Central Banks Smash: No Growth, No Inflation

European Central Bank:

On October 22 (Thursday), European Central Bank (ECB) left rates unchanged, with interests on the main refinancing operations, marginal lending, and deposit rate at 0.05%, 0.30% and -0.20, respectively. But the press conference gave an interesting hint. Mario Draghi, the President of ECB, was most dovish as he could be, “work and assess” (unlike “wait and see” before).

The central bank is preparing to adjust “size, composition and duration” of its Quantitative Easing (QE) program at its December meeting, “the degree of monetary policy accommodation will need to be re-examined at our December monetary policy meeting”, Draghi said during the press conference. They are already delivering a massive stimulus to the euro area, following decisions taken between June 2014 and March 2015, to cut rates and introduce QE program. In September 2014, ECB cut its interest rate, or deposit rate to -0.20%, a record low. Its 1.1 trillion euros QE program got under way in March with purchases of 60 billion euros a month until at least September 2016.

When ECB cut deposit rate to record low in September 2014, Mr. Draghi blocked the entry to additional cuts, “we are at the lower bound, where technical adjustment are not going to be possible any longer.” (September 2014 press conference). Since then, growth hasn’t improved much and other central banks, such as Sweden and Switzerland, cut their interest rates into much lower territory. Now, another deposit rate-cut is back, “Further lowering of the deposit facility rate was indeed discussed.” Mr. Draghi said during the press conference.

The outlook for growth and inflation remains weak. Mr. Draghi – famous for his “whatever it takes” line – expressed “downside risks” to both economic growth and inflation, mainly from China and emerging markets.

Given the extent to which the central bank provided substantial amount of stimulus, the growth in the euro area has been disappointing. The euro area fell into deflation territory in September after a few months of low inflation. In September, annual inflation fell to 0.1% from 0.1% and 0.2% in August and July, respectively. Its biggest threat to the inflation is energy, which fell 8.9% in September, down from 7.2% and 5.6% in August and July, respectively.

Inflation Rate - Annual Percentage Change Source: Eurostat
Inflation Rate – Annual Percentage Change
Source: Eurostat

Europe’s economy will slow down due to export demand decreasing from China and emerging countries, where a quarter of all euro-zone exports gets shipped to.

As the ECB left the door open for more QE, Euro took a dive. Euro took a deeper dive when Mr. Draghi mentioned that deposit rate-cut was discussed. Deposit rate cut will also weaken the euro if implemented. After the press conference, the exchange rate is already pricing in a rate-cut. Mentions of deposit rate-cut and extra QE sent European markets higher and government bond yields fell across the board. The Euro Stoxx 50 index climbed 2.6%, as probability of more easy money increased. Swiss 10-year yield fell to fresh record low of -0.3% after the ECB press conference. 2-year Italian and Spanish yields went negative for the first time. 2-year German yield hit a record low of -0.32.

Regarding the exchange rate (EUR/USD), I expect it to hit a parity level by mid-February 2016.

As I stated in the previous posts, I expect more quantitative easing by ECB (and Bank of Japan also). I’m expecting ECB to increase its QE program to 85 billion euros a month and extend it until March 2017. When ECB decides to increase and extend the scope of its QE, I also expect deposit rate-cut of 10 basis points.

ECB will be meeting on December 3 when its quarterly forecasts for inflation and economic growth will be released. The only conflict with this meeting is that U.S. Federal Reserve policy makers meets two weeks later. ECB might hold off until the decision of the Fed, but the possibility of that is low.

EUR/USD Reaction:

EUR-USD - ECB Press Conference - Nov 1 2015
EUR/USD – Hourly Chart

U.S. Federal Reserve:

On October 28 (Wednesday), the Federal Reserve left rates unchanged. The bank was hawkish overall. It signaled that rate-hike is still on the table at its December meeting and dropped previous warnings about the events abroad that poses risks to the U.S. economy.

It does not make sense to drop “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.” (September statement) I’m sure the events abroad has its risks (spillover effect) to the U.S. economy and the Fed will keep an eye on them.

In its statement, it said the U.S. economy was expanding at a “moderate pace” as business capital investments and consumer spending rose at “solid rates”, but removed the following “…labor market continued to improve…” (September statement). The pace of job growth slowed, following weak jobs report in the past several months.

Let’s take a look at the comparison of the Fed statement from September to October, shall we?

Fed Statment Comparation - Sept. to Oct. Source: http://projects.wsj.com/fed-statement-tracker/
Fed Statment Comparation – Sept. to Oct.
Source: http://projects.wsj.com/fed-statement-tracker/

The Fed badly wants to raise rates this year, but conditions here and abroad does not support its mission. Next Federal Open Market Committee (FOMC) meeting takes place on December 15-16. By then, we will get important economic indicators including jobs report, Gross Domestic Product (GDP), retail spending and Consumer Price Index (CPI). If we don’t see any strong rebound, rate-hike is definitely off the table, including my prediction of 0.10% rate-hike for next month.

The report caused investors to increase the possibility of a rate increase in December. December rate-hike odds rose to almost 50% after the FOMC statement.

Greenback (US Dollar) Reaction:

U.S. Dollar ( "/DX" on thinkorswim platform) - Hourly Chart
U.S. Dollar ( “/DX” on thinkorswim platform) – Hourly Chart

 

Reserve Bank of New Zealand:

On October 28 (Wednesday), Reserve Bank of New Zealand (RBNZ) left rates unchanged at 2.75% after three consecutive rate-cuts since June. The central bank’s Governor Graeme Wheeler said that at present “it is appropriate to watch and wait.” “The prospects for slower growth in China and East Asia” remains a concern.

Housing market continues to pose financial stability risk. House price inflation is way higher. Median house prices are about nine times the average income. Short supply caused the house prices to increase significantly. “While residential building is accelerating, it will take some time to correct the supply shortfall.” RBNZ said in a statement. Auckland median home prices rose about 25.4% from September 2014 to September 2015, “House price inflation in Auckland remains strong, posing a financial stability risk.”

Further reduction in the Official Cash Rate (OCR) “seems likely” to ensure future CPI inflation settles near the middle of the target range (1 to 3%).

Although RBNZ left rates unchanged, Kiwi (NZD) fell because the central bank sent a dovish tone, “However, the exchange rate has been moving higher since September, which could, if sustained, dampen tradables sector activity and medium-term inflation. This would require a lower interest rate path than would otherwise be the case.” It’s a strong signal that RBNZ will cut rates to 2.5% if Kiwi continues to strengthening. I will be shorting Kiwi every time it strengthens.

“The sharp fall in dairy prices since early 2014 continues to weigh on domestic farm incomes…However, it is too early to say whether these recent improvements will be sustained.” RBNZ said in the statement. Low dairy prices caused RBNZ to cut rates. New Zealand exports of whole milk powder fell 58% in the first nine months of this year, compared with the same period in 2014. But, there’s a good news.

Recent Chinese announcement that it would abolish its one-child policy might just help increase dairy prices, as demand will increase. How? New Zealand is a major dairy exporter to China. Its milk powder and formula industry is likely to benefit from a baby boomlet in China.

NZD/USD Reactions:

NZD/USD - Hourly Chart
NZD/USD – Hourly Chart

 

Bank of Japan:

On October 30 (Friday), Bank of Japan (BoJ) maintained its monetary policy unchanged and downgraded its growth and inflation projections. BoJ left – by 8-1 majority vote – its QE program at current level of 80 trillion yen (about $660 billion) a year.

BoJ expects to hit its 2% inflation target in late 2016 or early 2017 vs. previous projection of mid-2016. Again and Again. This is the second time BoJ changed its target data. The last revision before this week was in April. It also lowered its growth projections for the current year by 0.5% to 1.2%.

They also lowered projections for Core-CPI, which excludes fresh food but includes energy. They lowered their forecasts for this fiscal year to 0.1%, down from a previous estimate of 0.7%. For the next fiscal year, they expect 1.4%, down from a previous estimate of 1.9%. Just like other central banks, BoJ acknowledged that falling energy prices were hitting them hard.

Low inflation, no economic growth, revisions, revisions, and revisions. Nothing is recovering in Japan.

Haruhiko Kuroda, the governor of BoJ, embarked on aggressive monetary easing in early 2013. So far he hasn’t had much success.

In the second quarter (April-June), Japan’s economy shrank at an annualized 1.2%. Housing spending declined 0.4% in September from 2.8% in August. Core-CPI declined for two straight months, falling 0.1% year-over-year both in September and August. Annual exports only rose 0.6% in September, slowest growth since August 2014, following 3.1% gain in August.

Exports are part of the calculation for Gross Domestic Product (GDP). Another decline in GDP would put Japan into recession, which could force BoJ to ease its monetary policy again. Another recession would be its fourth since the 2008 financial crisis and the second since Shinzo Abe (Abenomics), the Prime Minister of Japan, came to power in December 2012.

Its exports to China, Japan’s second-biggest market after the U.S., fell 3.5% in September. The third-quarter (July-September) GDP report will be released on November 16.

April 2014 sales tax (sales tax increased from 5% to 8%) increase only made things worse in Japan. It failed to boost inflation and weakened consumer sentiment.

In April 2013, BoJ expanded its QQE (or QE), buying financial assets worth 60-70 trillion yen a year, including Exchange Traded Funds (ETF).

QQE stands for Quantitative and Qualitative Easing. Qualitative easing targets certain assets to drive up their prices and drive down their yield, such as ETF. Quantitative Easing targets to drive down interest rates. Possibility of negative interest rates has been shot down by BoJ. But, why trust BoJ for their word? Actions speak louder than words.

In October 2014, BoJ increased the QQE to an annual purchases of 80 trillion yen. When is the next expansion? December?

Did you know that the BoJ owns 52% of Japan’s ETF market?

Japan's ETF Market - BoJ's holdings Source: Bloomberg
Japan’s ETF Market – BoJ’s holdings
Source: Bloomberg

For over a decade, BoJ’s aggressive monetary easing through asset purchases did not help Japan’s economy. Since 2001, the central bank operated 9 QEs and is currently operating its current 10th QE (or QQE). The extensions of its QE are beginning to become routine or the “new normal.”

Growth and prices are slowing in China, with no inflation in United Kingdom, Euro-zone, and the U.S. The chances that Japan will crawl out of deflation are very slim.

USD/JPY Reaction:

USD/JPY - Hourly Chart
USD/JPY – Hourly Chart

US Market Reactions (ECB and FOMC):

S&P 500 ("SPX") - Hourly Chart
S&P 500 (“SPX”) – Hourly Chart

 

Next week, both Reserve Bank of Australia (RBA) and Bank of England (BoE) will meet. Will be very interesting to watch.

SURPRISE!!! RBNZ cuts rates by 0.25%

Last Wednesday (June 10, 2015), Reserve Bank of New Zealand (RBNZ) cut the Official Cash Rate (OCR) by 0.25% (25 basis points) to 3.25% for the first time since March 2011. According to RBNZ, further easing may be needed if future economic data are weak (“We expect further easing may be appropriate. This will depend on the emerging data.”). They believe Kiwi (NZD) is overvalued and “…further significant downward adjustment is justified.”. I can tell that they badly want Kiwi to decline.

In 2014, RBNZ raised rates four times from 2.50% to 3.50% (March, April, June, July), before pausing further hikes due to price depreciation in oil and dairy.

RBNZ lowered interest rates to boost inflation as growth in New Zealand slows. They are responding to slowing growth as dairy prices fall and inflation is not showing any signs that it will increase. The inflation is near zero and the central bank wants it at 2%, same as other major countries. Consumer Price Index (CPI) inflation currently stands at 0.1%. Fonterra Cooperative Group ltd., the world’s biggest dairy exporter, is a New Zealand company and is responsible for about 30% of the world’s dairy exports. The average prices of dairy has been declining, reflecting on lower inflation. Lower cash rate should help support dairy farmers which will lead to more spending.

The central bank also changed its growth forecast. They see inflation reaching their target–2%–by 4th quarter of 2016, from previous forecast at 3rd quarter of 2017. Why do they think that they will reach their inflation target by the end of 2016? They believe lower rates combined with currency decline (NZD, or Kiwi) will speed up inflation. However, they cut Gross Domestic Product (GDP) forecast for next year from 3.8% to 3.3%.

Screenshot (18)
RBNZ’s GDP growth and CPI forecasts
Screenshot (20)
Real GDP growth projections – Annual

Housing prices in Auckland, New Zealand’s largest city, have increased significantly. Lower borrowing costs (lower rates) might cause housing bubble which can have devastating effect across the country. Graeme Wheeler, governor of RBNZ, said a lack of housing supply is the main cause of surging market prices.

Immediately after the release, NZD (Kiwi) came crushing down. Kiwi against the US Dollar (NZD/USD) fell almost 200 pips to 0.7017, lowest since September 2010. After the immediate drop, I closed my short on NZD/USD, taking almost 800 pips profit. The reason for the close? The pair did not close below the support level around 0.7025. During this kind of news, the pair should have easily closed below the support level. Unfortunately, it did not. Therefore, I closed my position. As of right now, it’s below the support level and I would go short again once it rebounds little bit (and technical analysis of course).

Another news that might support NZD/USD to go lower are positive US economic news and upcoming rate-hike, unless future US economic reports are negative and the tone of the Fed changes to raising the rate later on.

NZD/USD - Hourly
NZD/USD – Hourly

 

Feel free to leave your comments below and/or contact me on this website, twitter, and/or LinkedIn. Thank you.

Update on Microsoft, RBNZ, and upcoming events to watch out.

Update on MSFT: I’m still watching MSFT (Microsoft stock ticker) for good entry. I will go long on it in the future at a good entry price. Microsoft stock and other blue chip stock fell after Intel slashed revenue outlook due to weak PC demand. The decrease in the price of MSFT is still a good buying opportunity.

Microsoft (MSFT) - Hourly
Microsoft (MSFT) – Hourly

Last Wednesday, Reserve Bank of New Zealand left the Official Cash Rate unchanged at 3.5%. NZD (Kiwi) quickly reacted by rising as it disappointed traders who were looking for rate cut. In a statement by the Reserve Bank Governor Graeme Wheeler, cited that the New Zealand dollar “…remains unjustifiably high and unsustainable in terms of New Zealand’s long-term economic fundamentals.”  I still believe that RBNZ will intervene and send NZD down, if not by rate-cut. I would be short on NZD/USD, at this time.

NZD/USD - Hourly
NZD/USD – Hourly

Upcoming: Bank of Japan (BoJ, Late Monday/early Tuesday – March 16/March 17 EST), Federal Reserve (Wednesday – March 18 – 2 P.M EST) and Swiss National Bank (SNB, Thursday – March 19 – 4:30 A.M EST).

BoJ will either hold or increase the stimulus package. If they do, JPY (Yen) will be bearish–sending USD/JPY further up–after rising to over 121.00 this week. If they don’t, we have to watch for their tone. It will be either bearish or bulling on the Yen, depending on what BoJ say, or react.

USD/JPY - Hourly
USD/JPY – Hourly

Federal Reserve will be watched very closely after a very positive non-farm payrolls last week. This week, U.S stocks were a roller coaster. There was a hard sell-off in equities and a bullish USD (U.S Dollar), due to an increasing chance of rate-hike. On Thursday (March 12, 2015), Retail Sales came out very negative. Retail Sales fell 0.6% (-0.6%), worse than expected of 0.3%, following -0.8%. Core Retail Sales (excluding automobiles which accounts for 20% of Retail Sales) fell 0.1% (-0.1%), worse than expected of 0.6%, following -1.1%. However, it was little better than previous report in February. I believe people who are saving money from low oil-prices are probably paying off their debts, before they spend on “wants”. The U.S market reacted positively because some people thought that negative Retail Sales would hold-off the Federal Reserve from raising the interest rates. On Wednesday, the Fed might also drop “patient”, signaling that rate-hike is very close.

S&P 500 (SPX) - Hourly
S&P 500 (SPX) – Hourly
US Dollar - Hourly
US Dollar – Hourly

SNB might set a new floor to the exchange rate (EUR/CHF). I would not trade CHF (Swiss Franc) because of two reasons. One, it’s too violent and there is no clear direction yet. Second, SNB does not know what it’s doing after what they did in January. But, I would still watch out closely, as it might affect other pairs, such as EUR and USD.

EUR/CHF - Daily
EUR/CHF – Daily

Recap: Europe, Australia, United Kingdom, Canada, and The United States.

This week was full of financial news. I will be talking about some of them, which I consider too important to pass up. I will also give my views on them.

Europe:

Last Monday (March 2, 2015), a report showed that Consumer Price Index (CPI) Flash Estimate ticked up to -0.3% year-over-year from previous -0.6%. Markets were expecting -0.4. The data was little positive. However, It remained in negative territory for the third consecutive month. There are deflation in euro zone. The deflation might soon end later in the mid-year, as Quantitative Easing (QE) program starts this Monday (March 9, 2015).

Last Thursday (March 5, 2015), European Central Bank (ECB) kept the interest rates unchanged. During the press conference, the President of ECB, Draghi stated that the QE would start on March 9. ECB raised its projections for the euro area, “which foresee annual real GDP increasing by 1.5% in 2015, 1.9% in 2016 and 2.1% in 2017.” Remember that these are just projections and can change anytime. Plus, central banks are not right all the time. Mr. Draghi felt confident as he talked about the future of Euro zone. He believes Euro zone will greatly benefit from QE program and some areas already have since the announcement of QE last January.

This week, EUR/USD fell all the way to 1.0838, lowest level since September 2003, due to positive U.S jobs reports, Greece worries and QE program starting next week. I was already short on EUR/USD and I still believe it has a room to go further down.

EUR/USD Hourly
EUR/USD – Hourly

Australia: 

Last Monday (March 2, 2015), Reserve Bank of Australia (RBA) announced that they will leave the interest rate unchanged at 2.25%. In February meeting, RBA cut by 0.25%. This time, they did not. RBA is in “wait and see” mode, for now. I believe another rate cut is coming in the two meetings, depending on future economic reports. In the Monetary Policy Decision statement by RBA Governor, Glenn Stevens stated that the Australian dollar “remains above most estimates of its fundamental value…A lower exchange rate is likely to be needed to achieve balanced growth in the economy…Further easing of policy may be appropriate…”.  I believe RBA is open to further cuts and it will come in the next two meetings. However, positive economic reports might change that direction. As economics reports come out from Australia, we will have better sense of what RBA might do.

Last Monday (March 2, 2015), Building Approvals report came out and it was very positive. It was expected at -1.8%. It came out at whooping 7.9% up 10.7% from previous -2.8%. It shows that more buildings are being built. Thus, creating jobs. However, Building Approvals reports show that building approvals tend to jump around every month. If the report continues to be positive, it might convince RBA to keep the rate unchanged.

Last Tuesday (March 3, 2015), Gross Domestic Product (GDP) came at 0.5%, up only 0.1% from previous report (0.4%). It came out little bit weak from what was expected, 0.7%. It’s still very weak and it might have larger impact on RBA’s future actions. I believe RBA will cut because GDP is not improving much.

Last Wednesday (March 4, 2015), Retail Sales and Trade Balance reports came out from Australia. Retail sales came out at 0.4% as expected from previous 0.2%.  Trade balance on goods and services were a deficit of $980 million, an increase of $480 million from December 2014 ($500 million). All these numbers are in seasonally adjusted term. I believe the gap in Trade Balance from the last two reports might convince RBA little bit to cut the rate again.

I would be short on AUD. I believe it has the potential to go further down to 0.7500. The best pair would be to short AUD/USD (Positive U.S news and upcoming rate hike).

AUD/USD Hourly
AUD/USD – Hourly

United Kingdom: 

Last Thursday, Bank of England (BoE) kept the interest rate unchanged at 0.50% and Quantitative Easing (QE) programme at £375bn. In March 2009, the BoE’s Monetary Policy Committee (MPC) unanimously voted to cut the interest rate to 0.50% from 1.00% (-.50%). The interest rate still stays unchanged and QE stays steady, for now. If future economic reports such as wages, and inflation declines or comes out negative, rate cut might come. If it does not, rate hike might come sooner than expected. I believe it will get better and MPC will decide to raise the rate, sending Pound (GBP) higher.

This week, Pound (GBP) fell after rising last week, due to little negative news from UK and that BoE rejected higher rate for some time being because of concerns in oil prices and inflation. I would not trade GBP at this time. If I’m going to trade GBP, I would analyze its chart first. Did you notice that last week GBP/USD had-daily bearish engulfing pattern and this week there is-weekly bearish engulfing pattern?

GBP/USD - Daily
GBP/USD – Daily
GBP/USD - Weekly
GBP/USD – Weekly

Canada:

Last Tuesday (March 3, 2015), Canadian Gross Domestic Product (GDP) came out little positive at 0.3% from previous -0.2% on monthly basis. It was expected at 0.2%. On quarterly basis, it came out at 0.6% following 0.8% in third quarter.

Last Wednesday (March 4, 2015), Bank of Canada (BoC) left the interest rate unchanged at 0.75% following 0.25% cut last month. Ever since BoC cut the rate last month due to falling oil prices; oil prices has risen and been in $50 range. If oil price continue to fall, I believe they will cut the rate again. There is strong relationship between Canada and oil. As oil gets weaker, Loonie (CAD) gets weaker. Why? Canada is ranked 3rd globally in proved oil reserves. When making a trade decision on CAD, I would look at the oil prices. Of course, I would also look at news and technical. For example, if I want to trade USD/CAD, I would look at both U.S and Canada economic news (rate hike/cut, employment, etc) and technical on chart. If U.S economic news are strong, Canada economic news are weak and USD/CAD is just above strong support line, I would definitely go long on it. However, let’s say if USD/CAD is just below strong resistance line, I would wait for confirmation of a breakout and if the news are in my favor, I would go long.

Last Friday (March 6, 2015), Building Permits and Trade Balance reports were strongly negative. Building Permits came out at -12.9%, following 6.1% the previous month, expected of -4.2%. Trade balance on goods and services were a deficit of -2.5 billion, following -1.2 billion the previous month, expected of -0.9 billion. Both reports were negative, which sent CAD lower. At the same time, U.S non-farm payrolls came out strong, which sent USD higher. As a result, USD/CAD skyrocketed. The reports will definitely be on BoC committee’s mind. As of right now, I would be short on USD/CAD.

This week, USD/CAD was mixed as BoC kept the interest rate unchanged, after cutting it last month (negative for USD/CAD) and strong U.S jobs report (positive for USD/CAD). I would be short on it as I said in the last paragraph.

USD/CAD - Hourly
USD/CAD – Hourly

United States:

Last Friday (March 6, 2015), U.S jobs report came out very strong except the wages. Employment increased by 295,000 (Expected: 240k) and unemployment rate went down 0.2% to 5.5% (Expected: 5.6%). However, average hourly earning fell 0.1%, following 0.5% the previous month (Expected: 0.2%). But, that hourly wages part of the report did not stop U.S Dollar from rising. It was very positive for the U.S dollar because there is little higher chance of rate hike coming in the mid-year.

Since U.S economic news tends to have impact on global markets, here’s what happened; U.S Dollar rose, U.S stock fell, European stock rose, Euro dived, Gold prices fell and Treasury Yield jumped. EUR/USD fell to 1.0838, lowest level since September 2003. USD/JPY rose to 121.28, a two-month high.

So why did U.S stocks sold off? It sold off because of upcoming rate hike, which can be negative for equities, specifically for dividend stocks. As economy is getting better, it should help boost corporate profits. At the same time, strong dollar can hurt them. Rate hike can only make dollar even stronger.

In two weeks, the Fed will be meeting and I believe they might drop the “patient” in its March policy statement.

I would be long USD. The best pairs would be to short EUR/USD (Euro zone delfation, Greece crisis and QE program) and short NZD/USD (RBNZ keeps saying that NZD is too high and they will meeting next week, rate cut?) as I’m already short NZD/USD, and long USD/JPY (Upcoming U.S rate hike and extra stimulus BoJ might announce).

Dow Jones Industrial (DJI) - Hourly
Dow Jones Industrial (DJI) – Hourly
Nasdaq - Hourly
Nasdaq – Hourly
Standard & Poor 500 (S&P 500) - Hourly
Standard & Poor 500 (S&P 500) – Hourly
USD/JPY - Hourly
USD/JPY – Hourly
NZD/USD - Daily
NZD/USD – Daily

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