- Recalibration of global rates
- RBA cuts to new record low
- PBoC continues to pump liquidity
Previously a covert scuffle that has ballooned into an open and aggressive battle, central bank monetary policy war is well underway. Over the past few weeks a plethora of central banks from Denmark to New Delhi to Down Under have been contributing to the whole process. All the various asset classes are adjusting to interest rate recalibration due to low inflation, deflation that is leading to lower growth mostly pressured by the -60% fall in energy prices.
Central banks are caught behind the curve and are now in reactionary mode. If soft data continues to emerge from the U.S., eventually the Federal Reserve will be backed into a corner and it will be required to save face. To date, it has been very transparent about its intentions to normalize rate policy, but the raging currency war is making that priority an unnecessary action. If the U.S. economy appears to be wobbling, global alarm bells will clang louder quickly.
Australia Lands an Interest Rate Blow
The low interest rate environment that has dominated financial markets globally since the financial crisis looks set to continue now that the Aussies have followed others in Asia, including Singapore, in easing monetary policy.
The Reserve Bank of Australia (RBA) became the latest major central bank to go beyond expectations in policy accommodation. They cut overnight interest rates by -25bps to a new record low of +2.25% against an “expected hold with an easing bias.” Observing the call from RBA Treasurer Joe Hockey to respond to changing global conditions, and also tracking a much more dovish position from the Reserve Bank of New Zealand last week, Governor Glenn Stephens cited weaker-than-expected growth in Europe and Japan, low oil prices, below-trend domestic growth, and expectations for persisting spare capacity in justifying the RBA’s decision.
The aim of the central banks is to walk their currencies down, giving their country a competitive advantage, but it’s a race to the bottom. The process so far this year has been supported, and interrupted, by deflation threats and geopolitical difficulties.
The Aussie dollar has been pushed sharply lower, falling to a new five-year low in the immediate aftermath of the RBA decision, while the S&P/ASX rose above 5,700 — the highest level in six-and-a-half years. Its closest neighbor, New Zealand, saw its currency hit multiyear lows below the $0.72 handle after the RBA announcement.
The market is trading as if there is more to come with the increasing possibility of tightening in the U.S. Perfect timing by the Fed is crucial. Chair Janet Yellen cannot afford to stifle any precarious growth that could be underway. The Fed is currently sitting between a rock and a hard place under the banner of patience.
The market should be keeping an eye on the central banks in China, Thailand, Korea, India and Indonesia for more easing in the short term. Even the Monetary Authority of Singapore (MAS) is in the spotlight. There is a strong possibility that the MAS could ease again, following its surprise move decision to do so last month. The market seems to be pricing in a +30% chance of further action by April.
Traders Eying Asia’s Central Banks
The People’s Bank of China (PBoC) continues to inject cash into the financial system through open market operations going into the Lunar New Year holiday period. This it has done with another +¥90 billion move in both seven and 28-day repos. The authorities’ actions happen to be the largest injection in just over 12 months. Investors are looking toward the PBoC and other regional central banks for further easing actions and not just at the scheduled meetings. Intermeeting decisions are looking to be more of the norm, but the element of surprise comes at the expense of market credibility.
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