Optimistic global growth outlooks have continued to send long term yields surging higher, with Australian and New Zealand bond rates seeing some of the biggest basis point gains. This is not entirely surprising since the commodity-exporters look to benefit the most from expansion – especially in China. On a percentage basis, the spread on US and European bonds have widened substantially as the far end of the curve benefits from the hawkish bias of both the Fed and ECB. The same applies to the UK curve, though it still shows a steep inversion.

The Japanese and Swiss curves could see a shakeup this week, as both the BOJ and SNB are scheduled to announce rate decisions on Thursday (BOJ at 4:00 GMT, SNB at 7:30 GMT). Steady rates are expected from the BOJ, but Governor Fukui has been issuing some fairly hawkish statements lately, spurring some speculation of a surprise hike. We still don’t forecast any potential until July, and even then, the chances are slim. Meanwhile, the SNB is widely anticipated to hike to 2.50 percent, but the big market-mover will be whether or not they signal policy tightening in the third quarter.



BOJ – Ready To Jump On The Rate Hike Bandwagon?

Are recent comments by Bank of Japan Governor Fukui subtle hints that the central bank will raise rates – against market odds – this week?

Toshihiko Fukui, Bank of Japan Governor

“Our current assessment is that the Japanese economy as a whole is recovering gradually, although the degree of the recovery varies depending on different sectors, company sizes and regions.” – June 5, 2007

“Every central bank is conducting monetary policy while keeping in mind movements in overall financial markets, especially asset prices. The Bank of England and the Reserve Bank of Australia, which have inflation targeting mechanisms, are also fully paying attention to real estate prices when conducting monetary policy. The same applies to Japan.” – June 11, 2007

“Everyone hopes for a very cautious implementation of monetary policy ... rather than rapidly stopping rate hikes or drastically raising rates.” – June 11, 2007

Hideto Fujii, Japanese Vice Finance Minister

“We are not in a situation where we need to use the term ‘deflation’.” – June 11, 2007

Hiroshi Watanabe, Japanese Vice Finance Minister for International Affairs

“I do not think yen-carry trade poses an immediate risk of unwinding at this moment. However, we need to continue to monitor developments and call for market participants' awareness of the risks involved.” – June 8, 2007

US Fed – Still Hawkish, But Still On Hold

Inflation remains at the top of the Fed’s list of concerns, as many central bank members have cited the upside risks to figures. With CPI scheduled for release on Friday, will the data warrant policy action in line with the Fed’s bias?

Ben Bernanke, Federal Reserve Chairman (Voting Member)

“Although core inflation seems likely to moderate gradually over time, the risks to this forecast remain to the upside. The adjustment in the housing sector is still ongoing, and the slowdown in residential construction now appears likely to remain a drag on economic growth for somewhat longer than previously expected.” – June 5, 2007

Sandra Pianalto, Federal Reserve Bank of Cleveland President (Alternate Voting Member)

“Inflation of around 3 percent in the United States since 2005 is too high for comfort in the longer term.” – June 11, 2007

Michael Moskow, Federal Reserve Bank of Chicago President (Voting Member)

“US economic growth should return to trend levels this year, and with the job market still surprisingly strong the biggest risk is still that inflation will not fall as expected.” – June 8, 2007

Is the typically hawkish Hoenig turning to a more dovish stance?

Thomas Hoenig, Federal Reserve Bank of Kansas City President (Voting Member)

“My judgment is that (monetary policy) is modestly restrictive...That allows for the economy to continue to grow...and to slow down the inflation rate.” – June 6, 2007

RBNZ – Full Of Surprises

Policy decisions out of New Zealand have caught markets off guard recently. First, the RBNZ’s hike to a record high of 8.00% sent the Kiwi dollar surging. The following week, they unexpectedly enacted FX intervention to cap the currency’s gains. NZDUSD has been holding up above 0.7500, but the question is: what’s next? Another rate hike? More intervention? Both?

Michael Cullen, New Zealand Finance Minister

“Today's action is a reminder to people if they over invest in the NZD, they could suffer losses.” – June 11, 2007

Alan Bollard, Reserve Bank of New Zealand Governor

“As stated in our June monetary policy statement, we regard current levels of the exchange rate as exceptional and unjustified in terms of economic fundamentals. This action does not prejudge the future direction of monetary policy, which as always will remain dependent on emerging economic trends.” – June 11, 2007

“We've got to see evidence that the household sector rate of increases slows down, and that household consumption moderates and we'd expect to see parallel stuff happening on household financial data and anything else that might be important for medium term inflation pressures (before considering an easing in monetary policy)…We're certainly aware of the danger of mistiming and being just over the top and pushing it down the other side in a way we just wouldn't want to do, but we don't think that's what's happening.” – June 8, 2007

“Firms have indicated that capacity remains stretched and that finding both skilled and unskilled staff has become increasingly difficult. These pressures continue to underpin inflation.” – June 7, 2007

BOC – What Will Their Next Move Be?

Canadian economic data has certainly warranted the central bank’s hawkish bias and expectations for a July hike, which has helped fuel an incredible Canadian dollar rally. With USDCAD rapidly heading towards parity, will the Bank of Canada follow the lead of the RBNZ and consider intervention?

Most government officials want no part of it:

Stephen Harper, Canadian Prime Minister

“It would be a huge mistake for governments to interfere with the activities of independent monetary authorities, and I think we have a century or so of data to suggest that's not where we want to go.”

Jim Flaherty, Canadian Finance Minister

“It's a market currency and the market will decide the value of the Canadian dollar.” – June 5, 2007

However, trade officials may believe that it will help give Canada an edge:

David Emerson, Canadian Trade Minister

“Regardless of how WTO negotiations turn out, we cannot sit on the sidelines. We've been a spectator for too long as market share is taken by competitors with more aggressive trade strategies.” – June 7, 2007

Terri Belkas is a Currency Analyst for FXCM.