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Big Incoming Coordinated Central Bank Action


Last week’s financial market turmoil, which saw most global equity indices fall into correction territory (i.e. losses of larger than 10%), was a kick up the backside for global central banks.

Despite shockingly bad Chinese PMI data on Saturday, which many had thought would lead to a big hit for markets when trade reopened on Monday, Global equities recovered off lows this morning.


This is largely because markets have been upping their expectations for some sort of co-ordinated global monetary response to counter the impacts of the global coronavirus outbreak (which is a positive for risk assets such as stocks).


Talk of a co-ordinated monetary response kicked off with unscheduled remarks from Fed Chair Jerome Powell last Friday; as a reminder, he pretty much gave the signal that the Fed is willing to act in order to counter any Covid-19 linked economic weakness in the US economy.

Mirroring the Fed statement last Friday, the BoE also surprised market this morning; steps will be taken to “ensure stability”, they said.


We have also had increasingly dovish vibes from the BoJ in recent todays. Officials last week hinted that further rate cuts further into negative territory might be needed. Meanwhile, in its open market operations last night, the BoJ upped its buying of Japanese ETFs to record levels (over JPY 100bln in one night).


Resultantly, we have seen money market pricing for easing from the world’s major central banks become increasingly dovish in recent days; the RBA, BoC and BoE are all seen delivering 25bps rate cuts this month, while the Fed is seen chopping rates by 50bps.

Might the major central banks team up and deliver a surprise rate cut together sometime this week?


Given the speed at which global stock markets plummeted last week (something which always unnerves central bankers), such a move is always on the cards. It’s not like it’s something we haven’t seen before; in October 2008, major global central banks joined forces to deliver rate cuts together, although this was to address what was primarily a financial crisis, rather than a biological crisis.


More likely, ECB reluctance to participate in such a move (ECB officials have thus far played down the demand-side impacts of the outbreak) will mean that global central banks opt to “go it alone” and cut rates at their respective upcoming meetings.


Easing from the world’s major central banks in the coming months is going to be one of the key fundamental themes driving FX markets.


Looking ahead, central bank divergence is likely to continue to drive FX markets in the coming weeks/months. I.e. currencies whose central bank’s have less room to ease (EUR, JPY, CHF) will likely outperform – remember, central bank easing is a negative for a currency.



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