Hi GRK, those are my general thoughts on where the various Central Banks are in their monetary policy’s cycles and implications for the markets / possible trends developing / continuing / Now I’m aware that Central Banks monetary policy is just one source of order-flow but to me it is a little bit like the joker in a game of cards as it “trumps everything else” and so I try to focus on it as much as possible. Please feel free to comment on anything.
Central Banks Recap
FED: On hold at Max QE/ Downside risks to inflation could prompt them to do more QE but the bar is high / Would need serious upbeat data to get the QE tapering talks going again
BOJ: On hold at Super Max QE / After their massive easing plan announced last March, they need a few months’ worth of data to evaluate the impact and decide whether more is needed or not
BOE: On hold until leadership change / Then I believe Carney will have the ability to lead to more easing if that is what he wants / What he thinks, I don’t know and I guess the market doesn’t know as well / So the market will continue to be sensitive to UK’s data / Any signs of continued improvements should support Cable as market builds expectations towards the BOE after Carney
BOC: On hold with a tightening bias / Market doesn’t care much for the tightening bias though as it is more or less there to discourage Canadians from borrowing too much and has been there for so long without action / Still, the risk are that the new Governor removes it / Also the government indirectly suggested it wants to help exporters by choosing someone from the Export agency as the new leader / So he may have an indirect mission to help exports and there aren’t too many ways to do that then to depreciate the currency hence a second risk is for the new Governor to talk down the currency / Hence it is important to listen to any comment from him the more so the closer we get to him becoming Governor (June 3) /
RBA: Easing Bias with room to cut rates further / Hence, the Australian dollar should be very data dependent
ECB: Easing Bias with little room to cut rates further / Inability to engage in QE like the other Central Banks / Negative rates would be very bearish for the Euro but chances of it happening are low considering the downside risks and probable objections from the important Bundesbank
(Due to time constraints, I’ve decided not to follow the Swiss and New-Zealand currencies for now)
One conclusion (there are many more) of this central banks assessment if is generally correct, is that the Australian Dollar should be the one currency where a clear trend may prevail (bearish one) as it is the only Central Bank with a clear easing bias and with room to cut rates more / So, I believe the Aussie can continue to depreciate especially against the Canadian$ Cable and the Euro (bearing in mind potential downside risks for those currencies mentioned above), less so against the Yen and the USD due to those two being engaged in MAX QE / Period of high risk on could see the Australian dollar rally and provide better selling opportunities
Absolutely, the central banks are very potent forces in the currency and in many financial markets. Even if they don’t impact the markets directly, that specific day, they can provide the global macro environment backdrop that can set up certain trends, etc.
As the book Inside the House of Money writes:
All I’m trying to do is arbitrage between what a central bank is going to do and what the market things it’s going to do… What is important is to get a sense when everybody is leaning one way.
The most important variable to me and my trading is the probability that a central bank will move interest rates… That’s where I focus my macro calls.
Reading central bank tea leaves is one of the most important components of global macro trading as interest rate policy ripples through world economies and affects most financial markets.
Other order flow generators for the currency and financial markets also exist, such as changes in growth and inflation, which also impact the central bank policy.
For the RBA, I would just say that they do have an easing bias, and it could lead to the AUD going lower, but with the interest rate cuts and global stock market boom, etc that could lead to a rebound in AUD growth and rebound in commodities. Soros and Druckenmiller came out against the AUD, but I am not sure how much more it can drop after today’s collapse. Generally, I am very leery of shorting the AUD after it has made new lows or posted a strong down move. I am wary of it reaching the macro exhaustion point. There is a big reward to risk difference between shorting AUD/USD at 1.05 and shorting AUD/USD at 1.01. At 1.05 it can be a decent trade, but at 1.01 I think the potential reward is too little. The EUR/AUD, and GBP/AUD could potentially offer better plays, but they just don’t feel right to me. Given the current information flow, I would say the bearish AUD move will fizzle out.
The RBA would definitely like to see the AUD drop around 10% or so to around 0.91 – 0.94 to alleviate the dampening effect on growth and inflation that the high AUD is having. Part of the AUD/USD will depend on the outlook for the US economy. If growth in the US improves further, with QE tapering talk, that would add a potential fresh catalyst for AUD/USD to drop. Or if risk aversion flares up, etc. But I personally wouldn’t expect a huge move to the downside for the AUD just based purely on the RBA rate cut. They have cut rates before and AUD/USD never seemed to break out to the downside strongly. I don’t know why this time would be different. Maybe I am not seeing something.
That is just my interpretation of the information. Other people may differ. That is what makes the market!