Looking after volatility

The dollar has emerged stronger from the past few eventful days and is trading at its highest levels in 2021 against the euro.  The greenback rose against almost all currencies as the yield on the 10-year Treasuries rose 1.50% for the first time since late June. At its policy meeting last week, the Fed hinted that it would reduce its asset purchases from November onwards and end its quantitative easing (QE) in the middle of next year. Once this is done, it may consider a gradual increase in interest rates. Its forecasts for the evolution of key interest rates were also revised upwards slightly. Half of the members of the committee now expect an initial rate hike as early as 2022. For Jerome Powell, encouraging employment figures in the next few months should trigger the process and would confirm the Fed’s expectations. The institution revised its forecasts at this meeting and now sees rates at 0.3% in 2022, 1% in 2023 and 1.8% in 2024. It is worth noting that two senior members of the central bank generally seen as hawks were forced to resign this week after revelations of private trading in the equities market, an activity Mr Powell deemed as “clearly not adequate”. Robert Kaplan of the Dallas Fed and Eric Rosengren of Boston will thus retire in the next two weeks. It is highly unlikely that this event will fundamentally change the policy of the central bank.

The single currency also lost ground against the dollar due to the German elections this weekend. The economic powerhouse of the eurozone is entering a period of uncertainty, as negotiations to form a coalition could drag on. Social Democratic Party leader Olaf Scholz said that a government coalition will be formed by Christmas. Talks between his party, the Greens and the Liberals will take place in the next few days, although at this stage a grand CDU/SPD coalition seems unlikely. The negotiations are therefore likely to be long and difficult.

Uncertainty over the future of Evergrande, China’s largest property developer, the outcome of the German elections and signs of a slowdown in growth did not have a significant impact on the Swiss franc, which stabilised at 1.0800 against the euro. The SNB kept its interest rate at -0.75%, as expected, but nevertheless lowered its growth forecast for the Swiss economy, just as the Fed did before for the US economy. While the Swiss economy was expected to grow 3.5% for the year, the forecast has been lowered to 3%. In view of the general situation, the SNB considers it necessary to maintain an expansionary monetary policy and is also prepared to intervene in the foreign exchange market if necessary.

The month of September, in which central banks reopen after the summer, saw some institutions adjust their monetary policies.

For example, Norway has kicked off a monetary tightening. The Central Bank raised interest rates by increasing its key rate by 25 basis points to 0.25%. This decision, which was expected by the markets, brings yields back into positive territory.

The Bank of Brazil increased its base rate by 100 points to 6.25%. After seeing inflation soar this year, the key rate, which had bottomed out at 2% in 2020 and early 2021, is expected to rise to at least 7.25% by the end of the year, the highest since 2017.

On the other hand, and despite a galloping inflation rate of 19%, the Turkish Central Bank actually lowered its key rate from 19% to 18%. President Erdogan’s repeated pressure for monetary easing is not unrelated to this decision. The Turkish lira fell to a new all-time low of 8.8938 lire to the dollar as markets fear the central bank’s loss of independence.

Status quo has held for the Bank of England but, although the 9 members of the committee have maintained monetary policy unchanged, two of them now support the idea of ending quantitative easing. This news boosted the pound last week, but it fell heavily in the early part of this week after announcements of petrol and lorry driver shortages. The UK and Ireland Fuel Distributors Association says that 50-90% of petrol stations have no reserves to supply the population due to delivery problems caused by a lack of drivers. As a result of Brexit, the UK is facing a shortage of almost 100,000 lorry drivers.

With the central bank period behind us, the market will refocus on economic data and particularly US employment data on Friday 8th, which Fed Chair Jerome Powell has cited as essential. Until then, it is not certain that the market will regain the volatility that even monetary policy meetings have failed to reactivate.

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