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Markets Dictate ECB, BoJ, RBNZ Monetary Policy Effectiveness

Markets Dictate ECB, BoJ, RBNZ Monetary Policy Effectiveness

John Kicklighter, Chief Strategist

Talking Points:

  • The New Zealand Dollar rallied after the central bank cut rates as the markets were expecting 'more'
  • We have seen major prominent, contradictory market reactions to monetary policy from the ECB and BoJ to RBA and RBNZ
  • Mon pol for financial vs eco impact is blurring, and central banks are increasingly sensitive to market's judgement

See how retail traders are positioning in the majors using the SSI readings on DailyFX's sentiment page.

Central banks are increasingly looking to the markets to evaluate the perceived success of their most recent monetary policy efforts. It is not that rate cuts, fresh QE and the more unorthodox programs being pursued nowadays are intentionally targeting moves in equity market or exchange rate benchmarks. The objectives of the broad easing effort is - for the most part - still directed towards economic results such as lifting inflation, encouraging lending and generally supporting growth. However the effectiveness of these efforts can be undermined by the capital markets which may deem the fresh support insufficient which adds an additional financial risk to the mix.

Many policy programs have some time ago connected their success to an influence over their markets, and that assumption has carried forward. The European Central Bank said back in early 2014 that a EUR/USD exchange rate over 1.4000 was a risk of deflation or disinflation and therein connected policy to a specific level. The Bank of Japan was the most blatant about its interest to drive the Yen lower; and despite backtracking, the market assumes its intention. Even former Federal Reserve Chairman Ben Bernanke said there was an interest in bolstering capital markets which could provide a 'trickle down wealth effect'. For a while, these efforts worked. However, as the scale on programs increased and the competition intensified, traction was lost.

Thursday Morning in Wellington, the Reserve Bank of New Zealand offered us the most recent evidence that a world awash in accommodative monetary policy for dubious means was further deflating new, discrete efforts to correct problems. The central bank cut the key benchmark (a bellwether for carry trade) and warned more may be ahead, yet NZD/USD and New Zealand crosses advanced. Add that to the 'disappointing' reactions seen following the RBA, BoE and BoJ over the past two weeks. Can the central banks impress the markets? Should they even try? And how do traders evaluate this fundamental development? We discuss that in today's Strategy Video.

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