Much is being made today of the 5-year anniversary of the credit crisis. It’s also ironic that markets are still hooked on the drug of stimulus measures, with weaker data from China overnight providing support to the view that more will be on the way. So for China at least, the notion that bad data is good because it brings scope for more stimulus measures still holds. Of course, one of the reasons is the belief that China still has a lot more to give, both in terms of fiscal measures and those aimed at getting more money circulating in the economy (by reducing the amount banks have to hold with the PBOC). This has offered support to those currencies more tied to the global economic cycle, such as the CAD and also AUD.
For the majors, where rates are already at or near to zero, it’s proving to be a different story. Here, policy-makers are pushing the boundaries, having already pursued a number of measures and in many cases, several rounds of it (such as bond purchases and longer-term repos). We are seeing less sensitivity from currencies to expectations of further QE in the US and also, for example, the UK. Investors doubt the effectiveness of it but also are less inclined to use those currencies as funding for investing elsewhere (the so-called carry trade). Increasingly, it seems that the ‘bad news is good news’ phenomenon that defined much of the early crisis response (and risk-on/risk-off see-saw) is being confined to ever smaller parts of the world. Watch carefully, as it may not last for much longer.