Central Banks’ Guns & Roses (and inaction)

In One extreme to another: A price worth paying? (6 July 2018), I argued that in recent years it had been incumbent on governments to tackle the negative side-effects of central banks’ arguably extreme, post-financial crisis measures.

Unsurprisingly perhaps heads of state have if anything become more vocal and prominent, with in particular US President Trump continuing to dominate headlines over the issue of global trade, and at the very least generated sometimes significant day-to-day price action.

But in many instances central banks’ interest rate, FX management and credit policies, whether stated or implied, or lack of action remain a key driver of interest rate and currency markets. In this FIRMS we focus on central bank policies and their impact on currencies in:

> US, where the 1^st August and in particular 26^th September Federal Reserve policy meetings could prove pivotal for a flat-lining Dollar;

> UK, where uncertainty about an August rate hike has, as per our view, contributed to a range-bound Sterling (Sterling caught in growth and Brexit trap, 13 June 2018);

> Eurozone, where the Euro is near a multi-year high despite the ECB signalling that a rate hike is unlikely until after Summer 2019;

> Norway, with the Norges Bank’s increasingly hawkish stance seemingly supporting the Krone’s slow up-trend;

> Australia, where the Reserve Bank of Australia’s conservative outlook for rate hikes in the face of low inflation has led to an Australian Dollar lacking any clear direction;

> China, where the central bank has weakened the Renminbi 5.7% in the past five weeks, in line with our view (Renminbi devaluation “lite”: Tool and weapon, 29 June 2018);

> Indonesia, where policy rate hikes have had little lasting impact on the Rupiah; and

> Turkey, where rate hikes have not stopped the Lira from dropping to multi-year lows.

This is a summary – Read the full research piece here