Earnings Call, Conference Presentation, Panel, Other
Global Rates & FX Views: The great central bank review
Bank of AmericaRalf Preusser, Agne Stengeryte, Meghan Swiber, Tomonobu Yamashita, Daesh Simha, Agnes Tengaraita, Yamashita-san
- Bank of Japan rate hike probability for October has declined to approximately 18%, with a baseline expectation of a 25-basis point increase in December, while a 50-basis point hike or back-to-back moves are deemed unlikely absent a significant inflation shock.
- The Bank of Japan is positioned for a rapid balance sheet normalization over the coming years through ongoing quantitative tightening and a gradual runoff of fund provisions, though net JGB supply relative to nominal GDP is projected to fall in 2027 compared to 2026 due to reduced redemptions.
- Climate-related fund caps are not currently binding and are not expected to significantly reduce the Bank of Japan's balance sheet in the near term, though such measures may gain long-term importance.
- Market positioning for the Bank of Japan suggests a bullish bias toward the long end of the JGB curve, despite a recent hit to FX credibility that has dampened near-term appetite for carry trades or long yen positions.
- The Federal Reserve is anticipated to reach a policy rate above 5% based on frameworks like the Taylor Rule, with additional front-end rate hikes required as current levels remain non-restrictive and equities show little reaction to an additional 80 basis points of tightening.
- US yield curves are expected to flatten further supported by heavy short duration positioning and limited pass-through from the Fed funds rate to longer-term rates, characterized by a historically low beta between the 12-month assessment and the 10-year yield.
- The US dollar is forecast to face challenges reaching new highs against the euro or within the DXY basket as other major central banks maintain hawkish stances alongside the Federal Reserve.
- The Bank of England has signaled a move closer to a rate hike with a decisively hawkish tone, though it implicitly rejected market pricing for four hikes, with the Governor noting that four hikes were not discussed.
- A six-month pause in active gilt sales is expected while technicalities regarding a new quantitative tightening style are resolved, with £20 billion in sales to be managed by the Debt Management Office rather than the Bank of England to maintain the same net absorption value.
- Market reaction to the Bank of England's announcement included a strong bull flattening driven by expectations of the six-month pause, resulting in Sterling weakening against the dollar and a trade-weighted basket due to lower front-end rates.
- Sterling is projected to outperform over the medium term, particularly versus the euro, driven by a lower gilt term premium and a QT announcement that prevented significantly weaker currency performance.
- Further policy actions beyond monetary policy are expected from the Bank of Japan, while the Bank of England is likely to see its QT approach involve shorter-maturity sales from the Debt Management Office compared to the previous methodology.