Central bank policy decisions are always important for the markets. However, this month some of the upcoming decisions could be more crucial than usual. For the stock markets, and the prospects of a further uplift into Christmas, this week could prove decisive in terms of US and Japanese equities. The dollar and the JPY could gather some steam too.
The expectations on what will change are running high. The markets anticipate that the Fed will cut the level of their overnight rates by 0.25% on Wednesday evening at 6pm. The talk surrounding possible Bank of Japan action in the early hours of the following day has been running higher than usual too. The Japanese central bank has left their benchmark rate unchanged at -0.1% for what feels like forever now.
However, there are signs that the BOJ might want to change this in order to steepen the yield curve. The flat yield curve in the JPY is making life extremely difficult for the Japanese commercial banks. The problem for the Japanese central bank is that they now own around 40% of their own debt already, so quite what they can do in reality is not such an easy decision to arrive at-keep printing JPY forever perhaps?
Who knows, but eventually this will have to stop because if it doesn’t, then the Japanese government may, at some point in the future, find themselves dependent upon the kindness of strangers. That is a luxury they are able to avoid right now because there is still no reliance on overseas buyers of Japanese debt. God help them if that ever changes; that’s all I have to say on the matter.
However, and when it comes to changes in monetary policy, chatter doesn’t always count for much when the cardseventually get turned over. So, I think most market participants are probably keeping an open mind on that potential. Whereas, and as far as Fed action is concerned,there is a strong consensus that Jay Powell and his colleagues at the FOMC will take another 25bp off the overnight rate this week.
US equity markets are poised for such action as they hover very near to their all time highs in anticipation of such a move. The S+P 500 matched it’s record high on Friday when it traded to within a whisker of 3028. Perhaps somewhat surprisingly, it didn’t surpass that level by even 1 solitary Point. The closing level on Friday, at 3022.55 didn’t surpass the record close either. That was set back on 26th July at 3025.86
Meanwhile, back at the currency farm the dollar actually recovered quite well last week. The Friday before last, the USD index had fallen back, and closed below its 200 day moving average and it did the same the following Monday.
However, the rebound from Tuesday onwards saw the price lift back above that level quite impressively. It should be noted that the 200dma is still rising and as of last Friday stood at 97.42, with the close set at 97.83.
The relapse in the GBPUSD, from above 1.30 (the 1.3013 the high last week) helped that dollar recovery too. The GBPUSD closed at 1.2827 on Friday thanks to a further round of Brexit headlines; that managed to cast a degree of doubt on all the reasons why the price had recovered back above 1.30 in the first place.
Hence the takeaway from all this is; that whilst the equity markets seem poised for some good news from the Fed this week, the currency markets appear not to be taking anything for granted. Well, gauging which market is going to be right in its assessment is as tricky as ever. I think one thingwe can say for sure; if the Fed does nothing on Wednesday evening, then the US president is set to bellow another tirade of abuse at the Fed boss. I already explained why that is likely in a previous article here, so I won’t repeat all that again.
Personally, I am still a fan of the dollar, but not necessarily for all the right reasons. However, when it comes to buying and holding the JPY, CHF or EUR, I simply cannot be drawn, all the time there is such a negative cost of carry. It’s the same with all their bonds- why pay those governments to invest in their debt? It just makes no sense to me whatsoever quite honestly.
So, lets suppose the Fed does cut again on Wednesday, and that outcome is fully baked into current market pricing, certainly and as far as the equity space is concerned anyway. Assuming that is the case, then what is likely to come next is probably more important. If the Fed makes it clear that a cut in October is the last in the current series, that might not be well received by the equity markets. Perhaps just as equally unpleasantly as if the Fed does nothing at all?
The ensuing reaction won’t be wasted on the dollar either. It is also conceivable that the BOJ might will want to wait to see what the Fed does before making any decision. The BOJ of course has the luxury of being able to do that, given that they will announce their decision the following day. The one thing the BOJ is especially mindful of; is the level of the USDJPY and they will not want to see that drop below 105 again. Take that as read.
Perhaps it’s also worth noting that the Bank of Canada is also due to make a monetary policy decision as well this week. On Wednesday afternoon the BOC is expected to leave their benchmark rate unchanged at 1.75%. Perhaps that is why the USDCAD has already broken down below a key long termtrend support line at 1.3080. The USDCAD closed on Friday at 1.3058. Whilst that may not sway the BOC’s decision making process, I am sure it hasn’t gone unnoticed either.
Important economic releases and events due this week
28/10- 4.00pm-ECB President Mario Draghi Speech from Frankfurt
29/10- 2.00pm US October Consumer Confidence
30/10- 12.30am Australian Q3 CPI Inflation Report
30/10- 12.15pm US ADP Private Payroll Report
30/10- 12.30pm US Q3 GDP and GDP Price Index Revision
30/10- 2.00pm Bank of Canada Monetary Policy Decision
(Consensus- 1.75% Bank Rate Unchanged)
30/10- 6.00pm US FOMC Monetary Policy Decision
(Consensus- 0.25% Cut Expected)
31/10- 2.30am- Bank of Japan Monetary Policy Decision
(Consensus- No Change Expected)
31/10- 1.00am China October Manufacturing PMI
31/10- 10.00am Eurozone October CPI Inflation Report
31/10- 1.30pm Canada August GDP Report
01/11- 1.45am China Caixin October Manufacturing PMI
01/11- 12.30pm US October Unemployment Report
01/11- 1.30pm Canada October Manufacturing PMI
01/11- 2.00pm US October ISM Manufacturing Index