As eager Trekkies draped in robes wearing light saber replicas sat patiently near their computers in December to book tickets for the first showing of Star Wars sequel trilogy, there was another type of trilogy wars unraveling in the background that did not generate the same level of enthusiasm. Box office promoters were salivating at the prospects of opening week revenues, which topped $247.7 million. Unfortunately news channels did not garner the same level of attention even though the central bank saga unfolding created far more intrigue than Disney’s version.
Draghi may certainly not be as gripping as Count Dooku, and Kuroda fortunately is less in need of a botox job than the Emperor Darth Sidious, but their master plans were undeniably more opaque questioning their credibility. Central banks face an enormous dilemma of how to boost economic growth in their respective countries and are at a loss of finding innovative ways to achieve this. This dilemma has caused great volatility in FX markets for investors. The Swiss who are known for being reliable, surprised the markets last year by abandoning their cap on the Franc. The ECB has been swaying back and forth with regards to expanding their monetary policy easing. Bank of Japan after assuring the market that it would not consider negative interest rates, announced its new negative interest rate policy (NIRP) just last week. If their dilemma was not so dire, investors could be forgiven for thinking our central bankers suffered from acute multiple personality disorder. After all even a villain is more respected if their behaviour and motives are consistent and actions predictable.
The most prevalent concern amongst investors and bankers today is fear of global economic growth slowdown, possibly even recession. Devaluing a currency improves its terms of trade, incentivising exports to grow and hence improving the current account surplus of that country. However if each export dependent country followed the same path to outdo the other, where does it all end? Inflation, or lack thereof, is often used to justify the central bank’s current printing motives. It seems both ECB and BoJ have adopted the “we will do whatever it takes” attitude. As if global investors were not taking enough risky bets, they will now be forced to do so as bonds globally go further in negative yield territory. According to JPM report, the total balance of government bonds with negative yields hit $5.5 trillion last week.
Perhaps Draghi should have commissioned Disney to rethink their next sequel, which could turn out to be a lot more profitable than their current Asset Purchase Plan. Seeing all the Central bankers on one stage with a ton of makeup splashed on and fake pointy ears attached to their heads may not top box office sales, but at least the fans may be more entertained as the real saga continues and the ending remains debatable.
