Last night’s Federal Reserve meeting was one of the least anticipated in a long time. This was with good reason, it turned out in the end. In a particularly brief statement, the FOMC maintained its desire to remain patient on the need to raise interest rates in the United States. Economic activity was said to be solid while the jobs market remained strong. When the Fed’s attention turned to developments abroad, they simply stated that its policy assessment would take into account international developments. That is central banker speak for “don’t worry, we’ve seen it”.
The whole statement was a placeholder in actual fact. The brevity and lack of new insight hints at a Federal Reserve that simply wanted to make sure the market wasn’t surprised by anything. USD rallied slightly in the aftermath on the lack of explicit language about international developments, seeing a delay to any rate increases stateside.
While we’re on central bank communications, we must mention Bank of England Governor Mark Carney’s speech yesterday. Speaking in Dublin, Governor Carney weighed in on the European Central Bank’s QE plan and the fiscal issues that the European economy faces moving forward. While there is nothing strange in this per see, the timing of it is interesting. “It is difficult to avoid the conclusion that, if the Eurozone were a country, fiscal policy would be substantially more supportive,” the governor said. “However, it is tighter than in the UK, even though Europe still lacks other effective risk-sharing mechanisms and is relatively inflexible.”
Coming three days after the Syriza party directly challenged this current set-up has been lost on nobody and will serve to highlight pressure on the fiscally responsible Eurozone nations – this means you Berlin – to enable fiscal transfers to poorer nations.
On UK monetary policy, the Governor was less forthright, maintaining that rate rises, when they come, will be gradual and limited. Sterling was unaffected by the speech with pound watchers largely focusing on the Bank of England’s Inflation Report due in little under a fortnight. In the short term, the focus is very much on whether we will see inflation fall below 0% in the coming months. The longer term issues surround the expectation of when CPI will start returning towards its 2% target. Within that will lie interest rate increase expectations.
Once again it is the Antipodean currencies that have been the big movers overnight. The Reserve Bank of New Zealand dropped a reference in its statement to further rate rises, moving their outlook to a more neutral bias. The central bank stated at its October meeting that falling commodity prices would ease the pressure on the NZD yet trade weighted Kiwi dollar actually rose 5.7% through Q4. A 6.64% gain against its Australian counterpart is largely to blame for that.
Both the AUD and NZD are lower on the session as bets increase of rate cuts by their respective central banks. In New Zealand, the central bank raised rates by a full per cent last year between March and July. We have seen the RBNZ cut rates after raising them previously however; interest rates rose from 2.5% to 3% in 2010 before falling back to 2.5% in early 2011.
For Australia, despite that better than expected inflation number, traders are betting that the wave of central bank interest rate cuts must touch the Reserve Bank of Australia. OIS swaps now forecast a 66.4% chance of a rate cut at the RBA’s meeting in February.
