Central banks expected to maintain policy rates
Several central banks will meet to determine policy in the week ahead. The Federal Open Market Committee (FOMC) will meet on Tuesday March 15, the Norges Bank will meet on Wednesday March 16, and the Swiss National Bank (SNB) is scheduled to meet on Thursday. All of these banks are expected to keep policy rates on hold with the Norges Bank the most likely to surprise with a hike, however we do not anticipate a move on rates.
In the U.S., the Fed has maintained the language that the bank will keep rates low for an ‘extended period’ and the large scale asset purchase program of $600B through June has a ‘high hurdle’ before altering the plan. While the unemployment rate has dropped slightly, labor data suggests that the recovery may not yet be self-sustaining. Additionally, the CPI has ticked upwards slightly but remains at comfortable levels last released at 1.6% YoY on the headline reading and 1.0% YoY for the core measure. This evidence suggests no change in policy at the Tuesday meeting.
The Swiss National Bank (SNB), whose primary mandate is to ensure price stability which it defines as inflation below 2% is likely to maintain rates at 0.25%. Recent data indicates February CPI at +0.4% and a drop in the unemployment rate from January’s 3.8% to 3.6% in February. SNB President Philipp Hildebrand recently noted that the strong franc lowers inflationary pressures in the near term however the bank noted the need to fight inflation over the medium and longer term as it sees its price stability threshold being breached in 2013.
The Norges Bank has signaled that it will resume tightening by the middle of 2011. The bank last raised rates in May and has provided guidance through the end of 2014 and expects its benchmark rate to average 2.25% this year and 3.25% next year. This indicates an expected 25bps hike each quarter from June 2011 until the end of 2014. Thursday’s release of February CPI showed a slowing to +1.2% from the prior month’s +2.0% which is supportive of no change in policy at the upcoming meeting.
A mixed picture in China , but further tightening is still needed
The past week of data released out of China has confounded many market participants. On one hand the February data showed elevated risks to inflation – Feb. PPI was 7.2% vs. expected 7.0% yoy and Feb. CPI was 4.9% vs. expected 4.8% yoy, however on the other Feb. Retail sales came in much weaker at 15.8% yoy and Feb. Trade balance turned negative for the first time in 11 months coming in at -7.31B vs. expectations of +4.9B. Finally it appears their efforts to slow the rapid rise in real estate is beginning to have knock-on effects, however a considerable amount of this may also be attributed to a robust Chinese new year.
In the end, China still has been unable to control the more pressing issue, inflation. While food prices remain the main driver of CPI (which have somewhat moderated of late), higher energy and commodity prices continue to remain the underlying concerns to PPI. Moreover, we’ve seen that commodity pricing pressures tend to lead Chinese PPI, and with crude oil and industrial metals near their respective highs, rising inflation looks like it’s a problem unlikely to go away anytime soon. Therefore, we believe the PBoC will continue to remain active over the coming weeks/months, with our central case looking for two further interest rate hikes, in sum 50bps, before the end of June. We also envision additional RRR hikes in order to further withdrawal liquidity from their financial system.
As China tightens to manage liquidity and control inflation, we may see periodic setbacks in risk sentiment as well as dips in commodity prices and the prices of commodity linked currencies (AUD, CAD, and ZAR), however we believe such pullbacks are likely to be relatively short lived and should be viewed as potential buying opportunities.
Key data and events to watch next week
United States: Tuesday- March Empire Manufacturing, Feb. Import Price Index, Jan. Total Net Tic Flows, March, NAHB Housing Market Index, FOMC Rate Decision Wednesday- MBA Mortgage Applications, Feb. Housing Permits, Feb. Building Permits, Feb. Producer Price Index, Q4 Current Account Thursday- Consumer Price Index, Weekly Jobless Claims, Feb. Industrial Production, Feb. Capacity Utilization, Feb. Leading Indicators, March Philadelphia Fed
Eurozone: Monday- Jan. EZ Industrial Production Tuesday- EZ Employment 4Q, EZ March ZEW Economic Sentiment, German March ZEW Surveys (Current Situation & Econ. Sentiment), EU Finance Ministers meet in Brussels Wednesday- EZ 4Q Feb CPI Thursday- EZ Jan. Construction Output Friday- EZ Jan. Current Account, Trade Balance, German Feb. PPI
United Kingdom: Tuesday- DCLG Jan. House Prices Wednesday – Feb. Claimant Count Change, Jan. Avg. Weekly Earnings, Jan ILO Unemployment Rate, Thursday – Feb. Nationwide Consumer Confidence
Japan: Monday- Jan. F Industrial Production, Jan. F Capacity Utilization, Feb. Consumer Confidence, Tuesday- BOJ Target Rate, Feb. F Machine Tool Orders, 1Q BSI Large All Industry, 1Q BSI Large Manufacturing, Wednesday- Feb. Tokyo Condominium, Jan. Tertiary Industry Index Thursday- BOJ Feb.16-17 Board Minutes Friday- Jan. F Coincident & Leading Index.
Canada: Monday- 4Q Capacity Utilization Rate Tuesday- 4Q Labor Productivity Rate Wednesday- Jan. Manufacturing Sales Thursday Jan. Int’l Securities Transactions, Jan. Wholesale Sales, Feb. Consumer Price Index, Feb. Bank Canada CPI Core
Australia & New Zealand : Monday- RBA March Minutes, Feb. New Motor Vehicle Sales, NZ REINZ House Sales (3/14-16) Tuesday Jan. Westpac Leading Index, 4Q Dwelling Starts Thursday: RBA Foreign Exchange Transactions, NZ 1Q Westpac Consumer Confidence
China: March 13-18- Feb. Actual FDI, March 13-15 Feb. New Yuan Loans, Feb. Money Supply (M0,M1,M2) Tuesday- Conference Board China January Leading Economic Index
Brian Dolan is chief currency strategist at www.FOREX.com.
Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.