FX is now back in the hands of Central Bank differentials. ‘Emergency meetings’, collapsing economic forecasts and the rapid spread of coronavirus outside of China has led to extraordinary measures being taken.
With central banks unanimously switching to ‘synchronised global stimulus’ to front-run the possible effects on the global economy from the coronavirus, I have paused and reset my FX views.
Technicals have been thrown out the window off the back of this action and the baseline scenario now is central bank differentials with this conclusion: the biggest, meanest central bank will, almost always, “win”.
The goal of all the CBs is to support their local economies – this infers that the Fed will likely overpower all others and will drive the USD lower over this period.
Here is the state of play so far from the big CBs, and some additional possibilities:
– US Federal Reserve slashed the Federal Funds rate by 50 basis points (bps) to 1% to 1.25% at an emergency meeting last week – the first time it has done so since the start of the GFC in 2008. It is clearly ready to do more, and most surveyed economists see a further 50bps coming out of the Federal Funds rate inside the next 2 to 3 months possibly sooner.
– The RBA cut the official cash rate by 25bps points to 0.5%. The market is currently pricing the prospect of a 25bps at the April meeting at 100%. This would see the cash rate reaching what the Board has termed its ‘terminal velocity’ rate of 0.25% meaning its next steps would be QE. This will not be enough to withstand the Fed’s actions in my opinion.
– The Bank of Canada at its own emergency meeting slash the Canadian overnight rate by 50bps to 1.25%, its first cut since mid-2015. The market is pricing an 84% chance the BoC will cut again on April 15 by 25bps.
– Bank of Japan injected ¥500 billion into a repurchasing program of Government Bonds on March 1 in an effort to provide liquidity. This is likely to be the type of action BoJ will take to curtail the economic fallout in Japan. Rates there are already in negative territory – there is minimal room to move on that front for the BoJ.
– ECB appears to be the old one out. This might be a little harsh as its policy options are nearing ‘exhaustion’. The Bank did communicate that is was joining the global effort stating: [It stood ready to take] “appropriate and targeted measures” to mitigate the coronavirus threat. The conclusion so far is that the ECB is in a ‘wait-and-see’ approach and this is been taken as an upside risk for the EUR as other central banks add accommodation. EURUSD is through $1.12 and heading further north.
– Reserve Bank of New Zealand is forecasted to cut rates by a minimum of 25bps to 0.75% at its meeting on March 25th. However, some 40% of economists are forecasting it to be even stronger at 50bps.
In this environment the biggest take out of all is your trading vigilance should be high.
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