4 Monetary Policy Biases You Need to Be Aware Of

In case you’re feeling overwhelmed by the latest set of monetary policy statements, don’t fret! In this edition of Piponomics, I’ve got a neat recap of the central bank decisions this week.

Reserve Bank of Australia

As expected, RBA Governor Stevens and his men decided to keep interest rates unchanged at 2.50% while citing concerns about falling commodity prices, particularly that of Australia’s main commodity export: iron ore. Similar to their previous policy statements, Stevens reiterated that the prudent course would be to maintain a period of stability in interest rates.

Of course Stevens also took the opportunity to jawbone the Australian dollar during his testimony. “The Australian dollar remains above most estimates of its fundamental value,” he explained. “A lower exchange rate is likely to be needed to achieve balanced growth in the economy.”

This relatively downbeat statement, combined with a lower than expected Australian Q3 2014 GDP reading and speculations of a future rate cut from the RBA, was enough to keep the Aussie weak for most of the trading week.

Bank of Canada

In contrast to the RBA’s cautious rhetoric, the BOC statement was much more upbeat, as Governor Poloz even hinted of an earlier than expected rate hike. Although the Canadian central bank decided to keep interest rates on hold for the time being, Poloz mentioned that a broad and sustained recovery is gaining traction.

In particular, the BOC head gave credit to the U.S. economy for shoring up Canada’s export industry, despite the recent slide in oil prices. Besides, earlier tightening may be warranted, as Canada’s annual inflation stands at 2.4% – safely above the central bank’s 2% target.

No wonder the Loonie managed to get back on its feet after its post-OPEC tumble! While the Canadian currency’s advance against the dollar was limited, it was able to chalk up significant gains against the euro and Australian dollar.

Bank of England

What a snoozer! As I mentioned in my BOE statement preview, this event doesn’t usually generate a lot of reaction from pound pairs, as forex traders would rather wait for the minutes of the monetary policy meeting to be released.

However, you should still keep in mind that the U.K. central bank decided to keep interest rates on hold and asset purchases unchanged as many predicted. In the previous meeting, several BOE policymakers expressed concerns about inflation while Governor Carney highlighted external risks during last month’s Inflation Report. These issues might pop up again in the official transcript of their meeting set for release in a couple of weeks.

GBP/USD experienced a burst of volatility during the event but remained within its recent range, just a few pips below the 1.5700 mark. GBP/JPY sold off briefly after the statement but managed to hold on to the 188.00 handle.

European Central Bank

Among the central bank statements this week, the ECB decision was perhaps the most exciting one. In the days leading up to the event, forex traders had been pricing in expectations of further easing or at least dovish remarks from Draghi and his men.

Well, the actual policy statement turned out to be a buzzkill, as Draghi simply said that they will wait until next year to reassess the economy and the impact of their latest easing efforts. In fact, it seems that the ECB head tried to manage market expectations on potential QE when he mentioned that there’s a lot of data to look at and that he’s not promising anything for the next policy meeting.

You can imagine the euro’s relief at those words! EUR/USD popped up by more than a hundred pips off its lows around the 1.2300 level while EUR/JPY spiked to a high of 148.58 during the ECB press conference. While euro bulls seem to be enjoying the party for now, don’t forget that Draghi also pointed out that they won’t tolerate any prolonged deviations from price stability, which suggests that they are ready to act if inflationary pressures continue to weaken.

Whew! That was quite a lot to cover. In a nutshell, these recent events suggest that the ECB and RBA are lingering around the dovish end of the central bank spectrum while the BOC is moving towards the hawkish side. As for the BOE, it seems that they’re stuck in the middle, with a cautious bias. Do you think these will dictate forex price trends until early next year?