Currency Point: How many are locked and loaded?

Little surprised the Bank of Canada didn’t pull the trigger and raise rates. All signs from Ottawa were that the Bank would act. However, it has kept its policy rate on hold at a quarter notch of 0.25%, but it is clearly locked and loaded to pull the trigger most likely at the next meeting at the latest at the one after.

That conclusion is draw from this line in its statement:

“Looking ahead, the Governing Council expects interest rates will need to increase, with the timing and pace of those increases guided by the Bank’s commitment to achieving the 2% inflation target”

 

The Federal Reserve as expected left its policy rates unchanged, but the market came to see its intentions, and it did not disappoint. The board stated that “the Committee expects it will soon be appropriate to raise the target range for the federal funds rate”. This clearly suggests it is ready to go with a rate hike at the next meeting in March.

On its bond buying program: “The Committee decided to continue to reduce the monthly pace of its net asset purchases, bringing them to an end in early March”. This will mean the US will have gone from QE at $120 billions a month to $0 in six months. It took 18 months to unwind the GFC QE program and that started at $80 billion a month not $120 billion.

Economic indicators were seen as improving but did highlight that supply/demand imbalances continued to contribute to elevated levels of inflation.

The vote on all of this was a unanimous 11-0.

Then there was the press conference – it was taken as nothing other than hawkish with this line particularly telling: “[the FOMC was] of a mind to raise the Fed funds rate at the March meeting” – That is as locked in as a Chair can give. What was even more telling was he did not dismiss questions about a 50-basis point hike in March nor the prospect of hiking at each remaining meeting in 2022.

This week, it will be the RBA’s turn in the spotlight, and after core inflation flashed up to 2.6 per cent, unemployment hitting 4.2 per cent and economic output remaining solid despite omicron. It too is facing the prospect of having to raise the cash rate. Will it lock itself in for March?

Looking to the currency markets and the US dollar kicked higher on the back of the Fed. EUR/USD fell from $1.1290 to $1.1240, GBP/USD from $1.3515 to $1.3450. USD/JPY added 30 pips to ¥114.60, having been at ¥113.90 24 hours before. AUD/USD touched $0.7181 the FOMC headlines but plummeted on Powell’s testimony down below $0.71 to $0.7096.

What is clear though is currencies are felling themselves out as all main central banks lock in rate rises it now a question of when and size for possible direction.




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