US Rates on Hold into 2010
The dollar weakened across the board following the announcement from the Federal Reserve that it is to keep rates at close-to-zero into 2010.
The continuation of the ultra-loose monetary policy confirms the Fed is willing to risk inflationary pressures for the sake of securing a stronger and sustainable economic recovery.
However, analysts did interpret the slight change in policy wording as an indication that the Fed had moved on from its ‘wait and see’ approach and is now planning to increase rates from the current 0.0%-0.25% band in 6 months.
Last month the Fed described the economy as “stabilizing”. This month the US Central Bank is clearly more optimistic and commented the recovery had “continued to pick up”.
Also reinforcing the differences in growth expectations between the US and UK the Fed confirmed it was to reduce its $200bn Freddie Mac (FRE) and Fannie Mae (FNM) mortgage debt purchase program by $25bn due to “the limited availability of agency debt”.
This compares to the £25bn extension of the Bank of England’s quantitative easing program also announced this week.
The US economy grew at an annualised rate of 3.5% in Q3, progressing 0.9% quarter on quarter. The UK economy contracted 0.4% in Q3 according to preliminary data.
Australia Hikes Rates Again to Keep Pace of Recovery in Check
For the second time in just a few weeks the Reserve Bank of Australia has increased rates by 0.25%. The RBS rate now stands at 3.5%.
The RBA Governor Glenn Stevens commented growth among Australia's major trading partners in the Asian region were experiencing "noticeably better" conditions and "Growth in China has been very strong, which is having a significant impact on other economies in the region and on commodity markets.”
The pace of recovery in Australia has surpassed most expectations and further rate rises are highly likely early in 2010 though the RBA may hold from further monetary action for the rest of 2009 as it digests ongoing data.
The Aussie dollar has gained sharply against the USD over the past year progressing from the oversold cyclical bottom of AUDUSD $0.60 to more than $0.90. Forward looking interest rate differentials are likely to maintain the current trend, or at least protect recent Aussie gains.
Chart: AUDUSD Weekly. Source: StockCharts
Bank of England Gives Up the Waiting Game and Adds another £25bn to QE Program
The BoE, faced with mounting criticism and a steady stream of predominately poor economic news gave up its ‘wait and see’ policy in relation to the £175bn of stimulus already injected into the banking sector and announced its intentions to print another £25bn.
The expansion of the quantitative easing (QE) program was expected by many analysts and Sterling actually jumped on the news with traders fearing the BoE might have committed another £50bn to the failed program.
The QE policy has facilitated the purchase of vast amounts of Gilts, government debt, from banking and financial institutions. The cash was then supposed to be passed on from the banks via lending and investment into the wider economy boosting jobs and economic growth.
However, the report attached regarding Lloyds Group (NYSE:LYG) and Royal Bank of Scotland (NYSE:RBS) highlights the fact much of the UK banking sector is still hamstrung from the 2008 credit crisis and is still structurally incapable of acting as a baton carrier for the BoE’s stimulus efforts.
The BoE also announced UK rates were unchanged at 0.5% and that the £25bn of additional stimulus would be injected into the banks over three months, half the pace compared to previous QE increases.
The QE program commenced in March with £75bn. £50bn was added in May. A further £50bn was added in August.
The UK is now the only major economy still is monetary easing mode and the vast majority of economists now predict the first rate hike will probably be executed deep into 2010 as opposed to during Q1 as previously expected.
The Labour government predicts a return to growth will occur “at the turn of the year”.