Friday, June 12, 2020

Week ahead: Central Banks in Spotlight – BOE, BOJ and SNB

NBHM Research Team

Global stocks declined last week as investors started to worry about valuations, a second wave of the virus, the slowdown in global growth, and the dovish Fed statement. Worries of a second wave of the virus emerged as traders reflected on the large protests in the US at a time when the country was still battling with the virus.

Growth concerns escalated on Wednesday when OECD released a worrying report on global growth. The report identified the eurozone, the UK, and the US as the countries most vulnerable. This was reinforced by the Federal Reserve, which released a relatively dovish statement on Wednesday. The bank expects the US economy to shrink by a record 6.5% this year.

Traders were also concerned about the energy sector as US inventories continued to rise. The price of crude oil also fell because Saudi Arabia decided to end its voluntary supply cuts.

Swiss franc: The Swiss franc is often viewed as a safe-haven currency because of the overall strength of the Swiss economy. As a result, the currency has been on an upward trajectory against the USD because of political tensions in the US. The Swiss National Bank (SNB) does not love it when the franc is strong because it disadvantages the export-oriented Swiss economy. At the same time, the bank has limited tools to devalue the currency partly because the US has already warned Switzerland about currency devaluation.

Therefore, the SNB will be in the spotlight this week as it delivers its interest rates decision. According to Reuters, most analysts expect the bank to leave rates unchanged at -0.75%. Still, going by Thomas Jordan’s recent comments about negative rates, the SNB may surprise the market by pushing rates to -1.0%.

Australian dollar: The Australian dollar remains one of the best-performing currencies in the developed world. Investors have rushed to its safety because of the emerging Chinese economy and the fact that the country has eradicated the coronavirus pandemic. This week, the strength of the Aussie will be tested when the RBA releases the minutes of the previous meeting. These minutes will provide more information about how the bank made its decision early this month. We will also see the extremes to which the bank is willing to go as it tries to cushion the economy.

In addition to the minutes, we will receive the house price index, new home sales data, employment numbers, and the country’s retail sales.

US dollar: Last week was important for the dollar because of the Fed interest rate decision. In this decision, the bank ruled out any interest rate hike until 2022. It also said that it would continue acquiring assets at a pace of $120 billion every year. Most importantly, the Fed did not rule out implementing yield curve control in the future. This week, the focus will be on key economic data from the country. These numbers will help us get a clearer picture of the recovery that is happening in the United States. The most important numbers from the country will be retail sales, industrial production, manufacturing production, and building permits.

Crude oil: After a positive May, the price of crude oil suffered significant losses last week after Saudi Arabia announced plans to end its voluntary cuts. Investors also started to question the compliance of key countries like Iraq, Kazakhstan, and Nigeria. Most importantly, there were questions about US inventories after data from API and EIA showed an uptick in US inventories. The price also declined because of rising fears of a second wave of coronavirus infections. This week, we will watch the API inventories on Tuesday and those from EIA on Wednesday. The chart below shows that Brent crude oil moved below the important support, shown in white, last week.

NBHM Weekly overview

British pound: The sterling will be a key currency to watch this week for three reasons. First, Boris Johnson is likely to send an update about Brexit. He is expected to signal whether he will ask for an extension of the transition period or not. Second, the Bank of England will deliver its interest rate decision on Thursday. This decision is critical as analysts expect it will signal an increase in its quantitative easing program.

Finally, we will watch the GBP because of the vast amount of economic data due from the UK. This will include the April employment numbers, inflation data, and retail sales numbers that will come out on Friday. The four-hour chart below shows that the pair moved below the 100-day exponential moving average and below the important support at 1.2644.

NBHM Weekly overview

Gold: Gold price rose on Wednesday after the Fed delivered a dovish rate decision, and as global risks continued to rise. As it rose, the price moved close to its YTD high of $1766. This week, the precious metal is likely to move based on what various central banks will say and because of the US dollar-related data mentioned above.

Other key events: This week, we will receive the interest rate decision from Japan, Brazil, and Norway. We will also receive key inflation data from Canada and the eurozone, and the unemployment rate from Hong Kong.

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