FxWirePro: Chemistry between G10 central banks’ monetary policy season and their FX space on eve of Christmas

We’ve woken up last morning unsurprised by the Fed decision and the market response; indeed, the policymakers’ median forecast is now fully aligned with our call that there would be three further hikes in 2018, followed by another two in 2019. We don’t expect the Fed to change its tone or direction appreciably under the incoming Chair Powell.

As ECB maintains status quo in its last monetary policy of 2017, at yesterday’s press meet, many journos attempted to wriggle for an answer to that question out of the ECB President - without success.

Are you interested in the hike in interest rates of the eurozone? It has been the most decisive question for the majority of EUR investors.

As per Draghi, the end of the asset purchasing programme which would have to precede a first rate hike was not even discussed by the council. The reason behind that is no doubt the dire inflation outlook. Draghi made it clear very quickly that the ECB’s mandate was price stability. And until a sustainable positive inflation trend emerged an expansionary monetary policy was still required. Looks like a blue Christmas for EUR-bulls.

A slow-moving Fed and more balanced global growth will continue to encourage FX investors to seek out higher-yielding currencies, fretting all the while that they may be picking up pennies ahead of a trundling steamroller.

The Bank of England’s policy announcements, meanwhile, resulted in the little sustained impact on markets, with the OIS curve continuing to fully price the next rate rise in early 2019. The Bank noted that the probability of a disorderly Brexit has fallen, but also that Q4 economic indicators have been softer than expected.

Elsewhere, the Bank of Canada Governor Poloz mentioned that less stimulus is needed over time, which seems to signal further interest rate increases next year.

Monetary policy destinations and FX valuations will continue to matter: The dollar looks dull, but a bit expensive given where real yields are. The euro is cheap but needs markets to discount far into the future in order to benefit from a hiking cycle that will only start in 2019. Yen bulls may have to wait even longer before the BoJ lets the yen off the leash, but when it goes up, there will be a bang.

Things are looking better in Norway. The Norwegian krone appreciated notably against the euro yesterday after the Norwegian central bank raised its growth and inflation outlook and as a result also brought forward a first rate hike to 2018. As an important reason for the upside correction, it stated the recent strong krone depreciation, one could have almost had the impression that Norges bank governor Oystein Olsen was not that pleased with the exchange rate development.

Of the other G10 currencies, we are bullish NOK and the Norwegian curve is the only one where, today, rates are expected to be higher in 2027 than they were a year ago. We’re also modestly bullish on both the AUD and CAD, preferring both to the NZD or the USD.