Central banks shifting gear towards more hawkish narrative - AmpGFX

Globally, central banks are shifting their stance towards more hawkish narrative with focus tilting from inflation targets to real interest rates and financial conditions, explains the research team at Amplifying Global FX Capital.

Key quotes

“The EUR is on the fly Tuesday after a month or more of consolidation.  The catalyst is a speech from Draghi.  Coming on the back of a number of more optimistic central bank noises in recent weeks, the market may feel there is something coordinated about these events.  Central banks are shifting their focus surreptitiously from inflation targets to real interest rates and financial conditions.  In terms of hawkish or less dovish surprises, count the Bank of Canada on 12 June (Speech by Deputy Governor Wilkins), the FOMC meeting on 14 June, the Bank of England 5-3 vote split on 15 June, Bank of England Chief Economist and MPC member Haldane speech on 21 June, Fed Dudley speech on Monday 26 June, and ECB’s Draghi speech on Tuesday, 27 June.  The Fed’s Yellen and Fischer also suggested they see risks in recent low levels of global risk premia.”

“We can include the Reserve Bank of Australia in the movement, since it has accepted a lower glide path back to its inflation target in deference to its concern over high house prices and household debt.  This is a warning to equity investors.  Equities are already showing fatigue and are vulnerable to a significant correction. Central banks are effectively encouraging some rise in real bond yields.  We have noted in the past that the more highly indebted households, in New Zealand and Australia, leaves their currencies more vulnerable to rising global bond yields.  The EUR has surged against the NZD, forming an outside range day trend reversal against the 200-day moving average.”