BoJ Governor Haruhiko Kuroda said, “When the yen is moving 2 to 3 yen per day, that’s a rapid move. We will watch exchange rate moves carefully.” The comment came after Kuroda met Prime Minister Fumio Kishida, where currency matters were discussed.
Separately, Finance Minister Shunichi Suzuki said the the government would not rule out any options on foreign exchange moves.
Chicago Fed President Charles Evans said yesterday, “I think that we’ve got a good plan in place. We could very well do 75 in September. My mind is not made up. I do know that we need to be increasing interest rates up to a substantially higher level than where they are now.”
“I think the precise path is less important than just constantly telling people, we’re on this path, this is what we’re going to do, inflation is job one, we’re going to handle this,” Evans said.
“Unemployment is 3.7% right now. I’m optimistic that we’re going to be able to navigate this and keep unemployment to about 4.5% by the time we’re done,” he said. “That would still be a pretty good outcome, although it will be costly for some.”
“I would prefer to find an appropriate spot to pause and monitor how things are going, rather than go much higher — potentially overshoot,” he said. “I wouldn’t say that I’m advocating sort of pausing at 3.5%, because I think 4 is more likely.”
BoC Senior Deputy Governor Carolyn Rogers said yesterday, “our primary focus will be to judge how monetary policy is working to slow demand, how fast supply challenges are resolved, and most importantly, how both inflation and inflation expectations respond.”
“Because we are in a period of excess demand, we need a period of lower growth to balance things out and bring demand back in line with supply,” Rogers said.
“By front-loading interest rates now, we’re trying to avoid the need for even higher rates down the road and a more pronounced slowing of the economy,” she said.
SNB Chairman Thomas Jordan said yesterday, “you cannot say we have passed the zenith and now it is certainly heading lower. If it comes to a power shortage situation, to a complete gas shortage in Europe, then it cannot be excluded that inflation pressure rises again. You have to be very cautious.”
Jordan declined to comment on currency interventions. But he added, “at the moment it is rather so that given the inflationary pressure an appreciation of the franc tends to help rather than hurt.”
Fed chair Jerome Powell said in a conference, “We need to act now, forthrightly, strongly as we have been doing (on inflation). My colleagues and I are strongly committed to this project and will keep at it.”
“Demand is very, very strong still in the labor market. We’re still printing new payroll job numbers at a high level, wages are running at elevated levels,” Powell said. “By our policy interventions, what we hope to achieve is a period of growth below trend, which will cause the labor market to get back into better balance, and that will bring wages back down to levels that are more consistent with 2 per cent inflation.”
“It is very important that inflation expectations remain anchored,” Powell said. “The longer that inflation remains well above target the greater the concern that the public will start to just naturally incorporate higher inflation into its economic decision making,. Our job is to make sure that doesn’t happen.”
By loading the video, you agree to YouTube’s privacy policy.
Learn more
US initial jobless claims dropped -6k to 222k in the week ending September 3, lower than expectation of 243k. Four-week moving average of initial claims dropped -7.5k to 233k.
Continuing claims rose 36k to 1473k in the week ending August 27. Four-week moving average of continuing claims rose 10.75k to 1439k.
ECB raises the three key interest rates by 75bps today. The main refinancing , marginal lending facility and deposit facility rates are 1.25%, 1.50% and 0.75% respectively. The Governing Council also expects to raise interest rates further over the “next several meetings”. Decisions will continue to be “data-dependent” and follow a “meeting-by-meeting approach”.
ECB staff projections now show inflation averaging 8.1% in 2022, 5.5% in 2023, and then 2.3% in 2024. Recent data point to a “substantial slowdown” in growth, with the economy expected to “stagnate later in the year and in Q1 of 2023. Staff now projects the economy to grow by 3.1% in 2022, 0.9% in 2023, and then 1.9% in 2024.
ECB is expected to deliver another rate hike today. A 75bps is not fully priced in, but that’s the more likely outcome after recent chorus of hawkish rhetorics. The markets would be eager to know more about two things going forward, the terminal rate of the current tightening cycle, and the pace to get there. But it’s unlikely for President Christine Lagarde to reveal much on the two questions. Nevertheless, Lagarde might indicate a discussion on ending the reinvestment phase of the APP, which could be a hawkish sign.
Here are some previews on ECB:
Regarding market reactions, the next move in EUR/CHF is worth some attention. On the bearish side, break of 0.9696 minor support will signal completion of the rebound from 0.9550, and the readiness for down trend resumption through this low. In case of another rebound, sustained break of 38.2% retracement of 1.0512 to 0.9550 at 0.9917 is needed to confirm a bullish turn. Otherwise, Euro’s rally elsewhere could be somewhat capped.
RBA Governor Philip Lowe reiterated in a speech that “further increases in interest rates will be required over the months ahead”. But policy is “not on a pre-sent path” due to uncertainties. Also, “all else equal, the case for a slower pace of increase in interest rates becomes stronger as the level of the cash rate rises.”
Lowe also highlighted three sources of uncertainty to the economy. The first is the “global economic environment”, including the US, Europe and China. He said, “some slowing in the global economy will help bring inflation down, but a sharp slowing would make the job of delivering a soft landing here in Australia much harder.”
The second source is “how inflation expectations and the inflation psychology in Australia adjust to the period of high inflation”. The third is “how households respond to higher interest rates”.
Fed Vice Chair Lael Brainard said yesterday that “monetary policy will need to be restrictive for some time to provide confidence that inflation is moving down” to 2% target. She added Fed will need “several months of low monthly inflation readings to be confident that inflation is moving back down to 2%.”
“Our resolve is firm,” Brainard said. “If history is any guide, it is important to avoid the risk of pulling back too soon,” and easing interest rates before inflation is under control.
Boston Fed President Susan Collins said, “It’s really premature right now to be too specific about exactly what the right policy move will be in September… I will reiterate that we need to do more, we’ve not yet seen significant declines in prices, and that’s what we’re going to be looking for.”
BoC raises the overnight rate target by 75bps to 3.25%. Correspondingly, the Bank Rate and deposit rate are now at 3.50% and 3.25% respectively. Hawkish bias is maintained as the Governing Council “still judges that the policy interest rate will need to rise further.”
“As the effects of tighter monetary policy work through the economy, we will be assessing how much higher interest rates need to go to return inflation to target,” BoC added.
BoC also noted that core inflation “continued to move up” with data indicating a “further broadening of price pressures, particularly in services”. It warned, “the longer this continues, the greater the risk that elevated inflation becomes entrenched.”
The economy “continues to operate in excess demand and labour markets remain tight”. BoC expects the economy to “moderate in the second half of this year, as global demand weakens and tighter monetary policy here in Canada begins to bring demand more in line with supply.”
US exports rose USD 0.5B to USD 259.3B in July. Imports dropped USD -9.7B to USD 329.9B. Trade deficit narrowed from USD -79.6B to USD -70.6B, versus expectation of USD -70.2B. The decrease in goods and services deficit reflected a decreased in goods deficit to USD -91.1B, and an increase of service surplus to USD 20.4B.
Goods deficit with EU decreased USD 5.7B to USD -11.9B. Deficit with China decreased USD 3.9B to USD -33.0B. Deficit with Mexico increased USD 2.0B to USD -11.7B.
Canada merchandise exports dropped -2.8% mom to CAD 68.3B in July. That’s the first contraction in 2022, with declines observed in 6 of 11 production sectors. Total imports dropped -1.8% mom to CAD 64.2B, the first decline since January. Contractions were observed in 7 of the 11 production sections.
Trade surplus narrowed from CAD 4.9B to CAD 4.1B, larger than expectation of CAD 3.8B.
BoE Chief Economist Huw Pill said plans by new Prime Minister Liz Truss on energy costs could help slowing inflation. He told the Parliament’s Treasury Committee today, “one of the things that does seem to be under consideration … is a change to the relationship between gas prices and retail gas prices in a direction that will lower headline inflation, relative to what we were forecasting,”
Governor Andrew Bailey said, “It’s not for us to comment on what fiscal policy will be and we will wait and see what it is … but I do very much welcome the fact that there will be, as I understand it, announcements this week because I think that will help to, in a sense, frame policy and that’s important.”
MPC member Silvana Tenreyro favors a more tentative approach on tightening. She said, “When close to the equilibrium rate, gradual rate rises allow us to react before we tighten too far into contractionary territory, as we observe the lagged impact of policy and demand on the labor market. They also do not preclude voting for more forceful rate increases in future, should adverse wage-price dynamics take hold.”
On the other hand Catherine Mann reiterated her stance that “a more forceful set of moves in Bank Rate earlier on opens the potential for a policy hold, or even reversal, later depending on the evolution of both inflation and demand relative to supply.”
BoC rate decision is the main focus for today. Markets are expecting a 75bps rate hike to 3.25%. But that’s far from being certain. With current interest rate at 2.50% already in neutral range, there are talks that BoC could opt for a smaller hike of 50bps. Yet, there are also arguments for a larger 100bps hike today, followed by a pause. Some wildcard potential is there.
Some previews on BoC:
AUD/CAD is making some progress in breaking through 0.8875 minor support this week. The development suggests that corrective rebound from 0.8733 has completed at 0.9104, and larger down trend is ready to resume. Retest of 0.8733 low should be seen first. Decisive break there will confirm this bearish view and target 61.8% projection of 0.9514 to 0.8733 from 0.9104 at 0.8621. However, break of 0.8949 minor resistance, in reaction to BoC, will mix up the outlook.
Australia AiG Performance of Services Index rose 1.6 pts to 53.3 in August. Looking at some details, sales rose 2.6 to 51.9. Employment rose 0.8 to 53.2. New orders rose 6.7 to 57.3. Input prices dropped -5.6 to 68.7. Selling prices dropped -2.2 to 61.2. Average waged dropped -1.3 to 67.6.
Innes Willox, Chief Executive of Ai Group, said: “Services remained in expansion in August, pointing to the overall resilience of the sector with sales, employment and new orders all higher than in July…. Price and wages pressures continued into August although the pace of increase in input prices eased somewhat. With service businesses highlighting interest rates as a key area of concern, the Reserve Bank’s decision yesterday to raise the cash rate by another 50 basis points to 2.35% will further fuel their fears of a fall in spending in the months ahead.”
Australia GDP grew 0.9% qoq in Q2, matched expectations. Household spending rose 2.2% for the quarter, contributing 1.1% pts to GDP. Net trade contributed 1.0% pts to GDP, driven by exports which rose 5.5%, partially offset by 0.7% rise in imports. Terms of trade rose 4.6% with export and import prices up strongly.
Sean Crick, head of National Accounts at the ABS, said: “Rises in household spending and exports drove growth in the June quarter. This is the third consecutive quarter of economic growth, following a contraction in the September quarter 2021, which was impacted by the Delta outbreak.”
As Yen tumbles further to fresh 24-year low against Dollar, Japan Finance Minister Shunichi Suzuki cautioned that “recent moves are rather rapid and one-sided . We need to be watching developments with strong interest.”
Chief Cabinet Secretary Hirokazu Matsuno said at a news briefing, “I’m concerned about rapid, one-sided moves in the currency market recently. If such moves continue, we will take necessary action.”
ActionForex.com was set up back in 2004 with the aim to provide insightful analysis to forex traders, serving the trading community for over a decade. Empowering the individual traders was, is, and will always be our motto going forward.
Contact us: contact@actionforex.com
© ActionForex.com © 2024 All rights reserved.
ECB Knot: we only have one problem on our plate – inflation
ECB governing council member Klaas Knot told Dutch radio BNR today, “We expect inflation to keep rising in the coming months, so that means we only have one problem on our plate: inflation. And that will mean that we will have to slow economic growth at least a bit to reduce inflation”.
Another Governing Council member Peter Kazimir said , “Inflation remains unacceptably high. The priority now is to vigorously continue the normalization of monetary policy.” While not commenting on the terminal rate of the current cycle, he said that ECB was still “quite far” from neutral rate.
Francois Villeroy de Galhau said, the central bank must be “orderly and determined” with rate hike. He expects inflation to stay high next year and come back to 2% target by 2024.