Markets don't think central banks will do much for the remainder of 2016

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It could be a slow end to the year for financial markets if expectations for central bank policy changes are anything to go by.

Yes, if you’re bored already, it could be about to get even worse. Probably not the news traders or investors want to hear after what has been a period of ultra-low volatility across markets.

The chart below tells the story. Courtesy of Daniel Katzive, head of FX strategy for North America at BNP Paribas, it shows current market expectations for monetary policy movements for G10 central banks by the end of 2016:

With the exception of the US Federal Reserve, Bank of Japan and Reserve Bank of New Zealand, markets currently favour all other central banks staying put for the remainder of the year.

“The lack of action expected by the financial markets reflects two primary assumptions,” says Katzive.

“First, markets believe the Fed will be unwilling and unable to proceed with rate hikes over the next few months. Second, a perception exists that most other G10 central banks have exhausted most of their ammunition with respect to conventional policy easing, and thus are not likely to cut rates much further.”

While Katzive largely agrees with the market view, he disagrees with current pricing for the Fed and Bank of England “with the former still likely to hike rates, in our view, and the latter expected to cut rates further”.

On the Bank of Japan, the one central bank markets have fully priced for a 10bps cut, Katzive suggests that “policy easing will likely fall short of expectations”, offering the opportunity for investors “to go long yen in the months ahead”.

While markets currently take the view that there’ll be little changes made to policy, should those expectations turn out to be incorrect, the shift in market pricing will almost certainly lead to a pick up in market volatility, especially if it’s the Fed.

Perhaps there’s hope for exacerbated traders and investors yet.

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