The significant move in global markets at the end of last week was due to the latest developments in the US regarding Hillary Clinton’s email investigation. The market is bracing for many economic releases and events this week, which are likely to have a significant impact on the markets ahead of the US elections. We must also keep in mind that Hillary Clinton’s investigation is re-opened, which opens the path for all possibilities. Therefore, traders need to be very cautious as the market is uncertain regarding the central banks’ decisions and the US elections.
During the upcoming Asian session, there will be two significant events from Japan and Australia. Both the Reserve Bank of Australia and the Bank of Japan will announce their policies, which may have a notable impact on the markets. For the time being, there are many possible scenarios for those meetings. Yet, the impact may remain short-lived.
Reserve Bank of Australia: For the time being, the estimates in the market show the high possibility for keeping current rates on hold, especially after the inflation data, which showed a pickup to the highest level in two years. The YoY CPI also advanced to the highest level since Q1 of this year at 1.3%. However, the economy lost around 10K jobs last month, despite the fact that the unemployment rate ticked down to the lowest level since June of 2013. Yet, the New Capital Private Expenditure kept on declining in the 1st and the 2nd quarter, falling by more than 5.4%, which keeps the possibility for an action by the RBA. However, traders are pricing in only a 5.9% chance for a rate cut by the RBA today.
Bank of Japan: The Bank of Japan is not in good shape recently, especially after the inflation data came in with more bad news, showing no improvement in core inflation, which came in at 0.0% in September down from 0.5%. This is the weakest reading since 2013. Moreover, nationwide inflation declined for the sixth month in a row, reaching levels we have not seen since 2012. With weak growth of only 0.2% in the past quarter and with a stronger Yen, the bank may need to act soon before it is too late. Yet, traders are pricing in a probability of 22% for further cuts in the deposit rate.
The Bank of Japan needs to consider new tools that are different from buying more assets, specifically government bonds. This is because they no longer have enough government bonds to buy. Therefore, increasing the current QE program would be almost impossible. Yet, what the bank might do is increase its ETF purchases, which is, in fact, a different tool, one that is also considered part of indirect QE.
What Matters The Most In Today’s Decisions
In every single central bank decision, the first headline might be the most important. This is the case when the central bank announces a surprise decision, such as a rise or cut in rates. However, if the bank’s decision comes in line with market estimates, then what matters the most is the bank’s tone, which could be dovish (negative) or hawkish (positive). As mentioned previously, markets always price in the future in advance. Therefore, a hawkish tone might lead traders to buy a specific currency. In today’s case, that would be JPY and AUD. This is primarily because they believe that the bank might hike the rate soon, keep the current policy on hold, or at least not take further stimulus actions. On the other hand, a dovish tone would lead traders to short (sell) AUD and JPY, because it would lead them to think that either both or one of the banks is still considering easing their policy further in the future.
Levels To Watch