After the Central Banks -by -Michael Oyebamiji
March 21, 2016The last two weeks witnessed different policy divergence from all major central banks globally including the merging market. Thereafter math left so many mixed signals and reactions on the market and also to investors.
The European central bank opened the floor ahead of other central Banks by introducing an increase its asset purchase to 80 billion Euros and cutting deposit rate lower from -0.30% to -0.40%. The president of the ECB made it clear that they might not cur rates lower anymore. On the back of this, Eurusd has rallied massively with all indicators now pointing towards 1.15000 and beyond.
The Bank of Japan on the other hand, left interest rate unchanged at negative but reiterated the fact that they might still intervene as they have more ammunitions to rescue the economy. It is obvious that japan is fighting deflation and they are still far away from the 2% target. Every policy decision is towards achieving this goal, hence the need for negative rate. Japanese Yen has rallied massively since the introduction of this Negative rate which contradicts the expectations of the BOJ on the back of Negative rate. USDJPY traded at 11.6 which is the lowest level since 2008.
The Federal Reserve left interest rate policy unchanged and market expects 2 rate hikes this year as against 4 rate hikes expected after the December FOMC meeting. The FED highlighted increased financial market volatility and global economic slowdown as some reasons behind holding back on hiking rates in March. The USD has seen 3 consecutive weeks of sell off to trade below $95.00. The Federal reserve will not be bothered with the weakness of the USD because this is needed in other to aide international trade.
Bank of England left rate unchanged due to low inflation and forecaster were further revised downward. The major trouble ahead of Bank of England is the uncertainty surrounding Brexit. Over the weekend, one major Cabinet Minister resigned (Ian Duncan Smith). This has fuelled more fear because he is one of the major Eurosceptic advocate. GBPUSD is selling of this morning, early trading in Europe.
Looking at the emerging markets, South Africa raised interest rate by 0.5% this according to the South African Reserve bank is to keep inflation target on check at 3-6%. South African Rand rallied on the back of this but USD is trying to gain some strength against the rand on Friday and early hours of trading today in Europe.
The conclusion that could be drawn from the central banks policies is that most economies expecting a weaker currency to fight deflation, and drive growth are actually not getting things right. Bank of japan and European Central Bank are examples, despite the negative rate; JPY is at the strongest level since 2010. Euro is also off the lows and now trading above the 1.10 level which opens door for 1.15o and beyond. USD despite rate hike in December, USD has been selling off. It seems the market is at s level of diminishing marginal utility which means additional stimulus might not be effective anymore.
