The RBA, BOE, and ECB’s Race to Debase

The non-farm payrolls (NFP) week usually focuses on the state of the U.S. economy and its impact on the Greenback. But with most of the U.S. traders psyched over the 4th of July celebrations, it was easy for the RBA, BOE, and ECB interest rate announcements to steal the spotlight from U.S. data. In fact, all three central banks managed to significantly weaken their currencies last week!

Reserve Bank of Australia (RBA)

What was said: Like last month, the RBA cited muted inflation rates, below-average economic growth, and the strong Australian dollar as their reasons why they’re still not ruling out a rate cut. What made traders pay attention was the RBA’s remarks that they’re expecting further weaknesses from the Aussie, which they think would help stabilize their economy.

Impact on the Aussie: Not surprisingly, AUD/USD reacted strongly to the RBA’s expectations of a weaker Aussie. The pair fell by 50 pips on the first 15 minutes of the release and even ended the day almost 100 pips lower than its open price!

Bearish effect: 6/10. Although the RBA’s remarks were bearish, they really didn’t add anything new from last month’s release. It also didn’t help that the central bank went to great lengths to explain that the decision to hold its rates steady was a no-brainer for the members, which means that they’re not seriously considering another rate cut anytime soon.

Bank of England (BOE)

What was said: New BOE head Mark Carney didn’t waste any time by releasing a statement at the same day the central bank published its monetary policy decision. In his speech, he explicitly said that the expectations of higher interest rates in 2015 are not supported by recent economic developments. Imagine the mini heart attacks from the pound bulls when they heard that!

Impact on the pound: Bloodbath can’t even begin to describe what happened to the pound. Traders immediately adjusted their interest rate expectations and by the end of the day, the pound had dropped to a 5-month low against the dollar and had fallen by hundreds of pips against its other counterparts.

Bearish effect: 9/10. With Mark Carney giving strong and direct statements, traders also couldn’t help but responding strongly and directly. In this not-so-old man’s book, he couldn’t have done better at weakening the pound than if he had said “Sell the pound. Sell it now.”

European Central Bank (ECB)

What was said: Mario Draghi was always the life of the party on days of BOE-ECB interest rate decision tandems, but last week he was upstaged by Mark Carney. His own speech didn’t lack firepower though, as he still managed to inspire caution by saying that risk surrounding the economy continue to be on the downside, and that interest rates are expected to stay low “for an extended period of time.” Yep, you heard that right. Super Mario just borrowed a page from Helicopter Ben’s book!

Impact on the euro: Much like the pound, the euro also sustained heavy losses against the dollar and the yen. EUR/GBP and EUR/CHF ended the day in the green though, so Draghi might not have been as bearish as Carney was.

Bearishness effect: 7/10. I could say that Portugal’s political woes had already weighed on the euro or that some traders didn’t appreciate Draghi borrowing Ben Bernanke’s mantra. In any case, there’s no denying that the euro didn’t react to the actual ECB statement as strongly as the pound had to the BOE’s report.

With their high-yielding currencies stunting domestic economic growth, you can’t really blame the RBA, BOE, and ECB for trying to use their monetary policy statements to weaken their currencies. For this round, I’m giving the “Race to Debase” award to Mark Carney for originality and impact.

Next week we’ll have the monetary policy speeches of the Fed and the Bank of Japan (BOJ), two central banks that are already dealing with rock bottom interest rates. In your opinion, which central bank will have a more bearish statement and what will they most likely say?


  • kanubhai

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