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Central Bank Policy Divergence: Can the US Stand Alone?

The last week and a half was a busy one for central banks, with the US Federal Reserve, the Bank of Japan, the Bank of England, and the Reserve Bank of New Zealand, all coming out with rate decisions and related forward guidance.  The results give further support for the diverging policy thesis, with the Fed giving indications of a rate hike in December, while virtually all other central banks in the developed world (and many in the emerging world) are leaning towards more dovish policies.


The Fed left rates on hold but the forward guidance caused the markets to push up the probability of a rate increase in December up to 76% after the meeting.  Three members of the Fed dissented by calling for a hike in September, marking the greatest number of hawkish dissenters this year. 


Meanwhile the BOJ, the BOE, and the RBNZ left rates on hold but remained...

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Trump and the Dollar

What a difference a month can make.  Back in August, following a number of seemingly terminal errors (insulting the family of an American soldier killed in Iraq being the most egregious) the prospects of a Donald Trump presidency seemed remote.  He was trailing badly in the polls, his Republican colleagues were deserting him, and the bookies put his chances of success at about 10%.   His opponent, the respected but unloved Hillary Clinton, was cruising. 


Today, however, the US presidential race has a whole different feel to it.  Hilary continues to struggle as the embodiment of an increasingly distrusted establishment, and Trump has begun to surge in the polls.  The average of the last five surveys now has Trump marginally on top, 45.6% to 43.8%.  The bookies have slashed his odds; the implied probability of a Trump presidency is now approaching 40%.


With that in mind, it is worth considering what a Trump...

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Draghi’s Dilemma

The ECB’s decision to do nothing last week, leaving interest rates on hold and failing to extend or increase its €80 billion a month bond-buying programme, might be considered a non-event from a financial markets perspective.  This interpretation suggests that, despite some pretty big market events (e.g. Brexit) and underwhelming economic performance (updated forecasts showing that the ECB will continue to miss its ‘near 2%’ inflation target for years) Draghi was content to sit on his hands and continue as before.  Nothing to see here folks.  Anyone looking at the currency markets would be tempted to support this outlook; the euro is essentially unchanged from its pre-ECB level (1.1250 against the dollar).


However, this reading of Mr Draghi’s inaction underplays its significance.  In fact, the ECB’s failure to act last week reflects two major developments that threaten the entire euro project.  Firstly (and most obviously) it reflects the fact that the...

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