Since Standard & Poor’s cut the ratings of 9 Eurozone countries, the euro has done nothing but rally. One of the main reasons why the EUR/USD has been so resilient is because the downgrades had very little impact on European bond yields. French and Spanish bond yields have increased but by less than a tenth of a percent while Italian bond yields decreased since the S&P announcement. The following table compares the 10 year bond yield and 5 year CDS spreads of key EZ nations today vs. before S&P’s announcement. Five year credit default spreads rose, representing an increase in risk premium but the uptick was nominal. The biggest consequence of sovereign downgrades are higher yields and borrowing costs but based upon 10 year bond yield spreads, troubled European nations have been spared from Armageddon for the time being.
The New Year has begun and it is important to see what the market is pricing in for central banks this year. As you may know, central bank rate hike expectations change often but as of last week, most central banks are expected to keep monetary policy unchanged in the coming year but one is expected to ease aggressively. Find out who below!
Federal Reserve - No Changes in 2012
European Central Bank - Possible 25bp Cut before Year End
Bank of England - No Changes in 2012
Bank of Canada - No Changes in 2012
Reserve Bank of Australia - Aggressive Rate Cuts this Year, 25bp by March!
The Federal Reserve’s Open Market Committee changes dramatically in 2012. Gone are Evans (the most dovish member of the FOMC), Fisher, Plosser and Kocherlakota (the Trio of hawks) and in comes Lacker, Pianalto, Lockhart and Williams. Three hawks and one dove will now be replaced with three doves and one hawk. We can only imagine what this means for monetary policy in the coming year. Every piece of good data will be looked at with skepticism and the central bank as a whole will be more introduce another round of quantitative easing than to normalize monetary policy.
Here is the updated FOMC Voters Dove Hawk Scale for 2012
Jeremy C. Stein and Jerome H. Powell have been nominated by President Obama to fill the 2 vacant seats on the Federal Reserve’s Board of Governors but they still need to be confirmed by the Senate who do not return to business until Jan 23rd.
Here’s where the current voters stand:
Openly Dovish
Cleveland Fed President Sandra Pianalto
Moderately Dovish
NY Fed President William Dudley
Vice Chair Janet Yellen
Slight Lean towards Dovishness
Fed Board Member Daniel Tarullo
Fed Chairman Ben Bernanke
Fed Board Member Elizabeth Duke
San Francisco Fed President John Williams
Atlanta Fed President Dennis Lockhart
Neutral
Fed Board Member Sarah Raskin
Slightly Hawkish
Richmond Fed President Jeffrey Lacker
First I want to apologize for being MIA for the past few weeks. Didn’t realize wedding planning would be so tough! But - all is finally done and I am happy to say that I will be getting married on Dec 12th and will then be off for a nice long honeymoon. I will back in the office on Jan 9th and one of my New Year resolutions will be to blog more! I promise!!! In the meantime, I want to wish all of you a wonderful holiday and a happy New Year. See you in 2012!
Forex (and Futures) trading involves high risks, with the potential for substantial losses, and is not suitable for all persons.
Kathy Lien is employed as Co-Head of Global Research for Global Forex Trading, a division of Global Futures & Forex, Ltd. (GFT). However, the KathyLien.com web site is maintained by Kathy Lien personally, and is separate and independent from her employment with GFT. GFT is not affiliated with and does not control the content of the KathyLien.com web site, and opinions expressed by Kathy on the KathyLien.com web site are not necessarily the opinions of GFT
January 19, 2012 
Posted in 2011 euro forecast, eu bank stress tests, euro sovereign debt crisis 
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