25 Nov 2021

As the capital markets are largely the playground of the central banks I like to look at the central bank scene from a top down global perspective. The US Fed gets most of the commentary as it is the biggest in the world however when it comes to central bank intervention relative to the size of its local economy Japan still is the biggest player by far. They have been playing the zero interest game for decades and 30yrs on are still struggling to achieve inflation. The ECB is also a decent size player.


The Reserve Bank of New Zealand raised rates for the second time this year as it tries to wrestle inflation down from above 4% to its target range of 2 – 3%. The RBA is still trying to play chicken with the market and maintains its no rate hike until 2024 while the bond market is having none of it. Let us ask ourselves the question does it really matter what the RBA does?

The answer is yes and no. Firstly lets refresh our memories to the curve control the RBA committed to until 2024 where it promised to peg the yield to 0.1%. As inflation fears took root the fears overwhelmed the bond market with the yield pushing up to 0.8% forcing the RBA to abandon its control of the curve. Coming back to the initial question does it matter?

If the cash rate which we are referring to here is at 0.1% then you can borrow money from your bank at a variable rate that will have a margin on it and it will not be too much of a worry. However, if you wish to borrow money at a fixed rate then you are forced to price of the government yield curve. Take a look at the curve of the 3yr versus 1yr to get an idea of the steepness taking effect. The current yield on the government 3yr is just over 1% so this with the commercial banks margin is what affects us buyers of property and loans for our businesses. So in the bigger scheme of things what the central banks is doing with the cash rate is not everything. A central bank can be impotent when the bond market starts dictating the terms and will then play catchup to what the market dictates. The central bank behaviour should set the agenda but in many instances they land up playing price takers versus makers.

There were some major dislocations in the Bitcoin price in India with some murmurs around legislation causing spot to trade 15% below fair value on a major exchange WazirX. If it persists there could be a Korean flavour to this arb.

Finally we are starting to see some decent volatility in the 1 month forward EURUSD, there is also an uptick in volatility in the EUROSTOX index but it hasn’t reversed the trend like the EURO. Lets see what December brings to the currency markets.

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