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By HaleStewart June 10, 2014 12:44 pm
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Ranking the Major Central Banks In the Order of Most Likely to Least Likely to Raise Rates

There are several major events in currency trading that can alter the fundamental trajectory of a currency’s chart.  Perhaps at the top of the list is a change in the home country’s interest rates.  Below is a list of the big 6 currency countries -- the EU, UK, US, Canada, Japan and Australia – in order from the most likely to raise rates sooner to the most likely to raise rates later.  Before moving, please note that no country is facing any major inflationary pressures forcing them to raise rates.  Also, as China’s currency is essentially manipulated, it’s pointless to include the PBOC in the list.

Most Likely to Raise Rates Sooner

UK: UK economic news started to turn the corner in the 3Q of last year with bullish news from the Markit service and manufacturing reports.  Then in the 3Q-4Q of last year, the annual rate of GDP growth turned positive, accelerating over the last two reports.   At the same time, unemployment has been dropping, the housing market has taken off (in fact, it’s probably close to bubble territory now) and retail sales have rebounded strongly.  Of all the major OECD economies, the UK is closest to raising rates.

US: While this might seem counter-intuitive with the somewhat softer data in the 1Q, the slow rate of Canadian growth over the same period indicates the US slowdown was most likely weather related.  US Manufacturing and service sector surveys from both Markit and ISM are pointing to stronger growth, retail sales are doing fairly well, job growth is at least treading water and auto sales are increasing at solid rates.  While the housing market is slowing, I believe it will pick up a bit over the next 6-12 months as consumers realize that current interest rates – while increasing – are still a historical bargain.  Finally, the Fed is already cutting back on its asset purchases at a pace of roughly $10 billion/month.

Not Moving Anytime Soon

Canada: The Canadian economy is doing OK: annual GDP is printing between 2% and 3% for the last three quarters, manufacturing PMI has been printing over 50 for the last year, and retail sales have been increasing between 2.8% -3.9% Y/Y for the last year.  But unemployment remains stubbornly high and exports – a key data figure for a natural resource rich country like Canada – are lack-luster.  What Canada really needs is for its trading partners to start growing faster for their exports to meaningfully increase.

Australia: Australia has had the benefit of being a prime raw material exporter for China for the last 10 years.  As such, the country hasn’t experienced a major recession over the last 20 years.  But with China slowing, Australia has to re-balance their economy from that of a raw materials exported to one with more balanced growth composition between raw material development and other areas of the economy.  The latest annual GDP Growth rate printed at 3.5% with a 2.9% inflation rate.  Simply put, there’s no need for the central bank to move in either direction with those numbers.

Lower Rates More Likely

EU: at its latest meeting, the ECB FINALLY cut rates and voted for a negative deposit rate for funds held by the ECB for banks.  The purpose of the negative rates is to encourage banks to not store funds with the ECB but instead loan them to businesses.  However, the ECB may need to lower these rates further as a way to “get the message out.”  In addition, a further cut in the overnight rate is likely as well.

Japan: Devaluing the yen was one of the three arrows of Abenomics.  To accomplish this, the BOJ is moving to double the monetary base over a 12-18 month period with the intended result occurring in the form of a devalued yen.  While interest rates are currently at .1%, it’s a bit more likely for the BOJ to follow the ECB’s lead of lowering deposit rates to negative territory in order to increase lending, thereby adding to inflationary pressures. 

Hale Stewart is a former bond broker who has been writing about economics and financial markets since 2006 on the Bonddad Blog.  He is also a tax attorney with a domestic and international practice while also forming and managing captive insurance companies for US companies.   You can follow him on twitter at:@captivelawyer 

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