An important round of central bank meetings is at hand. Important because there is some expectation one or more bank will indicate policy tightening is near and with it a subtle shift in the balance of powers. Until recently the FOMC has been the only bank on a path of policy tightening. Now, expectations for the FOMC to ramp up the pace of tightening has dimmed while that for other banks to begin tightening, the ECB in particular, has begun to pick up.
The Bank of Canada has already released their statement and the first of a string of banks to report over the next 3 weeks. In their statement they make note of increasing economic momentum among the major world powers, the USA specifically, along with an expectation for growth to continue in Canada as well. Growth is expected to slow a bit in 2018, down to about 1.8%, before rebounding in 2019 and 2020. Slowing may be related to NAFTA uncertainty, what is a certainty is that a successful conclusion to renegotiations will be a boon for the nations economy.
The ECB is the bank traders really need to watch. The bank recently released minutes from the last meeting. In them the bank let slip the committee’s readiness to begin altering public perception about policy trajectory, an end result they have achieved with the minutes themselves. The news sent the euro spiking higher to break through a key resistance level and set new multiyear highs. Now traders are looking for confirmation of the change and that could come next week. If they don’t, or if they fail to meet the markets expectations, the euro could see a big decline versus the dollar.
The BOJ meets the next week, releasing their statement on Tuesday, time to be determined. The bank recently made an adjusted to their bond purchase program that the market took as a sign of tightening. The trouble is that the bank has made this type of adjustment before and is really not expected to embark on any kind of quantifiable policy shift in the near to short term. This has left the yen elevated versus the dollar and in danger of correction. Adding to risk is a general risk-on attitude among global market participants that is driving the riskier assets.
The FOMC’s January policy meeting is scheduled the very next day and could be another major mover for the market. The bank is expected to raise rates 3 times this year and possibly at the next meeting so any indication of hesitation or urgency will be taken very seriously. Recent data suggests the US economy is still progressing at the same steady month to month clip it has for some time, the difference now is that YOY gains are starting to add up and forward outlook is good if not robust. While underlying inflation is still below the target rate there are signs it is picking up and if that gets mentioned you can be sure the dollar will strengthen.