World central banks are preparing for lower rates

World central banks are preparing for lower rates. So, starting in 2019, the US Federal Reserve System (FRS) rhetoric began to change  gradually from hawk to a softer dovish tone. More details on the reasons for such behavior and expectations can be found in the article “To increase or not to increase the difficult choice of the US Federal Reserve System”.

As a result, the US Fed made it clear to the market that it wouldn’t be such tempo of rate hikes, as it was in 2018. At the same time, the Fed has retained the “place for maneuver”, not giving clear predictions on the rate hike in the United States, and also declared a difficult economic situation that may require tough measures in the form of a rate hike.

In addition to a soft monetary policy, the European Central Bank (ECB) has long adhered to and is not going to retreat from it. Against the backdrop of the Fed and the possibility of lowering rates in the US, the ECB’s soft policy may not be enough. In fact, if the United States starts lowering rates, the eurozone will also be forced to take similar measures.

While the Fed began to think about lowering rates, and the ECB is struggling to justify the super soft monetary policy, the Reserve Bank of New Zealand (RBNZ) unexpectedly decided to join the soft monetary policy camp. It triggered a wave of pessimism about both the New Zealand dollar and commodity currencies, as well as in the stock markets and in  the market in general. If the RBNZ is decided on such steps to lower rates, then similar actions should be expected from the Reserve Bank of Australia (RBA). Australian economic performance is noticeably worse than New Zealand.

Statements about the slowdown in the economy and taking a waiting position from the RBA should be expected on April 2, 2019. The technical picture also helps to reduce the Australian dollar, pointing to the annual descending channel and the formation of the “double top” pattern.

The AUD/USD chart

With all the skeptical expectations, other global central banks (CB) are also inclined gradually to a soft monetary policy. The actual reduction in the Fed’s rates may cause a chain reaction for other central banks (Canada, Australia, New Zealand and the eurozone). At the same time, the Bank of Japan will probably also not stand aside and will resort to the favorite instrument for weakening the yen – verbal intervention.

Anton Hanzenko