Central banks dampening the mood
For the second week in a row, the movements of central banks are front and centre for the currency markets. Last week’s dramatic shifts in policy language from the European Central Bank and the cut in interest rates by the People’s Bank of China on Friday have highlighted many things about markets; the prime focus being that while inflation is too low in most markets and policy to bring CPI higher globally remains in place for a while, there are sufficient concerns about growth as well.
China’s cut in interest rates and lowering of its reserve requirement ratio – governing the amount of money banks are allowed to lend out against how much they keep in reserve – was no surprise. Data has remained poor since the revaluation of the yuan on August 11th, the large falls in the Shanghai Composite stock exchange and tensions with other members of emerging market over FX policy. As it stands, despite China’s insistence that it is growing at near 7%, the true figure is probably below 6% and that is necessitating looser monetary policy. More stimulatory fiscal policy should also be forthcoming as China’s leaders convene this week.
Parity still out of reach for EUR/USD
Euro has maintained its downwards tilt from Thursday and is looking to push below the 1.10 level in EUR/USD for the first time since August. As we wrote on Friday, it seems that an additional easing of policy, at the very least an increase and/or extension of the current quantitative easing program, will be forthcoming at the Bank’s December meeting.
We cannot be told that policy is now based around a weakening of the euro but there is little left to infer from the Draghi press conference that hasn’t already been said. Chatter about parity between euro and the US dollar is back although I think that we would need to see the Federal Reserve take interest rates higher in December for that to become more of a reality than a dream.
ECB board members will give six speeches this week and I expect all of them to toe the line that their boss laid down on Thursday.
Worldwide help for assets
This week’s central banks have a lot to live up to but with meetings from the monetary policy committees of Israel, Angola, Sweden, the US, New Zealand, Mexico, Egypt, Ukraine, Russia, Bulgaria, Japan, the Dominican Republic and Colombia we are set for quite a feisty few sessions. The ones that we are most focused on are that of Sweden, the US, New Zealand and Japan as all are close to a policy shift after a period of pause. Sweden – Wednesday morning – is unlikely to move on account of the ECB’s warnings just yet. Deposit rates in Sweden are already negative, and any moves by the European Central Bank to create a new lower bound will heap pressure on policymakers to react. I’m not sure if they will however, given recent noises that seemed to suggest a stronger SEK will be tolerated.
The Federal Reserve – Wednesday evening – will stay on hold and with no press conference or additional economic forecasting at this meeting little movement is expected. Thursday’s noises from the European Central Bank have lessened the chances of a Federal Reserve lift-off in December.
In New Zealand, a World Cup Final against the Aussies will not distract policymakers too much but there is little chance of a cut now we believe – further news from China is needed to make a more informed decision.
That leaves Japan and an expansion of asset purchases. I think it happens on Thursday and today’s JPY strength will be but a memory come Friday.