Currency Point: Sliding scales

As mentioned in last week’s note central bank differentials will be vogue in the coming years. The Bank of Canada moving on its COVID-QE programs is just the beginning of what will drive FX positioning. 

On this point, if you lay out central banks on a scale of dovish to hawkish all are still technically dovish clearly, but some are less dovish than others.

The BoC, the standout, has now tapered and is on a path to ‘neutral’. The Bank of England, and the Federal Reserve are believed to be the next in line with its suggestion the Federal Funds rate will move in 2023 according to its dot plots. 

The RBA and the RBNZ are happily sitting on their hands. Although the RBNZ now has macroprudential rules to deal with making it tougher to hold a truly dovish line. While the RBA has low inflation but with higher growth an interesting spot to be and one that most now believe will trigger a third tranche of Aussie-styled QE.

However as with everything markets be it bonds, equities or FX your start point is always Stateside and thus last Thursday and Friday gave us insight into the moves of the USD going forward.

First here are the key points from the Fed’s policy statement and speech: 

• • Policy settings unchanged: as expected and forecasted to hold for minimum 18 months
  • Repeated its key guidance messages around ‘stable inflation and long-term growth: also widely expected. 
  • The statement was slightly more positive than expected – noted: “progress on vaccinations and strong policy support are helping strengthen economic indicators, including employment.”
  • Reflation was accepted but was seen as transitory rather than structural.
  • It reiterated its view on the recovery “the path of the economy will depend significantly on the course of the virus, including progress on vaccinations.” 
  • This meant the board kept its QE purchases at least $120bn per month “until substantial further progress has been made towards the maximum employment and price stability goals.
  • The biggest market moving event was during the Q & A. Powell stated this: ‘[It’s] not yet time to start talking about tapering asset purchases.’

Second here are the take-outs from the first quarter GDP figures:

• US GDP for the March quarter was largely inline however it was 0.3% under the street coming in at 6.4% versus estimates of 6.7%. 
• The miss was mainly due to a larger than expected fall in inventories. 
• The biggest point was personal consumption up a massive 10.7% beating estimates by 0.2%. This beat was due to the massive US$1.9 trillion government stimulus payments and better than expected recovery. With Biden unveiling a new US$1.8 trillion children and family’s package to congress on Friday. One would expect Q2 to see consumption being the main force in the GDP figures.

So, the Fed is more dovish than the BoC and probably the BoE but is sitting on strong growth.

Thus the reactions in FX are just as interesting as the USD is mixed.

EUR/USD has got to $1.2150 a new two-month high, this is a level that we see as the top of its Q2 trading band and also a point that will worry the ECB. 

GBP/USD is stuck in the $1.395 range but is pushing higher more consistently than been sold off. Interesting inflection point for Cable.

USD/JPY rose 0.3% to 108.95, with a high of 109.22 as US Treasury yields bounced on the Q1 GDP report. 

AUD/USD reversed CPI-disappointment to be chasing $0.78 as iron ore drives new record highs on an almost daily basis.