Central Bank “March Mayhem” Puts Currency ETFs in Focus

by on March 3, 2010 | ETFs Mentioned:

Federal Reserve meetings are always among the most anticipated and closely scrutinized events in the investment community, as specific decisions on key interest rates and more general observations on the state of the economy have the power to set off waves of either buying or selling on Wall Street and around the globe. Central bank meetings have lost a bit of their luster in the last year, as ongoing concerns of a double-dip recession and weak fundamentals in the economy have essentially removed any possibility of a rate hike and taken much of the suspense out of the gathering.

Most equity markets have found their footing, and seemingly sustainable recoveries are underway. With anxiety rising over the long-term impact of the capital injections used to stimulate global markets over the last two years, many investors have anticipated that the Fed’s hand would ultimately be forced to boost rates from record lows in coming months. Last month’s revelation that core CPI actually fell for the first time in nearly 30 years may allow Bernanke & Co. to put off rate hikes for a few more months, but investors remain anxious to hear thoughts on how the recovery is progressing (see Five ETFs For The Great Deflation).

In fact, one of the biggest questions facing markets this year relates to how governments will wind down the massive stimulus plans implemented at the height of the recession. As such, central bank meetings around the world will once again take center stage, and investors will resume scrambling to analyze every word and predict the ramifications of various proposals for “exit plans.”

Australia has already begun raising rates, and several Asian economies are expected to follow suit in coming months. While many other nations are expected to leave rates unchanged for the time being, upcoming meetings could nevertheless shed some lights on strategies for weaning economies off of stimulus support.

Currency ETFs In Focus

Central Bank Meeting Date Currency ETF
ECB March 4th FXE, EU
Bank of England March 4th FXB
Reserve Bank of New Zealand March 10th BNZ
Swiss National Bank March 11th FXF
Bank of Japan March 16th FXY
Federal Reserve March 16th UUP
Bank of Brazil March 17th BZF
Bank of Mexico March 19th FXM

Central bank meetings are also major events for currency investors, as expectations for changes in interest rates available in certain countries can have a major impact on the relative strength of the related currency. With nearly every major central bank of any importance meeting this month, March looks to be a busy time for currency ETFs as well.

Australia and Canada have already kicked off the month, with Australia raising rates to 4.00% and Canada leaving rates unchanged at 0.25%. The CurrencyShares Australian Dollar Trust (FXA) surged on news of the rate hike, and has now gained about 1.2% on the week.

But Canada and Australia were just warmups for a full slate of central bank meetings, kicking off tomorrow with the European Central Bank and Bank of England and leading up to the Fed’s March meeting mid-month. Depending on the outcomes of these meetings, March could be a very interesting month that sets the stage for the rest of 2010.

Disclosure: No positions at time of writing.