Stock markets have been a one-way bet for many years thanks to the 'Fed put' – but those days are over
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Monetary policy divergences may be starting to deviate between countries
EUR/USD closed above 1.10 yesterday. Effectively, it took back losses incurred for the whole of November. Yesterday's short-covering was in response to European Central Bank member Ewald Nowotny blaming market analysts for expecting too much out of the fresh stimulus measures delivered on 3 Dec. Despite its retracement in the past fortnight, EUR/USD is unlikely to move back into its higher 1.11-1.15 range seen in Aug-Oct. The objective of ECB's quantitative easing program is to ease monetary conditions via a weaker real exchange rate.
In Asia, all eyes are on the Chinese yuan. Despite the EUR's recovery, the central parity for USD/CNY surpassed its post-devaluation high of 6.4085 (27 Aug) yesterday, a new four-year low. Onshore spot USD/CNY achieved this a day earlier, while offshore USD/CNH closed above 6.50 for the first time since 25 Aug. Interestingly, the CNY resumed its depreciation after it was admitted on 3 Dec into the International Monetary Fund's (IMF) Special Drawing Rights (SDR). With exports weak and inflation low, China is seen lowering rates again, at a time when Fed is about to lift rates next week. Meanwhile, the Japanese yen appreciated after Japan upgraded 3Q15 GDP growth from -0.8% (QoQ saar) to +1.0%. Effectively, Japan is no longer in technical recession as thought previously, and hence, less need to consider a new round of stimulus. USD/JPY plunged to 121.42, below its 122.20-123.67 range of the past five weeks.
This morning, AUD/USD climbed back above 0.73 again on receding expectations for the Reserve Bank of Australia to cut rates. Australia's jobless rate fell below 6% for a second month to 5.8% in Nov15 from 5.9% in the previous month. Despite lower oil prices, consumer inflation expectations also picked up to 4.0% in Dec15 from 3.5% in the previous two months. Hence, monetary policy divergences may be starting to deviate based on each country's fundamentals against the looming US rate hike next week.