Four Upcoming Rate Decisions and the Impact on Forex Trading

12/08/2009 12:01 am EST

Focus: FOREX

Kathy Lien

Managing Director and Co-Founder BKForex LLC, BK Asset Management

It will be another busy week in the forex market with four central banks delivering monetary policy announcements. Although the strength of Friday's non-farm payrolls report should help the US dollar hold onto its gains, the lack of US economic data in the beginning of the week turns the market's focus to the monetary policy outlooks of Canada, New Zealand, Switzerland, and the UK. The degree of "hawkishness," or "dovishness," of these central banks will determine how their currencies perform against the US dollar and other currencies. Here is our outlook for each of the upcoming monetary policy announcements:

Bank of Canada: Potential for Hawkish Comments
Announcement: Tuesday, December 8 - 9:00 EST or 14:00 GMT

The Bank of Canada will be the first to make a monetary policy announcement on Tuesday. Given the improvement in the Canadian economy, there is a good chance that the central bank will adopt a hawkish tone and talk about implementing an exit strategy. The latest labor market numbers from Canada, which reported job growth of 79k-five times greater than expectations-adds to the string of gradually improving economic data stemming primarily from the automobile sector. Retail sales have also been strong, annualized gross domestic product surged from -3.40% to 0.4% in the third quarter, while inflation rose for the first time in five months. While we might be tempted to call for the Bank of Canada to start tightening as a result, the odds show that the bank is settled and will not budge for some time. From the most recent monetary meeting on October 20, the bank notes that they have reaffirmed their commitment "to maintain its target for the overnight rate at its currency level of 0.25% until the end of the second quarter of 2010." However, before raising interest rates, the central bank will first need to unwind some of their emergency measures, and we believe that they could telegraph their plans to start doing so at this week's monetary meeting, which would be bullish for the Canadian dollar. The only thing that would hold the central bank from doing so is the recent strength of the Canadian dollar, but it is currently trading three cents off its lows. In the last monetary policy statement, the Bank of Canada indicated that the persistent strength in the loonie was becoming a "drag" on growth and is putting additional pressure on inflation. However, it is questionable as to how long Carney will be able to stall with the economy clearly gaining traction.

Reserve Bank of New Zealand: Set to Repeat Plans to Keep Rates Unchanged Until Mid-2010
Announcement: Wednesday, December 9 - 3:00pm EST or 20:00 GMT

Of all the central banks reporting this week, the Reserve Bank of New Zealand has probably been the most direct in its preference to keep rates unchanged until the second half of 2010. Therefore, it is almost set in stone that the RBNZ will keep things steady this week, which could be bearish for the currency because their dovishness comes in contrast to the stronger US employment report. According to central bank governor Alan Bollard, there is just no urgency to take rates higher at this point. The RBNZ is being held back by two factors: The consistent strength in the kiwi and economic data that has not necessarily wooed traders. Bollard has commented several times about the strength in the kiwi, noting that current account deficits are suffering as a result. The RBNZ will not want to risk pushing up the currency through any unnecessarily hawkish comments considering that economic data has been relatively lackluster. Bollard recently pointed out that the New Zealand recovery will be "slower and more vulnerable" than in neighboring Australia. Producer prices sank severely in the third quarter into negative territory, raising the risk of inflation. Retail sales completely missed the mark, increasing by only 0.2% after rising 1.10% the previous month. The list just keeps going, with unemployment skyrocketing and an expanding trade deficit. Furthermore, the bank is under pressure from both the Organization for Economic Cooperating and Development and New Zealand's own Institute of Economic Research to keep the target rate pegged at the 2.5% mark, and that is exactly what we expect from the central bank.

NEXT: Preview of Swiss National Bank and BOE Meetings

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Swiss National Bank: Soft Warnings About Franc Strength
Announcement: Thursday, December 10 - 3:30 EST or 8:30 GMT

The last time that the Swiss National Bank held a monetary policy meeting was back in September. Even though central bank officials have noted improvements in their economy since then, their constant battles to keep the Swiss franc from strengthening may prevent any action on the monetary front. If they point to the franc specifically, the currency could sink on a renewed possibility of intervention, but given the recent appreciation of EUR/CHF and USD/CHF, we don't expect the SNB to grow more concerned about their currency. Swiss National Bank president Jean-Pierre Roth recently made remarks that indicated that he might "soon" consider withdrawing extraordinary stimulus measures. These comments set the stage for the upcoming rate decision as the market will be looking for an exit schedule. At the last meeting monetary policy meeting, the central bank upgraded inflation estimates, but the recent falloff in consumer prices contradicts the central bank's forecast. Similarly, even though growth improved over the prior quarter, it is still in negative territory, lagging many G20 countries. Therefore, on a fundamental basis, the SNB may not be quite ready to make any rash decisions. Also, we fully expect the SNB to repeat their threat to "act decisively to prevent any strengthening in the Swiss franc against the euro," which should be bearish for the currency.

Bank of England: No Change to Quantitative Easing
Announcement: Thursday, December 10 - 7:00 EST or 12:00 GMT

One of the most anticipated monetary policy announcements this week will be from the Bank of England on Thursday. After raising their quantitative easing program last month, we expect the central bank to remain on hold, as they usually prefer to wait until the quarterly inflation report is prepared (in February) to telegraph their monetary policy plans. According to BoE member Andrew Sentence, this gives the bank "a lot more evidence" to make a decision. Although the Bank of England remains one of the most dovish central banks, their last decision did not express the usual magnitude of their easing bias, suggesting that the next step for the bank may be to keep things on hold. On November 5, BoE policy makers voted to keep the target rate at 0.5% and increase the quantitative easing program by ?25 billion. Even though on a comparative basis, the BoE looks to be clearly behind the pack, this was less than the ?50 billion expansion expected by economists. Nevertheless, continued easing of any sorts gives the impression that one of the oldest central banks in the world still has doubts about the viability of their economic recovery. The minutes that followed showed that the vote was split three ways, with one member pushing to keep the program unchanged and another dissenting to expand by ?40 billion. It is important to note that even the extreme opinion presented at the meeting did not meet market estimates. While this might give the impression that November was the last-ditch effort to boost the effectiveness of asset purchases, recent comments indicate otherwise. The Bank of England's governor, Mervyn King, noted that he has an "open mind" when considering further easing in coming meetings. Furthermore, King's assertion that the "depreciation in the sterling should lead to recovery" may keep policy on the easy side. As for the upcoming gathering on December 10, expectations are confounded by very mixed economic data. For one, consumer prices were stronger across the board, but manufacturing PMI and Gfk consumer confidence weakened. Furthermore, revised GDP may have been better than previous estimates, but still showed a modest contraction.

By Kathy Lien of GFTForex.com

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