A question from yesterday's webinar (a web-based presentation that we do with charts and stuff):
Rob, what's driving the currency markets right now? What will get the market moving again?
Well, for the last week or so (at least until yesterday), it appeared that nothing at all was driving the market. It seemed that everything had calmed down so much that we were not getting much movement at all. Especially in the JPY-related currency pairs there seems to have been a major stalling point.
This often happens after giant trending moves -- we get a Phoenix Phase (what I call a trend) and then we slip into the Yuma Phase (what I call a garbage/directionless market) for what seems like an eternity. And that's exactly what the EUR/JPY, the GBP/JPY, the AUD/JPY, the CAD/JPY, and the CHF/JPY have been doing. Just sort of larfing around.
What will get the market moving again is more news about interest rates. Here's an overview:
1. The European Central Bank. Stayed pat on their base interest rate at 4%, called the, and I am not making this up, "Main Refinancing Operations Variable Rate." Yesterday's decision might have come as a surprise to some, but here's what a member of the central bank council said yesterday: "We said we were in a process of [raising] adjusting interest rates and I've said that this process hasn't ended yet. Delayed doesn't mean abandoned." What he is saying is that the ECB could actually raise rates at a near-future meeting. The decision yesterday from the ECB sent the Euro moving a bit, finally. Next meeting: October 4.
2. Bank of England. The "Repo Rate" as they call it, stayed at 5.75% in yesterday's decision. The Bank of England also issued a statement that inflation could still be a worry, and that the impact of recent financial problems on the consumer were not yet ascertained. This, like the ECB, looks to be a statement that could even lead to another rate hike in the future. This got things moving a bit yesterday as well. Next meeting: October 4.
3. Bank of Canada. On Wednesday, kept it's "Overnight Rate" steady at 4.5%. Next meeting: October 16.
The big upcoming meetings are:
1. The US Fed. The big question on everyone's mind is whether the Fed is going to lower the base interest rate, the "Fed Funds Rate" to 5%. Of 111 economists surveyed by Bloomberg, the average prediction for the rate at the next meeting is 5%. If the rate is lowered, it's absolutely reasonable to expect a ton of movement in the currency markets -- 200 pip moves within 24 hours, or even less. Next meeting: September 18.
2. The Bank of Japan. The carry trade has been in such turmoil lately that all eyes will be on the Bank of Japan on September 19, when the bank meets to discuss the "Discount Rate", which is currently set to just under .5%. There had been consensus that the Bank would be raising interest rates further this year, but according to one major investment bank, the odds of an increase at the next meeting have fallen to 4%. That's pretty low. If the interest rate is kept low, the carry trade could get a temporary (2-3 month) boost, and we could see the GBP/JPY jump back up into the 240's and the EUR/JPY jump back up into the 160's.
Interest rates, right now, seem to be dominating the conversation and driving the markets. And movement can occur after a major economic report that is strongly tied to inflation (because interest rates are set by most central banks to maintain growth in the economy and contain inflation), or on newly revealed problems in the financial markets, because these economic events lead to further speculation about what the central banks are going to do.
