Why the “Summer of Easing” Is Straight‑Up Smooth Sailing
Forget the drama we expected. The big-grade central banks — FOMC and RBA — have quietly turned off the “hawk” dial this past week. That means less jagged FX swings and a potential comeback for the slick carry‑trade.
The Classic Twist: Policy Divergence (but not doing it)
We’ve spent a good chunk of time arguing that, while G10 rates should all drift toward being looser, the speed of that swim would differ by country. That stroll in the dog park would have created higher FX volatility and, consequently, trading chances.
Yet, as we sprint into what we called the “Summer of Easing,” the divergence story is fading.
Fed & RBA: The Hawk Is Out
- Fed Chair Powell said it’s “unlikely” that the next move will raise the fed‑fund rate. He laid out three paths:
- Cut because the labor market took a surprise dip.
- Cut once the FOMC feels confident that inflation is heading back to the 2% target.
- Hold rates steady until those certainties arrive.
- RBA, at the end of its May meeting, whispered that it’d keep a foot on “higher for longer.” We heard no hawkish nod toward a September hike, and Governor Bullock emphasized that policy “is about right” now.
Other G10 Players, Gently Drifting
Two major pivots already happened: the SNB took a 25‑bp cut, and the Riksbank, ECB and BoE will all start normalising within the next six weeks. By the end of Q3, the RBNZ and FOMC are expected to have thrown at least one more cut, possibly the RBA too.
Those cuts won’t be rock‑solid; quarterly steps remain the most realistic ploy for the BoE and ECB across the rest of the year.
The Result: Calm FX (or Low‑Vol, Low‑Risk)
When everyone moves in sync, the DM FX arena’s volatility takes a slide. If the geopolitical backdrop stays chill (as it appears to be), that only adds to the calm.
Why Carry Trades Are the New Stars
Carry trading is all about borrowing in a low‑yield currency to invest in a high‑yield one. When volatility dips, the risk of a sudden market backlash that could wipe out those earnings shrinks. Consequently, more traders jump on the bandwagon.
- USD keeps a steady edge thanks to its yield advantage versus most G10s—though a massive rally looks unlikely without further Fed hikes.
- The GBP and NZD should rock if the carry trade trend revives.
- Conversely, the CHF (after the SNB’s cut) and JPY (with the BoJ’s sluggish rate lifts) are the “lower‑yield” drag‑rafts that will feel the heat.
Heads-up for the MoF: it’s already pulled the pump twice to curb what it sees as over‑speculation. That intervention won’t stop the currency from weakening, but it may slow the slide.
Key Takeaway
In a world where rate changes march in unison, FX volatility takes a vacation, and carry traders get to enjoy the sunny side. Whether that spells a sunny run for the USD or a steady performance for the GBP and NZD depends on how long the calm lasts. Stay tuned.
