Keeping Up With the Central Banks

This week has been rich in terms of interest rate cuts from major central banks. The Reserve Bank of Australia (RBA) didn’t cut its rates but gave an unexpectedly dovish statement, citing that the RBA officials are turning more confident that inflation is on path toward their policy goal. The Bank of Canada (BoC) delivered a second 50bp cut in a row, following three 25bp cuts before that. Then, the Swiss National Bank (SNB) delivered a 50bp cut – it was not the base case scenario but it was not a surprise, either. The SNB has recently stepped up efforts to counter the franc’s appreciation, especially given the accelerated selloff in the euro since Trump’s election which pulled the EURCHF down to the lowest levels on record. The EURCHF rebounded after the SNB decision, the USDCHF also made a significant move to the upside and the SMI gained. The aggressive messaging from the SNB – warning that it could go negative on rates if it is needed – will hopefully help the franc lose field in the coming months. But one thing is certain, the SNB should remain more dovish than its peers to give the franc the opportunity to weaken without intervention. Otherwise, the global political and geopolitical uncertainties will continue to play in favour of the franc. What a problem to have!

Elsewhere, the European Central Bank (ECB) also cut, but the European officials decided to go ahead with a cautious 25bp cut before Xmas, and Lagarde didn’t say much about what the ECB would do in the next meetings. She stuck to the ‘data dependence’ rhetoric. But, still, the ECB lowered its growth and inflation forecasts – reviving hope of back-to-back cuts next year – but not too much either as Lagarde highlighted that inflation has come down but remains strong and that risks to inflation remains high. She talked about geopolitical risks that could boost energy prices and climate risks that could boost food prices. She didn’t mention Trump, she rather said that the euro zone countries should consider Mario Draghi’s innovation booster plan to give the European economies a boost. She is right but the Europeans have bigger problems today, they should first get their leadership issues right. Anyway, the ECB decision and Lagarde’s speech had a hawkish flavour yesterday, the Stoxx 600 index closed slightly down.

The EURUSD fell, however, but the selloff was mostly explained by a higher-than-expected US PPI print that landed just between the ECB decision and Lagarde’s press conference. The data showed that the producer price inflation in the US ticked higher to 3% in November, up from 2.6% printed a month earlier and expected by analysts. But the surge in egg prices was one of the major drivers. As such, the November reading was interpreted as being ‘probably less informative (and threatening) on the overall trend’ than the headline figure suggested. Nonetheless, the US 2-year yield advanced past the 4.20%, the major equity indices gave back gains and the US dollar jumped – the rise of the dollar was also due to the weakening yuan after the Chinese authorities said this week that they would let the yuan weaken to boost exports, and due to rate cuts from other major central banks throughout this week. As a result, the dollar looks stronger this Friday than it looked last Friday. The probability of a 25bp cut slightly eased but activity on Fed funds futures continues to asses a very comfortable 96% probability for an additional 25bp cut that the US probably doesn’t need in December. But it’s probably too late to turn for the gigantic Fed ship a few days before their next decision – they only do that when it’s a dovish surprise. But the chances of a January cut are melting by the day, and that’s supportive of the US dollar. As such, the ECB’s cautious tone could slow down the euro’s depreciation but will not stop it if the Fed expectations turn more hawkish at the beginning of next year. The EURUSD fell yesterday to 1.0460, Cable was lower too, on the back of a broadly stronger US dollar, and the USDJPY is flirting with the 153 level this morning as traders are scaling back their Bank of Japan (BoJ) rate hike bets for next week. Still, around 60% of economists in a recent Reuters poll think that a 25bp hike is still on the menu of the December meeting – an expectation that should limit the USDJPY’s upside potential into 155.