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Central Bank Blackout Period
Just quickly following up with a question from a subscriber on what exactly is a central bank blackout period, and why are these important?
So, obviously from a market moving perspective by now, it should be very clear that the single biggest driver of asset prices across the board, are normally central banks, their actions, the policy, so whether actual policy changes with its actual changes of forward guidance, their actions directly affect the economy and obviously the currencies as well.
Now, when central bank members talk in public, whether that is in speeches or interviews, et cetera, they are often asked questions about the economy and where they think monetary policy might be going next. And traders usually analyze and scrutinize these comments for clues on potential changes in monetary policy or for any change in the bias as well.
So for example, if a member is normally considered as a very dovish member of the central bank, and they suddenly come out saying something very hawkish, that can obviously be market moving.
Now, the one fear for the lack of a better word that central banks normally have is excessive asset price volatility. And because markets are so sensitive to the comments made by central bank, is most banks require their members to observe what we call a blackout period or a quiet out period or quiet period in the run up to very important policy meetings. Not important ones, but but all policy meetings.
So, they do this in order to avoid markets basically reading in too much into subtle comments made before meeting and potentially causing unnecessary or unwanted volatility.
So, let’s look at it from a scenario perspective. So imagine that a central bank has, through their forward guidance and previous comments, basically cause the markets to price in a rate cut for the upcoming meeting.
And imagine that there was no blackout period for the bank and without intending to cause volatility, a bank member say something that causes the market to suddenly doubt whether a cut will actually take place. So you basically see the market trying to reprice lots of volatility before the meeting, because of those comments.
And then to make matters worse, the bank still goes ahead with a plan cut at the actual meeting. And then all of that volatility starts all over again, with the market trying to reprice the repricing, so to speak.
So, to avoid that type of mess, most central bankers have what we call, central banks rather have what we call a blackout period before the meetings where the members are not allowed to interact with the media. So obviously, the different central banks, will have different criteria for when the blackout period starts, how long it lasts, and what the members may and may not do, but generally the idea is the same for most of the major central banks.
So having this info, how can we use it? Usually market will already be pricing in a central bank’s upcoming changes ahead of time. But if a central bank feels that the markets might be too complacent in a specific direction, maybe pricing in too dovish, or maybe too hawkish moves from the bank, the central bank members will use the pre-blackout speeches and interviews to try and guide the market or realign the market in the right direction.
So, if they wanted to change the markets expectations for an upcoming meeting, for example, the pre-blackout speeches and interviews, will be the perfect time for them to do that. Which is why these speeches are very important for us as traders.
Now this of course, doesn’t mean that every speech or interview before the blackout period is going to be market moving, it only means that the market will be paying very close attention to it. And if we do see comments that differ significantly from what the markets are currently pricing in, that can create some great trading opportunities for us.
So, hope that helps. Any other questions as usual, don’t hesitate to let us know.