Central Bank Meeting Minutes: BoE, FOMC and ECB (Update on Greece)

During the week of February 16, 2015, BoE (Bank of England), FOMC (Federal Open Market Committee) and ECB (European Central Bank) released its meeting minutes for the latest monetary decisions. Let’s go in depth of these meeting minutes and how we can apply them to our trading decisions.

 

Bank of England (BoE) – (February 18, 2015)

The Bank of England meeting minutes showed that the Monetary Policy Committee (MPC) voted unanimously (9 members) to keep the benchmark interest rate unchanged at a record-low of 0.5%. There were hints it could be lowered in the next few months (yes, decrease, not increase). Two committee members, Martin Weale and Ian McCafferty who voted in favor of rate hike previously, were in favor in holding rates this time. Regarding its inflation in which Consumer Prices Index (CPI) fell to 0.3% (lowest since decades ago) last month changed the views of MPC. Some worry that it might slip below zero in the next few months. It has caused some to suggest rate cut over the next few months. The rate cut hinted in the minutes is totally different than what the Bank of England governor, Mark Carney said last week.

Mark Carney spoke to the press at Inflation Report press conference. He signaled that BoE remains on course to raise interest rates in the U.K. next year, despite decline in inflation. He also mentioned that BoE might cut the interest rate if inflation transforms into deflation (below 0). I believe if the inflation falls below 0, the BoE will cut the interest rate by 0.25, but only for short period of time. However, he pointed out that BoE still expects its next move will be raising rates, not cut them.

There are confusions going on with BoE on interest rate. I look at this way; inflation goes below 0, rate cut will come, inflation starts to increase, rate increase will come, and watch out for future statements by BoE for more clues. I would not trade Pound (GBP) based on these interest rate talks, for now. There is no clear road for interest rate for now. But, I would trade based on other news/events and charts’ technical.

 

Federal Reserve – (February 18, 2015)

The Federal Reserve meeting minutes showed that the Federal Open Market Committee (FOMC) expressed concerns over raising interest rates too soon, which could could halt or slow the U.S economic “recovery”. They are also worried over the impact of dropping “patient” from central bank’s rate guidance. They thought that removing “patient” from the FOMC statements in the future would put too much weight on its meaning. As a result, it would cause financial markets to overreact (Unlike Swiss National Bank, Federal Reserve cares about financial markets movements). If “patient” is dropped, I would think that interest rate hike is coming in the next two meetings. They also worried about falling inflation expectations in the U.S. If the inflation drops, I believe it’s going to halt (not cut) FOMC from raising the interest rate, but not decrease the rates.

In the minutes, it’s mentioned that there are worries about international events such as Greece (Greece got 4 month bailout) and Ukraine (There’s no “truce”). But, it’s not going to keep them from raising the interest rate, backed by strong jobs reports. However, the federal reserve signaled its willingness to keep interest rates low for longer because of strong U.S dollar and “flat” housing market. Raising interest rates will only send U.S higher, making it much stronger than ever.

On February 24 and 25, Fed Chair Janet Yellen will be speaking in congressional testimony and we should look for further clues to the timing of the interest rate hike.

Any clues of earlier rate hike will send U.S. dollar to rise in which I would go short USD/JPY, USD/CAD, and/or long GBP/USD. Remember, don’t hold your trade positions for more time if you trigger market order just based on what Yellen said, unless there are other news and technical to support your trade.

 

European Central Bank (ECB) – (February 19, 2015)

The European Central Bank first ever meeting minutes showed fears of continued deflation the euro zone, which led to launch of Quantitative Easing (QE) program which starts in March. The main goal of QE is to drag the euro zone out of deflation and near to 2% inflation target. This first minutes doesn’t reveal much of anything. Since there weren’t any new details or “surprising” details, the markets, especially Euro did not move much.

Europe has agreed to extend its financial lifeline to Greece only for 4 months. The deal was stuck last Friday (February 20, 2015). This is another bailout for Greece. How long does Euro has to keep bailing out Greece from the mess Greece made? The deal is not final if Greece does not come up with its plan by Monday (February 23, 2015). Then, it will be voted by institutions involved in the bailout by April. If the institutions do not back the plan, the “deal” becomes “no deal”.

I would still keep an eye on Greece. If you trade Euro, be careful with news coming out of Greece. It will be violent and may cause you to have losing positions or touch stop loss (or make money). When picking Euro to trade, I would pick pairs other than EUR/USD.

If you have any questions, feel free to leave comments or contact. Thank you.

SNB Shocks Global Markets

Last Thursday (January 15) around 4:30 a.m, SNB (Swiss National Bank) surprised everybody and woke the markets up by ending the minimum exchange rate of CHF 1.20 per euro and lowering interest rate to -0.75% from -0.25%. The announcement was unscheduled. It was shocking to everybody and there’s more come to the story.

After seconds of the announcement, CHF rode in fastest  bull mode in the modern history. EUR/CHF went on free fall with no ground stop. SNB’s floor rate of 1.2000 for EUR/CHF was broken. A lot of people were long EUR/CHF with stops just below 1.2000. Not only the CHF pairs were effected, but also other pairs. Stops were triggered in seconds (or minutes) and panic spread like wildfire. Imagine a highway with all the automobiles driving more than 200mph and large truck in the middle suddenly stops in a second.

In September 2011, Swiss National Bank (SNB) called its currency (Swiss Franc) “Massive Overvaluation”. They wanted to weaken the Swiss Franc to improve their economy. Therefore, they set a floor rate of 1.2000 of EUR/CHF exchange rate. In a statement, they stated “The SNB will enforce this minimum rate with the utmost determination”. They were saying that they will do everything in their power not to allow the exchange rate break the floor rate. Their tone was still same in the late 2014. Ever since, they have been buying the foreign exchange in unlimited quantities, until last thursday (January 15, 2015).

After abandoning its currency, SNB stated that “Swiss franc is still high”. Well, it is even more higher now. Immediately after the announcement, CHF pairs sky-rocketed. EUR/CHF dropped from above 1.2000 to about 0.9705, over 2000 pips drop in one day. USD/CHF dropped from around 1.0200 to 0.8350, almost 2000 pips drop in one day. The reason for SNB’s action “divergences between the monetary policies of the major currency areas have in increased significantly”. They are referring to Euro, which has depreciated a lot against USD, which has caused Swiss franc to weaken. That’s why they say that defending floor rate “no longer justified”. At the end of their statement, they said “remain active in the foreign exchange market to influence monetary conditions”. That’s what scares me. After what they did, we need to be cautious and not trade CHF pairs at this time.

 

EUR-CHF
EUR/CHF – Weekly

 

USD-CHF
USD/CHF – Weekly

 

SNB’s action looks suspicion for two reasons. First, SNB announces this sudden change of plans just a week before ECB meeting. Second, it looks like that IMF (International Monetary Fund) was not kept in loop.  I believe SNB is trying to buy time. The question is “For what?”. If they are trying to buy time, the move by SNB is only temporary (less 4 months).

 

2015-01-16-PROPHET
Comparison Chart – EUR/USD and USD/CHF

 

As to ECB, they have been decreasing the interest rates, which has caused Euro to decline a lot.. This week on Thursday (January 22, 2015), ECB will be releasing the results of their meeting. There has been a chatter (still is) that ECB will be announcing a full-blown Quantitative Easing (QE). At this time, I believe the interest rates will stay the same. Regarding to QE, I think QE will be announced, but limited. They might wait for Greek election results, which takes place on Sunday (January 25, 2015). Greece may exit Euro union and have their own currency. If they do, the currency will go down in value. I think full-blown QE will be announced in March 5.

Not only traders were effected, but also brokers such as FXCM. FXCM experienced significant losses ($225 million) and they may be in a breach of some regulatory capital requirements. When the news came out, their stock “FXCM” fell from around $12.50 to just below $1 (about 90% decline). In the morning of Friday, its stock was halt due to news pending. At 3:55, Dow Jones reported that Leucaidia National Corporation would be proving $300 million in cash to FXCM to continue normal operations. The agreement is in the form $300 million senior secured term loan with two-year maturity and an initial coupon of 10%. Immediately after the news, FXCM surged from around $1.50 to $4.50 (about 350% increase).

FXCM Ticker - SNB Effect
“FXCM” stock

 

Europe in Focus and its impact on the rest.

Earlier today, German CPI (Consumer Price Index) was released. It was weaker than expected. It’s the lowest since October, 2009. CPI is important for inflation. If it drops more (more likely will), deflation will be here both in Germany and spread to other Euro countries.

Japan is already in recession. Europe most likely will be next. It will spread to UK (United Kingdom). Japan, Europe and United Kingdom all have major impact on the economy of the US (United States). Therefore, United States might join the recession list. It’s like a domino effect. Everything starts from somewhere and spreads.

Greek crisis is worrisome. Greek may default and exit from Euro. Elections will be held 3 days after ECB, on Sunday, January 25, 2015.

On Thursday, January 22, 2015, ECB (European Central Bank) will release interest rates and there will be press conference. It will be closely watched as always. But this time, many are wondering if they will release QE (Quantitative Easing).

I believe ECB will delay QE because Greek elections are yet to be held. After the Greek elections, ECB will act on its next meeting.