Central bank event risk

The greenback was squarely on the defensive last week until reports that Ireland is at risk of a default led to a bout of risk aversion on Friday which, coupled with all the central banker activity due out this week, caused the dollar to get a safe-haven induced bid. RBA governor Stevens starts out the proceedings with a speech on Sunday night and that is followed by the release of their monetary policy meeting minutes on Monday night. Not to be left out the FED chimes in with their FOMC statement on Tuesday afternoon and the British release their MPC meeting minutes on Wednesday morning. The week concludes with Bernanke giving a speech at Princeton as the markets get ready to close on Friday (talk about timing!). Given the events of last week (Basel III, BOJ intervention) it might be worthwhile to take a brief look at each of these events.

Governor Stevens’ speeches have,at times, generated much turbulence in the markets, but this one was fairly tame as he restated the obvious by implying that rate hikes were right around the corner. The RBA minutes should also make the case for rate hikes in the very near future as all recent data coming from this country points to a robust economy that will need to be actively managed to keep it from overheating. The key event will be the FOMC decision slated for release at 2:15 PM EST on Tuesday. The focus will be on whether or not the FED will commence another round of the much predicted quantitative easing (QE) measures. Given that there seems to be some abatement in the disappointing economic data stateside, it would be a surprise if they did indicate that they are leaning towards the resumption of this process at this juncture. What is more likely is that, in their usual nebulous language, they postpone the notion of implementing the exit strategy they hinted at in their last meeting and rather focus on the nascent signs of growth in the US. The MPC minutes out at 4:30 AM EST on Wednesday will be scrutinized for any changes in the voting patterns of the members. The QE issue is also extremely relevant for them, so it might be interesting to see if there was any discussion about this matter.

If all events were to pan out as expected and the consensus from the FED and MPC is for sluggish expansion, then the Aussie would be the clear beneficiary based solely on the fact that its a high yielding currency whose economy is clearly outperforming the rest of the industrialized world.

Akhilesh S. Ganti
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