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What Happens When Central Bank Policies Diverge?


From the Buzz & Banter: When central banks aren't on the same page, already weak medicine loses even more efficacy.

This article was originally posted on the Buzz & Banter where subscribers can follow over 30 professional traders as they share their ideas in real time. Want access to the Buzz plus unlimited market commentary? Click here to learn more about MVPRO.

The inflation forecast for Europe continues to languish going into the ECB meeting. As the Fed inches back toward a neutral, low-rate stance, the ECB will be debating several easier calibrations. Halting the sterilization of Securities Market Programme bond holdings is a possibility. Another, one with more international consequences, would be moving the deposit rate negative. This could alter the projected forward guidance path in dollar deposits and often proves tricky to return to normal.

China has struggled in 2014 and key money rates have fallen harshly from the spike at 2013 end. The 7-day repo dropped 100bps recently, bringing back liquidity draining operations, which could pick up by mid-March. The yuan has been falling along with this adjustment.

The US, Europe, and China end up on different pages of the inflation handbook. The domestic focus, though needed, shows the consequence of money that flows around the world in milliseconds. When central bank policies diverge, already weak medicine loses even more efficacy. The US stock market becomes a repository while turbulence is low and things get sorted out. Any bumps, like January, and participants quickly hide. If ECB President Mario Draghi goes negative, Fed Chairwoman Janet Yellen's job will become more difficult.

Twitter: @Hooper_Quant
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