Central banks on parade

March 18, 2016 02:22 PM
Fundamental recap

The primary global macroeconomic theme that prompted the most significant moves in the currency markets this past week was clearly central bank activity. In actuality, however, this theme can be more accurately described as inactivity, as all four major central banks that issued statements during the week kept interest rates unchanged. This included, in chronological order, the Bank of Japan, the US Federal Reserve, the Swiss National Bank, and the Bank of England. This non-action was in stark contrast to the prior week, when the European Central Bank introduced a broad array of rate cuts and stimulus measures that exceeded expectations, taking the markets by surprise.

Despite this past week’s conspicuous lack of interest rate changes, however, comments and implications that accompanied some of the central bank statements resulted in unexpected currency movement. Most notably, in issuing its policy statement and press conference this past Wednesday, the Fed asserted that expectations of US interest rate hikes this year had shifted down substantially to two projected hikes from prior forecasts of four hikes. These and other unexpectedly dovish comments led to an immediate plunge for the US dollar and a sharp rebound for gold along with other dollar-denominated commodities.

As for the Bank of Japan (BoJ), its choice to keep rates on hold instead of cutting further into negative territory led to a surge for the Japanese yen, as the accompanying statement left lingering uncertainty over when, or even if, further stimulus measures might be implemented. This was especially the case since the BoJ’s negative rate cut during its last meeting in January was unable to keep the yen from strengthening dramatically.

While the Swiss National Bank also left its monetary policy unchanged, comments from the central bank revealed its continuing estimation that the Swiss franc is overvalued, and that it was prepared to resume intervention in its currency should the franc persist in strengthening.

Finally, the Bank of England on Thursday maintained its bank rate at 0.5% as well as the magnitude of its asset purchases at £375 billion. The statement concluded with somewhat of a dovish outlook that asserted: "all members agree that, given the likely persistence of the headwinds weighing on the economy, when Bank Rate does begin to rise, it is expected to do so more gradually and to a lower level than in recent cycles." This dovish leaning, however, had been largely expected and priced into the markets within the past several weeks, along with concerns over the upcoming referendum on UK membership in the European Union. As such, the British pound managed to rise rather substantially after the monetary policy summary.

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