As such, the slowdown in growth is likely relatively temporary.
On the liquidity front we are increasingly convinced that we have reached the cycle peak. In the near term, this may not have much impact on markets but in the background some potentially seismic shifts are beginning to take place. As such, ANZ Research now believes that the carry trade is now becoming akin to picking up the last few pennies in front of a slow moving steam roller.
Of particular note will be what happens as the Fed begins to wind down its balance sheet, and on this front there are two different elements to consider.
First, whether the announcement effect means there is some imminent threat to sentiment and second what the liquidity indicator says about the pace and severity of the reversal in liquidity to come.
At the time of the ‘taper tantrum’, the announcement had as much impact on markets and FX as the actual act of tapering. However this time this is less likely as there are a few important differences.
Firstly global growth is stronger and broader, and indeed the market has already been able to see the beginning of a tightening cycle and remained resilient. In 2013 there was a real fear that any tightening would be disastrous.
Second, markets have arguably decoupled somewhat from simply being a liquidity trade. Today there is far more diversity in positioning and cross-market correlations are significantly lower. This implies contagion risks are significantly lower, and as such the risk of a systemic sell-off is lower for now.
Third, misalignments across both markets and economies are lower today than they were in 2013. Valuation extremes are not as large, current account positions have significantly improved and, more broadly, the economies vulnerable to a sharp reversal of flows looks more resilient.
Liquidity is coming
ANZ’s Liquidity Indicator projects the direction of liquid based on assumptions of various factors - namely the Fed reduce its balance sheet by $US10 billion per meeting and the Bank of Japan being unchanged on rates throughout calendar 2017, among others.
As the below figure shows, the impact of these changes is somewhat gentle, but it is also persistent, and by the end of 2018 official liquidity will be approaching zero.