Central Banks: Positive vibes across the board - Westpac

Sandeep Kanihama FXStreet Contributor

It is a time of good cheer for central bankers suggests Sean Callow, Research Analyst at Westpac, with positive growth outlook coming from most of them.

Key Quotes

“The RBA has had a bullish view on Australian growth for many months. The Fed is confident enough in the outlook to have accelerated the pace of tightening, from only one hike in each of 2015 and 2016 to two moves already this year. Earlier this month, the Bank of Canada became notably more optimistic, hinting that it could soon raise rates for the first time since 2010.”

“But for FX markets, the real paradigm shift will be when the monetary policy trajectory realigns on the most heavily traded currency pair, EUR/USD. The ECB took a small step in this direction by reducing the pace of asset purchases from a huge €80bn per month to €60bn in April.”

“Yet this only returns QE to the pace over the year to March 2016. A more significant change could be in prospect. EUR/USD has rallied 2% to trade above 1.14 for the first time since Brexit last June, in response to ECB president Draghi’s speech on Tuesday at a major ECB forum. He elaborated on the more upbeat growth outlook at this month’s ECB meeting, summing up that “All the signs now point to a strengthening and broadening recovery in the euro area.”

“Most importantly for policy, Draghi detailed why both headline and core inflation were likely to rise towards the ECB’s near-2% target. He even made the case that “adjusting the parameters of its policy instruments” would not be tightening. Markets aren’t interested in such semantics and are scrambling to price in a more swift reduction in ECB stimulus.”

“In contrast, the weight of money suggests the Fed will take its time to hike again, with an increase by Sep rated <20% chance. The dollar is already well below pre-US election levels and seems set to fall further near term. So long as central bankers outside the US are willing to believe that better times are ahead, the US dollar will look somewhat less exceptional.”

Author

Sandeep Kanihama

FXStreet Contributor

Sandeep Kanihama is an FX Editor and Analyst with FXstreet having principally focus area on Asia and European markets with commodity, currency and equities coverage. He is stationed in the Indian capital city of Delhi.

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