Central Banks & Interest Rate Forecasts

In light of dovish comments by central banks and the surprising 100bp rate cut by SNB Thursday, forecasts on cash rates were revised down more aggressively. For the week ended Nov 21, economists priced in a greater interest rates cut in US, Europe, United Kingdom, Australia and New Zealand in central bank meetings in December.

Fed: Deutsche Bank caught up with Danske Bank, Goldman and Morgan Stanley to expect a 50bp cut in December. ‘The recent further weakening of economic activity confirm the view that the economy is dropping into a severe recession. Under these circumstances, and given the recent sharp drop in inflation, we expect the Fed to bring all available ammunition to bear as quickly as possible. This points to a rate cut to unprecedented levels at the December meeting, and indications that they could remain at a very accommodative level for some time to come,’ the bank commented.

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Mid-Day Report: ECB 50bps, BoE 150bps, SNB 50bps… but Markets Still in Range

Markets remain steady in early US session even though three of the world’s major central banks announced rate cuts today. BoE’s 150 bps cut surpassed the most aggressive speculation of 100bps. In a somewhat coordinated way, SNB cut rates by 50bps in an unscheduled meeting. Expectations were then built up for a deeper than expected 50bps cut from ECB but the bank disappointed market participants by cutting rate by 50bps, exactly as they originally expected. There were plenty of reasons to send the markets to either side today but after all initial kneejerk reactions, major pairs and crosses are still staying in established range.

So what is happening? We believe the forex markets are already pricing those cuts as well as, very likely, further rate cuts from majors central banks to eventually bring interest rates within a very tight range between 0-2%. The indecisiveness is indeed on the unknown impact in cutting ahead of the curve or behind the curve. Somehow, this could be seen in EUR/GBP’s sharp fall even though BoE cut much more than ECB. In the end, the effect will be reflected in the economy which will also be led by the stock markets. So to put it in simple way, the forex markets are still driven by the developments in the equity markets and traders will probably avoid to commit too much before the correction/consolidation in the global equity markets complete.

Having said that, attention should be paid to the development of DOW today and tomorrow. A short term top should be made yesterday after Obama’s win and if the DOW continues its fall towards the lower end of the range below 8,000 level, the forex markets will follow. Also another key factors in driving the stock markets, as well as the forex markets will be tomorrow’s NFP report.

ECB just met markets expectation and lowered interest rates by 50bps to 3.25% on unanimous vote even though the possibility of a 75bps cut was discussed. Though, the case of 100bps cut was not discussed today. In the following press conference, Trichet said that markets are now facing an extraordinary degree of uncertainty stemming from the financial market turmoil which will dampen demand in the Eurozone. Recent data confirms that growth momentum has weakened. Sluggish domestic demand and tighter financial conditions are expected. Upside inflation risks has fallen and Trichet expects strong CPI declines due to base effects.

BoE surprised the markets by cutting as much as 150bps today to bring the benchmark interest rates to 3.00%, lowers since 1955. Also, this is the largest single cut in 16 years. The accompanying statement acknowledged that there is a “marked deterioration in the outlook for economic activity at home and abroad,” and “availability of credit to households and businesses is likely to remain restricted for some time”. Risks to inflation is believed to have “shifted decisively to the downside,” and now with “substantial risk of undershooting the inflation target”. Hence, it’s believed that the policy easing cycle is not over yet.

In also a surprised move, SNB lowed the LIBOR target rate by 50bps to 1.5-2.5%, with point target of 2.0%, in an unscheduled meeting. SNB said in the statement that the global economic outlook has “deteriorated more severely than anticipated”. Much impact is expected to growth which, as SNB said, might even be “negative” in 2009.

On the data front, jobless claims came in at 481. Q3 labor cost rose 3.6% in US, with productivity up 1.1%. Canadian building permits surprised on the upside, rising 13.4% in Sep. Germany factory orders dropped sharply by -8.0% mom, -2.7% yoy in Sep. UK Halifax house prices dropped more than expected by -2.2% mom in Oct. New Zealand unemployment rate rose less than expected from 3.9% to 4.2% in Q3. Australian unemployment rate was unchanged at 4.3% in Oct, better than expected 4.4%. Japan leading indicator rose 0.2% to 89.2% in Sep.
By ActionForex

Daily Report: Risk Aversion Back ahead of ECB and BoE Meetings

Risk aversion is back to the market following 486 pts fall in DOW and broadly lower Asian stock markets. The Japanese yen and dollar fight back with the usual candidate, the Aussie, hit most in spite of a better than expected job report from Australia. Dollar index climbs back to above 85, oil weakens to below $65 while gold also drops below $738. Markets’ focus now turns to two of the biggest events of the week, ECB and BoE meeting and much volatility is anticipated throughout the day.

ECB is widely expected to cut the benchmark rates by 50bps from 3.75% to 3.25%. Eurozone CPI peaked at 16 year high of 4% in July and moderated steeply to 3.2% yoy in Oct since then. With falling commodity prices, inflation is believed to be a much lesser threat now, giving room for ECB to cut rates to revive growth in the Eurozone and avoid a recession. Due to recent sharp deterioration in growth outlook, there are some speculations on a wider than expected cut by 75bps today. Also, markets are pricing in as much as 125bps cut in the coming nine months. Hence, be it a 50bps cut or more, Trichet will likely sound dovish and signal further rate cuts in the near term in the post meeting conference.

BoE is also expected to cut rates by 50bps from 4.50% to 4.0% today but there are even more speculations of a larger than expected cut of 100bps. It’s no doubt that UK is entering a recession with sharp deterioration in growth data and confidence in consumers and businesses. Markets are speculating that UK will be the next to follow US to get itself close to near Zero Interest Rate Policy. This is reflected in the fact that Sterling was the weakest European major currency in Oct and it’s even weaker than Aussie and Kiwi this month.

On the technical side of the story, a few things to note. Firstly, AUD/USD and USD/CAD are showing sign of momentum loss and the correction might be completing. Secondly, similar situation is seen in USD/JPY which argues that the rebound might have completed. Though, EUR/JPY and GBP/JPY remains relatively steady in range so far. Thirdly, Dollar Index’s rebound left the fall from 86.98 to 83.9 in three wave corrective structure which suggests upside potential in near term. But after all, note that the major pairs and crosses are mostly still bounded in established range and the current choppy consolidation could extend further in unpredictable path as long as the range holds.

On the data front, New Zealand unemployment rate rose less than expected from 3.9% to 4.2% in Q3. Australian unemployment rate was unchanged at 4.3% in Oct, better than expected 4.4%. Japan leading indicator rose 0.2% to 89.2% in Sep. Germany factory orders is expected to drop -0.2% mom, 3.2% yoy in Sep. US jobless claims is expected to edge higher to 480k. Q3 labor cost is expected to rise 2.8% with productivity up 0.8%. Canadian building permits and Ivey PMI will also be released.
By ActionForex

he week will feature three central banks’ meeting, US presidential election as well as a number of important economic data around the world. RBA, ECB and BOE are expected to cut rates by another 50bps to continue the coordinated global easing cycle. From US, ISM manufacturing and services, factory orders Q3 labor cost and productivity, pending home sales will be featured with the highly anticipated on-farm payroll. Eurozone PPI, manufacturing and services PMI, retail sales will be released. Swiss Oct CPI, SVME PMI, unemployment will be released too. Focus from UK will be on manufacturing and services PMI, nationwide consumer confidence, industrial and manufacturing production. Canadian building permits, Ivey PMI and job report, Australia retail sales, house price index, job report, New Zealand employment report will also be watched.

Technically speaking, as mentioned in various report, dollar and yen should have made a short term top. In most cases, it’s uncertain on whether these are medium term tops. Nevertheless, good range trading opportunities should be presented in most pairs in near term. In short, we’d expect some more choppy consolidation in last week’s range.

Shortly after the unprecedented $700B financial bailout plan was passed, the Fed acted together with major central banks to cut interest rates. The Fed announced to reduce its key federal funds lending rate and discount rate by 50bps to 1.5% and 1.75%, respectively. In Europe, both ECB and the Bank of England ratcheted the rates by 0.5% to 3.75% and 4.5% respectively. The central banks of Canada, Sweden and Switzerland also lowered their key rates. In Asia, China joined by trimming its key rate by 27bps. It’s the first time that global banking authorities worked together to cut interest rates in order to stimulate economy and restore market confidence.

As expected, dollar fell against other major currencies upon the rate cut across the board. In NY morning, USD fell to 1.3663 from 1.3645 (Tuesday afternoon) and 1.7323 from 1.7510 (Tuesday afternoon) against Euro and Sterling. It also lost grounds against Yen, Canadian dollars and Swiss francs.

Reducing interest rates so abruptly indicated financial crisis has intensified. Accompanied with recent weak economic data, recession does not only spread from the US to Europe but also to Asia Pacific regions. World economic slowdown induced investors’ worries on oil demand growth.

Although crude oil for November delivery bounced to 90.99 after making a low at 86.05, 8-month low, renewed selling pressure after release of the disappointing weekly inventory report forced the black gold to trade below $90/bbl again (currently at 87.00). As 93.02 resistance holds, we maintain our near-term bearish view on crude oil price and expect price would fall to 85.42 (Jan 08 low) first.

Demand has been slowing very rigorously in developed countries. According to Credit Suisse, OECD consumption has fallen 3-4%. The market has dried up. There’s no way for traders to access to credit and therefore they have to deleverage their positions. EIA also slash world oil demand growth next year by 140 000 bbl/day.

EIA has just released report petroleum inventory. Crude oil inventory unexpectedly increased by 8.123 mmb, much higher than consensus of 2 mmb. As for gasoline, the build of 7.2 mmb also exceed market forecast of 1 mmb. Although distillate stockpile fell last week, the less than 1mmb draw was lower than 1mmb reduction as expected by the analysts.

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Action Insight Mid-Day Report

Federal Reserve, European Central Bank, Bank of England, Bank of Canada, Swiss National Bank and Sweden’s Riksbank join forces today in a historical, emergency, coordinated global rate cuts by 50bps ease save the world’s economies from the worst crisis since the Great Depression. Fed, ECB, BoE, BoC and Riksbank will cut by 50bps. SNB cut by 25bps. PBoC of China also joins to cut by 27bps. BoJ didn’t participate but said it supports the move.

The resulting interest rates are:

• Fed - 1.50%
• ECB - 3.75%
• BoE - 4.50%
• BoC - 2.50%
• SNB - 2.50%
• Riksbank - 4.25%

Equity markets response positively to the announcement initially with FTSE 100 turned positive. However, European stock markets lacked follow through strength and turned south again. US stock indices are mixed in tight range.

In the forex markets, yen gives back earlier gains against most major currencies but in general, it’s still holding in established tight range. Dollar also continues to consolidate against most major currencies. Aussie recovers after diving to as low as 0.6445 earlier today. However, note that key near term levels still holds. Dollar index retreats mildly but is still holding above 80 level. There is no change in the yen and dollar bullish outlook.

Earlier today, UK government announced a plan to invest about 50b pounds to prevent collapse of the UK banking system. The government will buy preference shares and BoE will make 200b or above available for banks to borrow under the special liquidity plan. UK government will also provide a guarantee of 250b pounds to help refinance debts. Tomorrow’s BoE meeting is cancelled after today’s rate cut.

On the data front, US pending home sales beat expectations by rising 7.4% mom in Aug. Canadian housing starts rose slightly from revised 217k to 218k in Aug. Germany industrial production rose 3.4% mom, 1.7% yoy in Aug. Eurozone Q2 GDP was finalized at -0.2% qoq, 1.4% yoy.

Action Insight Daily Report
While the stock market crash continues all over the world, the forex markets are relatively steady so far. Yen edges higher against dollar, euro and sterling but remains in range so far. Dollar continues to retreat against most major currencies. The biggest loser today is indeed the Aussie which dives to as low as 0.6746 against dollar and 67.26 against the yen. The weakness in the Aussie is some what a delayed reaction to yesterday’s unexpected 100bps rate cut from RBA as well as carry trade unwinding. The Aussie is additionally pressured after data showed consumer confidence plummeted by -11% in Oct.

Both Bernanke’s speech and FOMC minutes yesterday hinted that Fed is ready to cut rates. Interest rates futures continue to show full probability of 50bps cut from Fed on Oct 29. Though the odds for 75bps cut was down slightly from 40% to 32%. Nevertheless, the firm expectation for rate cut provided no support to US stock markets. Down recovered briefly to above 10,000 level but reversed and extended decline to close over 500pts down to 9,447. Fed’s new measure to buy commercial paper to help corporations offered little relief to investor confidence.

Nikkei was also hit hard today, dropping over 9% and hit the lowest intraday level of 9,159 in five years. Research report showed the number of corporate defaults in Japan accelerated in Sep. Bankruptcies rate rose sharply to 34.4% annualized rate. Total debt from bankruptcies in Japan grew to 5.36T yen.

UK government announced a plan to invest about 50b pounds to prevent collapse of the UK banking system. The government will buy preference shares and BoE will make 200b or above available for banks to borrow under the special liquidity plan. UK government will also provide a guarantee of 250b pounds to help refinance debts.

On the data front, Nationwide consumer confidence in UK dropped less than expected to 50 in Sep. Japanese Economic watch DI dropped slightly to 28 in Sep. Eurozone Q2 GDP final, Germany industrial production, Canadian housing starts and US pending home sales will be released later today.

By ActionForex

(CEP News) - Speaking in an interview with RAI 1 at a meeting in Lake Como, Italy, European Central Bank President Jean-Claude Trichet said economic growth in the euro zone should recover in the fourth quarter of 2008.
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(CEP News) - Speaking in interviews with multiple news organizations, newly appointed head of the Austrian Central Bank Ewald Nowotny said he sees no reason for the European Central Bank to raise or lower rates.
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(CEP News) Frankfurt - Inflation is Europe’s main challenge, European Central Bank Governing Council member Athanasios Orphanides said in a speech given in Frankfurt, Germany on Friday, adding that the situation is not expected to rapidly improve.
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