterday’s comment. As I said, most market participants anticipate no change in policy targets, including the 0% target for 10-year JGBs despite the rise in US bond yields. The US moves will simply be welcomed by the BoJ as aiding their efforts – so far fruitless -- to get inflation back to the 2% target.

In fact, the market sees an 80% probability that the BoJ will keep rates unchanged for the entire year. It’s unlikely that this meeting will cause any major change to those expectations and therefore the meeting might not have a dramatic impact on JPY.

The Swiss National Bank (SNB) meeting is unlikely to result in any fireworks, either. The deposit rate has been at -0.75% since Jan. 2015 and there’s no indication it’s going to change any time soon, at least not before the ECB raises its rate. SBN President Jordan has complained that the CHF is “significantly” overvalued, which is certainly is –the OECD reckons it’s the most overvalued of all the G10 currencies, and the Economist’s “Big Mac” index makes it the most overvalued currency in the world. But he also said that “we currently see no reason to adjust our monetary policy,” and although the SNB is notorious for having pulled the rug out from under the FX market in the past, this seems to be a reasonable assessment at this time. EUR/CHF is virtually unchanged from the December meeting, although clearly it has required some intervention in the FX market to achieve that (see graph). Inflation has risen slightly but remains quite low. I don’t expect any significant change in policy at this meeting and CHF may wind up being little changed.

The Bank of England may offer more for the market to chew on though as market participants will scrutinize the minutes of the meeting to see what kind of disagreements and hints they can come up with. Points of particular interest will be: 1) how serious are the emerging signs of weakness in the economy? 2) how does the slightly more accommodative fiscal policy affect their outlook? And 3) any further signs of a split between the two hawks on the MPC (Forbes, who leaves the MPC in June, and McCafferty) and the others. Has the Fed rate hike emboldened them, or has the weakness in the UK economy caused the doves to dig in their heels (or talons?)

Still, with no new forecasts and no press conference scheduled afterwards, it’s hard to see any major changes emerging. The fundamentals haven’t changed much since the last meeting on 2 February and so I would expect them to vote unanimously again to keep rates stable and to repeat that their next move depends entirely on the data. And in any event, it appears that ever since the Brexit vote, politics is moving the pound more than monetary policy. Thus I don’t expect the meeting to have a major or lasting impact on the pound.

The US data out today is mostly second tier, so USD will probably be affected more by further consideration of yesterday’s FOMC meeting than by any new insight into the economy from today’s releases.

The forecasts for housing starts and building permits are almost the same. That would be a slight rise for starts and a slight fall in permits. But in either case, both are at a relatively high level and so a modest decline is nothing to worry about.

The Philadelphia Fed business survey, which soared last month is expected to fall substantially. That would bring it back more in line with the Empire State index, which by the way also fell yesterday.

The Job Opening and Labor Turnover Survey (JOLTS) job opening figure is expected to be right on the six-month average and so continuing at the same pace as usual – neither up nor down significantly. That too would give no reason to adjust anyone’s thinking or their FX position. The figure is likely to be significantly different however as I believe this month will include the annual revisions.


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