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Chart of the Day: Central bank expectations

Changing tack a little today and looking at what the market is expecting from central banks. Here, I’ve looked at the implied probability of a cut at the respective upcoming meeting, then in the last column the expected easing (in basis points) over the coming 12 months. We can assess this from the interest rate and swaps market pricing.

Implied rate path

It's fair to say we’re in for an active October and November, with the market expecting easing from the Federal Reserve, Bank of Japan, and Reserve Bank of New Zealand. Meanwhile, they’re split on whether the Reserve Bank of Australia will cut again to 50bp. That said, with regards to the RBA, the market feels that if they don’t go in October, the implied probability of the RBA cutting in November sits 66%. We’re in a race to the bottom. And for those questioning why all the volatility is in equity and energy markets and not FX, then we can start with the fact that global central banks are broadly moving in alignment with easing interest rates.

For those feeling we’re going to see the USD materially weaken as the Fed cuts, it’s important to see that at this stage the Fed needs to do far more to compel speculators to offer USDs. Consider that hedge funds are loath to pay carry-on USDs unless they genuinely believe the underlying position is going to move significantly. It’s interesting to see such high expectations for easing from the BoJ, and one questions if that keeping JPY buyers at bay.

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