The QE Chartbook: The QEquation: ECB + BoJ = Fed?
Can near-zero interest rates and balance sheet expansion from the ECB and BoJ offset policy rate hikes and a flat balance sheet from the Fed? Periods of changing expectations will have an impact on global interest rates. As expectations of further easing from the ECB and the BoJ materialised in 2H14, the future path of short-term rates and hence long-term rates shifted down globally. But can such an offset to the Fed be sustained?
In order to find out who sets the global interest rate, we examine three questions:
• What does the stock of assets and liabilities tell us? What do cross-border lending and international reserves
stocks tell us about the relative role of USD, EUR and JPY assets?
• Why do we observe a persistent dominance of one currency over another? Is there a friction that incentivises against switching costlessly between USD, EUR and JPY funding? Can a ‘dollar zone’ be such a friction?
• Could the flow overturn the stock effect? If EUR and JPY funding flows dominate, then they will become the marginal lenders and could dominate the stock effect.
A simple flow of funding metric gives us some insights here.
In the chartbook section, Sung Woen Kang provides a follow-up to The QE Chartbook: The End of the Beginning, October 15, 2012, with charts on: i) G3 central bank balance sheets, stock and flow of funding by currency and international reserves compositions; ii) A timeline of G3 central bank actions; iii) How ‘active’ and ‘passive’ QE strategies are reflected in the composition of central bank assets and liabilities; and iv) a refresher on how QE works.
A global economy battling lowflation, and particularly an EM world that has accrued substantial USD as well as domestic liabilities with heavy foreign ownership, await the denouement with palpable tension. Out-of-sync EM economies (see The Global Macro Analyst: EM – Out of Sync? February 12, 2014) will likely remain ill-equipped to deal with global interest rate dynamics if the US economy and the Fed are the ones setting them. An ECB and BoJ offset would provide welcome relief.
In the chartbook section, Sung Woen Kang provides a follow-up to The QE Chartbook: The End of the Beginning, October 15, 2012, with charts on: i) G3 central bank balance sheets, stock and flow of funding by currency and international reserves compositions; ii) A timeline of G3 central bank actions; iii) How ‘active’ and ‘passive’ QE strategies are reflected in the composition of central bank assets and liabilities; and iv) a refresher on how QE works.
A global economy battling lowflation, and particularly an EM world that has accrued substantial USD as well as domestic liabilities with heavy foreign ownership, await the denouement with palpable tension. Out-of-sync EM economies (see The Global Macro Analyst: EM – Out of Sync? February 12, 2014) will likely remain ill-equipped to deal with global interest rate dynamics if the US economy and the Fed are the ones setting them. An ECB and BoJ offset would provide welcome relief.