By Michael O’Neill
The 2017 World Series of Poker is still six months away but FX market poker is in full swing. At this table, the central bankers are the jokers and the new US president is trump.
On December 14, 2016, the Summary of Economic Projections was released alongside the policy statement. The dot-plot chart indicated three rate hikes in 2017, instead of two that were previously forecast.
That may not be enough, if the FOMC minutes can be used as a guide. The minutes, released on January 4, 2017, have Committee members expressing concern that the “upside risks to the forecast had increased. Those risks may be exacerbated considering that “about half of the participants incorporated an assumption of more expansionary fiscal policy in their forecasts”. So what happens when the other half start plugging in their assumptions after Mr. Trump sits in the oval office? Does the dot-plot get another one or two increases pencilled in? If the upside risks come to bear, that is a reasonable scenario.
Another way of looking at the FOMC minutes is; the thinking on the Committee is that the Committee doesn’t know what to think.
They said so, themselves. “participants emphasized their considerable uncertainty about the timing, size, and composition of any future fiscal and other economic policy initiatives as well as about how those polices might affect aggregate demand and supply.”
Across the pond (and then the channel) the European Central Bank’s (ECB) Mario Draghi, is another joker and a master of Orwellian “double-speak.” In December, he announced that the ECB would reduce its monthly bond purchases from €80 million to €60 million which is similar to a tapering move. He said that “tapering was not discussed “at the meeting, conveniently ignoring the Oxford Dictionary definition of tapering which is; “a gradual or incremental reduction.” The ECB is trying to jump-start a Eurozone economy that is under performing. Mr. Draghi said “economic growth in the euro area is expected to be dampened by a sluggish pace of implementation of structural reforms and remaining balance sheet adjustments in a number of sectors.”
And, like his FOMC counterparts, he is unsure of what’s in store for 2017. He noted “it is difficult to judge the effect of these big events, not only the election of Mr. Trump, but Brexit, the defeat of the Italian referendum.”
The Bank of England is at the same table as the FOMC and the ECB. Unfortunately, BoE Governor Mark Carney isn’t playing with a full deck. And no, not because he is a part-time climate change expert howling at the moon and railing against global warming but because he and his colleagues have been saddled with managing the monetary policy fall-out from the Brexit bomb. Mr. Carney is on record stating that the outlook for Britain’s financial stability remains “challenging”. The biggest issue for the Bank of England is that the politicians do not have a plan. The British Ambassador to the EU, Sir Ivan Rogers, just quit. He complained that the basic structure of the UK Brexit negotiating team had not been resolved and they didn’t have a negotiating strategy.
The Bank of Japan has its issues as well. They have negative interest rates and a quantitative easing program of ¥80 trillion per year. They also keep pushing back the date for when they expect all these measures to boost inflation to 2% per year. BoJ Governor Haruhiko Kuroda said that the Japanese economy would grow above its potential. He hedged those remarks by warning of risks to the outlook from developments in the US economy and monetary policy.
A recurring theme in the policy statement and press conferences of “The Big Four” central bankers was “uncertainty” which is also appears to be a euphemism for Trump, as in Donald J. Trump, soon to be the 45th President of the United States.
The jokers of the central banks may be uncertain of Mr. Trump’s impact on the 2017 economic outlook but the president-elect has already made a splash.
His promises of corporate and personal tax cuts and massive infrastructure spending has lifted US equity markets and long term bond yields. Canada’s TMX composite has gone along for the ride.
He has called China a currency manipulator and the Peoples Bank of China (PBoC) was buying Renminbi (RMB or CNY) aggressively on January 4th.
Mr. Trump tweeted a threat to General Motors that if they built the Chevrolet Cruz in Mexico, he would levy large import taxes on the Mexican built cars.
That tweet spooked Ford Motor Company into cancelling a $1.6 billion plant investment in Mexico and they will now invest $700 million in Michigan. Ford officials denied that it was anything but a business decision.
Made in Mexico by GM? There will be a tax! Photo: Shutterstock
Since election day on November 8, the US dollar has rallied against all the G10 currencies including a 12.1 percent rise against the Japanese yen. The greenback gained between 4.6 and 5.4 percent against Aussie, Kiwi, Swiss and the Euro. The only currencies to post gains have been the Canadian dollar and Sterling.
That is an impressive array of economic accomplishments and the man hasn’t even been sworn in.
In FX market poker, one Trump beats 4 central bank jokers.