This week’s spotlight is on key central policy decisions, some of which are expected to be decided. The Bank of Japan, RBA, Federal Reserve, SNB, and BOE are all on the agenda, so all the powerful players are taking action. That way you’ll at least have a fun week. So let’s take a look at what it could bring to the market.
notable person
At this point, it’s clear that all eyes are on the Bank of Japan this week. Before the pandemic, it would have seemed impossible for Japan to break out of deflation or even discuss monetary tightening. But now here we are.
Considering all the reports and tweets, it is almost certain that the Bank of Japan will end negative interest rates tomorrow. In addition, the yield curve control (YCC) policy is likely to be abolished.
But that doesn’t mean they will immediately switch to a more hawkish policy stance. Unless bond purchases are maintained and major steps are taken to tighten monetary policy, it may be difficult for the Japanese yen to appreciate significantly.
This article hasn’t been written for a while, but still today USD/JPY is at 149.00. Support from lower US Treasury yields will also be needed for the pair to trend further down. And this past week has not been the case. The 10-year bond yield rose to 4.30% from 4.10%, which remains a key factor in limiting the narrowing of interest rate differentials if the Bank of Japan moves this week.
Surprise factor
I think most traders are probably underestimating the possibility of the SNB cutting rates this week. Switzerland’s annual core inflation rate fell to 1.1% in February. The highest point was a year ago, when core annual inflation was 2.4%. So it now appears that the Swiss central bank is among the major economies to actually start easing its tightening policy.
The question is whether they feel bold enough to act in front of the Fed and ECB. The unexpected move would strengthen the Swiss franc and intuitively lower inflation. However, there is also the risk of economic stagnation as a strong currency puts pressure on manufacturing exports.
big boss
No interest rate changes are expected at this week’s Fed meeting. However, this decision comes with a modern set of dot plots. And that’s what’s most notable, besides Mr. Powell’s press conference itself.
Late last year, the dotplot showed a roughly 75 bps worth of rate cuts in 2024. And given recent economic developments, that should still be the case.The keywords there are should of course.
So it will be interesting to see if and how things change, as that plays a role in influencing the market’s view of the Fed’s outlook. And it remains to be seen whether Mr. Powell will continue to leave the door open for his appointment in June.
The Usual Suspects
The BOE and RBA are most likely to have no events this week. Both central banks are expected to maintain the status quo given their respective predicaments. They are already communicating early steps towards mitigation, but the key message remains that now is not the time.
The best way to tell they’ve done a good job is if the market has minimal reaction to it.
