With summer over, beaches empty and classrooms re-occupied, the quiet time for monetary policy is over. Central bankers are returning from their respective cooling-off periods this week, and after watching from their deck chairs what happened during the month of August, they have gathered in Jackson Hole to share the new sentiment in the markets about their policy, which is just that. They will have to accelerate rate cuts to avoid a recession of their economies, as was already seen after the publication of US employment data for July.
This week, the ECB will hold its penultimate rate meeting of the year, during which A 25 basis point reduction is taken for granted to leave the benchmark at 4%. However, just a few weeks ago, the possibility of a double cut was very real on the markets. Today, a total of 75 basis points of cuts are priced in until the end of the year.
On the other side of the Atlantic, the members of the FOMC (Open Market Operations Committee) will meet next week in a meeting more uncertain than that of the ECB. The market, in this case, gives a probability of about 40% that the cut will be 50 points and not 25. In total, The year should end with the reference at 4.5%or one percentage point less than the current level.
In recent days, this has already been reflected in fixed income transactions. The major benchmark, the 10-year US bond, is trading with a yield below 3.7% on the secondary market, the minimum since June 2023 in what is a clear bet by investors for an aggressive Fed in the three remaining meetings. Similarly, the main European bond, the German Bund, is also in the lowest zone of the year, with a yield of 2.15%.
On both sides of the puddleSo there will be several rate cuts in the coming months. However, investors are clearly betting on a more hawkish Fed in this regard, and this is also reflected in the foreign exchange market.
Since the April lows The euro has already rebounded by around 5% against the dollarreaching nearly $1.12 per unit in August, a level not seen since July last year.
And investors are clearly buying this small imbalance between central banks. Net positions (long minus short) on euro futures They are approaching 100,000the highest figure since the beginning of the year, when we remember that expectations of rate cuts had also soared. For their part, investors also expect a stronger dollar in the coming months but with much less intensity since the number of futures contracts on the greenback is increasing. less than 20,000 net, a fifth of those in euros.
“Stiff inflation and good news on unemployment, which has fallen to 6.4%, another record low for the eurozone, mean that the ECB will probably have to settle for maintaining a cut every other meeting as markets anticipate a more moderate outcome, with the possibility that the euro could continue to rise if expectations are disappointed,” they point out from Ebury.
“Expectations of rate cuts are most likely overblown, and the Fed knows it. Usually reliable labor market indicators continue to weaken, as the recent rise in unemployment is the result of a supply shock rather than a cooling in demand due to immigration boosting demand.” labor force above trend,” they explain in Julius Baer. “Other indicators such as hiring intentions are firm,” they add. “In addition, uncertainty about the effectiveness of monetary policy transmission to the private sector is very high, even more so than through taxation,” they conclude.
Japanese yen trades at January levels
The other major world currency (courtesy of the yuan), the yen, has also been in the news in recent weeks. The Japanese currency was precisely the protagonist of the stock market panic of early August, when a sharp rise in its value led to the closure of many exchange operations. to trade on this currency in anticipation of the first rate hikes by the Bank of Japan, which in turn caused the Japanese stock market to collapse. Today, a little over a month after this event, the yen has continued to appreciate against its major peers. As for the dollar, this currency is already trading at its highest levels not seen since January, reaching $0.007 per yen at the weekly close.
