Week In FX Europe – CB’s, Debt Agencies and Governments Gotta Work Together

Are we about to face a period of “considerable turmoil’? Central Banks in the developed world are preparing to reverse some of the stimulus programs that they have put in place over the past six-years. The Paris based research body – OECD – insists that the agencies that have been responsible for selling government bonds will have to work with their respective CB’s to ensure that the “exit from all said programs run smoothly.”

The reversing of stimulus needs to come, but the potential problems have more to do with CB’s communicating their respective exit strategies without creating unnecessary volatility that could cause longer lasting negative effects. The challenge for CB’s and relevant agencies is to go about their “exit” strategy without causing yields to back up aggressively. Central Banks have yet to decide on what portion of their holdings they will be required to sell and over what time period.

The OECD said that bond sales by CB’s would likely take place when the borrowing needs of governments remain high – this will obviously lead to interest rates to back up further. Backing up is only natural; it’s the speed and aggressiveness that could become an issue. Already we have seen that investors reaction to a Fed taper has caused US yields to “move earlier and more sharply” than probably warranted by policy makers. This is not a good situation for any economy that has questionable growth rates. The reality is that this is all new for Central bankers and investors alike. Tapering has been a “novelty” and reversing this stimulus has never been done before. With that in mind it may not be possible for the financial markets to execute an “exit” without at least causing some minor financial turbulence.

Expect to hear unified dulcet tones from Central Banks, governments and debt management agencies getting louder as we approach an exit!

WEEK AHEAD

* EUR Euro-Zone Consumer Price Index Estimate
* CAD Gross Domestic Product
* AUD Reserve Bank of Australia Rate Decision
* EUR German Unemployment
* USD ISM Manufacturing
* EUR European Central Bank Rate Decision
* USD ISM Non-Manufacturing Composite
* CAD Net Change in Employment
* CAD Unemployment Rate
* USD Change in Non-farm Payrolls

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell