Currency Point: The Ballad of Central Banks

I think there is one line that can summarise the actions of the Reserve Bank of Australia (RBA) and the European Central Bank (ECB) – If we taper now, we can ease again later.

I think you can also throw the Federal Reserve into this category too. Dallas Fed President Robert Kaplan stated last week ‘Delaying the start of taper gives the Fed less flexibility’.

That statement really does read – do it now, if it doesn’t work, we can undo it.

It has been interesting to see the RBA start tapering by reducing its monthly program from $5 billion to $4 billion, but then at the same time extended the program out to February. Net-net they are actually providing more stimulus when you take this timeline into account.

Then the ECB stated it was time to trim its Pandemic Emergency Purchasing Program (PEPP), the program size is EUR1.85 trillion it has EUR500 billion left and will continue to ‘least the end of March 2022’. Christine Lagarde argues this isn’t a taper because they haven’t changed the Asset Purchasing Program (APP) which will continue at EUR20bn per month for as long as necessary couple this with the long-term financing operations (TLTRO III) which are also open-ended.

The ballad of central banks – lower for longer let’s overrun so employment and inflation can return to trend.

It fits nicely into how one can position their FX.

Both RBA and ECB statements and actions read as hawkish, but actually, they are dovish.

EUR/USD: fell from $1.1835 to $1.1805 following the ECB, but as the chart shows it is steady quickly. With this week’s US CPI data we will have a clearer picture of what might happen next week at the FOMC. So just hold tight here

AUD/USD: initial popped because tapering has begun but eased quickly. The spike on the chart clearly shows the market overreacted.

This is a bear story in my opinion. The AUD has several domestic issues that will weigh on its price over the coming months – it’s just a question now of the USD holding firm. Something the Fed will have to answer.