Central Banks Rate Meetings Hold Sway This Week

Ang Kok Wee, Head of Treasury

Markets are now in a “wait and see” mode as all eyes are on several central banks’ meetings.

Federal Open Market Committee (FOMC) – 0200 hrs SGT, Sep 21 (Thursday)

If last month’s Jackson Hole Summit was any indication, the market expects the Fed to hold target rates steady at 5.25-5.50%. Interestingly, the focus will likely be on its quarterly update of the Summary of Economic Projections. This includes the 3-year projections of Fed-favoured market metrics such as GDP, unemployment rate, Core Personal Consumption Expenditure, and Personal Consumption Expenditure rates.

Most will also be anticipating the release of updated DOT plots (Fig. 1) which alludes to each of FOMC members’ rate projections as well as consensus view of the future path of interest rates.

Fig1 Fed DOT Plot June2023 Source federalreservegov

Bloomberg’s survey of economists indicates there may be an upgrade of GDP, from 1.0% to 2.0% in 2023, as well as a reduction of unemployment rate, from 4.1% to 3.9% for 2023.

This may easily go down well with the “higher for longer” view, particularly with oil prices surging 38% from its June low to USD$95 a barrel currently. If this trend persists, it will potentially put a damper on risk-on trades.

Swiss National Bank (SNB) – 1530 hrs SGT, Sep 21 (Thursday)

It is widely expected that SNB will raise interest rates by 25 basis points, bringing the policy rate from 1.75% to 2.0%. This is expected to be the second consecutive rate hike. SNB has already raised interest rates twice this year, by a total of 75 basis points.

Bank of England (BOE) – 1900 hrs SGT, Sep 21 (Thursday)

Economists are widely expecting the BOE to raise interest rates by 25 basis points, bringing the Bank Rate to 5.5%. Having already raised interest rates by 2.25% this year, this is expected to be the sixth consecutive rate hike. However, there is an outside chance of a more aggressive 50 basis point hike, which may imply a weaker British Pound if so. Monetary Policy Committee (MPC) votes on rates are expected to remain unchanged with most, if not all, voting for a rate hike.

Bank of Japan (BOJ) – from 1030 hrs SGT, Sep 22 (Friday)

There has been speculation on a pivot after the new BOJ Governor Kazuo Ueda hinted at the possibility of ending the long-standing negative interest rate policy.

Inflation has remained above the BOJ’s 2% price target for well over a year now and that may be the necessary impetus for a bold change, at least in paring its massive stimulus program, otherwise known as the Yield Curve Control (YCC) policy.

Nonetheless, BOJ is not expected to make significant moves. Ironically, it is a year to the day since Japan’s first intervention to prop up the yen since the late 1990s. Uncannily, US Treasury Secretary Janet Yellen hit the tape this morning commenting that she would understand if BOJ were to intervene in the currency market due to volatility post announcement, a thinly veiled statement that alludes to BOJ’s impending non action.

BITCOIN

Bitcoin has been trading within a well-defined range of $25,500 and $27,500, albeit slightly volatile. This could simply boil down to rumours surrounding Mt. Gox, Silk Road and FTX asset sales. It appears to be a classic case of “sell the rumour, buy the fact” as development this week in the Mt. Gox court settlement revealed that recovered Bitcoins would not be available until early 2024. Court orders of weekly sale quotas of FTX assets also brought relief to fears of a potential dump. In any case, monetizing FTX’s holdings of $268 million worth of Bitcoins is unlikely to impact the BTC spot market in a material way.

Apart from slight selling pressure at the front end (Fig.2), Bitcoin implied volatility has been steady the past week. Similarly, the implied vs actual volatility spread remains unchanged.

Fig 2 Bitcoin Implied Volatility by Tenure 20 Sep 2023

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