FXEMPIRE
All

Will the BoJ and the ECB join the Fed or show strategic prudence?

Monday is a day off in the American markets due to the Martin Luther King’s Day. Because of the holiday, trading on other markets also promises to be muted.
Alexander Kuptsikevich
BOJ

However, the following week promises to be an eventful one, with decisions by major central banks, including the Bank of Japan, Bank of Canada and the ECB. The troika – Fed, ECB, and Bank of Japan – are the most influential global central banks, capable of significantly affecting trends in global markets as they did four years ago. Hence, it is worth paying more attention to their signals at the beginning of the year.

More and more observers point out that new highs by American indices on an almost daily basis linked with the interbank market liquidity pumping from the Fed. By early September, the Fed stopped letting its balance sheet shrink. It soon began to replenish it with short-term US government bonds to fill the repo market with liquidity, where at some point the rates jumped up to 10%, four times exceeding the target levels of the central bank.

As soon as it became clear that the Fed’s emergency liquidity pumping measures in September, the US indices switched into a regime of the virtually unstoppable rally. The same can be said about the actions of the ECB, which in August announced the restoration of asset purchases on its balance sheet since November.

Bank of Japan did not stop feeding the markets with liquidity. The total balance sheet of these three central banks is approaching $16 trillion, updating record highs. It can hardly be considered a coincidence the balance sheets growth of the largest central banks and the growth impulse in the markets.

However, the actions of the ECB and Bank of Japan look much more cautious than the Fed. Perhaps, this explains why American markets are much more active in updating their records. This week, the ECB promises a comprehensive monetary policy strategy review. If this revision brings the ECB closer to the Fed in terms of increasing aid to markets, it may refresh the growth of the eurozone stock markets. The same applies to the Bank of Japan, whose meeting will be held tomorrow morning.

If the ECB and Bank of Japan focus on the negative aspects of the existing movement in the stock markets, it may trigger a correction rollback and even become a defining feature of the full-year trends. The negative sides are widely known and often highlighted in the press.

Buying government bonds on the central bank balance sheet is essentially government financing, which devalues the currency. Also, pumping markets with liquidity contributes to debt accumulation. At some point, they will have to pay for it. However, if central banks intend to soften the policy further, this moment of reckoning may be somewhat distant, but as a result more destructive.

This article was written by FxPro
Don't miss a thing!
Discover what's moving the markets. Sign up for a daily update delivered to your inbox

Latest Articles

See All

Expand Your Knowledge

See All
IMPORTANT DISCLAIMERS
The content provided on the website includes general news and publications, our personal analysis and opinions, and contents provided by third parties, which are intended for educational and research purposes only. It does not constitute, and should not be read as, any recommendation or advice to take any action whatsoever, including to make any investment or buy any product. When making any financial decision, you should perform your own due diligence checks, apply your own discretion and consult your competent advisors. The content of the website is not personally directed to you, and we does not take into account your financial situation or needs.The information contained in this website is not necessarily provided in real-time nor is it necessarily accurate. Prices provided herein may be provided by market makers and not by exchanges.Any trading or other financial decision you make shall be at your full responsibility, and you must not rely on any information provided through the website. FX Empire does not provide any warranty regarding any of the information contained in the website, and shall bear no responsibility for any trading losses you might incur as a result of using any information contained in the website.The website may include advertisements and other promotional contents, and FX Empire may receive compensation from third parties in connection with the content. FX Empire does not endorse any third party or recommends using any third party's services, and does not assume responsibility for your use of any such third party's website or services.FX Empire and its employees, officers, subsidiaries and associates, are not liable nor shall they be held liable for any loss or damage resulting from your use of the website or reliance on the information provided on this website.
RISK DISCLAIMER
This website includes information about cryptocurrencies, contracts for difference (CFDs) and other financial instruments, and about brokers, exchanges and other entities trading in such instruments. Both cryptocurrencies and CFDs are complex instruments and come with a high risk of losing money. You should carefully consider whether you understand how these instruments work and whether you can afford to take the high risk of losing your money.FX Empire encourages you to perform your own research before making any investment decision, and to avoid investing in any financial instrument which you do not fully understand how it works and what are the risks involved.
FOLLOW US