Central Banks to the Sidelines

The inability of central banks to forecast more than a month in advance along with an unwillingness to surprise is increasingly leaving them paralyzed. The New Zealand dollar was the top performer Wednesday after the RBNZ stayed on the sidelines while the pound lagged. Chinese CPI numbers are due up next. A new JPY trade has been opened last night, while a new set of gold and USDX charts has been added to the Premium Insights.

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The market was pricing about a 25% chance of a cut from the RBNZ and 7 of 17 economists were forecasting a move. But Wheeler decided to leave rates unchanged at 2.25% and the key parts of the statement virtually unchanged. He did a bit of optimism by noting that financial market volatility has abated. He also toned down the jawboning by removing the line that said 'a lower New Zealand dollar is desirable'.

The kiwi surged in response. NZD/USD rose to 0.7115 from 0.7020 on the knee-jerk and then faded back to 0.7070 before a fresh climb to 0.7093. The level to watch is 0.7054, which was the May high and had represented the best level in 11 months. A close above there raises the possibility of a significant climb.

What's helping to fuel the pair is the indecision at the Fed. At the start of May, Fed expectations for a hike this month were high. They were dashed by April non-farm payrolls, re-stoked by the FOMC minutes and then dashed again by May non-farm payrolls.

The Fed has struggled to predict anything since the crisis and has now adopted a wait-and-see approach that requires near-perfect economic data before a move.

The story elsewhere is a dovish bias but the malaise has been prolonged because central banks make overly-optimistic forecasts and hold onto them until they've been completely dashed.

What does it mean going forward? The trend is for central bankers to talk more but offer less, for fear of damaging their already-strained credibility. Data dependence is the crutch for poor forecasting.

What we may see more of is central banks holding strong biases – like the Fed and RBNZ – while keeping markets guessing about when they will act.

China is in focus in the hours ahead with the CPI report due at 0130 GMT. The consensus is for a 2.2% y/y rise. Yesterday, strong import numbers from China set a positive tone and kept the commodity rally going. Note too that these numbers are being released on a Chinese holiday that extends into the weekend.