What to Expect When the FED and the RBNZ Meets This Week – Introduction
The dollar index started the year by falling. In May, it started a strong rally that saw it reach a Year-to-date high of 97 in September. After that, the index started weakening and last week, it reached a low of 93.86. The recent price action is attributed to a few things.
First, inflation in the United States is rising – albeit slowly – which has led to the fears of a more aggressive Federal Reserve. Second, the yield on the US treasuries is flattening. A flat yield happens when the difference between the yields on the ten-year and the two-year falls. When the spread reaches zero, the yield curve is said to be inverting. Historically, when the yield curve inverts, it usually leads to a recession. Third, there is chatter in the market that the other central banks might start raising rates from 2019. Already, the ECB has indicated that it will likely hike in September next year while the BOE has pointed to another hike in 2019 depending on the Brexit talks. While the BOJ has pointed to lower rates for longer, there is a likelihood that it will hike because of the strength of the Japanese economy.
This week, the focus among traders will be on the Federal Reserve, which is expected to raise interest rates. This will be the third rate hike this year. It will also be a continuation of the gradual tightening process that started under Janet Yellen. Since this rate hike is already baked-in, it will not move the market. What will move the market will be the statement by the Fed which will give indications of a December rate hike. After the last statement, the odds of a rate hike in December reduced from lower 90s to about 65%.
Even with a rate hike in December, it is unlikely that the Fed will do more hikes in 2019. Already, some Fed officials have cautioned that they will not accept raising rates that will lead to the inversion of the yield curve. Just last month, Atlanta Fed chair, Richard Bostic said that he would not support such measures. Other officials will likely not accept to do so as well.
In addition, while the Fed is an independent body, it might be influenced by politics. In recent weeks, the US president has expressed ‘buyers remorse’ for nominating the current Fed Chair, Jerome Powell. This is because the Fed chair has supported raising interest rates which is opposite to the dovish nature of the president.
The Fed will not be the only central bank this week to make a decision. On Wednesday, the Reserve Bank of New Zealand (RBNZ) will release its interest rates decision. The bank is expected to leave rates unchanged. Because of the recent positive economic data from the country, there is a likelihood that the bank will start talking about raising rates. They are currently at 1.75%. In recent months, the country’s main challenge has been the rising housing prices as Western and Asian tycoons move to buy houses there. Last month, the country placed a ban on such purchases for leading to an inflated housing market.