Rhetoric is key
It stands to reason, therefore, that investors might be tempted to glance over a line-by-line summary with some brief analysis when looking to make any investment decisions, rather than dedicating time to carefully reading these statements in full. Generally, I would advise against this – doing so leaves open the possibility to miss out on important contextual information, or a phrase that the bullet points miss, and which then goes on to become relevant at later date.
Although many might think that banks are shrouded in mystery, quite the contrary, the publication of central banking statements and minutes exist precisely to communicate monetary policy transparently and manage market expectations. The most seasoned Bank of England or Fed watchers, for example, will know to look out for any shifts in tone or perspective from key speakers. An altered phrase here or there, or an indication that a central figure has changed their outlook, can be enough to move currencies, as traders react to any change in emphasis.
A perfect example of this back in June came from the Bank of England’s Dr Gertjan Vlieghe, who deviated from his usual neutral perspective, and took a more hawkish shift. The key comment to watch out for here was that Vlieghe said that he expected the UK to transition out of the furlough scheme more smoothly than expected, and that a somewhat earlier interest rate rise would be appropriate. This marked a decidedly bullish shift in perspective from his earlier position on the UK’s monetary policy, as he made the case for an earlier rate rise. In light of these comments, it was no coincidence that what followed was a strong run higher in GBP.
Sometimes, like the latest RBNZ rate decision on June 14, the central bank notes a sudden shift in policy. In this instance the RBNZ surprised markets and announced that they were stopping all asset purchases on June 23. The NZD has been given a strong buy bias over the next few days due to this policy shift.
So, what to take from all of this? Central bank statements are not cryptic documents. There is plenty to be gained from reading these pieces in depth. Over time, investors will likely find that they develop something of a ‘sixth sense’, or a gut feel, when they read these statements, which ought to give them an edge when making financial decisions.
