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Monetary policies to diverge in small advanced economies with Riksbank in focus – Goldman Sachs

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 29, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Delhi) – Research Team at Goldman Sachs, suggests that their monetary policy forecasts for the small advanced economies for which they provide forecasts are broadly in line with market pricing in 2016 and 2017, with some exceptions.

    Key Quotes

    “Our base case is for central banks to be on hold (we forecast no further cuts to policy rates or unconventional easing tools to be deployed) and to begin hiking rates at a different time and pace depending on the size of the countries’ output gaps, their exposure to emerging markets (EM), and the sensitivity of output and inflation to exchange rate fluctuations.”

    “Based on our economists’ forecasts, the first central banks to begin tightening policy rates will be the Riksbank (2016Q4) and the Bank of Canada (2017Q1), and the last will be the RBA (2018Q1). Beyond 2017, our economists expect steeper money market curves than the forwards are pricing. In addition to specific country factors, this reflects our more bearish rates’ views than the market is pricing for the G4 countries.”

    “From a strategy point of view, an economy that deserves our attention at this juncture is Sweden. Our Swedish economist expects the Riksbank to be the first of the central banks of the small advanced economies for which we provide forecasts to raise the policy rate from -0.35% to -0.1% in 2016Q4 and a steeper repo path, with the rate reaching 1.9% at the end of 2019. The market is pricing the first hike about six months later and the repo rate the forwards discount at the end of 2019 is about 40bp below our target.”

    “In the near term, the risk is skewed towards a lower policy rate than we forecast given that the Riksbank, concerned about pressure on the exchange rate, may step up the pace of accommodation as the ECB eases further. That said, over the 2017-2019 horizon, our conviction that the Riksbank will tighten more than the market anticipates is high, given the strong economy, evidence that core inflation is firming and pressures coming from a financial stability perspective, which may not be fully addressed via macro-prudential policy. We therefore think that positioning for a steeper term structure for rates at the 1-3-year sector has an attractive risk / reward.
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