Morning Commentary: Global Central Banks: Agree to Disagree
A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.
Global Central Banks: Agree to Disagree
Share this story:
Andrew Kositkun Senior FX Advisor
Today will bring a wave of central bank speakers, including speakers from the Bank of England, the Bank of Canada and the Riksbank and, of course, Jay Powell and Janet Yellen in the U.S. Yellen is expected to touch on the improved outlook and extra stimulus help for families while urging more spending. As for Powell, he should reiterate his pledge to delay tightening until deep into the recovery. Both should also address the deficit and debt sustainability.
In past commentaries, we discussed how growing divergence in monetary policy has become a key driver in the foreign exchange markets. The heavy central bank meeting calendar over the past two weeks has only emphasized the importance of policy divergence as a driver of relative currency performance. With this in mind, here’s a summary of recent central bank actions:
The Federal Reserve: While initial focus might have been on forecast changes, the statement, guidance and tone were largely unchanged. Most importantly, the Fed signaled comfort with the rise in rates and pushed back on the need, or desire, to manage yields.
The European Central Bank: After weeks of increasing rhetoric, the central bank followed through by upscaling monthly asset purchases and pushed back on rising yields.
The Bank of Canada: Despite better-than-expected data, the bank’s monetary policy remained little changed with the bank also expressing comfort with higher yields. Should economic data continue to the upside, expect markets to increasingly price in tapering.
The Reserve Bank of Australia: The bank continues to be dovish and provide guidance toward a 2024 rate lift-off. The bank has also pushed back on higher yields.
The Bank of England: The bank acknowledged a faster return of inflation, didn’t push back on higher yields and set itself up to upgrade forecasts in May.
The Bank of Japan: The bank published results from its policy review but struggled to balance accommodation with sustainability. The bank widened its yield curve control trading band but downplayed the move while hinting at the possibility for further rate cuts and pulling back on asset purchases.
This backdrop of growing monetary policy and policy rate divergence represents the realization that countries will emerge from the pandemic at a considerably different pace around the world. Beyond extraordinary U.S. fiscal policy, there are also significant differences in vaccine deployment. In the U.S., the timeline for normalization of activity has been materially accelerated. Meanwhile in Europe, countries are facing more challenges, including a temporary halt of one vaccine. This divergence in fiscal, vaccination and infection trajectories is likely to challenge the narrative of a synchronized recovery. Based on differences in the vaccination rate, the timing of when various countries can sustainably normalize economic activity could be measured in quarters rather than weeks or months.
With the U.S. expected to add to its fiscal stimulus lead through a large infrastructure package, the U.S. should remain at the forefront in both the pace at which countries exit the pandemic and the follow-through in growth thereafter. As such, the U.S. dollar should receive support, especially against non-commodity G10 currencies. However, U.S. exceptionalism is also expected to be accompanied by global optimism. This optimism should somewhat offset U.S. dollar strength and lead to some divergence in the foreign exchange markets, as illustrated by the Canadian dollar sitting at its strongest level since the first quarter of 2018.
Want to learn more about international finance, economics, and global events? Sign up for our other Foreign Exchange emails and videos!
Follow City National Bank on social media:
Non-deposit investment products:
Are not FDIC insured,
Are not deposits or other obligations of City National Bank and are not guaranteed by City National Bank, and
Are subject to investment risks, including possible loss of the principal invested.
This report is for general information and education only and was compiled from data and sources believed to be reliable. City National Bank does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors as of the date of the report with no obligation to update or notify of inaccuracy or change. This report is not a recommendation or an offer or solicitation to buy or sell any financial instrument discussed. It is not specific investment advice. Financial instruments discussed may not be suitable for the reader. Readers must make independent investment decisions based on their own investment objectives and financial situations. Prices and financial instruments discussed are subject to change without notice. Instruments denominated in a foreign currency are subject to exchange rate and other risks. City National Bank (and its clients or associated persons) may engage in transactions inconsistent with this report and may buy from or sell to clients or others the financial instruments discussed on a principal basis. Past performance is not an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.
Now accepting scholarship apps Celebrating 40 years of service -- A loan to an innovative company -- Affording your dream home -- Mergers and a new branch in Raleigh View this email in your browser Forward to a friend