Forex has its favorites and outcasts among central banks

Even central banks won’t be spared if they stop obeying the market

– Could I talk to the central bank?

– It’s busy at the moment.

– What is it doing?

– Being beaten.

Central banks’ determination to protect ultra-soft monetary policy is regularly under attack at the end of October. Inspired by high inflation, investors expect an earlier rise in borrowing costs than was promised by regulators. Once the latter pretended to ignore market signals, they got a right hook.

The Reserve Bank of Australia had attempted to defend the 3-year bond target and then gave up the idea. The Aussie consolidated. The ECB had said whether or not the market was running too fast was none of its business. European bonds and EURUSD rates soared. So, investors appeared to take offense at the central banks that were ignoring their signals.

Former ECB chair Wim Duisenberg could afford to say “I hear, but I do not listen” back in 2001, but such a stance isn’t affordable these days.

In March 2020, Christine Lagarde made a mistake saying the ECB wasn’t supposed to regulate spreads in the bond market. As a result, she had to apologize as bond yields grew. A similar situation occurred in October. Does she want to be the best at screwing things up? ​

The markets have got a lot of influence and power in the past 20 years, which shouldn’t be ignored. The huge liquidity from the Fed and other regulators made them feel omnipotent. They now believe they can dictate central banks what to do. To normalize monetary policy in response to an inflation boost or not? To withdraw QE or not? Money is the primary reason for disputes, in the end. The lack of money is another reason.

However, investors spare those who are affected by the “hall of mirrors” concept. Though unexpected, the Bank of Canada’s decision to give up QE amid an economic recovery was welcomed by the market. Not only the loonie but also the NZ dollar and the pound sterling consolidated. What do those currencies have in common? The fact that their banks aren’t willing to turn a blind eye to the inflation boost. They are skeptical about the temporary nature of high prices and pessimistic about their foreign peers’ doing nothing. A pessimist once met an optimist and took away his last half-full glass of water…

Logically, investors love those to normalize monetary policy and hate those who don’t. Why shouldn’t financial markets get back to normal when the economy is recovering? I wouldn’t be surprised if the BoE’s Mark Carney was just trying to please the market, saying the regulator would have to step in to tackle inflation. The attempt did no good, unfortunately: Brexit used to create uncertainty for the pound, and now it’s the Bank of England. Love and hate are just one step apart, right? Will they eat the BoE for breakfast unless it raises the REPO rate at the beginning of November? Let’s wait and see. Meanwhile, the good old saying “Don’t play against the Fed” is gaining new meanings. Don’t play against the market!

 

Price chart of EURUSD in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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