Dovish central bank surprises in the week - Nomura

The research team at Nomura suggests that the RBNZ and the BoE both caught the market off-guard and surprising on the dovish side.

Key Quotes

“The RBNZ made no change to its interest rate outlook, amid expectations of bringing it forward. We believe the RBNZ remains too pessimistic, but it will take time for it to change its tune. NZD slumped in the wake of the announcement. A further near-term adjustment lower in NZD is likely, but elevated New Zealand commodity prices should help cushion the blow. Nevertheless, we continue to favour NZD relative to its commodity currency peers over the coming months.”

“The BoE inflation report was also on the dovish side. Whilst the Bank raised its views on inflation in the near term, the crucial two- and three-year ahead forecasts were revised down (the former quite sharply). Nonetheless, we retain our long GBP view despite our dovish interpretation of today’s Inflation Report. Because the downward revisions in the inflation forecasts suggest the BoE is likely to be on hold for longer, the market may not share the same view and continue to price for a higher risk of above target inflation in the years to come. But this is a one-day trade that we do not expect to continue for long. Considering there is a BoE communication that appears to be actively talking up the market to price in a steeper curve with some members close to voting for a hike, it looks like the balance of risks are for a further hawkish BoE tone in months to come.”

“Oil prices have staged a recovery this week as inventory data showed US stockpiles being drawn down. We continue to see upside risks to oil prices, and also argue that EUR/NOK has diverged from its fundamentals (on a terms of trade and rates differential basis). We like to short EUR/NOK via a 2m 9.25/9.10 put spread.” 

“Implied volatility has also been reaching historic lows. However, we would be hesitant about arguing this implies investor euphoria. Instead, external triggers will be needed to trigger a bout of risk aversion. An obvious one would be policy action such as an overly hawkish Fed or a growth-insensitive PBoC. With the former, the market is already almost fully pricing a hike in June, and so the Fed would need to talk up later hikes, which we think is unlikely in the run-up to the June meeting. Of course, “non-risk” events such as a stronger euro (our view) or even stronger equity markets could see volatility and other risk measures rise. That remains our base case. Therefore, we would be comfortable taking a nuanced approach to the risk environment.”