* Markets predict start of new wave of global policy easing
* New Zealand, India, Thailand, Philippines cut rates this
week
* Asian c.banks pre-empt U.S. Fed as investors bet big cuts
By Swati Pandey
SYDNEY, Aug 9 (Reuters) - Central banks in Asia, Australia
and New Zealand have joined a brewing global currency war by
slashing interest rates and pledging to keep them down, worrying
markets over the risk of a chase to the bottom.
Policymakers around the world are struggling with lukewarm
inflation and tepid wage growth even as unemployment rates in
many developed economies have fallen to record lows.
The Sino-U.S. trade war has complicated matters further by
raising fears of a world recession, prompting financial markets
to price in aggressive easing by the U.S. Federal Reserve.
In Asia-Pacific, some central banks are attempting to get
ahead of the curve to soften the impact on their currencies and
economies from potentially steep U.S. rate cuts and a weaker
dollar.
On Friday, Australia's central bank chief acknowledged that
major reason for cutting interest rates was to weaken its
currency. The Aussie dollar AUD=D3 , the fifth most-traded
currency in the world, has lost 3.5% so far this year.
"A higher exchange rate would be hurting many, many sectors
across our economy," Reserve Bank of Australia (RBA) Governor
Philip Lowe said, referring to the country's export-driven
agriculture, mining, tourism and education sectors.
The RBA made surprising back-to-back cuts in June and July
to reduce its cash rate to an all-time low of 1%. Lowe has
subsequently left the markets in no doubt by signalling the need
for rates to remain lower for longer.
GLOBAL RACE
Earlier this week, the Reserve Bank of New Zealand (RBNZ)
slashed interest rates by a larger-than-expected 50 basis
points. As a result the kiwi dollar NZD=D3 fell 1.2% to a
3-1/2-year trough. RBNZ Assistant Governor Christian Hawkesby told Reuters
weakening the export-reliant economy's currency was part of the
reason for the hefty rate cut. The RBNZ also floated the idea that negative interest rates
were a possibility in a bid to keep downward pressure on its
currency, the tenth most traded in the world.
The RBNZ's shocking move sparked fears of a global
recession, sending the Aussie AUD=D3 to decade lows on the day
while U.S. Treasuries rallied to record highs and gold surged
past $1,500 an ounce.
Investors soon began pricing in similar moves by other
central banks as the RBNZ surprise came even as it admitted it
was meeting its employment and inflation mandate.
"The world race to ease rates is clearly under way," said
Marshall Gittler, Cyprus-based chief strategist at ACLS Global.
"If a central bank that is currently meeting its employment
and inflation targets is talking about negative rates,
quantitative easing and who knows what else, what should be the
response of a central bank that isn't meeting its employment and
inflation targets?"
Short-term yields on Australian and New Zealand sovereign
debt are now below their respective cash rates, indicating
prospects for further easing. AU2YT=RR NZ2YT=RR
Financial markets expect the European Central Bank to cut
rates at its September meeting and to restart quantitative
easing while the U.S. Federal Reserve too is seen cutting three
more times over 2020 after a 25 bps "insurance" cut last month.
In Asia, the Reserve Bank of India (RBI) slashed rates by a
surprisingly larger 35 bps on Wednesday to 5.4%, its fourth cut
this year while the Bank of Thailand unexpectedly lowered rates
to 1.5%. Philippines' central bank (BSP) followed suit on
Thursday and left the door wide open for further reductions.
NEW FRONT
The RBNZ's hefty cut came only days after U.S. President
Donald Trump hit China with 10% tariffs on $300 billion imports,
spooking investors globally. In response, Beijing allowed its
yuan to hit record lows in offshore markets, prompting Trump to
label the country "currency manipulator."
Trump next repeated his calls for the Fed to cut interest
rates more steeply and stop its "ridiculous" quantitative
tightening.
"These actions indicate the new front in international
competition is foreign exchange markets," said Michael McCarthy,
Sydney-based strategist at CMC Markets.
Australia also risks becoming caught up in any rounds of
competitive devaluations as its economy's biggest export market
is China.
Economists are concerned the latest round of "insurance" cuts
are leaving central banks with limited room to ease policy
further if and when things get dire.
Last week, the German 30-year government bond yield
DE30YT=RR slipped into negative territory for the first time
ever. Already, $14 trillion of outstanding debt around the world
is now yielding negative returns.
Investment manager Pacific Investment Management Co (Pimco https://www.pimco.com.au/en-au/insights/blog/interest-rates-naturally-negative/?utm_source=subscription_email&utm_medium=email&utm_campaign=3826340-SMS%20Article-Interest%20Rates:%20Naturally%20Negative&utm_term=Token%3A7XQwZ%2FMsnHnt6dRA%2BppdUzI%2FeMKnACTfZmIpqRhX0guluPYdlNY%2FDO9sN6ggynwSblYE7M5ysf5cfwjTOep31A%3D%3D&utm_content=visit%20link&)believes
negative yield in the United States was no longer an "absurd"
idea as an economic slowdown and the trade war depress interest
rates.
The Fed's effective rate is 2.15% currently while a 10-year
U.S. Treasury note is returning 1.68%.
"Recent developments have increased the odds, in our view,
that a 'mid-cycle adjustment' of the fed funds rate similar to
the mid and late 1990s, when the Fed cut rates three times, may
not suffice to stabilize growth," Pimco's global economic
advisor Joachim Fels wrote in a blog post on its website.
"If the Fed cuts rates all the way back down to zero and
restarts quantitative easing, negative yields on U.S. Treasuries
could swiftly change from theory to reality."
($1 = 1.5480 New Zealand dollars)
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Developed market currencies against the dollar https://tmsnrt.rs/2MLjdFP
Interest rates in developed economies https://tmsnrt.rs/2YzChOv
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