It feels like the end of a 10-year long financial era of easy money is upon us, as another central bank yesterday seemed to indicate tighter monetary policy going forward, with the Governor of the Bank of England Robert Carney publicly remarking that “some removal of monetary stimulus is likely to become necessary”. Earlier this week Mario Draghi, President of the European Central Bank, said the same thing, and currency and bond markets have reacted quite strongly. The Bank of Canada also repositioned itself into a similar position a couple of weeks ago, leaving no major central banks with a public policy of a continuation of an accommodative monetary policy.
Euro, Pound Rise
The consequences of these policy shifts have been felt immediately in the Forex markets, with the Canadian Dollar reaching multi-month highs against the U.S. Dollar, and the British Pound and Euro rising very strongly this week. The benchmark EUR/USD currency pair has reached a new 1-year high price of 1.1419 during today’s Asian session, having risen by more than 2% since Draghi’s comments. The GBP/USD currency pair has also risen strongly since Carney’s comments yesterday, by more than 1.35%, to levels not seen since the governing Conservative Party had been expected to win the recent British general election by a landslide. Against the Japanese Yen, the Euro and Pound’s movements have been even stronger, as the U.S. Dollar has continued to gently strengthen against the Japanese Yen. The Yen remains in an interesting position as the currency whose exchange rates seem to be least controllable by its central bank, due to its attraction to investors and traders as a safe haven, which leaves the Bank of Japan with a considerable policy headache.
Bonds and Stocks
Bonds and stocks have also been affected by the perceived policy shifts, with the U.K.’s major stock index, the FTSE 100, perversely falling by 0.67% due to its constituent companies’ earnings being denominated primarily in foreign currencies. The DAX 50 has risen as the Euro received a boost. A stronger effect was seen in bond markets, with German 10 Year bond yields having their biggest one-day rise in 2 years.