Central Banks: QE to QT will dominate the 2018 market and policy outlook - Westpac

Sandeep Kanihama FXStreet Contributor

David Goodman, Research Analyst at Westpac, suggests that 2017 will be remembered for unusually low levels of volatility as QE and central bank liquidity pacified and assuaged markets. However, 2017 also marked an important point, as combined G3 central bank balance sheets peaked in August at an all-time high of just over USD 14 trillion, he further adds.

Key Quotes

“The FOMC’s tightening cycle and balance sheet normalisation will continue through 2018, ECB has committed to a tapering path in 2018, and BOJ is running well short of its ¥80trn purchase pace. Given central bank balance sheets have peaked and the pace of accumulation is slowing, we are clearly moving from quantitative easing to quantitative tightening (QE to QT). The Fed’s balance sheet normalisation is designed to be gradual and predictable, and of course can be stopped or modified if it unleashes excess volatility. However our core view is that with the global tide of liquidity reversing through 2018 and 2019 and policy uncertainty increasing, market volatility should increase.”

“Economically, inflation is the missing piece of the puzzle. This is a global phenomenon and we are seeing many countries with “below target” core inflation outcomes despite very accommodative policy levels and near full employment. We expect global growth of 3.7% in 2017 and 3.6% in 2018, yet wages growth is failing to respond in many countries to this improved growth and employment outlook (Australia is no exception), as a series of idiosyncratic and temporary factors weigh. That said, technological changes and globalisation suggest altered inflation dynamics could be more persistent and the Phillips curve not as reliable as in the past.”

“This will be a key part of the policy outlook for 2018, as RBA Lowe commented: “Low growth in wages means low inflation, which means low interest rates, which means high asset valuations. So a lot depends on understanding the reasons for slow growth in nominal and real wages.”

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.

EUR/USD trims gains, reclaims 1.1600 and beyond

Following an earlier drop to yearly lows around 1.1530, EUR/USD now manages to recoup part of the ground lost and reclaim the area above 1.1600 the figure in the latter part of the NA session on Tuesday. Meanwhile, the pair’s marked retracement comes in response to the unabate march norht in the US Dollar, always propped up by the intense flight-to-safety environment amid the deteriorating geopolitical landscape in the Middle East.

GBP/USD attacks 1.3300, refreshing three-month lows

GBP/USD is deep in the red near 1.3300, accelerating its downside to renew three-month lows in European trading on Tuesday. The ongoing escalation in the Iran war, combined with rising Oil prices, weighs negatively on the higher-yielding Pound Sterling as the US Dollar capitalizes on increased haven demand.

Gold bounces off lows, back above $5,100

Gold remains on the defensive, eroding part of the recent multi-day advance and managing to trade back above the $5,100 mark per troy ounce on Tuesday. The precious metal initially dropped just below the critical $5,000 threshold on the back of the persistent strength of the Greenback, higher US Treasury yields across the curve and investors' repricing of Fed rate cuts.