Weekly Outlook: Sep 06 — Sep 10: ECB, BoC and RBA Decide on Monetary Policy

Last week, we did not have any central bank decisions on the agenda, but we do have three on this week’s schedule, and those are the ECB, the BoC and the RBA. With the hawkish voices within the ECB getting louder, it would be interesting to see whether there will be any information with regards to a slowdown in QE purchases. As for the BoC and the RBA, there are chances for both Banks to delay their own tapering processes.

Monday appears to be a relatively light day, with the only release worth mentioning being the UK’s construction PMI for August, which is expected to have declined to 56.9 from 58.7. Markets in the US and Canada will be closed in celebration of the Labor Day.

On Tuesday, during the Asian session, the RBA decides on monetary policy. At its latest gathering, this Bank maintained plans to extend its QE purchases beyond September, albeit at a slower pace, with officials reiterating the view that interest rates are likely to stay at present levels at least until 2024. With the nation struggling to quell its worst coronavirus wave and officials warning that worse is yet to come, some market participants raised bets that the Bank may decide to maintain the current pace of purchases and perhaps delay its tapering beyond November, when it said it will reexamine its policy plans. Another scenario on the table may be for the Bank to avoid rocking the boat at this gathering and indeed proceeding with the planned tapering, but in November, they may decide to delay any further reductions until the epidemiological picture improves.

As for the Aussie, it has been on a recovery mode since August 20th, with its traders taking advantage of the weaker US dollar and the improvement in the broader market sentiment. However, a dovish RBA, and especially a decision not to taper at this gathering may wake up the bears and push the currency back down. Now, in case the second scenario takes flesh, perhaps due to vaccinations accelerating recently in Australia, we would expect a smaller slide, which could eventually prove to be temporary, as market participants already anticipate some degree of dovishness.

As for Tuesday’s data, during the European session, we get the German ZEW survey for September. The current conditions index is forecast to have risen to 33.0 from 29.3, but the economic sentiment one is anticipated to have fallen to 30.0 from 40.4. Eurozone’s second estimates of the employment change and the GDP for Q2 are also coming out, but they are expected to confirm their preliminary estimates.

On Wednesday, the central bank torch will be passed to the Bank of Canada. Last time, Canadian policymakers appeared less hawkish than expected, saying that they continue to see the output gap closing in H2 2022, which suggests that their expectations over when they may start raising interest rates have not come forth. What’s more, both the headline and core Canadian inflation rates for July declined, the employment report for the month fell short of its own forecasts, and GDP data for Q2 revealed a contraction. All this added credence to the Bank’s view and raises questions as to whether officials will appear more dovish this week.

As for our view, we don’t expect any policy changes or bolt statements at this gathering, as, on September 20th, the nation’s federal elections are planned. What’s more, this will be one of the Bank’s smaller meetings, without any updated economic projections, neither a press conference by the Bank’s Governor. Such a gathering will take place in October, with market participants expecting to see whether the Bank will announce another a tapering step. However, with the data coming on the soft side, this may not be the case and we may get clues on that at this week’s gathering.

The Canadian dollar has been in a recovery mode since August 20th, mainly driven by the weakening US dollar and the recovery in oil prices. However, with oil prices correcting lower in the end of last week, that supportive factor may be off the table for a while. Thus, clues that the Bank may delay additional tapering in October could encourage some Loonie selling this week.

The only other release on Wednesday’s schedule worth mentioning is Japan’s GDP for Q2. However, this will be the second estimate and expectations are just for a small upside revision to +0.4% qoq from +0.3%.

On Thursday, it will be the ECB’s turn to decide on monetary policy. At its latest gathering, the ECB kept all of its settings untouched, but changed its forward guidance, saying that it will keep interest rates at present or lower levels until it sees inflation reaching 2% well ahead of the end of its projection horizon, which may also imply a period during which inflation moderately overshoots that objective. In our view, this translates into willingness to hold rates low for much longer than the previous guidance suggested.

With the Bank unlikely to make any guidance changes at this meeting, all the attention is likely to fall on its QE programs. With the economic recovery gathering pace in the bloc, inflation in August accelerated to a rate not seen in the past decade, with the underlying metric getting closer to the Bank’s new 2% target. ECB President Lagarde and some of her colleagues consider the jump to be driven by one-off, pandemic-related effects, and thus, they don’t want to rush into policy changes. However, others, including Vice President Luis de Guindos and Governing Council member Jens Weidmann, believe that they should consider gradually scaling back their programs.

Thus, it will be interesting to see whether we will get a tapering decision this week or not. We believe that policymakers will try to find common ground and not rush into any final decision at this gathering. After all, they may prefer to wait for a while more to see what happens with the pandemic and its new mutation after the summer. Having said all that though, they may signal that they could start withdrawing support at one of the upcoming gatherings if the economic recovery continues.

As for the euro, it’s been in a short-term uptrend mode since August 20th against its US counterpart, which suggests that its traders may have already priced in the decision taken at the previous gathering. Therefore, anything pointing to some slowdown in purchases at some point soon, combined with Friday’s disappointing US employment data adding to speculation of a later tapering by the Fed, could result in more advances in EUR/USD.

On Thursday, we also get the UK monthly GDP for July, as well as the industrial and manufacturing production rates for the month. No forecast is available for the GDP, while industrial production is expected to have rebounded and manufacturing production to have slowed somewhat. Nonetheless, both the yoy rates are anticipated to have declined.

At its latest gathering, the BoE lowered the threshold of when they will start reducing their stock of bonds. Specifically, they said that they will do so when the policy rate hits +0.50%, by not reinvesting the proceeds of maturing debt. The previous guidance was for the Bank to not start unwinding its bond purchases until interest rates were near +1.5%. In our view, this could mean that QE tapering may start earlier than previously anticipated. That said, since then, inflation slowed by more than anticipated in both headline and core terms, which combined with potentially soft data this week, could push somewhat back expectations of when the policy rate could hit the +0.50% threshold.

Finally, on Friday, we have Canada’s employment report for August. The unemployment rate is expected to have declined to 7.3% from 7.5%, but the net change in employment is forecast to show that the economy has added slightly less jobs than it did in July. In our view, if the forecasts are met, this report is unlikely to receive much attention, as CAD-traders would probably have already adjusted their policy bets, and thereby positions, in the aftermath of the BoC decision.

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