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Central Banks to Make Global Waves Next Week

Friday, 29 October 2010 01:38 PM Current | Bio | Archive

Central Banks will set the tone next week in markets all over the world.
No less than five major central banks will let us know their monetary policy decisions.

Tuesday, the Reserve Bank of Australia (RBA) will give us its decision on its official “cash” rate. Last time, on Oct. 5, Reserve Bank Governor Glenn Stevens cited the prospect of slowing growth over 2011, short-term containment of inflation in Australia and continued uncertainty in overseas markets as the key factors that prompted the RBA against raising the cash rate from 4.5 percent.

However, the RBA also made an interesting remark: “It is likely that higher interest rates will be required” at some point in the future.

We’ll see if that point in the future has come now.

Wednesday, the day after the U.S. midterm elections, the Federal Open Market Committee (FOMC) will let us know its decision on U.S. key interest rates and QE2.

The FOMC will most likely unveil its program of U.S. T-bond purchases worth several hundreds of billions of dollars over several months.

The announcement of QE2 by the Fed will be one of the most widely watched and heavily traded Fed announcements in decades.

Keep in mind the Fed's goal is to drive up the price of long-term Treasury securities, lowering long-term interest rates and hopefully stimulating more economic growth and job creation.

It will be the level of QE2 (QE1 started in March 2009) the Fed announces on Tuesday that will be the trigger that could move the markets suddenly in any direction.

If QE2 is lower than the markets are expecting and the Fed acts too cautiously, then the dollar could move up sharply. But that’s not all.

Investors should keep in mind that this could also have the opposite effect on the price of Treasury securities than the Fed intends, and we may see Treasury bonds and notes actually move lower on the announcement.

That said, we may see a good example of “buy the rumor, sell the fact” in the dollar next week.

In the meantime, most of us have learned that when the dollar moves up, most everything else goes down — and vice versa.

Yes, it could become an interesting week.

Thursday, the Bank of England (BOE) and the European Central Bank (ECB) will announce monetary policy decisions.

Last time, on Oct. 7, the BOE kept the “bank rate” at 0.5 percent and the size of their asset purchase program at 200 billion pounds (US$315 billion). Like its U.S. counterpart, it also started its QE program in March 2009.

In the October BOE statement, it said: “Committee members differed … on the overall balance of risks to the medium-term outlook for activity and inflation since the August inflation report … projections prepared for the November inflation report would give the committee an opportunity to re-evaluate more thoroughly the outlook for activity, the margin of spare capacity and inflation in light of all the news.”

By the way, Adam Posen was the only one of nine members who wanted an increase of the BOE asset purchase program by 50 billion pounds to a total of 250 billion pounds (US$359 billion).

Now that the U.K. austerity program is under way, it will be interesting where the BOE will detect the risks that will matter going forward.

On the strength of the United Kingdom’s third-quarter GDP, a consensus that previously foresaw the BOE revamping its policy of QE next week now appears to favor its postponement until 2011.

Also Thursday, the European Central Bank will unveil its monetary policy decisions.

On Oct. 7, it left the key ECB interest rates unchanged and reiterated the current monetary policy stance remained accommodative.

In its statement, it said “on the Governing Council’s assessment, the risks to this economic outlook are slightly tilted to the downside, with uncertainty still prevailing … inflation expectations over the medium to longer term continue to be firmly anchored in line with the Governing Council’s aim of keeping inflation rates below, but close to, 2 percent over the medium term.”

At the news conference following the policy announcement, ECB President Jean-Claude Trichet also said that “excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability. And, as you have heard me say on a number of occasions, I have always shared the view of the U.S. authorities that a strong dollar is in the interests of the United States.”

Trichet will inevitably face questions about his colleagues, Axel Weber and Jürgen Stark, and their growing demands for the ECB to ditch their “emergency (QE) measures.”

Although his commitment to the measures is resolute, any hint of tension will come at a most inopportune time given renewed concerns about the eurozone periphery’s path towards fiscal consolidation.

It will be interesting to see what has really changed during the month of October hereby also keeping in mind the overall

Eurozone inflation rate was up to 1.8 percent in September from 1.6 percent in August.

It’s important to note that there are growing signs that the eurozone is literally growing apart. This is highlighted by the fact that Ireland is now facing “deflation” of minus 1 percent year over year while Greece has an “official” inflation rate of plus 5.7 percent year over year.

Friday, the Bank of Japan (BOJ) will announce its monetary policy after the BOJ’s “unprecedented” decision to bring forward its November policy meeting by two weeks so the BOJ could address promptly, if necessary, any “adverse” impact upon the Japanese yen from the widely anticipated launch of the Fed’s QE2.

Although any adjustment of the Japanese QE program as well as any new foreign-exchange intervention so soon after their launch would undoubtedly invoke much criticism, we must note there are much bigger issues right now. One of those issues is the expected commitment Japan arguably expected from the United States when both promised to “be vigilant against excess volatility and disorderly movements in exchange rates” as agreed in the G-20 accord whereby finance ministers from the G-20 nations vowed to avert a currency war that could derail the global economic recovery.

Of course it may not come to that, but all in all, the interlinkages of all these events suggest the possibility of a particularly interesting and probably volatile week.

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Central Banks will set the tone next week in markets all over the world. No less than five major central banks will let us know their monetary policy decisions. Tuesday, the Reserve Bank of Australia (RBA) will give us its decision on its official cash rate. Last...
Friday, 29 October 2010 01:38 PM
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