One More Surprise From Central Banks

In our age of transparency, monitoring the signals from the major central banks is not a full-time occupation. Wall Street used to hire people whose sole job was to mine the data and official comments for clues into policy. Such people now are among the endangered species. When one wants to contemplate the Federal Reserve's next move, one can consult the fed funds futures contract, where the accuracy of the front-month contract, especially as an FOMC meeting draws near, is unquestionable.

Other communities don't have comparable indicators for their central banks, and the rubber band that ties three-month money to overnight money is fairly elastic -- and thus less precise in deciphering policy expectations. Moreover, the three-month futures contracts, such as Euribor and short-sterling futures, are best understood not as three-month money but really as a forward rate agreement (FRA). If one were to take delivery of a March Euribor futures contract, one would receive a three-month time deposit for 1 million euros. Because we are now in the middle of January, the true comparison is a three-month rate in two and half months' time.

But the process of extrapolating policy from looking at the three-month futures contracts is even more difficult. If one were to take delivery of a three-month time deposit, one would want the interest rate to reflect the risk of a change in policy during the tenure of the time deposit. That is to say, in our example, the March Euribor futures should reflect some part of expectations for European Central Bank policy in the second quarter.

This is of particular interest now because of the Bank of Japan's upcoming meeting. A look at the actions and degree of clarity about recent policy of the Bank of England and European Central Bank sets the stage for handicapping the BoJ's confab and possible effects on currencies markets.

The Surprising Bank of England

Bank of England Governor Mervyn King once quipped that interest rate policy should be "boring." But in the past 18 months, U.K. interest rate policy has been anything but. Back in the summer of 2005, over his objections, the monetary policy committee decided to cut rates. I can't recall another major central bank where the governor was out-voted.

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Marc Chandler has been covering the global capital markets in one fashion or another for nearly 20 years, working at economic consulting firms and global investment banks. Currently, he is the chief foreign exchange strategist at Brown Brothers Harriman. Recently, Chandler was the chief currency strategist for HSBC Bank USA. He is a prolific writer and speaker and appears regularly on CNBC. In addition to being quoted in the financial press, Chandler is often a guest writer for the Financial Times. He also teaches at New York University, where he is an associate professor in the School of Continuing and Professional Studies. While Chandler cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.