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FX Blog- Global-View.com Month Ahead Interest Rate Outlook for September 10, 2008


September 10, 2008

Monetary Policy Forecasts for Major Economies


The Global-View.com Monetary Policy Outlook is prepared weekly by the trading professionals at GVI Forex. For information on the GVI Forex Service Click Here



December Fed Fund futures have moved to a slight easing bias 12% odds for a -25bp cut in the wake of a run of weaker U.S. economic data. Absent a significant deterioration in future data, we feel that the odds for future Fed ease at the present time are very low. It may be that the U.S. economy might be moving into the early stages of a long bottoming phase. Note in the PMI indices below that the U.S. manufacturing PMI has been bouncing around at the 50 level. The employment data continue to worsen, but employment tends to be a lagging rather than leading or coincident indicator. PMI data are often good forecasters od GDP. We are still waiting to see a floor in the housing sector. This will take a while. A structural problem to overcome is that the real estate financing industry now has to restructure itself in the aftermath of the sub-prime debacle. The resolution of the Fannie Mae and Ginnie Mae problems has been a positive development.

To its credit, the Fed wisely eased policy pre-emptively very early in the process. Official U.S. rates are not likely back higher until well into 2008, but we feel that a bottom in rates is in.


UNITED STATES

GVI U.S. Feberal Reserve Bank Policy Meeting Preview

  • Decision: September 18 at 18:15 GMT.
  • Fed Funds rate: 2.00%
  • Expected Decision: No rate change
  • Short-term market sentiment contnues to exert a strong infuence on Fed policy decisions. On Tuesday August 4, the central bank held its fed funds target steady at 2.00%. The policy statement was seen as less hawkish than the previous announcement. Future policy decisions now will be data-dependent.

FEDERAL RESERVE Policy Objective: The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.

uscpi

The chart above shows year/year core PCE for the U.S. relative to its its reported "comfort zone for this key price index. Headline and Core CPI figures are also shown.

ezcpi

ezcpi




s-t rates

The above monthly U.S. employment chart is included because its the most closely followed data release each month, and because one of the objectives of the Fed is to maximize employment.

s-t rates


s-t rates

The chart above shows the current three month libor rate, the current Fed funds target  and where the futures markets are currently trading three month rates for the specified periods in the future. The chart also includes comparisons of where these futures rates were trading most recently, a week ago and four weeks ago.  The chart provides a view on where the markets feel U.S. interest rates are headed.




interest rates

The chart above shows the U.S. Fed Funds rate target, three month libor, and two- and ten-year bond yields over the past twelve months.

Major Economies � Interest Rate Forecasts- Monthly Perspective

foreign currency pairs

The ECB has been indicating that monetary policy is no longer in a tightening phase. It is behind the curve but is apparently willing to throw the economy into recession to contain inflation. The E-Z economy has been showing signs of rapid deterioration. No rate cuts are on the horizon.


EUROZONE

GVI European Central Bank Policy Meeting Preview

  • Decision: October 2, 2008 at 11:45 GMT.
  • ECB Refi rate: 4.00%
  • Expected Decision: Steady policy.
  • ECB policy is now on hold as the central bank awaits upcoming data. Key Eurozone PMI figures, which correlate well with GDP, are pointing to a developing economic slowdown. Inflation remains at an uncomfortable level as the Eurozone economy slows.

    ECB Policy Objective: The primary objective of the ECB's monetary policy is to maintain price stability. The ECB aims at inflation rates of below, but close to, 2% over the medium term.

    ezcpi

    The chart above shows year/year HICP (Harmonized CPI) for the Eurozone relatrive to its "below 2%" target level.

    ezcpi

    ezcpi




s-t rates

The chart above shows the current three month libor rate, the current ECB  "refi" rate target  and where the futures markets are currently trading three month rates for the specified periods in the future. The chart also includes comparisons of where these futures rates were trading most recently, a week ago and four weeks ago.  The chart provides a view on where the markets feel Eurozone interest rates are headed.


interest rates

The chart above shows the ECB refi rate target, three month libor, and two- and ten-year bond yields over the past twelve months.

forex forecast services In Japan, no changes in monetary policy are in store for a good while into the future. There is no pressure for higher interest rates from the BOJ. The economy is currently presenting a more negative picture, although the government has embarked on a stimulus program. The government is now in transition. No major shifts in the spread in the 2-yr bond spread between Japan and the U.S. are likely anytime soon.



JAPAN

GVI BOJ Policy Meeting Preview

  • Decision: September 18, 2008
  • Current Overnight Target Rate: 0.50%
  • Expected decision: No change.
  • As the economy slows, there is no longer a threat for higher Japanese rates. No cuts are even possible. The political situation also is unstable.

BANK OF JAPAN Policy Objective: The Bank of Japan Law states that the Bank's monetary policy should be "aimed at, through the pursuit of price stability, contributing to the sound development of the national economy."

Nationwide CPI

The chart above shows year/year core nationwide CPI and the reported BOJ goal of between 0% and 2% for this price index. 

Manufacturing PMI



CHART: BOJ Quarterly Tankan Survey




s-t rates

The chart above shows the current three month libor rate, the current BOJ overnight rate target  and where the futures markets are currently trading three month rates for the specified periods in the future. The chart also includes comparisons of where these futures rates were trading most recently, a week ago and four weeks ago.  The chart provides a view on where the markets feel Japanese interest rates are headed.


interest rates

The chart above shows the Japanese overnight rate target, three month libor, and two- and ten-year bond yields over the past twelve months.

major currency pairs The markets now expect Bank of England rate reductions by the end of this year as the economy swiftly weakens. The problem is that the central bank would have to base policy ease on interest forecasts rather than reality.


UNITED KINGDOM

GVI Bank of England Policy Meeting Preview

  • Decision: October 9, 2008 at 11:00 GMT.
  • BOE Repo Rate: 5.00%
  • Expected Decision: Risk of -25bp rate cut.
  • BOE policy makers continue to balance concerns about inflation against the risk of a slowing economy. Note below that both the U.K. Manufacturing and Services PMIs have turned south. Inflation data are a worry, but there is a risk that the economy might fall off a cliff.

    BANK OF ENGLAND Policy Objective: The Bank's monetary policy objective is to deliver price stability, low inflation, and, subject to that, to support the Government's economic objectives including those for growth and employment. Price stability is defined by the Government's inflation target of 2%.

    ezcpi

    The chart above shows year/year CPI for the U.K. relative to its 2% target for this key price index. 


    ezcpi




s-t rates

The chart above shows the current three month libor rate, the current Repo Rate  and where the futures markets are currently trading three month rates for the specified periods in the future. The chart also includes comparisons of where these futures rates were trading most recently, a week ago and four weeks ago.  The chart provides a view on where the markets feel U.K. interest rates are headed.


interest rates

The chart above shows the U.K. repo rate target, three month libor, and two- and ten-year bond yields over the past twelve months.

forex currency market reports The Swiss National Bank tries to maintain a stable relationship of the CHF vs. the EUR. Monetary policy is currently on hold.



SWITZERLAND

GVI Swiss National Bank Policy Meeting Preview

  • Decision: Sepember 18, 2008 at 08:30 GMT.
  • SNB 3mo Swiss libor target: 2.75%
  • Expected Decision: No rate change
  • The SNB had indicated that the peak in interest rates had been reached.The Swiss CPI (see below) is well above its target ceiling of 2.0%. The SNB manages the value of the CHF as critical element of monetary poilcy.

    SWISS NATIONAL BANK Policy Objective: The National Bank equates price stability with a rise in the national consumer price index (CPI) of less than 2% per annum. In so doing, it takes account of the fact that not every price movement is necessarily inflationary. Furthermore, it believes that inflation cannot be measured accurately. Measurement problems arise, for example, when the quality of goods and services improves. Such changes are not properly accounted for in the CPI; as a result, inflation, as measured by the CPI, will be slightly overstated.

    chcpi

    The chart above shows year/year CPI and the Swiss goal of less than 2% for this price index. 

    chpmi




s-t rates

The chart above shows the current three month libor rate, the current three-month Euro-Swiss target  and where the futures markets are currently trading three month rates for the specified periods in the future. The chart also includes comparisons of where these futures rates were trading most recently, a week ago and four weeks ago.  The chart provides a view on where the markets feel Swiss interest rates are headed.


interest rates

The chart above shows the Swiss three-month Euro-swiss rate target, three month libor, and two- and ten-year bond yields over the past twelve months.

currency exchange forecast The Australian economy is slowing. The key foci for the Reserve Bank of Australia remain inflation and slowing external demand. The Reserve Bank of Australia cut rates by 25 bps rate cut in September, but the markets are anxious for additional ease.


AUSTRALIA

GVI Reserve Bank of Australia Policy Meeting Preview

  • Decision Anouncement: October 7, 2008 at 04:30 GMT.
  • RBA Cash Rate Target: 7.00%
  • No rate cut islikely.
  • Inflation continues to be a problem for the Reserve Bank. Nevertheless, officials have started to focus on the slowing of the economy and have signaled that rate additional future cuts are likely. In September the cash rate target fell by-25bps to 7.00%. We expect no rate reductions at the October meeting.

RESERVE BANK OF AUSTRALIA Policy Objective: The policy objective is a target for consumer price inflation, of 2-3 per cent per annum. Monetary policy aims to achieve this over the medium term and, subject to that, to encourage the strong and sustainable growth in the economy. Controlling inflation preserves the value of money. In the long run, this is the principal way in which monetary policy can help to form a sound basis for long-term growth in the economy.

aucpi

The chart above shows year/year and the CPI target of 2% to 3% for this price index. 

aupmi



jobs


s-t rates

The chart above shows the current three month bank bill rate, the current Cash Rate target  and where the futures markets are currently trading three month rates for the specified periods in the future. The chart also includes comparisons of where these futures rates were trading most recently, a week ago and four weeks ago.  The chart provides a view on where the markets feel Australian interest rates are headed.


interest rates

The chart above shows the Australian overnight rate target, three month bank bills, and two- and ten-year bond yields over the past twelve months.

us currency The Bank of Canada held policy steady on September 3 as many (including us) had been expecting. Its policy statement continued to be fairly neutral and id not even hint at future policy moves. It looks to us as though they are keeping all their options open. At the moment we feel the central bank HOPES rates are at their cyclical lows. This of course is dependent on future data.


CANADA

GVI Bank of Canada Policy Meeting Preview

  • Decision: October 21, 2008 at 13:00 GMT.
  • BOC Overnight Target Rate: 3.00%
  • Expected Decision: no rate change. The Bank of Canada has been signaling a steady policy for now.
  • We suspect that future policy decisions will be data dependent, but the central bank is not unhappy with the current level of interest rates.

    BANK OF CANADA Policy Objective: The Bank of Canada aims to keep inflation at the 2 per cent target, the midpoint of the 1 to 3 per cent inflation-control target range. This target is expressed in terms of total CPI inflation, but the Bank uses a measure of core inflation as an operational guide. Core inflation provides a better measure of the underlying trend of inflation and tends to be a better predictor of future changes in the total CPI.

    cacpi

    The chart above shows year/year CPI-X (core CPI) and the target of 2% for this price index. 

    PMI



    jobs


s-t rates

The chart above shows the current three month Banker Acceptance rate, the current BOC overnight rate target  and where the futures markets are currently trading three month rates for the specified periods in the future. The chart also includes comparisons of where these futures rates were trading most recently, a week ago and four weeks ago.  The chart provides a view on where the markets feel Canadian interest rates are headed.


interest rates

The chart above shows the Canadian overnight rate target, three month Bankers Acceptance, and two- and ten-year bond yields over the past twelve months.

John M. Bland is a co-founder and partner of Global-View.com. Prior to Global-View.com, he was a Vice-President and senior dealer in a forex inter-bank and futures trading arm of a subsidiary (ContiCurrency) of the Continental Grain Company in NYC. Previous to that, he was one of the early members of the Chemical Bank corporate advisory service in NYC, and also worked in international liability management for that bank. John holds an MBA from the Hass School at the University of California at Berkeley and a bachelors degree in International Economics from Berkeley.






 

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Amazing Trader EVENT RISK Calendar:

Wed 18 Oct
12:30 US- Housing Starts & Permits
14:30 US- EIA Crude
Thu 19 Oct
01:30 AU- Employment
08:30 GB- Retail Sales
12:30 US- Weekly Jobless
Fri 20 Oct
12:30 CA- Retail Sales & CPI
14:00 US- Existing Homes Sales

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  • POTENTIAL PRICE RISK: HIGH Tue-- 08:30 GMT GB- CPI top tier confirmation of Inflation.

  • POTENTIAL PRICE RISK: Medium Tue-- 09:00 GMT DE- ZEW Survey second most important German monthly Survey.

  • POTENTIAL PRICE RISK: Medium Tue-- 09:00 GMT EZ- final HICP revision to flash report. Revisions are usually minor.

  • POTENTIAL PRICE RISK: Medium Tue-- 13:15 GMT US- Industrial Production. Top output indicator.



  • POTENTIAL PRICE RISK: Medium Wed-- 12:30 GMT US- Housing Starts and Permits revision to flash report. Useful housing leading indicator.

  • POTENTIAL PRICE RISK: Medium Wed-- 14:30 GMT US- EIA Crude. Top WTI inventory measure.



  • POTENTIAL PRICE RISK: Medium Thu-- 01:30 GMT AU- Employment. Top economic indicator.


  • POTENTIAL PRICE RISK: Medium Thu-- 02:00 GMT CN- GDP. Top economic indicator.


  • POTENTIAL PRICE RISK: HIGH Thu-- 08:30 GMT GB- Retail Sales. Top consumption indicator.


  • POTENTIAL PRICE RISK: Medium Thu-- 12:30 GMT US- Weekly Jobless. Employment Indicator.



John M. Bland, MBA
co-founding Partner, Global-View.com

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