There is a busy corporate calendar in the days ahead, with three major central banks deciding what to do with interest rates. While both the BOJ and BOC are forecast to hold rates unchanged, the differing circumstances may result in different reactions in the Forex markets. And Japan’s recent trade deal may also play a role.
For one thing, the BOC is expected to maintain its easing bias, while the BOJ is projected to continue a hawkish tone. For many analysts, it’s just a matter of time before Canada’s central bank cuts rates again. Meanwhile, the BOJ clearly wants to hike, but the circumstances still aren’t allowing it.
The BOC’s Dovish Hold
Futures markets are pricing in a more than 90% chance that the BOC will keep rates unchanged on Wednesday. While Canada’s economy has been struggling lately, the potential impact of tariffs could be a concern for central bankers. The focus will likely be on what to expect at the next meeting. The market is pricing in just one more rate cut this year, the reaction could be on the timing.
Key themes to focus on are the emphasis the policy statement places on job data and the assumptions made about the tariff impacts on prices. Canada’s unemployment rate has been above 6.5% since the start of the year, and only saw a minor reduction in June. Governor Tiff Macklem has sounded more pessimistic than the market over the last couple of months. That means that, for once, the market might not be pricing in enough cuts, and could be surprised by a more dovish tone than expected.
Trade Deal Clears Way For BOJ Hikes
The BOJ is also widely expected to keep rates unchanged at the end of its meeting on Thursday. Japan’s central bank has been in an uncomfortable position due to high inflation, but the large amount of low-interest debt held by banks makes it difficult to tighten monetary policy. Additionally, the high inflation hasn’t been driven by out-of-control consumer demand in a vibrant economy. Crop failures raised the cost of food staples, while the trade war has increased import costs.
As a result, the BOJ has been attempting to get the markets to do its bidding by talking tough about raising rates, but not actually implementing a rate hike. Economists believe that the BOJ will hike by 25 basis points sometime late this year or possibly early next year. Having reached a trade deal last week, the expectation is that the economy might pick up the pace, allowing the BOJ to ease a little sooner.
It’s All About the Timing
Usually, when there is a solid expectation for a hold, the market’s focus is on what the central bank’s head says about when the following policy change will occur. However, given Governor Kazuo Ueda’s history of discussing rate hikes, this is unlikely to provide a significant signal to the markets.
Instead, BOJ officials might note the recent downturn in inflation. If Ueda softens his tone about hiking, it might be more influential on the markets. After all, there still seems to be a pent-up desire to revitalise carry trading as the Fed keeps rates elevated.
