The spotlight this week turns to major central policy decisions and there will be a handful of them. The heavyweights are all in action as we will be getting the BOJ, RBA, Fed, SNB, and BOE all on the agenda. That will make for a fun-filled week at the very least. So, let’s take a look at what that might entail for markets.
The One to Watch
It is pretty obvious at this point that all eyes are on the BOJ this week. Before the pandemic, it would seem an impossibility for Japan to escape deflation and for us to even be discussing tighter monetary policy. But now, here we are.
Given all the reports and murmurs, it’s almost certain now that we will see the BOJ end negative rates tomorrow. Adding to that, they are likely to scrap their yield curve control (YCC) policy as well.
However, that is not to say that they will immediately shift to a much more hawkish policy stance. Their bond buying operations will remain intact and barring any major steps in a tighter direction, it may be tough for the Japanese yen to muster an outsized rally.
The writing has been in the sand for a while and yet, we’re still seeing USD/JPY at 149.00 today. For the pair to trend much lower, it will also need the help of lower US Treasury yields. And that hasn’t been the case over the last one week. 10-year yields have risen from 4.10% to 4.30% and that is still a key factor in limiting the reduction of rate differentials should the BOJ move this week.
The Surprise Factor
I think the majority of traders are possibly underestimating a possible rate cut by the SNB this week. Core annual inflation in Switzerland had declined to 1.1% in February. The high point was a year ago with core annual inflation seen at 2.4%. And so among all the major economies now, the Swiss central bank seems most primed now to actually begin easing back on tighter policy.
The question is whether they will feel bold enough to act before the Fed and the ECB. A surprise move will strengthen the Swiss franc and intuitively pressure inflation lower. However, it comes at the risks of stifling the economy as a stronger currency weighs on manufacturing exports.
The Big Boss
The Fed meeting this week will not feature any change to interest rates. However, the decision will be accompanied by the latest set of dot plots. And that is the main thing to focus on, besides Powell’s press conference itself.
At the end of last year, the dot plots showed roughly 75 bps worth of rate cuts for 2024. And given recent economic developments, that should still be the case. The key word there being should of course.
So, it will be interesting to see if and how things shift as that will play a role in impacting the market’s take on the Fed outlook. And then, we will have to see if Powell will continue to keep the door open for a June move.
The Usual Suspects
The BOE and RBA are the likeliest to be non-events in trading this week. Both central banks are expected to stick to the status quo considering their respective predicament. They have already communicated early steps in moving towards looser policy but the key message remains that now is not the time yet.
The best way in telling that they have done a good job is to see minimal market reaction in response.