Swiss Franc As usual, when U.S. data is good, then the EUR/CHF appreciates. Click to enlarge. FX Rates The focus is squarely on the US employment data today, ahead of which the capital markets are mostly consolidating yesterday’s Bank of England inspired moved. The Australian and New Zealand dollars, alongside sterling, which is up about half a cent after losing two yesterday. The RBA’s monetary policy statement failed to tell investors anything they did not already know.There was not formal bias expressed, but the fact that the central bank expects inflation to undershoot its target over the forecasting period keeps many watchful for another rate cut. While this is possible of course, we think those who expect a quick follow up move may be disappointed. Meanwhile, the market has next week’s RBNZ move fully discounted. The attractiveness of these currencies is that even after the rate adjustments, they are still the highest among the high income countries, and as the BOE underscored, rates will be lower for longer. The US dollar has been able to distance itself from support near CAD1.30. The Canadian dollar has lagged the other dollar-bloc currencies.
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Marc Chandler considers the following as important: Canada Employment Change, Featured, FX Daily, FX Trends, Germany Factory Orders, Italy Industrial Production, Japan Average Cash Earnings, newsletter, Spain Industrial Production, U.S. Average Weekly Earnings, U.S. participation rate, U.S. Trade Balance, U.S. unemployment rate
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Bank of England
Lastly, we return to the BOE decision yesterday. It succeeded when many other central banks have struggled in getting ahead of the curve of expectations. The 25 bp rate cut was, though widely anticipated. The central bank has a clear easing bias with another 10-15 bp cut likely in Q4. Carney explicitly rejected negative interest rates.
The GBP70 bln asset purchase program, of which GBP10 bln will be corporate bonds was more than many had anticipated. Of note, the ECB appears to be buying a small amount of nearly every corporate bond it can. Carney indicated that BOE wold buy those investment grade bonds of corporations that it judges make a material contribution to the UK. The program is projected to be complete in six months.
The BOE also announced a “Term Funding Scheme” (TFS), which is similar to the TLTROs of the ECB. Banks (and building societies) can have access to four-year funding from the central bank at a rate close to the base rate (now 25 bp) compared with the cost of funding that was nearer 1.0%. The lenders must maintain or expand their lending or face higher costs and loss of access to the facility. This GBP100 bln facility is bigger than the QE purchases but is also funded by the creation of new bank reserves (central bank money).
Despite the Bank of England doing more than the market expected, its economic assessment is not as dour as many in the private sector. The central bank expects growth to slow to 0.1% this quarter than then be stagnant in Q4 and Q1 17. It is not clear whether this that the UK escapes a recession, as there is no agreed upon definition of a recession. Two consecutive quarters of negative growth is not a technical definition but a rule of thumb, and one, incidentally, that is not used in the US by the NBER that is the official arbiter.
One criticism that has been levied at central banks is their hubris regarding the power of monetary policy. If that criticism is valid, which we have our doubts, Carney addressed it head-on. He was explicit. The shock to the economy can be cushioned but not overcome by monetary policy, seemingly hinting without being explicit, that there is a role for fiscal support. Yet he defended monetary action, noting that it is the first line of defense and can be brought to bear quicker than fiscal policy.
Graphs and additional information on Swiss Franc by the snbchf team.