Central Banks Gaming

What is the Next Shoe to Drop?

Central Banks, Gaming, What is, Next Shoe, Drop, Monetary Policies, fx trader, forex

29 Apr 2016

One can appreciate the frustration in Tokyo. The Bank of Japan surprised the world by adopting negative rates in January and the yen rallied. It now disappointed many by not easing, and the yen rallied. The BOJ next meetings in mid-June and like this week, the outcome of its meeting will be announced the day after the FOMC meeting. There is some idea that BOJ may be waiting for Abe's new fiscal package and the G7 meeting Japan hosts next month.

The latest FOMC's statement did not convince investors that a June hike was more likely, though a majority of economists surveyed see the second hike delivered then. Sequentially, many see the failure of the Fed to include a risk assessment as indicative of the high hurdle for a June move.

While the Fed needs to see evidence that the US economy is recovering from the six-month slowdown, which we think will in fact materialize, we are concerned that the global climate will look different when the Fed meets in mid-June. We are not convinced that emerging market equities can hold their 25% four-month rally. The same is true for commodities. Then, of course, there is the UK referendum, the Spanish election, and likely tensions with Greece. It is possible that the impeachment process in Brazil drags into June as well.

Some suggest a Fed move at the July FOMC meeting. The potential for June turmoil, at least from Europe, may have subsided, and the Fed would have more evidence of the economic performance in Q2. On one hand, the fact that there is no press conference in July would argue against a move. On the other hand, raising rates without a scheduled press conference would free the Fed from the gaming in the market. We still would prefer a press conference after every meeting to get around that gaming, which is a common practice among many major central banks.