5 July 2013

The Calm After the Central Bank Storm

The ECB and Bank of England have both announced trailblazing, 'forward guiding' monetary policy. Where we're being guided to, still remains a mystery however.



Yesterday’s keenly anticipated Bank of England (BoE) and European Central Bank (ECB) meetings were once again in line with expectations in terms of actual policy (both unchanged as expected). And once again, the post meeting press-conference was where the volatility kicked in, and where money was won and lost.

The key points from both meetings were:

European Central Bank (ECB) | statement in full


  • Left rates unchanged at 0.5% (REFI rate) and 0% (deposit rate) respectively
  • "Our monetary policy stance will remain accommodative for as long as necessary” (Very dovish comment which has been interpreted by market commentators as ‘forward guiding’)
  • "We are committed to keeping interest rates low for an extended period" (very dovish and resembles the Fed’s commentary over the past 3 years)
  • 0.50% is not the lower bound for the main REFI rate and 0% isn't the bound on the deposit rate (introduces the possibility that negative interest rates may be introduced within the Eurozone in order to discourage cash hoarding)
  • “Inflation expectations for the Euro area continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to 2%” (dovish comment that gives the green light for QE, ZIRP and negative interest rates)
  • "The risks surrounding the economic outlook for the euro area continue to be on the downside" (confirms that the economic recovery continues to be anaemic which will require artificial central bank support going forward)

EUR pairs were quick to decline against all other counterparts. EUR/USD failed to hold onto its 1.30 handle and is now posied for further declines as Fed hawkish policy is bullish for USD contrasted against dovish ECB policy being bearish for the EUR. However, we still see non-farm payrolls this Friday as the key factor this week so Thursday's central bank inspired FX moves stand a good chance of reversing.

Bank of England (BoE) | statement in full


  • "The implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy"
  • Recent BoE meetings have shown 6 members voting against more stimulus versus 3 members voting to increase stimulus. Mervyn King, the previous BoE governor retired last week to be replaced by Mike Carney. Investors will have to wait until July 17th to find out if Carney himself voted for more bond buying yesterday.
  • The BoE's statement did not give any time horizons or caveats about how it will continue with policy i.e. forward guidance was given but it was rather unclear and ambiguous so expect elevated market speculation and GBP volatility in the immediate future.
  • Speculation is already starting to build that the BoE's bond buying programme called the Asset Purchase Facility (APF) may be restarted under Carney. So expect GBP pairs to be under pressure on the back of diverging monetary policy and profit taking due to GBP's strong bullish run over the past 3 months.

GBP pairs sold of rapidly with largest declines seen against commodity currencies. GBP/AUD declined from a week high of 1.6710 down to 1.6400 - a move of over 300 pips in a single day. UK shares were positive after the statement on expectations of looser borrowing costs for longer. Futures markets are now pricing in the BoE's next interest rate rise for H2 2015, rather than H1 as previously expected before the BoE announcement.

As policy divergence gains momentum between the Fed and the rest of the G20, expect currencies to fluctuate extensively in line with perceived changes in yield differentials.

The reality behind the veil


For us, the most important (and most worrying) aspect of yesterday’s central bank tag team dovishness was the following, found in the ECB statement:

"In order to ensure an adequate transmission of monetary policy to the financing conditions in euro area countries, it is essential that the fragmentation of euro area credit markets continues to decline further and that the resilience of banks is strengthened where needed. Further decisive steps for establishing a Banking Union will help to accomplish this objective. In particular, the future Single Supervisory Mechanism and a Single Resolution Mechanism are crucial elements for moving towards re-integrating the banking system and therefore require swift implementation."

Reading between the lines, this is what the statement says when you remove the ECB's rhetoric ridden, purposefully confusing vocabulary:

In order for the ECB to maintain the status-quo and maintain its influence over financial markets, it is essential that money market rates remain low – should they rise, the ECB will of course provide unlimited funding to banks to ensure they survive. Centralising the whole of the European banking system within a Banking Union is the easiest way for the ECB to maintain and increase its control over the finances of all EU nations. In the future, the SSM and SRM will be the tools the ECB uses to consolidate the whole banking system so this should be done as a priority.

All the talk about forward guidance from the ECB and BoE is missing the point because the ECB, BoE and the Fed are not interested in guiding their respective economies to health. Central banks are more concerned in transferring economic decisions away from elected officials in sovereign governments towards elitist, unelected technocrats at the helm of the EC, European Investment Bank (EIB), Bank of International Settlements (BIS), IMF and World Bank – and they want to do it "swiftly" before the derivatives/housing/banking/credit/fiat currency bubble bursts. Once a banking union is implemented, the technocrats will be in full and total command of every aspect of every European economy – without all those pesky restrictions that politicians begrudgingly have to put with. Everyone is equal under the law, except for those who are above it.


Commissioned by Think Forex