It’s central bank week and most of the majors are scheduled to decide on policy.
The consensus is that they are in a “race to the bottom” with rates, and are just waiting for each other to pull the trigger. So, needless to say, it will be an interesting time for the currency markets!
Let’s focus on the two major safe-haven currencies and see why expectations for what they could do have changed recently. Both countries have been dealing with an increased demand for their currency as the world economy has slowed.
However, the latest developments could indicate that they might hold steady.
Japan’s Unending Problem
Last July, BOJ Governor Kuroda said that a further cut into negative territory was an option. This has helped fuel speculation that there would be a rate cut in the near future. Certainly there are plenty of excuses for one: the perpetually below target inflation rate, the meagre economic performance in the middle of the trade dispute, and next month’s sales tax hike which apparently will finally be implemented and broadly expected to have a negative impact on the economy.
That lead to a strong consensus that the BOJ would cut rates. But with easing tensions in trade and the more cautious reaction following the attacks on Saudi refining, investors have appeared to be more keen on risk. This has helped add some weakness in the Yen, helping exporters a bit and putting some wind into the sails of inflation.
What to Expect from BOJ
The central bank is quite reluctant to take action unless it is absolutely necessary.
The latest moves in the exchange rate have helped move the consensus towards keeping the rate steady at least for one more month. However, we should note that a rate cut wouldn’t be a terrible surprise.
Some are simply expecting the BOJ to depend on the Fed in order to keep the interest rate spread intact.
This sets up the markets for a strong reaction regardless of what happens. With the bank under less market pressure, we could see a strengthening in the yen if they choose to not act.
A cut would usually bring about weakness in the yen. However, with the increasing questioning of the effectiveness of negative rates, it might not be as strong a move as some would expect.
The SNB’s Ball and Chain
The SNB’s in a slightly different position.
Switzerland has a strong economic dependence on the eurozone. The consensus is that the SNB will keep rates steady, and will emphasize their position that the Franc is overvalued.
However, some analysts are pointing to a high potential of a rate cut. Especially since the SNB itself has argued that it’s important to maintain a certain gap in rates with the euro, and just last week the ECB cut rates.
This initially seemed to guarantee a rate cut by the SNB. However, cash flows in September have given the SNB some more breathing room. We should note, though, that this came after the bank significantly stepped up their asset purchasing in August to counteract the strengthening of the Franc.
Also, there is no press conference scheduled after the meeting. This is a sign that at least going into the room, Governor Jordan isn’t expecting a rate cut.
The Market’s Reaction
Again, there’s a weak consensus that the SNB will hold off on a rate cut (and that only dependent on the fickle exchange rate), some potential of a cut has been priced into the market. This would imply we could have a bigger move in the currency regardless of the outcome in the meeting.
Switzerland is also concerned about the lack of effectiveness of negative rates.
There is an increasing risk that further excursion into negative territory could backfire if banks passed rates onto clients, prompting them to hoard money in cash. Switzerland’s important financial sector is also suffering under the negative rates, and wouldn’t be happy to have the situation get worse.