Central Bank Roundup: Hawks vs. Doves – Part I

Monetary policy biases tend to play a huge role in long-term forex trends so I’ve decided to give y’all a rundown of which major central banks are feeling hawkish and which ones are in the dovish camp. Let’s start with the doves, shall we?

Bank of Canada (BOC)

central bank doveBOC Governor Stephen Poloz and his gang of policymakers have lowered interest rates twice so far this year, first as a pre-emptive measure against what could’ve been a worse oil industry slump and second as an acknowledgement that their earlier rate cut just wasn’t enough. While the Canadian economy had been able to chalk up a few improvements in spending and inflation every now and then, underlying employment data and business investment trends suggested that the recovery has lost its momentum.

Because of that, BOC policymakers projected weaker growth prospects down the line, downgrading their GDP forecast from 2% to just a little over 1% this year. Central bank officials also hinted that falling commodity prices might continue to drag trade volumes and revenues down and confirmed that downside risks to inflation have increased. *cough, Iran nuclear deal, cough*

Reserve Bank of New Zealand (RBNZ)

Governor Graeme Wheeler and his boys over at the RBNZ have also been on an easing spree this year, announcing back-to-back interest rate cuts in June and July. And if you’ve been reading up on my Monthly Economic Roundup on New Zealand, you would’ve seen those rate cuts coming!

The factors that led RBNZ officials to pull the easing trigger were pretty much the same in both instances, as they cited a softer economic outlook and potentially weaker inflation. While the Canadian economy is worried about its oil sector, New Zealand is particularly concerned about the ongoing dairy industry slump and its impact on export activity, which accounts for a huge chunk of overall economic growth.

In this week’s monetary policy announcement, Wheeler mentioned that “some further easing seems likely” and that “further depreciation is necessary given the weakness in export commodity prices.”

Reserve Bank of Australia (RBA)

The RBA has also cut interest rates twice this year, although Governor Stevens and his fellow policymakers decided to take a chill pill from all their easing in the past few months. In case you’ve lost track, recall that the RBA cut rates from 2.50% to 2.25% back in February then pulled ’em down to 2.00% in May.

Some forex market analysts say that we’ve seen the last of the RBA’s rate cuts this year, but the tone of their latest policy meeting minutes reveals that central bank officials are still wary about further declines in commodity prices. In particular, Australia’s trade figures could be vulnerable to another tumble in iron ore prices which are driven by crude oil trends and demand from China. In addition, RBA policymakers also pointed out that further Aussie depreciation “seemed both likely and necessary.”

Swiss National Bank (SNB)

Negative deposit rates? Forex market intervention? Now that’s more than enough to make the SNB the leader of the dovish camp! After causing quite a ruckus in the markets with their decision to scrap the franc peg earlier this year, SNB Chairman Thomas Jordan confirmed that they stepped in the currency market to drive down the value of the franc.

As it turns out, the Greek debt drama had forced investors to move funds out of the euro and into the Swiss franc, which had been gaining a safe-haven appeal in the European continent. SNB officials weren’t too happy about this because a rising franc meant that their exports of Swiss chocolates, cheese, and army knives would be relatively more expensive in the international market, thereby hurting demand. At the same time, a strong franc made imported goods cheaper, which ain’t good for an economy trying to ward off deflation.

What seems to bind these dovish central banks together is the downturn in commodities, which has resulted to a slowdown in exports and subdued inflationary pressures, leading policymakers to take an accommodative stance. And with commodities still facing plenty of headwinds, these central banks might not be ready to shed their dovish feathers anytime soon.