Next Wave of Central Bank Decisions
01/03/10 22:45
Hello Traders;
The Olympic games are over and I'm back in action and reconnecting with the market. The best show of psychological tenacity was Canadian Bobsledder Lynden Rush, who, while in bronze medal position in the 2man, crashed in the second heat, giving up all hope for a medal. Remarkably, he came back the second day and finished the race. This is the Olympic ideals in its truest form. He came back the following week and won a bronze medal in the 4man. The psychological profile of a winner, indeed! The mind of a trader!
Update:
The next wave of central bank decisions are upon us and the RBA is the one where we could see some movement, which has benefited the Australian dollar in the lead up to the meeting. The ECB and BoE are unlikely to do anything materially different as sovereign fiscal pressures are restricting the ECB to a certain degree and BoE officials have signaled more quantitative easing could be in the cards, both of which are pressuring the domestic currencies. But for the BoC, inaction at its upcoming meeting will not necessarily weigh on the Canadian dollar. I have covered a lot of this in todays Pro Traders Club.
The Olympic games are over and I'm back in action and reconnecting with the market. The best show of psychological tenacity was Canadian Bobsledder Lynden Rush, who, while in bronze medal position in the 2man, crashed in the second heat, giving up all hope for a medal. Remarkably, he came back the second day and finished the race. This is the Olympic ideals in its truest form. He came back the following week and won a bronze medal in the 4man. The psychological profile of a winner, indeed! The mind of a trader!
Update:
The next wave of central bank decisions are upon us and the RBA is the one where we could see some movement, which has benefited the Australian dollar in the lead up to the meeting. The ECB and BoE are unlikely to do anything materially different as sovereign fiscal pressures are restricting the ECB to a certain degree and BoE officials have signaled more quantitative easing could be in the cards, both of which are pressuring the domestic currencies. But for the BoC, inaction at its upcoming meeting will not necessarily weigh on the Canadian dollar. I have covered a lot of this in todays Pro Traders Club.
For the RBA, we are looking for a 25bp hike, although growing concerns over Greece's fiscal health may be enough to encourage the policy board to pause on this occasion. The OIS curve has priced in 15bp of tightening for this meeting and less than 10bp for each of the next two meetings. Even though the possibility of a rate hike in March has helped the Australian dollar, we are looking for a subsequent pause until the second half of 2010 and that could cause a pullback in AUDUSD. In Europe, the ECB and BoE inaction are weighing on the euro and sterling, respectively, and we see that continuing as we do not expect any rate hikes from either central bank until Q4 2010.
But for the BoC, an unchanged meeting and a reiteration of its conditional pledge to keep rates low through the second quarter of this year will not necessarily weaken the Canadian dollar. Some institutions do not think the BoC will move at the upcoming meeting because inflation remains the key to the conditional pledge and as of the last reading inflation was in the middle of the BoC's comfort zone. That said, data as of December shows foreign interest in Canadian assets remains strong, with most of the interest in bonds, which shows that Canada's relatively stronger policy footing has been attractive to investors despite the policy rate being exceptionally low. The Canadian dollar has also been helped because the conditional pledge comes with an expiry date. USDCAD has been subject to swings in broader US dollar sentiment, but we continue to like the Canadian dollar as a relative value play via non-USD crosses as current issues widen the policy gap between Canada and the rest of the G10.
Fed Vice Chairman Kohn submitted his resignation, effective at the expiration of his term on June 23, 2010. Kohn is a veteran member of the Board staff and his resignation comes when there are already two Board vacancies. President Obama's spokesman said the President intends to have a replacement nominated and confirmed before Mr. Kohn leaves as there cannot be three vacancies at the same time. In a WSJ article, Philly Fed President Plosser discussed the "extended period" language and said he preferred to "have language that is more conditional on the state of the economy, and less upon some arbitrary time frame. At some point we're going to have to get rid of it."
EURUSD should hit 1.30 in the weeks to come.
Source: UBS, Bloomberg, Chris Lori