Central Banks: Unwinding unconventional monetary policy – Nomura


The coming months is likely to be pivotal for markets as the history of unwinding unconventional monetary policy is replete with examples of sharp bond selloffs ahead of the actual announcement of such a policy, points out the research team at Nomura.

Key Quotes

“The three main examples are: the Bank of Japan ending its zero rate policy in 2006, the Fed tapering in 2013, and the ECB adjusting its QE programme in 2016. Given that most expect the Fed to announce quantitative tightening in September or October and the ECB to announce its tapering plan in September, rates markets are likely to experience sharp moves in the months before that. On top of that, the summer months typically see the worst performance of risk markets. Clearer trades are likely to be the ones that suffer from Fed/ECB balance sheet adjustments and a rotation in growth surprises away from China to the US. These include: buying EUR/NZD, selling AUD/USD, buying USD vs selective Asia FX.”

“At this week’s meeting, the Riksbank removed its easing bias, taking a small step towards normalisation. However, the Bank maintained a cautious stance, and gave no sign of turning hawkish anytime soon. The external assessment was more pessimistic than we were expecting, and it seems the Riksbank will wait for actual policy normalisation announcements from the ECB. This makes a hawkish shift at the 7 September Riksbank meeting unlikely, unless domestic inflation pressures materially increase. With no sign of the Riksbank turning hawkish soon, SEK remains vulnerable to an increase in ECB tapering expectations, meaning EUR/SEK upside pressures may continue in the near term towards the 9.80 level. For us to enter short EUR/SEK positions, we still need to see a convincing improvement in domestic inflation and wage growth, and evidence Governor Ingves’ stance is shifting. This may not come before the next Riksbank meeting.”

“At next week’s BoC meeting, we now expect a raise interest rates by 25bp. The post-oil shock “insurance” of looser policy settings is no longer needed, in our view. We remain positive on CAD over the medium term, but given the extent of the recent move and rampant shift in market pricing we would not look to chase USD/CAD lower from current levels ahead of the event, preferring instead to fade any bounce back up towards 1.32.”

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