Monetary Policy Coordination: From Global Easing to Global ‘Tightening’

Abstract: An interesting series of central-bank announcements over the past semester confirmed my view of a global central banking monetary policy coordination. The first two major players that hinted in a speech that the central bank might slow down their asset purchases were the ECB and the BoJ; but more recently we heard hawkish comments coming from the BoC, RBA and even the BoE. In this article, I will first review the quantitative tightening (or the Fed balance sheet reduction program), followed by some comments on the current situation in the other major central banks combined with an FX analysis.

Link ==> US Dollar Analysis 2

Some overnight developments (Kiwi, Aussie…)

Yesterday evening, the Reserve Bank of New Zealand raised its official cash rate by another 25bps for the third time this year to 3.25%, at a time when most of the central banks have kept their base rates at or near zero. If we have a quick look at the statement, it said that inflationary pressures are expected to increase (as a reminder, CPI came in at 1.5% in the first quarter) and the central bank would like to see interest rates back to a more ‘neutral’ level as it is important that ‘inflation expectations remain contained’. The next meeting will hold on July 25th and some economists already expect another 25 bps rate hike.

With FX volatility at very low levels since the beginning of the week, I have played the typical classical carry trade strategy since Monday by holding a long position on NZDJPY ahead of the RBNZ meeting. If you have a look at the graph below, I thought that it was interesting to buy the pair between 86.80 and 87.00 for a test back towards 88.80 (s/l below 85.80). As you can see it on the graph below, NZDJPY was helped by the spike in the 10-year yield from 4.22% (end of May) to 4.47%.

NZD-12-06

(Source: Reuters)

I think it is still interesting to play the Kiwi in the short term, potentially against the AUD or the EUR. AUDNZD is now approaching an interesting level, trading around its 50-day MA at 1.0844, and seems to be on its way to retest its support at 1.0800 (second one stands at 1.0780, 100-day MA). I suggest that new joiners should wait for a slight ‘bull’ correction after yesterday losses. In Australia, jobs data were a bit disappointing in May with total employment falling 4.8K (vs +10K consensus) from an upward revised 10.3K the precious month. However, full-time employment rose 22K (vs part time fell 27K) and could explain why the Aussie remains well supported against the yen (trading around 96.00) and the US Dollar (0.9400).

For the Euro, I would continue to keep a bearish view against the British pound in the days to come based on the monetary policy divergence, with a next target at 0.8030 (followed by the psychological 0.8000 level).

 

Time to go Long GBPAUD

For the past couple of weeks, GBPAUD has been recovering from its January losses as traders and investors are starting to price in a BoE rate hike in early 2015 (some observers target Q4 2014). Firstly, the UK unemployment rate fell sharply over the past few months since Carney introduced the forward guidance back in August 2013 and now stands at 7.2% (edged up 0.1% today in the quarter to December, but claimant count change down 27,600 In January vs. expectations of 20K), closed to the 7-percent threshold for considering a rate rise. Secondly, fundamentals remain pretty strong in the UK, with PMIs well above the 50-recession level (Mfg PMI printed at 56.7 in January) and the BoE raising its growth forecast (again) for 2014 from 2.8% to 3.4%.

Therefore, even if the annual inflation rate undershot the Bank of England’s 2-percent target for the first since 2009 (1.9% YoY in January), boosting the central bank’s case that there is no immediate need to raise the Official Bank rate, the British pound should continue to be supported against most of the currencies as the market is starting to believe in an early ‘BoE tightening’ scenario.

On the Aussie side, the $A dollar has recovered quite a bit since its low reached in late January (0.8660 on January 24 against the USD) supported by the demand for carry trades (AUDJPY is trading at 92.20, up four figures in two weeks) and driving other RISK-ON assets such as equities (S&P500 back to its December highs at 1,838). However, higher levels on the Aussie brought back traders’ interest to short the currency again as they consider that the recovery won’t last for long. Fundamentals remain weak in Australia as we saw last week with official employment data that showed a 3,700 fall in January versus a 15,000 rise expected by economists (Unemployment rate stands now at a 10-year high at 6.0%). Moreover, the Australian Bureau of Statistics reported overnight that the wage price index slowed to 2.6% YoY in Q4 last year (slowest annual increase since the series began in 1979), confirming RBA Governor Glenn Stevens’s commentary ‘the Aussie is uncomfortably high’.

Therefore, I maintain a bullish view on GBPAUD in the medium term; 1.8400 seems to be a good support to start buying on dips for a test back towards 1.8650 at first (1.8800 is my MT target).

AUDGBP-19-Fe(Source: Reuters)