View from London: Reward for Dovish Talk Is a Weaker Currency
10/26/2017 12:36 pm EST
Today, while many will be fixed on watching the U.S. 10Y and the fear of 2.50% and higher yields, the success or failure of central bank talk rests with the euro not breaking over 1.1880, writes Bob Savage, CEO of Track Research Thursday from London.
Not deciding to do anything is still an action – that is the lesson from the Swedish Riksbank and Norway Norges Bank overnight.
The contrast with Brazil is important where the COPOM cut 75bps to 7.5% as expected but more importantly, the embattled and sick President Temer survived another lower house vote.
Whether that continues with the ECB has been the waiting game all week and it matters for global markets as the ratcheting up in U.S. rates has unnerved the balance of sentiment with yields breaking out driving CAPM models to recalibrate. Risk managers are nervous, and the forward guidance game from all central bankers is under the microscope for investors to see if the “normalization” like the global growth can spread into next year.
So far, doing nothing now means doing more later, steeper curves and more “uncertainty” the headline speech from the RBA Debelle deputy governor overnight which hits the key paradox for everyone – namely with tight labor markets why isn’t inflation higher everywhere.
Now it’s Draghi’s turn with a dovish taper talk and expectations of doing half again as the QE buying for 2018 is expected to be E30bn down from the E60bn a month now.
What really matters is when they are talking about raising rates – like the Riksbank – is it mid-2018 or later?
The reward for inaction and dovish talk is a weaker currency – just ask Norway and Sweden and Canada and Australia.
As for economic data pointing the way, its clear that the BOK is going to have to respond Korean GDP mattered overnight with 1.4% q/q growth fills the gap and puts a rate hike in November on the table – that lifts South Korean won (KRW/GPB) and hurts the Kospi Composite Index (KOSPI) accordingly.
The big surprise for Europe overnight was in the bounce of Italian confidence and the stalling of German – but that has little to do with today and the bigger economic data surprise was in the UK with very weak UK CBI retail survey – suggesting the BOE maybe hiking into a slowing consumer with construction already in recession.
Policy mistakes are the heart of the risk in 2018 – and normalization for rates back after 8 years of QE and negative rates isn’t going to be taken lightly or easily.
Today, while many will be fixed on watching the U.S. 10Y and the fear of 2.50% and higher yields, the success or failure of central bank talk rests with the euro (EUR/USD) not breaking over 1.1880.