September ends with whimper ahead of key Eurozone week

Central bank decisions: RBA, ECB & BOE

A number of major central banks are meeting next week, and while we and the market expect them all to make no policy changes, there is no shortage of risks for a surprise. The RBA is first up on Tuesday afternoon local Sydney time where the bank is expected to hold the OCR steady at 4.75%. Recent RBA minutes suggested market expectations of imminent rate cuts was misplaced, diminishing the prospects for a cut at Tuesday’s meeting. Still the risks lie in that direction on the global outlook, but we also think the RBA could take a more hawkish tone in its statement, attempting to reinforce the message from the minutes. We would hope such a statement materializes as it could provide a nice opportunity to short AUD/USD from better levels.

On Thursday we have the BOE and the ECB. The BOE is expected to hold rates steady at 0.50% and refrain from announcing new asset purchases. However, there is a decently high risk they may announce an increase to its asset purchases (QE), likely on the order of GBP 50 bio. While not entirely unexpected, it would still likely send GBP lower, as markets express alarm over the sense of urgency displayed by the BOE, suggesting more is wrong with the UK economy than meets the eye. No QE announcement could see GBP rally for a period, but we would also view that as an opportunity to short.

The ECB follows up later that morning and is also expected to hold rates steady, but announce additional liquidity measures to the banking sector. The ECB is expected to re-establish 12-month term loans, a practice it dropped at the end of 2009. There has been more than a little speculation the ECB would enact a 25/50 bp emergency rate cut at this meeting, but since it’s Trichet’s last meeting as President of the ECB, we don’t think he’ll exit on a note of panic. Along with the surge in Sept. Eurozone CPI to 3% reported this week, we think the ECB will hold steady. The ECB’s economic outlook in its statement, however, is likely to highlight downside risks to growth again, keeping the overall outlook for rate cuts down the road and adding to pressure on the EUR. A steady decision may see the EUR pop a bit as those betting on a cut run to cover, but again we would look to fade any such rally.

Brian Dolan is chief currency strategist at

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.

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