Written by Steven Dooley and Shier Lee Lim
Central banks key this week
FX markets will be driven by central bank decisions this week with policy announcements due from the US Federal Reserve, Bank of Japan, Bank of England and Reserve Bank of Australia.
The Bank of Japan will be closely watched on Tuesday after Friday’s key wage negotiations saw wages rise by their fastest level in 33 years – another sign of price pressures that could see the Japanese central bank end its negative interest rate policy this week.
The Japanese yen gained strongly in early March on expectations the BoJ might soon tighten policy but the JPY gave back much of those gains last week.
The yen’s weakness was partly driven by a stronger US dollar ahead of Thursday’s Federal Reserve decision. The USD index was up 0.7% last week. In other markets, the AUD/USD fell 1.0% last week, while the NZD/USD lost 1.5%. The USD/SGD gained 0.5% last week and USD/CNH was flat.
Fed this week’s highlight
This week’s Fed decision is likely to be the highlight with markets still looking for rate cuts from the US central bank over the next few months. However, expectations have eased with markets looking for only three 25-bps cuts in 2024 rather than the six cuts forecast by markets at the start of the year.
This year started on a positive footing due to hopes for Federal Reserve rate cuts but if inflation doesn’t continue to ease this view could change.
Ongoing inflation could see the narrative revert from the “Goldilocks” scenario of strong growth and falling inflation to something akin to the stagflation of the 1970s, which could significantly impact asset allocation – and FX moves.
The primary characteristic of the 1970s is its high rate of inflation, which occurred in three distinct waves and was largely influenced by developments in geopolitics. With geopolitical tensions rising, the current scenario is not dissimilar.
The Fed decision is due at 5.00am Thursday (AEDT).
Is the worst over for China housing?
Key Chinese data is due today with industrial production, retail sales and fixed asset investment released at 10.00am local time (1.00pm AEDT).
The latest attempt to calm the housing market is represented by PBOC’s larger-than-expected reduction in the 5-year LPR (not shown in chart).
If there is a subsequent reduction of house purchase limitations or other administrative control measures, we think that the easing of mortgage policy will be beneficial.
Our base case predicts that housing activity will continue to drop in 2024, but that momentum will progressively settle at a low base.
Aussie, kiwi at lows as USD gains last week
Table: seven-day rolling currency trends and trading ranges
Key global risk events
Calendar: 18 – 22 March
All times AEDT
*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
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