The Week Ahead: Key Central Bank Decisions (BoJ, ECB) in Focus

The past week featured some key economic events, including the Bank of Canada’s interest rate and policy decision, and Australia’s latest employment data release. Stealing the limelight from these events, however, was drama surrounding a possible US government shutdown if lawmakers fail to reach an agreement by Friday night, as well as a sharp plunge in the price of Bitcoin and other cryptocurrencies due to reports of tightening regulations in Asia.

Bank of Canada

On Wednesday, the Bank of Canada raised interest rates, as widely expected, and portrayed strong confidence in the Canadian economy, even indicating that more rate hikes may likely be on the horizon. At the same time, however, central bank policymakers also cautioned that they were in no hurry to normalize interest rates, and that continued monetary policy accommodation would likely still be necessary for the time being. Key among the BoC’s worries was the future of NAFTA. BoC officials stated that “uncertainty surrounding the future of the North American Free Trade Agreement is clouding the economic outlook,” as concerns over the upcoming NAFTA talks weighed heavily on the central bank’s stance. These mixed messages prompted some indecision and hesitancy for the Canadian dollar, ultimately resulting in a relatively tight trading range for the currency in subsequent days.

Australian Jobs

Thursday’s Australian jobs report for December was a mixed bag, as the headline employment change far surpassed expectations at 34.7K jobs added against prior expectations of 13.2K, but the unemployment rate rose a notch to a slightly worse-than expected 5.5%. The Australian dollar received a modest boost from the headline beat, but the impact was not significant enough to move the needle much for Australia’s already-strong and sharply rising currency.

Bank of Japan and European Central Bank

The week ahead will likely feature heightened volatility for currency markets, depending in part on developments in US government efforts to avert a shutdown, as well as two major central bank decisions.

Up first will be the Bank of Japan, which issues its interest rate decision, monetary policy statement, and press conference on Tuesday in Japan. Though there are no expectations of any changes to the longstanding negative interest rates, markets will be watching closely for any signs that the central bank may be looking to wind down its massive stimulus program at some point in the foreseeable future. Recently, the BoJ unexpectedly reduced its purchases of Japanese government bonds, which provided a sharp boost for the Japanese yen on speculation that the central bank may be leaning towards tighter monetary policy. Any further indication on Tuesday of stimulus reduction or an otherwise more hawkish Bank of Japan could result in another boost for the yen.

Thursday will feature the monetary policy decision from the European Central Bank. As with the Bank of Japan, markets will also be focusing on how the central bank frames its path towards ending stimulus with respect to winding down its asset purchases. The euro has recently extended its persistent strength, especially after the previous week's release of the ECB monetary policy meeting accounts, or the minutes from its last meeting in December. The minutes were seen as hawkish, as ECB officials hinted that tighter monetary policy, which includes the possibility of higher interest rates as well as the winding down of asset purchases, could be on the horizon amid strong European economic growth. Coupled with pronounced US dollar weakness, euro strength has been instrumental in pushing EUR/USD up to new multi-year highs this month.

Aside from the BoJ and ECB announcing policy decisions on Tuesday and Thursday, respectively, in the week ahead, other key economic events will include: the UK jobs report and eurozone services/manufacturing PMI data on Wednesday; New Zealand CPI and Canadian retail sales on Thursday; and finally, UK and US GDP as well as Canadian CPI and US durable goods orders on Friday.

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