End in sight for era of extraordinary loose central bank policy

The tide is turning: central banks are finally in the process of ending their extraordinary loose monetary policy stances that had been originally established in response to the global financial crisis and the economic slump that ensued. The US Federal Reserve started the process of normalising its policy, raising interest raised rates three times now. The Fed has now even started plans to reduce its balance sheet. The Bank of England today gave a strong hint that it too is about to raise interest rates as the “CPI overshoot may be bigger than previously thought,” which saw three MPC members vote for a rate increase, but were ultimately outnumbered by the five who decided, for now, to keep monetary policy unchanged. The Bank of Canada is another central bank which hinted at the prospects of raising interest rates earlier this week. So far, the European Central Bank has resisted the pressure to raise rates, but with economic data improving noticeably in the Eurozone it could only be a matter of time. We will hear from Bank of Japan in the early hours of Friday. And in Australasia, the Reserve Bank of Australian and that of New Zealand are pretty much neutral with their next policy decisions likely to be to increase rates rather than to lower them. Bucking the trend is the Swiss National Bank, which continues to remain the most dovish central bank out there, as it made it clear in its policy statement earlier today.

So you get the picture: central banks are on the whole turning hawkish, which in theory should be negative news for the equity markets which had been supported until now by low rates and QE. Among the central banks, the Fed is the most hawkish out there currently and the SNB is the most dovish. This policy divergence should support the USD/CHF going forward. The Swissy has reclaimed its broken bullish trend line, so it will be interesting to see if it will be able to climb back towards the top of its range again given the renewed hawkishness from the Fed. To get there, the USD/CHF will need to clear a few key hurdles, for example at 0.9865 (old support) and around 0.9960-1.000 area (200-day average and bearish trend line).

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