Rate Hike, Balance Sheet Reduction, Geopolitics, and Omicron spread

Last week, The Fed and Bank of Canada released their monetary policy statement. Canada could be considered as flat or neutral but for sure we could sense the hawkishness from Fed’s Jay Powell. Powell said that the The Fed will react due to inflation pace getting faster than predicted. Quantitative Easing will end in February and then the Fed is expected to increase the interest rate in March, followed by two or three more interest rate hikes and balance sheet reduction. Does the market have priced in from now and how far these acts affect the USD price? Well, let’s see and use this opportunity to gain profit as traders.

The Bank of Japan, which is known for its ultra-easy policy, also has unique statements. The Bank of Japan could consider targeting a shorter maturity than the current 10-year bond yield when the time comes to exit its ultra-easy policy, the central bank’s governor, Haruhiko Kuroda, said on Friday [1]. “If the time comes to exit ultra-loose policy and debate an exit strategy, such steps could be discussed,” Kuroda said, when asked about the chance of targeting shorter-duration bond yields under its yield curve control (YCC) policy [2]. “When 2% inflation is achieved, there will be various discussions on an exit which will be communicated to markets. At this stage, however, it’s appropriate to maintain the current YCC policy,” he said. [3].  This could be a sign of how BOJ communicates if they want to withdraw their ultra economic policy. However, since their  inflation rate is still at 0.8% the exit could be considered still not in the near time.

As per our previous post titled “Europe is Under Pressure”, traders could expect the weakening due to geopolitical instability in the 2022 election year across the European area and rising tension between Russia and Ukraine, as well as in the UK, where the geopolitical and the leadership are being challenged. However, traders shall pay attention to ECB and BOE monetary policy statements and act this week. Whether they went hawkish or dovish, traders should expect volatility within the central bank monetary policy announcement period. Bear in mind that hawkishness such as interest rate hike and/or liquidity withdrawal could bring a strengthening momentum for both currencies for a particular period.

On the other hand, omicron spread is still haunting economic recovery across the globe. Australia suffered its deadliest day of the COVID-19 pandemic on Friday with nearly 100 deaths. Infections exploded during the past four weeks, with around two million cases recorded. Australia had counted just 400,000 cases since the pandemic first hit the country nearly two years ago. Australian business confidence has swung into the red as a surge in coronavirus cases hit consumer spending and staffing. We’ve seen that the aussie has been under pressure last week. However, the RBA will release their monetary policy statement this week. Several economic analysts expect the RBA will end the QE programme, upgrade forecast, acknowledge the inflation, and might discuss the rate hike. Traders shall watch the RBA statement and action in order to assess the short to mid term influence.

As final words, we could expect several volatility and decisive momentum this week. Which one (or maybe more than one) is interesting for you?

Happy Trading,

Glori Kapital Indonesia

About Reza Aswin

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