3 May 2016
G3 policy is on track for minimal divergence in Q2 - BNPP
Research Team at BNP Paribas, notes that the Federal Reserve, Bank of Japan (BoJ) and European Central Bank (ECB) elected to keep their powder dry in April, leaving policy unchanged and sending no new significant signals.
Key Quotes
“While ECB inaction was widely expected, the lack of a hawkish Fed hint was disappointing for some forecasters, and the BoJ’s decision to leave policy unchanged caught the market significantly off guard.
The implication is that G3 policy is on track for minimal divergence in Q2, after the Fed hike and ECB easing in Q4 and BoJ easing in Q1 put the central banks on notably different paths. We see a couple of implications from this lack of divergence:
The most obvious is that front-end rate differentials are no longer diverging. The cost of hedging USD risk for buyers of US assets remains stable and, as a result, the USD is losing ground versus current account surplus currencies. Comments from Japan’s Government Pension Fund president Takahashi this week, discussed in a subsequent article in this publication, highlight the risks to the USD from steady rate differentials.
The focus will again shift to which of the three central banks is likely to adjust policy next. We still expect the BoJ to be forced to move first. We note that Japanese real yields are currently running slightly above US and well above eurozone equivalents. This is likely partly a function of the year on year change in the yen TWI being significantly more positive than it is for the USD or EUR, depressing Japan inflation expectations on a relative basis. Accordingly, we expect the BoJ to deliver further easing by June, in contrast to steady policy from the ECB and Fed. We would also expect verbal warnings from the Ministry of Finance to escalate, as USDJPY tests below 108.”
Key Quotes
“While ECB inaction was widely expected, the lack of a hawkish Fed hint was disappointing for some forecasters, and the BoJ’s decision to leave policy unchanged caught the market significantly off guard.
The implication is that G3 policy is on track for minimal divergence in Q2, after the Fed hike and ECB easing in Q4 and BoJ easing in Q1 put the central banks on notably different paths. We see a couple of implications from this lack of divergence:
The most obvious is that front-end rate differentials are no longer diverging. The cost of hedging USD risk for buyers of US assets remains stable and, as a result, the USD is losing ground versus current account surplus currencies. Comments from Japan’s Government Pension Fund president Takahashi this week, discussed in a subsequent article in this publication, highlight the risks to the USD from steady rate differentials.
The focus will again shift to which of the three central banks is likely to adjust policy next. We still expect the BoJ to be forced to move first. We note that Japanese real yields are currently running slightly above US and well above eurozone equivalents. This is likely partly a function of the year on year change in the yen TWI being significantly more positive than it is for the USD or EUR, depressing Japan inflation expectations on a relative basis. Accordingly, we expect the BoJ to deliver further easing by June, in contrast to steady policy from the ECB and Fed. We would also expect verbal warnings from the Ministry of Finance to escalate, as USDJPY tests below 108.”