Divergence of monetary policy breeds instability: Nikko
Diverging monetary policy paths being taken by the US Federal Reserve, and other central banks around the world, are driving instability in the market, Nikko Asset Management global rates and currencies strategist, Roger Bridges, believes.
Bridges said the US Fed and the European Central Bank (ECB) needed to get on "the same page" if they are to stabilise international markets.
"The fact is that 99 per cent of central banks [around the world] are either easing, looking to ease or on hold, while one central bank is saying ‘we're going to tighten'," he said.
"That's creating a major problem for the world in the fact that the US dollar keeps on going up.
"The majority of commodities are tied to the US dollar, and in fact it's no coincidence that commodities started falling when the US dollar started rising in July 2014.
"A lot of the risks that we talk about are tied to the Fed and how the market perceives — and how the US dollar is reacting — to these divergences of monetary policy, because at the same time we've got the Fed seeming to be tightening or have been tightening over the last 18 months.
"The markets have been preparing for it, at the same time they know that the ECB, the Bank of Japan and everybody else is going to try to keep their currency down, so there's only one currency that can go up.
"If you got the Fed and the ECB on the same page, then we may see more stability on the markets, because then we won't have this divergence of monetary policy.
"Personally, I think the divergence story is giving instability and should last… the trouble is it can last longer than what I believe it actually should, but the natural solution is for all central banks to go to the same page, and that may be that they're all cutting rates or they start to go up… that's when stability will come back."
AUTHOR
Nicholas O'Donoghue
Recommended for you
Australian fund managers are actively seeking to launch Cayman versions of their funds to attract offshore flows, with Regal Partners set to launch its latest offering this month.
As private markets gain traction in Australia but only a limited pool of talent is available, three recruiters explore whether fund managers should consider looking overseas to find top talent.
With an explosion of private credit managers appearing in the market, two alternatives experts believe a consolidation is needed to maintain the quality of the sector.
Bentham Asset Management has become the latest fund manager to expand its distribution team as it reports increased interest in its credit strategies.
