With no major U.S. or European economic reports on the calendar, currencies are finding support from the flood of liquidity provided by central banks. Last night, the Reserve Bank of Australia joined the party and cut interest rates by 25bp. In just under 30 days, four of the world’s largest central banks have eased monetary policy. While easing by central banks may not be coordinated, it is happening almost contemporaneously which is scary because it implies that policymakers think conditions in the global economy will worsen significantly before they improve. For the RBA, the latest rate cut was an insurance against slowing growth in Asia and the impact of uncertainty in Europe. Unfortunately all of these efforts by central banks have failed so far in generating momentum and fueling risk appetite. If all 4 central banks eased on the exact same day, it would have sent a more powerful message to the market but right now, investors still see policymakers in reactionary mode.
The goal of these central banks is to drive up the price of stocks, bonds, housing and other assets and from this perspective, it is too early to say whether they failed or succeeded. In fact, we believe that they will successfully drive up asset prices and in some ways they already have with U.S. stocks up 3% since the ECB made the first move. The problem is that stocks have not been able to push beyond its initial rally in the beginning of September. There is also a general sense of nervousness in the market and the tension is so thick you can cut it with a knife because there’s still no news out of Spain. Moody’s missed the deadline on announcing their ratings decision which leads us believe whether they are in the know on a bailout. Reports that German Finance Minister Schaeuble will be meeting with Spanish Economy Minister Guindos fueled further speculation that that Spain is gearing for a bailout this month. Read our special report on Why Spain Will Cave in the Next 20 Days. Spain is the last piece of the puzzle and a Spanish bailout request would be positive for the euro because it removes a thick layer of uncertainty that has smothered the market for months.
Yet we also have to recognize that if not for the recent efforts by central banks, currencies and equities would probably be trading much lower than where they are right now. The one thing central banks have been successful at is containing volatility. Trading ranges in the FX market have narrowed significantly over the past month, which is great news for policymakers but terrible news for FX traders looking for big moves. Thankfully range trading shouldn’t last for long because Spain is due for a big announcement.
