This morning the WSJ leads with an article that summarizes the prevailing market confusion at the moment, namely that global currencies are soaring, "defying central bankers" despite a flurry of easing around the globe in the past month, all of which have been undone by one Fed dot plot which cut the number of rate hikes forecast by Yellen & Co., from 4 to 2. To wit: "efforts by many of the world’s central banks to weaken their currencies are failing, raising concerns about whether policy makers are losing the ability to wield control over financial markets."
Despite the Bank of Japan ’s efforts to push down its currency and jump-start the economy with negative interest rates, the yen is up 8% this year and is at its strongest level against the dollar since October 2014. European central bankers are having similar problems containing the strength of the euro and other currencies.
The European Central Bank has struggled with its efforts to weaken the euro, which gained 0.8% against the dollar on Thursday. Last week, the ECB cut interest rates further into negative territory, yet the currency is up 4.2% this year.
Even some central banks with less actively traded currencies are having a hard time guiding markets. Norway’s central bank on Thursday cut its main interest rate to a record low of 0.5%, and a bank governor said he wouldn’t rule out negative rates, in which central banks charge big lenders to hold deposits. The Norwegian krone gained more than 1% against the dollar and was up against the euro.
The WSJ then briefly touches on what we have been warning about since 2009: "These difficulties are a reminder that the long stretch of exceptionally low rates in response to the 2008 financial crisis has created market distortions that may be difficult for central bankers to contain" and concludes that "this disconnect could produce more volatility in financial markets. Even if investors can predict what actions central banks are likely to take, they are having a hard time predicting how markets will react, potentially sparking a pullback from riskier assets, such as emerging markets or commodities."
In other words, nobody has a clue what is going on, but at least whatever the "central bank accord" agreed upon during the G-20 meeting, it has pushed stocks 10% higher from the February 11 lows. For now.
Which is to be expected: after all not even central banks have any idea what they are doing as the full relent by the "no longer data dependent" Fed showed on Wednesday, when Yellen decided to chicken out from the tightening cycle even though the PCE deflator of 1.7% is will above her year end target, while unemployment is at the low end of the Fed's long-term forecasts.
In sum: "There is a rising concern that central banks are testing the limits of their policies,” said Brian Daingerfield, a currency strategist at RBS Securities. “Each time you take a tool out of the tool kit, it gets closer to being empty.”
But the best summary of just how confusing it all is comes from BofA's Athanasios Vamvakidis who writes the following:
If FX is the messenger, the message is not clear
The FX market is confusing this year. More easing by the BoJ, the RBNZ, the Riksbank, the ECB and the Norges Bank, led to stronger currencies, despite delivering more than markets had expected in all cases. The market seems to be taking recent monetary policy easing as evidence that central banks are reaching their limits, as their forward guidance has sent mixed signals. We disagree in the case of the ECB, but are more sympathetic in the cases of the BoJ and the Scandies. A surprisingly dovish Fed this week added to the confusion, by ignoring the latest improvement in US data and better global market conditions. The market moves would be consistent with EM central bank interventions, as the time zone analysis in our quant section would suggest.
Vamvakidis' take home:
However, we do not believe that this is sustainable. In our view, the more counterintuitive the market moves, the sharper the correction during the inevitable reality check.
That, however, should be no problem: once we get the reality check, central banks will unleash even more liquidity surreality, undoing what is now an 8 year overdue mean reversion, and forcing global central planners even more all in on their attempt to "reflate or bust." And reflate they will, one way or another. After all, it was just one month ago when monetary paradrops and banning cash were the dominant topics in the financial media.