Morning Commentary: Central Banks – Please don’t add to the Uncertainty and Confusion!

Foreign Exchange - Morning Commentary

Central Banks – Please don’t add to the Uncertainty and Confusion!

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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
The main job of the world's key central banks is to keep their respective economies on an even keel in regards to both balancing growth and inflation and show a steady hand in managing the economy and not succumbing to short term pressures.  It is a difficult task to try and balance those forces at times as short, medium, and longer term factors come to bear on the economy. Central banks should avoid flip-flopping as it only adds to market volatility and uncertainty.
For those that live in the U.S., we have most recently witnessed our own Federal Reserve influenced by market movements and a wash-out in equities (Q4) flip-flopping in policy over a short period of time. It was just a few months ago that the Fed had indicated at least two more interest rates hikes in 2019 to now standing pat. The Reserve Bank of Australia (RBA) has taken flip-flopping to a new level.
Yesterday, the RBA left monetary policy on hold at 1.50% and had indicated through the communique that rates would remain on hold for the near term. While Aussie jobs data and wages have been improving, other economic data has been mixed overall. The market was pleased with the messaging and interpreted yesterday’s action has a “hawkish hold” as Aussie interest rates moved up slightly as did the Aussie dollar.
Today, RBA Governor Lowe, in a major address, said there was now an equal chance of rates being cut as rates to being raised. The market was caught totally off guard by his dovish comments and Aussie interest rates collapsed along with one of the sharpest moves downward in the Aussie dollar in the past year. Once again, the job of the central banks is not to add to market volatility by mixed and confusing messaging. The weaker Aussie dollar has pulled down many other commodity linked currencies today and has allowed the DXY to continue to move up for the fifth day in a row.
  • Good news regarding the U.S. trade deficit as it came in well below expectations at $49.3 billion in November after a $55.7 billion deficit in October as imports tumbled by the most in more than two years. It was the first decline in the trade deficit in the past five months. The main improvement came from reduced imports as imports shrank by 2.9% while exports dropped by 0.6%. The trade gap closed with China by $2.8 billion to $35.4 billion.
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