Policy divergence refers to a situation where different people, organizations, or governments adopt different policies or approaches in dealing with a certain issue or problem. It means that there is a lack of agreement or alignment in the chosen courses of action.
Full definition
Monetary policy divergence points to a strong dollar and weaker euro, meaning it may make sense to hedge international currency exposure.
To be clear, this should not prevent the ECB from hiking rates before 2021, but the result is a «soft guarantee» and a stronger case for
policy divergence with the US, which the ECB hopes will eventually result in currency depreciation.
As it stands, developed economies are in different stages of the cycle (Japan and Europe versus everybody else), and that is
fuelling policy divergence, which will create discrepancies in relative valuations in a global context.
Monetary
policy divergence points to a strong dollar and weaker euro, meaning it may make sense to hedge international currency exposure.
It's impossible to predict when these might overcome the current
policy divergences as a dollar driver, but the most recent data suggests that time is not imminent.
As the Federal Reserve (Fed) prepared for «liftoff» while the European Central Bank (ECB) and Bank of Japan (BoJ) eased further, policy sensitive two - year yields reflected growing
expected policy divergence.
Such policy divergences have made it difficult for the Trump administration to govern effectively despite boasting a congressional majority.
According to Jurrien Timmer, Fidelity Investments» director of global macro strategy, there is a
major policy divergence between the US and China.
This monetary
policy divergence comes as U.S. inflation appears poised to re-awaken, whereas price pressures elsewhere are minimal.
Additionally, based on the theme of monetary
policy divergence on a global basis, we would anticipate that, all things equal, the US dollar will likely strengthen versus other developed markets» currencies, particularly over the longer term.
An expected bounce back in German retail sales at the end of the 1st quarter should provide the EUR with some support, though it's going to boil down to the inflation numbers, as the market continues to look for signs of a pickup in inflationary pressure that could see
policy divergence in favour of the Dollar narrow.
However, further
regional policy divergence, slow emerging markets growth and global liquidity risks are likely to keep market volatility higher, meaning effectively navigating a low - return world will remain a challenge.
As it stands, developed economies are in different stages of the cycle (Japan and Europe versus everybody else), and that is
fuelling policy divergence, which will create discrepancies in relative valuations in a global context.
There were no apparent catalysts, but some market analyst said in hindsight that the euro's early slide may have been due to monetary
policy divergence between the ECB and the Fed.
These contrasting inflation outlooks suggest further
monetary policy divergence is ahead (read more on this divergence and its investing implications in our recent post Opportunities emerge as central banks diverge.).
«
Policy divergence is expected to remain a prominent theme,» Canadian policy makers said in their December 2 statement, new language that read as a reminder to currency traders that the Bank of Canada sets policy independent of the Fed.
In this context,
policy divergence is expected to remain a prominent theme.
(For more on this monetary
policy divergence, check out the BlackRock Investment Institute «Diverging World» interactive graphic).
For starters, despite the Fed's interest rate hikes, the rate differentials with Japanese government bonds and German Bunds were near extremes, suggesting the markets were already reflecting the worst of
policy divergence.
Increased central bank activism and
policy divergence, combined with political uncertainty across major economies, have contributed to an increase in volatility across major asset classes.
Another takeaway: We expect monetary
policy divergence to be an ongoing theme supporting the U.S. dollar.
The policy divergence theme has since appeared largely baked into currency values, even as central bank policies have continued to diverge.
Within currencies, we favor the USD to the euro and yen amid monetary
policy divergence.
This policy divergence from the United States may help keep a lid on U.S. rates, at least in the near term.
Our newly launched BlackRock Inflation GPS signals greater potential for U.S. and eurozone monetary
policy divergence than markets expect.
As we go forward in 2016, we anticipate this monetary
policy divergence will likely impact the US dollar; we would expect the dollar to appreciate against the major currencies over time.
The second calls for an inflation re-awakening in the U.S. and heralds monetary
policy divergence.
This policy divergence will likely have ramifications for assets prices in Europe and for bonds in particular.
As Poloz articulated in a speech in Ottawa at a BIS BREAKFAST SERIES January 7 (regarding monetary
policy divergence): «It is very important that we understand the reasons for these policy divergences.
The contrasting inflation outlooks suggest further monetary
policy divergence.
The electoral victories helped to marginalize the adversaries, while the majority's inner tensions, mainly due to personal and
policy divergences, didn't significantly undermine the new dominant ideology.
«We expect both monetary
policy divergence and minimal support from commodity prices to push the currency lower over time.
Contrasting inflation outlooks in the U.S. and eurozone suggest further monetary
policy divergence, creating opportunities for investors.
Inflation will remain below ECB's target, thus increasing
the policy divergence with the Fed.
Phrases with «policy divergence»