Central Bank Rate Cut Race in Full Force

Down-under toes the line

Recalibration of global rates

RBA cuts to new record low

PBoC continues to pump liquidity

Previously a covert, but now blatant, open and aggressive Central Bank monetary policy war is well underway. Over the past few weeks a plethora of Central Banks from Denmark to New Delhi, to down-under have been contributing to the whole process. All the various asset classes are adjusting to interest rate recalibration due to low inflation, deflation that is leading to lower growth mostly pressured by the -60% fall in energy prices. Central Banks are caught behind the curve and are now in reactionary mode. If soft data continues to emerge from the U.S eventually the Fed will be backed into a corner and will be required to save face. To date, they have been very transparent about their intentions to normalize their rate policy, but their foes are making that priority an unnecessary action any time soon. If the U.S economy even hints of wobbling, then the global alarm bells will only get louder very quickly.

Down-under does not disappoint

The low interest rate environment that has dominated financial markets globally since the financial crisis looks set to continue now that the Aussies have joined forces with several others in Asia, including Singapore, in easing monetary policy.

The Reserve Bank of Australia became the latest major central bank to go beyond expectations in policy accommodation. They cut overnight interest rates by -25bps to a new record low of +2.25% against an “expected hold with an easing bias.” Observing the call from the Aussie treasurer Hockey to respond to changing global conditions and also tracking a much more dovish position from the RBNZ last week, Governor Stephens named weaker than expected growth in Europe and Japan, lower oil prices pushing down inflation, below-trend domestic growth, and expectations for persisting spare capacity in justifying their decision.

The aim of the Central Banks is to walk their currencies down, giving their country a competitive advantage, in other words a race to the “bottom.” The process so far this year has been supported, and interrupted by, deflation threats and global political difficulties.

The Aussie dollar has been pushed sharply lower, falling to a new-five year low in the immediate aftermath of the RBA decision, while S&P/ASX rose above 5,700 – the highest level in six-and-a-half years years. It’s closest neighbor, New Zealand, own currency has also managed to hit multi-year lows below the $0.72 handle after the RBA.

The market is trading as if there are more to come, when combined with a possible tightening in the U.S means a much stronger dollar. Perfect timing by the Fed is crucial – Ms. Yellen cannot afford to stifle any precarious growth that could be underway. The Fed is firmly sitting between a rock and a hard place under the banner of “patience.”

The market should be keeping an eye on the Central banks in China, Thailand, Korea, India, and Indonesia for more easing in the short term. Even Singapore’s MAS is under the spotlight. There is a strong possibility that they could easy again, following its surprise move decision to do so last month. The market seems to be pricing in a +30% chance of further action by their authorities in April.

Asian’s lowdown

Chinese PBoC continues to inject cash into the financial system through open market operations going into the Lunar New Year holiday spending period. This they have done with another +90b move in both seven and 28-day repos. The authorities actions happen to be the largest injection in just over 12-months. The market believes that investors be looking towards PBoC, Thailand, Korea, India and Indonesia for further easing actions – and not just at the scheduled meetings. Intermeeting decisions are looking to be more of the norm, the element of surprise is clawing back some Central Bank credibility.