Overnight the BOJ cuts rates while the RBA keeps rates steady – both surprising moves out of Asia (via Trade the News):
– Both and BoJ and the RBA surprised markets with unexpected rate action. First out was the RBA decision to leave interest rates unchanged in Australia at 4.50%. Earlier in the session Treasurer Swan hinted , “Cannot assume rates will be hiked today.” 19 out of 23 analysts thought otherwise. Comments implied that there was to be a hike in the short term in order to keep inflation consistent with target. RBA felt important commodity prices to Australia remained high domestically and globally the economy will ease into trend over the coming year. AUD responded by selling off about 90 pips.
– BoJ announced plans to pursue powerful monetary easing through the introduction of an additional ¥5T of funding to purchases various financial assets including JGBs, corporate paper, treasury bills all speculated in the Japan press leading up to the announcement. USD/JPY responded by some temporary gains. BoJ expects the pool of funds to be around ¥35T. Domestically the economy is recovering moderately but improvement in weakening and GDP is unlikely to meet July forecast.
It looks like the global race to the bottom is heating up. Central banks around the world are attempting to devalue their currency with the hope that exports will take the place of a lack of private consumption. Of course, it’s mathematically impossible for everyone to devalue and become a net exporter. At this juncture, the only major region that doesn’t appear to be easing monetary policy in some manner is Europe. It’s safe to assume that they won’t stand by idly while global central bankers drive the Euro ever higher….The global credit crunch appears to be going along as expected. The next steps in this intricate dance usually involve some form of trade war followed by recession followed by some form of global conflict. Let’s hope history plays out differently this time around….
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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