…Straight from Behind Closed Doors at the Major Central Banks
You’re probably familiar with the concept of insider trading in the stock world.
It happens when CEOs, COOs, and board members start buying up a company’s stock (and report it legally). When the insiders buy, they’re essentially telling all investors that they expect the stock price to rise, so it may be a good time to buy.
It’s the same when the insiders are dumping their company stock – they expect the price to fall, so it’s an indication that the stock may fall.
If you’re a currency trader, some of the best “insider” information comes from behind closed doors at the biggest central banks.
You see, central banks set the monetary policy for their country. So in a sense, they are the major players who can tell you when it’s time to buy or sell a currency if you pay attention to their actions.
Central bankers know every tiny minute detail of their economy, and the voice their opinion on their economy with their interest rate decisions.
As a trader, if you know their interest rate decisions ahead of time, you know whether to buy or sell that central banker’s currency.
During the next few weeks and months, there are several key decisions that could affect the currency world. Today I want to take you through all of them so you have a better idea where traders will be buying and selling…
Let’s Start in New Zealand
Tomorrow, we’ll get another interest rate decision from the Reserve Bank of New Zealand.
Economists expect that New Zealand will raise their interest rates this time from 2.75% up to 3.00%. The New Zealand central bank will announce their decision around 5pm EST tomorrow.
For once, I believe economists have gotten it right. The New Zealand central bankers will go ahead and hike interest rates.
However, many countries are now seeing lower inflation, now that stocks have turned south. That includes New Zealand. If this persists (and I think it will), then that could cause the interest rate hikes to dry up rather quickly.
Once traders believe New Zealand is through hiking interest rates, the New Zealand dollar will start to dive. The markets are still too volatile for traders to stick their neck out there and buy the New Zealand dollar if the central bank doesn’t keep hiking rates.
More Hikes Could Be in Store for Australia
Since we started off with one of the “commodity currencies,” let me tackle the other two.
Australia central bank announced last week that they would wait and see what the outcome was for Europe’s bank stress tests before they would decide what they would do on interest rates at their next meeting. They also mentioned that they’d be taking into account the local inflation figures too.
Really, the stress tests didn’t turn out so bad. Only seven out of over 90 banks failed the test. While we’ll never know how rigged those tests were, that’s all we have to go on.
Since the stress tests turned out alright overall, it should make the Aussie central bankers breathe a bit easier.
Unlike New Zealand, Australia’s inflation has still continued to rise overall. And since commodity prices have rebounded over the last 30-45 days or so, these numbers could continue to hold towards the high side for a bit longer.
Therefore there’s a good chance that Australia may have to hike rates another time or two before their rate hiking cycle is over.
Canada Will Watch and See…
Now on to Canada, aye!
Canada’s inflation has been receding for months now. It’s down to 1% now on a year over year basis and the central bank has hiked interest rates for a 2nd time (as recently as last week).
So I think the Bank of Canada can afford to hold the line for a bit longer even though their central bank does talk about gradual rate hikes over time.
Therefore, I think that you will see Canada let an interest rate meeting or two go by without doing anything. Then if inflation has reared its ugly head again by then, they may pepper some periodic quarter point hikes here and there from there.
Okay, so that takes care of the “commodity currencies.” Now let’s turn to the rest of the majors.
These Countries Are “On Hold” for the Months Ahead
The overall inflation rate in the Eurozone is at 1.4% right now and their GDP just turned positive for the first time in over a year.
So I anticipate they’ll sit tight for a good while longer on interest rates. Hiking rates could crush their fledging economic growth at this point. That concern far outweighs the need to tackle any inflation right now.
Over on the other side of the pond in the U.S., we see a similar picture. The U.S. inflation rate has cut in half (from 2.2% down to 1.1%) over mere months. So since inflation is on its way lower in the U.S., I think it’s safe to say that the Fed will hold rates steady for many, many months to come.
Now here’s an easy one….Japan. They haven’t had their interest rates above 0.50% in the last 9 to 10 years. Their interest rates are at 0.10% right now and I expect them to hold interest rates right there for the months to come.
Their yen has been soaring and that alone is enough to temper any bouts of inflation even if they had some (and that won’t likely happen anytime soon).
You see, Japan’s inflation numbers are still in the negative. This means they are still wrestling with deflation. Therefore, there is no need for the Bank of Japan to hike rates anytime soon. So they will remain on hold for the months to come.
Now onto the land of fancy watches and chocolates: Switzerland! These Swiss guys barely have any inflation at all right now (0.50%). The trend of their inflation numbers has been heading south for months now.
Switzerland’s GDP growth is barely positive as well, so I don’t see anything spurring on any huge amounts of inflation any time soon there. The strengthening franc will mute any inflationary problems that they would have had anyway.
So these guys are on hold for now as well.
I’ve Saved the “Wild Card” for Last: The British Pound!
…And lastly, the U.K. This one gets a bit trickier!
On one hand the U.K. has the highest inflation of any of the major economies (coming in at 3.2%). However, their inflation has trended lower over the past few months from as high as 3.5%.
The GDP turned from the negative to the positive, and in a fairly strong fashion (coming in with a reading of 1.6%).
I think they will want to hold off a bit longer before tackling this inflation. I say that because the Brits still have a higher unemployment number than they’d like and because their GDP just turned back positive.
So I think that they will hold rates steady for now, but they are one that will have to keep the biggest eye on their inflation numbers going forward.
Also, if they started to hike their rates in the months ahead, I think it would be a big shocker to many traders. Therefore, the pound could get a big jolt to the up side once this happens.
Again, just by watching a combination of the “insiders” at the central banks and inflation, you can get a pretty good idea of where currencies are heading next.
