Slight shifts in central bank rhetoric highlight the uncertainty in central banks and markets. The New Zealand dollar was the top performer on the day while the pound lagged. Chinese CPI is due up next.
USD,Yen & Taxes
Central banks have been playing a game for years. The aim is to keep the domestic currency low while controlling inflation and instilling confidence in the broader market. That paradigm frequently leads to mixed messages. In addition, policy makers often quickly backtrack when hawkish moves lead to a spike in the currency.
The stakes were on full display in the RBNZ decision. The central bank has long pledged to remain accommodative for a considerable period so it was no surprise when rates were left at 1.75%. The unexpected move was a shift in the forecast for inflation. They now see rates rising in Q2 2019 compared to Q3 previously. That was enough to send the kiwi to 0.6966 from 0.6925.
The market emphasis on forecasts isn’t new but it’s increasingly prevalent. The kneejerk reaction to the FOMC is now more about things like the dots than the words in the statements. In the longer term, we suspect central banks will be irked by the increasing irrelevance of written language versus forecasts but for now, the data domination is the main trade.
Up next is the CPI report from China, which is expected to accelerate to 1.8% from 1.6%. The data is due at 0130 GMT and it’s a reminder that even in emerging markets where growth is near 7%, inflation isn’t a formidable problem. That said, a surprise uptick about 2% could make waves in broader markets.