In this article, we will review the current circumstances and future outlook for the RBA, FOMC and ECB.
Last week, the market’s risk tone continued to recover from geopolitical/global concerns.
Although Turkey remains an ongoing concern, Qatar’s pledged of $15bln helped stem the market’s run on TRY.
Furthermore, reports that the US and China are to recommence talks after two-months further supported the global risk tone.
This week, we expect geopolitics will remain a dominant theme throughout FX. This is further highlighted by the lack of tier one data scheduled for release.
However, it is worth noting that the RBA, FOMC and ECB will all be releasing their latest meeting minutes.
Many market participants overlook meeting minutes, considering them outdated and often ‘non-events’.
However, meeting minutes are a key form of communication between the market and the central bank.
For this reason, even when meeting minutes fail to move markets, they can still be crucial to the fundamental outlook for a currency.
Above all else, they allow us to monitor the central bank’s outlook, a key component to fundamental analysis.
Before you can extract value from each central bank’s minutes, you need a good understanding of each bank beforehand.
For this reason, we’ve reviewed each central bank for you below.
In this article, we will review:
- The RBA’s, FOMC’s and ECB’s latest meeting.
- Each central bank’s current outlook and future expectations
- Our fundamental outlook for each central bank’s respective currency.
Reserve Bank of Australia
This week’s RBA Monetary Policy Meeting Minutes will relate to their August 7 meeting.
At their August meeting, the RBA kept policy unchanged with the Cash Rate remaining at 1.50%, in line with market consensus.
In the accompanying statement, the RBA stated that steady policy was consistent with growth and inflation targets.
However, in their Statement on Monetary Policy, they added that higher rates are likely to be appropriate at some time if the economy evolves as forecast.
In regards to the RBA’s forecasts, they expect GDP growth of 3.00%-3.25% over their forecast horizon.
The Unemployment Rate is forecast to range between 5.50%-5.00% and inflation of around 2.00%.
The above table shows the RBA’s forecasts as of their August SOMP.
If the RBA’s forecasts are correct, the market expects the RBA to begin hiking rates by the end of 2019 (Q4).
Although, there are some noteworthy participants who disagree with the market’s consensus.
Leaning towards the more hawkish side, Blackrock expects a hike in Q3 2019 and a second hike in Q1 2020.
While Bank of America look for a hike by Q1 2019 and a second hike by Q3 2019.
Leaning towards the dovish side, JP Morgan expects the RBA to keep rates unchanged until at least Q1 2020. While Saxo Bank expects the RBA to cut rates by Q2 2019 to 1.25%.
Although there are some noteworthy outliers, the overwhelming consensus is for the RBA to remain on hold until the end of 2019.
For us, this signals an overall neutral fundamental outlook for AUD.
However, with that said, there is one significant risk to AUD’s neutral fundamental outlook. Of course, that risk is the increasingly uncertain geopolitical landscape.
According to the Observatory of Economic Complexity, Australia is the 22nd largest export economy in the world.
Furthermore, in 2016, Australian exports valued at $195bln or around 16% of GDP.
Of all of Australia’s exports, 33% are to China and 80% to Asia as a whole. This means the performance of Australia’s economy is closely linked to global growth.
The US’s trade war with China and concerns over Turkey and EM, in general, all pose significant risks to the outlook for Australia.
For this reason, although we hold a neutral outlook for AUD, we would argue that the risk is to the downside.
This week’s FOMC meeting minutes will relate to their August 1 meeting.
At this meeting, the FOMC kept rates unchanged with the Fed Funds Rate remaining at 1.75%-2.00%.
In their accompanying statement, the FOMC reiterated that they expect further gradual increases in the Fed Funds Rate.
Adding, monetary policy remains accommodative and that near-term risks to the economy are roughly balanced.
With no major surprises from the Fed’s August meeting, the market continues to expect a September hike.
According to CME Fed Fund futures, the market is pricing in a 96% chance of a September hike. Beyond September, the odds of a fourth hike (in December) stand at 66%.
Although the market is leaning towards a fourth hike this year, there are many participants who only expect three.
Westpac is looking for a September hike but then for the Fed to remain on hold until early 2019.
While Danske Bank expects no more hikes this year with the Fed only increasing rates to 2.00%-2.25% in Q1 2019.
Beyond Q2 2019, most market participants expect the FOMC to begin concluding their hiking cycle.
This isn’t too surprising considering many expect the US to potentially fall into a recession by late 2019/early 2020.
In regards to the Fed’s expectations, according to their June economic projections, they expect GDP to peak this year at 2.8%.
They then look for growth to slow to 2.0% by 2020 and to just 1.8% in the longer run.
The Fed expects the Unemployment Rate to fall to 3.5% by 2019 but then rise to 4.5% in the longer run.
Inflation (PCE) is also expected to peak in 2019 at 2.1% but then remain around 2.0% in the longer run.
Regarding the Fed’s actual rate hike projections, the Fed looks for rates to peak in 2020 with a median expectation of 3.4%.
In the longer run, the Fed looks for rates to fall with a median expectation of 2.9%.
The above table shows he FOMC’s June 2018 median economic projections.
Although it looks like the US economy could be peaking relatively soon, the US continues to outperform its major peers.
Furthermore, given the current degree of global uncertainty, USD could remain supported regardless of the US’s economic outlook.
At this particular moment in time, we remain bullish on the fundamental outlook for USD.
This will continue to remain the case providing the economy continues to outperform its major peers, and there remains a degree of global uncertainty.
European Central Bank
This week’s ECB minutes will relate to their July 26 meeting.
At their July meeting, the ECB left monetary policy unchanged with the Main Refinancing Rate at 0.0%.
Furthermore, after cutting their QE programme in June, asset purchases remained at €15bln.
In their accompanying statement, the ECB reiterated that rates are to remain at present levels at least through summer of 2019.
This was a key phrase for the market as there remains a wide range of opinions on the timing of eventual hikes.
Even when questioned in their accompanying press conference, ECB’s Draghi was reluctant to give a more specific answer.
The ECB’s vagueness on the timing of future hikes is no doubt deliberate; offering them more flexibility for the future.
However, the degree of uncertainty created is likely one of the contributing factors for EUR’s stall over recent months.
In regards to the market’s expectations, most expect a hike within Q3 or Q4 of 2019. Although there are many who expect the ECB to remain on hold into 2020.
Leaning to the more hawkish side is Monte dei Paschi (the worlds oldest bank) who are looking for a 0.25% hike in Q3 2019.
BMO is also looking for a 0.25% hike in Q3 2019, while Lloyds Bank expects a hike but of only 0.10%.
Leaning to the dovish side, Bank of America expects the ECB to remain on hold throughout 2019. While Standard Chartered expects a hike in Q4 but of only 0.05%.
This illustrates another important question and cause of uncertainty among market participants. When the ECB do hike, how much are they likely to raise rates by?
In regards to their future expectations, according to their June projections, the ECB believes growth peaked in 2017 at 2.5%.
From here, they expect GDP to moderately slow to 1.7% by 2020.
For the Unemployment Rate, the ECB expects a continued decline to 7.3% by 2020. For inflation (HICP), they expect this to remain around 1.7% until 2020.
The above table shows the ECB’s June macroeconomic projections.
Overall, we believe the bias for EUR remains firmly to the upside. The bigger question, however, is when EUR strength is likely to come back into play.
Like many market participants, we see the recent stall in EUR’s bullish run as more of a pause than a conclusion.
For this to resume, we believe the market will need to come to a greater consensus on the timing and size of hikes.
Of course, there remain multiple risks to EUR’s outlook, most notably the EU’s exposure to Turkey and uncertainty over Italy.
According to The Guardian, Spain’s exposure alone to Turkish debt is $80.9bln while France, Italy and Germany total $66.3bln.
Overall, we maintain a bullish fundamental outlook for EUR, although our medium-term outlook remains neutral.
Although not always market moving, central bank minutes remain a key method of market communication.
After reviewing the RBA, FOMC and ECB, you should now be in a better position to monitor changes going forward.
If you continue to analyse central bank events, you will be more aware when the outlook begins to shift.
This will allow you to stay tuned-in to the market’s fundamental outlook. Which should mean you spot more trading opportunities and are better prepared for central bank events.
The goal of this article is to help you improve your understanding and ability to trade risk events.
If you would like to learn more about risk event trading, please type your question in the comments below.