Week Ahead for FX, Bonds: Fed, BOJ Decisions the Highlight of a Central-Bank

Below are the most important global events likely to affect FX and bond markets in the coming week starting Monday, March 18.

A number of central-bank meetings in both Europe and Asia will be the focus of a busy week, most notably decisions by the U.S. Federal Reserve as investors hunt for clues as to the timing of a first rate cut, and by the Bank of Japan, which could opt to exit negative interest rates.

Other central-bank decisions are due in China, Australia and the U.K., as well as Indonesia, Taiwan, Switzerland and Norway. Chinese economic data will be watched closely for signs of recovery at the start of the year.

U.S.

The Federal Reserve announces a policy decision on Wednesday, where interest rates are expected to be left on hold and markets will scrutinize any comments that provide hints on when the central bank could start lowering rates.

Markets are fully pricing in a rate cut in July, with a sizeable chance of an earlier move in June, Refinitiv data show. Fed Chair Jerome Powell said in testimony recently that interest rates had peaked and were likely to be cut this year. U.S. economic data continue to suggest that the economy is holding up well, while recent figures showed inflation unexpectedly rose in February, which will likely concern some policymakers.

U.S. economic data releases start with housing on Tuesday, followed by weekly jobless claims and existing home sales on Thursday.

JAPAN

The BOJ’s decision on Tuesday will be closely watched by global investors as bets have been growing recently about the central bank’s imminent exit from negative interest rates and its yield-curve control policy.

Analysts and investors expect the BOJ to raise its key short-term interest rate from minus 0.1% either in March or in April.

Policymakers have grown more confident that a positive cycle of higher wages and higher prices is finally starting to kick in after decades of deflation, with many companies saying they will raise wages significantly this year.

However, views are split on whether the BOJ should follow up by raising interest rates into positive territory, and if so, how quickly. According to people familiar with the BOJ’s thinking, the bank is likely to move slowly in raising rates above zero if it does decide to end negative rates, given Japan’s fragile momentum on prices.

“If the bank raises short-term rates too rapidly, it could damage the economy,” said one of the people familiar with the BOJ’s thinking.

“Any policy inaction or indication of little urgency from the BOJ could suggest that markets have gotten ahead of themselves, which may tame hawkish rate bets and potentially weigh on the yen,” said Yeap Jun Rong, market analyst at IG. Any near-term pullback “could still be a temporary move,” however.

CHINA

After the highly-anticipated “Two Sessions” gathering of policymakers failed to give markets much to cheer about, fresh data for January-February will indicate whether the world’s second-largest economy is picking up. Sentiment is low after February home-price data showed continued declines. That adds to views that the stimulus undertaken so far isn’t doing much to boost the property sector, fanning concerns that the sector downturn will continue dragging on China’s economy for some time.

Figures for retail sales, fixed asset investment and industrial output are set to be released on Monday.

On Wednesday, focus will be on the loan prime rate (LPR) announcement by the People’s Bank of China amid expectations of more monetary-policy support in the pipeline but a lack of clarity on what shape this will take. The PBOC held its one-year medium-term lending facility unchanged on Friday, signaling that the LPR will also stay steady. Commercial banks in China are asked to price their LPR with medium-term lending facility rates.

Last month, the one-year LPR, which is tied to many personal and corporate loans, was left unchanged the previous month while the five-year LPR, which is linked to mortgages, was lowered.

“The PBOC remains on a dovish tilt, but depreciation pressure on the renminbi limits room for monetary easing in China before global central banks start to cut rates,” said Lynn Song, ING’s chief economist for Greater China.

HSBC economists Jing Liu and Erin Xin see more likelihood that the central bank will use liquidity tools like another cut to lenders’ reserves requirement and structural tools like targeted relending rather than interest-rate cuts in the near term.

EUROZONE

Data in the eurozone is relatively sparse in the coming week but will still be watched given prospects of the European Central Bank cutting interest rates in the coming months and as concerns remain…