Forex Investment and Currency Trading

The MPC minutes were more interesting for what they did not discuss than for what they did:

- No mention of the interest paid on bank deposits at the BoE

- No real discussion of an increase in asset purchases

- No discussion of downside news on the month

There is upside commentary on pretty much everything: the global economy, revisions to back data, forward-looking business surveys, broad money growth, asset prices, including GBP, equity prices, house prices and interest rate expectations. They concluded that near-term downside risks to activity have lessened.

Analysts think these minutes significantly reduce the likelihood of any move next month and expect both the UK and global economies to continue to recover. By the time the November decision comes, the data will mean that any extension of QE is very unlikely. All this is very positive for GBP given current levels and the tone of the debate over recent weeks.

FOMC - limited room for surprise

Market expects the FOMC to signal in its statement that it will taper off its agency MBS and agency debt purchase programs. Analysts do not expect the Committee to expand the total amount of the programs, but rather to slow the pace of purchases and extend them through Q1 10. Market also expects a more upbeat description of incoming economic data, but continued caution in its description of the outlook.

The USD positive surprise would be some concrete indication that the timing of monetary tightening was beginning to be discussed. However, this seems premature. If there were some strong voices for an early tightening as per speculation last week, it might raise concerns in the market that the Fed game plan envisioned the run-up from isolated talk, to formal discussion of exit, to actual tightening.

The USD negative surprise would be if it gave indications unexpectedly that it would extend and increase the program participation. Also negative would be emphasis on the drop in core PCE to historically low levels as it could be viewed as a signal that it will tie rates to the low inflation rather than recovering asset markets and economy.

Norges Bank

The market expects Norges Bank to signal an October hike. It probably wants to figure some way of pointing to tightening without giving an all clear on bidding up NOK. Even if it intended to hike next month it may see some incentive to downplay the hiking tone. However, unless it makes a strong ‘no-hike’ commitment it is unlikely that pullbacks will be extensive.

Hiking is a real act of bravery for central banks in this cycle because they will be castigated heavily if the hike turns out to be premature. Hence a concrete signal of an upcoming hike, although largely priced in, could still have a significant currency impact.

The investor dilemma will be if they signal a hike but go out of their way to signal a slow pace of hiking. This initially may be a disappointment but investors at this stage may well view the qualification as not really binding and come back buying NOK.