Weekly Market Update (19 July 2021) – A surprise halt in QE by the RBNZ

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ByLCMS Traders FX Analysis Team

 JUL 19, 2021

(1) During their monetary policy meeting last Wednesday, the Reserve Bank of New Zealand (RBNZ) surprised the market by putting a stop to their Large Scale Asset Purchase (LSAP) programme. Although the economic recovery in New Zealand has been robust, the market has been expecting a tapering from the central bank instead of a complete halt in quantitative easing (QE). Nonetheless, the RBNZ highlighted that the LSAP programme “remains an important tool for supporting the efficient functioning of the New Zealand debt market” and will use it again if required. The interest rate has been held unchanged at 0.25%.

(2) Shortly after the RBNZ’s hawkish move, the Bank of Canada (BoC) followed suit. The central bank carried out its second QE tapering during their meeting, cutting back asset purchases from the previous C$3 billion per week to C$2 billion per week. The central bank also highlighted that any further adjustments of QE will depend on the strength and durability of the economic recovery. The BoC also held interest rate unchanged at 0.25%. In the released economic projections, the central bank revised downwards its GDP forecast for 2021 due to the third wave of COVID-19. Nonetheless, it remains optimistic in 2022, revising its GDP forecast from 3.75% to 4.5%.

(3) Moving from one central bank to another, the Bank of Japan (BoJ) held its monetary policy unchanged during their meeting last Friday. Interest rates remain at -0.10%. Due to negative impact of COVID-19, the central bank has revised its GDP forecast for 2021 downwards but has revised the metric for 2022 upwards. Inflation forecast for 2021 has been revised upwards due to higher energy prices.

(4) During his testimony before the U.S. House Financial Services Committee, Federal Reserve Chairman Jerome Powell highlighted that the U.S. economy has not recovered to the point whereby QE tapering is warranted. Specifically, employment in the U.S. is still quite a distance away from the pre-pandemic level. On the recent spike in inflation, Powell said that it has been “higher than expected and hoped for” and if the high inflation persists, the Federal Reserve will amend their policy. Powell also mentioned that QE discussion will continue during the next monetary policy meeting.

(5) Over the weekend, the OPEC+ reconvened their meeting. The group has agreed to increasing oil production on a monthly basis by 400,000 barrels-per-day starting from August. The OPEC+ also agreed to phasing out 5.8 million bpd of oil production cuts by September 2022. In regards to the oil production baseline, there is an increase in quota for the UAE, Saudi Arabia, Iraq, Kuwait and Russia.