Today’s economic calendar is relatively quiet with the exception of the main events, the US Federal Reserve’s monetary policy statement and the Central Bank of New Zealand’s monetary policy meeting.
FOMC Statement
With no major events during the day, markets are likely to drift along within a range in the run up to the main FOMC event. Today’s statement will not follow through with a press conference, meaning that the FOMC’s statement is likely to mirror the previous month’s language and outlook. However, the major variable will be how the markets read into the language.
Of importance of course will be the phrase “considerable time” or “patient”, which will be expected to remain the statement in order not to change from the usual course too much. Inflation however is likely to get more attention from the Fed. On an annualized basis, inflation rate declined to 0.8% from 1.3%, while core CPI was modestly lower at 1.6% from 1.7%. The downward pressure on inflation is probably going to see the phrases “considerable time” in this month’s statement.
Inflation expectations, another variable to track have also been declining lower, something that could spark a mention or two in the Fed’s statement. However, considering that last month’s Fed statement has urged the markets to be patient while ruling out rate hikes until April, we expect this month’s FOMC meeting to remain neutral in most aspects.
The Dollar Index has been struggling near the highs since the start of this week and from a technical perspective, we could expect to see a larger sell off in the US Dollar index, should this week close on a bearish note.
In conclusion, today’s FOMC statement is most likely to stick to its previous language without giving away too much.
RBNZ Monetary Policy
Later in the evening, the RBNZ will be holding its monetary policy review. While the overnight cash rate is expected to remain unchanged at 3.5%, the statement might reflect the latest decline in New Zealand’s quarterly CPI, which fell from 0.3% to -0.2%. However, bringing uncertainty to the equation comes from previous month’s RBNZ statement which was viewed as being “hawkish” by the markets as Governor Wheeler noted that “further increases in interest rates will be required.” But considering that the surprising hawkish statement was way before the quarterly CPI data was released, it will be interesting to see whether the above line will remain in this month’s statement. Markets might however read the above as a translation for “the possibility of further rate hikes later this year”, whereas should the statement be removed, it could be viewed as being dovish, ruling out rate hikes from the RBNZ at least for the next quarter at the minimum.
In light of the CPI numbers missing estimates by a large range, tonight’s RBNZ monetary policy could be expected to be neutral to dovish.
The NZDUSD in particular will be susceptible to high volatility considering that the RBNZ’s monetary policy comes just one hour later, traders are advised to be cautious when trading the NZDUSD.
In conclusion, the RBNZ is likely to remain neutral, but the language might give further clues into forward guidance for interest rate changes.
Photo curtecy of Jamie McCaffrey
