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Summary
- In the next seven days, six G10 central banks provide monetary policy updates.
- Excepting the Bank of Japan (BoJ), no interest rate moves are expected.
- Markets are therefore largely in wait-and-see mode, with most G10 currencies in a range, presenting very few attractive trades.
Market Implications
- One exception to this is being short the Swiss franc (CHF).
- We flagged long EUR/CHF last month and still like the position into the SNB rate announcement on 21 March.
Preparing for the Busiest Week of the Year
The next seven days sees six G10 central banks update monetary policy, making it one of the busiest weeks of the year for DM policymakers.
The central banks in focus next week are the US Federal Reserve (Fed), the Bank of Japan (BoJ), the Bank of England (BoE), the Swiss National Bank (SNB), the Reserve Bank of Australia (RBA) and the Norges Bank.
We examine the state of play for each and in relevant FX markets.
US Federal Reserve (20 March)
The market currently prices less than a 1% chance that the Fed cuts rates on 20 March. This sharply contrasts end-2023, when a 25bps rate cut was fully priced.
Since then, stronger data and deliberate messaging from Fed officials (most notably Chair Jerome Powell) saw the market price out any possibility of the Fed cutting rates this month.
Market pricing currently points to the first Fed rate cut coming in June or July, with ~19bps priced for the former and ~30bps for the latter.
Over the past two months, the US dollar index (DXY) has traded in a relatively tight 2.5% range.
Chart 1: Orange Line = US Dollar Index
We see this rangebound price action continuing in the coming weeks.
Fed messaging next week will be important. But barring any major shift from the central bank (which we do not expect), the DXY should chop around in the range seen since mid-January.
Bank of Japan (19 March)
Next week’s BoJ policy update is one of the most anticipated in recent years, with much speculation that the central bank will hike rates for the first time in a generation.
Despite the speculation, the consensus is that the decision will be a close call.
Markets agree, pricing just over a 50% probability of a 10bps rate hike (to take the BoJ’s policy rate back to zero).
Despite the uncertainty, we think wage increases in Japan have been strong enough to convince the BoJ to raise rates back to zero.
Over the past two months, USD/JPY has traded in a ~3.5% range and is currently near the middle.
Chart 2: Orange Line = USD/JPY Spot Price
If the BoJ hikes as we expect, USD/JPY will probably see downside. Yet any shift in USD/JPY should be limited, as the market awaits the Fed’s decision and messaging the next day.
Additional factors should cap USD/JPY upside. We expect both verbal pushback (again) from Japanese officials if USD/JPY rises above 150 and perhaps actual FX intervention if last year’s high near 152 is challenged.
This all points to continued range-trading in the near term in USD/JPY.
Bank of England (21 March)
Like the Fed, the market prices less than a 1% chance of a BoE rate move next week, with the first rate cut priced for August.
Also like the Fed, respective market pricing has tilted more hawkishly over the past couple of months. This is partly due to stronger-than-expected domestic data and partly the shift in Fed pricing.
We expect no material change in BoE messaging on 21 March. Yet we think the data should allow the central bank to ease rates in June – sooner than the market currently prices.
Over the past two months, EURGBP has traded in a very tight 1.2% range.
Chart 3: Orange Line = EUR/GBP Spot Price
Given no one expects BoE fireworks next week, plus minimal risk of any ECB action before June, we think EUR/GBP will remain in its tight range in the coming weeks.
Swiss National Bank (21 March)
For us, the SNB rate announcement next week presents the most opportunity. We expect messaging from the Swiss central bank could open additional CHF downside.
The market prices about 7.5bps of easing for the quarterly policy update on 21 March, or about a 30% probability of a 25bps rate cut (which is fully priced for June).
We expect the SNB to stand pat next week while setting up a June policy ease. Yet the key to a weaker CHF lies in their message on FX intervention. We expect a looser tone, potentially suggesting they would sell CHF in the market.
After all, Swiss inflation is below 2%, and exporters (and the SNB) have voiced concern about currency strength since January.
We expect any SNB messaging vis-à-vis the CHF to exert additional downward pressure on the currency.
EUR/CHF has grinded higher over the past month, providing one of the few tradeable trends in the G10 currency space.
Chart 4: Orange Line = EUR/CHF Spot Price
We expect this trend to continue in the coming weeks.
Most of the move has probably already happened, and any approach to parity will probably require the SNB to sell CHF in the market.
Until then, though, even a subtle shift in SNB messaging regarding the currency should see EUR/CHF trade back to ~0.9700.
Reserve Bank of Australia (19 March)
The market prices just over 8bps of easing for the RBA on 19 March, or roughly a one-in-three probability of a 25bps rate cut.
It is helpful to look at previous RBA messaging. Last time out, they kept ‘a further increase in interest rates cannot be ruled out’. We think there has been insufficient evidence for them to change this stance; initial CPI data has shown goods inflation progressing less than perhaps they had hoped.
Over the past two months, trade-weighted AUD has traded in a very tight range, about 1.25%.
Chart 5: Orange Line = AUD Trade Weighted Index
Ahead of the RBA, with the AUD TWI near the middle of its tight recent range, we prefer to stand aside and wait for the price action at either extreme of the range.
Norges Bank (21 March)
The market prices virtually a 0% probability of a Norges Bank policy change on 21 March.
This week’s CPI outturn has been key. Headline was 4.9% YoY, 0.6pp below Norges Bank forecast.
Norges Bank have overestimated inflation for several months running. This as ratcheted up expectations that the central bank may tilt more dovishly next week, lowering its inflation forecasts and raising expectations for future unemployment.
Time will tell what impact this will have on the currency. Over the past two months, the NOK range on a trade-weighted basis has been about 2%.
Chart 6: Orange Line = NOK Trade Weighted Index
We wait to initiate any NOK risk until we get further clarity from Norges Bank.
Rangebound Markets Require Patience
We wrote last week, in the context of US rates’ markets, that we want to respect trading ranges and that, with so much event risk, we preferred to await better levels to initiate any risk.
Last week’s note preceded the US jobs report last Friday and the US CPI data this week.
Next week, event risk is even higher given central bank policy updates are coming thick and fast. As such, we are sidelined in most of the G10 currency pairs that we follow.
Short CHF Stands Out as Preferred Exposure
The one exception is in CHF.
Going into the SNB policy update on 21 March, we expect additional value in being short CHF.
CHF weakness, especially reflected in being long EUR/CHF, is one of the few durable trends so far this year. It still has some room to run.