July 6, 2022
  • July 6, 2022

FX: Will risk appetite eclipse rate decisions and data?

By on October 4, 2021 0
Investors have started this busy trading week with concerns about how central bank policy will change in a broader recovery. They have fallen by more than 300 points and while these declines are often due to signs of economic weakness, potential policy changes in response to recoveries can also weigh on market sentiment. The rise and rally in the Japanese yen crosses today tells us that risk aversion was not the predominant theme. The Reserve Bank of Australia and the Reserve Bank of New Zealand have monetary policy announcements this week, and we are awaiting optimism from both central banks.
The RBA is the first, with a monetary policy announcement tonight. After what will most likely be a contraction in the third trimester, there shouldn’t be any dramatic changes. However, at its last meeting, it decided to proceed with decreasing asset purchases. Since then, we’ve seen upside surprises in PMIs, retail sales and building permits. Slowly but surely, with increasing vaccination rates and COVID-19 ‘Freedom Day’ in sight, new economic momentum is expected. For all of these reasons, we believe the RBA will be more bullish, which may be all it takes to extend its earnings.
The RBNZ, meanwhile, is ready to raise interest rates. On Wednesday local time, it will be one of the first major central banks to raise rates since the start of the pandemic. In August, RBNZ deputy governor Christian Hawkesby said it was difficult to raise interest rates on the day the country was locked out, but officials considered a 50bp hike. With most restrictions eased, the central bank could go ahead with the tightening, but a smaller point of 25bp is expected. As the only major central bank to raise rates, it should outperform even if a more modest move is expected.
Friday’s US and Canadian jobs reports will also bolster spending cuts by the two central banks. Federal Reserve Chairman Jerome Powell has made it clear they are ready to cut asset purchases, and this month’s jobs report will not stand in the way of the central bank. Employment growth is expected to accelerate, with the unemployment rate most likely falling to 5%. Job growth in Canada is expected to slow slightly, but like the United States, the unemployment rate is expected to decline, keeping the Bank of Canada‘s spending cuts on track. The euro was one of the best performing currencies of the day, thanks in large part to the, which jumped more than 2.5% to new three-year highs.
They traded lower against all major currencies despite lower stock prices and higher yields. This counterintuitive price action reinforces our view that risk aversion was not the main driver of market flows on Monday.