Heading into Q2 – An FX Central Bank Summary

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The Fed – Paused Tightening

For now, it seems the Fed has put its tightening program on hold. Following four rate hikes last year, the Fed was expecting to raise rates again this year. However, the recent downturn in global growth, as well as some slowing in the domestic economy, means the Fed no longer feels that further tightening is necessary.

Indeed, at its last meeting, the Fed revised its growth forecasts for 2019 lower to align with this dovish view. Frustratingly for the Fed, better wage growth levels recently have not materialized into higher inflationary readings so until this is the case, or the general tide of data starts to improve, rates will remain on hold.

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The ECB – Delayed Tightening

Midway through last year, the ECB sounded the alarm that it would be reducing its huge QE program further in September 2018 followed by ending it altogether by the start of 2019. The bank also judged that rates would likely lift after summer 2019. Towards the end of 2019, while the ECB did indeed reduce and end QE, data had turned significantly lower.

Fast forward to the present day. The ECB recently announced that rates will likely remain on hold through the rest of 2019. They claimed that this was so they could wait and see the severity of the current downturn. The bank has also launched a new series of TLTRO’s designed to help banks maintain capital access. With rate hikes on hold, traders are now wondering whether we will wee QE reintroduced at some point.

The BOE – Paused Tightening

It has been an incredibly frustrating time for the BOE. UK data has continued to perform robustly and the BOE has reaffirmed its optimism around the UK economy. It has also stated its preference to proceed with further rates hikes.

However, the heavy cloud of Brexit continues to darken the outlook with uncertainty. And, as such, the BOE has had to not only postpone further hikes but also warn that in the event of a no deal Brexit, it could well be forced to cut rates. So, for now, the key to determining future BOE policy decisions lies in the outcome of Brexit.

The BOJ – Committed to Easing

There were some expectations starting to bubble up below the surface last year about a potential forthcoming shift in BOJ policy. The lifting of the bank’s yield curve target range as well as improving data and a backdrop of increasing central bank hawkishness, suggested that the BOJ could be considering a change in course.

However, the BOJ remained adamant that this was not the case. And as global growth started to nosedive toward the end of the year, the BOJ reaffirmed its commitment to maintaining an easing presence in the market. At its latest meeting, the bank warned against the downside risks facing the global economy and defended its necessary use of negative interest rates.

The SNB – Committed to Easing

As with the BOJ, there were some whispers last year of a potential shift in SNB policy. The bank upgraded its inflation forecast unexpectedly. However, as the trade war between the US and China ballooned, the bank was forced to reaffirm its commitment to protecting against CHF strength, as a result of safe haven inflows.

The current situation remains the same. With Brexit and trade war concerns still a real threat and global growth slowing, the SNB is very vocal about the need to maintain an easing presence. This is especially true now given the ECB’s recent shift away from 2019 rate hikes, which could have created a path for the SNB to follow suit. For now, the SNB’s game remains the same.

The RBA – Committed to Easing

As the general tide of hawkishness swept over central banks in the early-mid part of last year, the RBA was somewhat left out. Domestic issues posed as a hurdle to hiking. These included the high level of household debt, subdued wage growth and falling house prices.

The RBA eventually announced that its members now all agreed that the next move in rates would likely be higher. However, there was no word on timing. And as the global downturn worsened, the bank was forced to abandon that view this year. At its recent meeting, the RBA said that it now views a rate cut to be just as likely as a rate hike as persistent domestic issues around housing and wages, along with broader global issues, keep the economy weighed.

The BOC – Paused Tightening

The BOC’s tightening program has closely matched the Fed’s. The bank raised rates three times last year in line with strong domestic economic momentum and rising oil prices. However, the near 40% crash in oil over the last part of 2018 along with the global downturn, saw the BOC forced to postpone its final rate hike of the year.

This rate hike has still not come. And, for now, the bank has had to pause its tightening. This is so that it can monitor issues such as oil prices and household spending as well as the broader economic picture. If the US and China agree on a trade deal and oil prices rise again, we could well see the BOC move back into tightening this year. However, in the meantime, the hikes are on hold.



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