By Vishnu Varathan, Head, Economics & Strategy, Asia & Oceania Treasury Department, Mizuho Bank, Ltd.,
Framing & Bias
Despite both the Fed and ECB implicitly acknowledging “taper” in the foreseeable future, the Fed-ECB impact appears to be a tale of two cities; albeit a rather subtle one.
In essence, both central banks have the same bottom-line of continued QE. But two nuances make for all the difference. And this comes down to framing and bias.
On framing, San Francisco Fed Mary Daly caused a mini stir with her comments that the Fed is “talking about tapering”; arguably framing this as “taper” considerations.
In contrast, the ECB ‘s views that “conditions … do not justify reducing the pace of purchases” (of PEPP) have framed the timing issue of “taper” as simply “not yet”. Interestingly, there is something to be said about not overindulging in forward guidance.
Second on bias, the Fed, with even more dovishly inclined dual mandate of flexible average inflation targeting is expected to be far more dovish one; whereas the ECB, recognized for its single mandate, which limits space for accommodation amid rapidly rising inflation, is assumed to be constrained in dovish response.
Thus, resulting in diametrically (albeit gently) opposed outcomes owing to differences in assumed biases in spite of a similar position of the central banks (“taper” down the road).
Here, the ECB’s “dry gunpowder” may be a convergence with the Fed on inflation tolerance. To our point, while US equities eked our modest gains (S&P500 up 0.2%), European equities wavered, slipping 0.1%. And despite UST yields lifted ~2bps, European yields slipped ~4bps.
FX markets dove-tailed with cross-Atlantic bond yield divergence; with USD rebounding; setting back EUR below 1.22; lifting USD/JPY clear of 109; stalling USD/SGD glide down to 1.32; knocking AUD from high- to low-0.77. A firm Q1 capex read may partly restore AUD traction.
But for now, overdone easing bias of the USD, and framing stretched USD shorts as cost-benefit trade-off amid Fed-ECB shifts is reason for USD bears to be cautious rather than brash.
BoK: Comfortable Hold …
Bank of Korea will be comfortable keeping policy on hold (at record low rate of 0.50%); maintaining a dovish bias that is complementary – mostly via liquidity and B/S channels – to fiscal stimulus. To be sure, the uneven recovery in the Korean economy, with much weaker pockets of domestic demand with attendant soft spots in jobs, remains a bug bear for the BoK.
Nonetheless, with the growth outlook buoyed further by a boost to semiconductors, aggregate economic conditions are not aligned (if not at odds) with further aggressive policy stimulus.
And with the BoK set to lift 2021 growth projections from the ballpark of 3% to “mid-3%” monetary policy taking a backseat to far more fine-tuned and targeted fiscal tools may be the optimal policy mix to deal with stubbornly patchy recovery beneath aggregate pick-up.
But equally, this also means that it is premature to mechanically dive into discussions of policy normalisation in response to an improved economic outlook . Fact is the distribution of recovery is uncomfortably uneven while downside risks from COVID are far from dispelled.
And so, until a more emphatic recovery that permeates many more sectors, resulting in a more broad-based labour market improvement, the BoK will probably sit on its hands.
Crucially, Korea’s vaccination progress, may be the “insurance” that the BoK may be gauging before it considers a distinct shift in policy gear to neutral-with-normalisation view.
And so, the BOK is not merely assured of the justifications for its dovish hold, but rather it is comfortable in maintaining current accommodation through the 2021 recovery.
Credit: Mizuho Bank Ltd