Policy Decoupling -- Episode I

We have been arguing that the new theme for the markets will be the policy decoupling. China moved first. They tinkered with their version of QE. The impact on the equity markets was profound. So they stepped back and ensured policy sustainability in the near term. However, yesterday saw the most obvious sign of monetary policy decoupling. Bank of Israel is now crowned as the first central bank to raise interest rates in this cycle. It was 25bps with a tightening bias... Markets frowned but did not move much on the news. As all EM managers know Israel is a hybrid market in the sense that it is in the EM universe but not exactly an emerging market economy with more obvious developed economy characteristics. So nobody really owned this move. At the same day Monetary Council in Hungary decided to cut rates by 50bps on the back of continued weakness in the economy. With a further easing bias. So most analysts now expect several cuts to follow. It is a well deserved cut and analyst are right about the direction of next moves. Alas Hungary is not living in a vacuum. These cuts somewhat rely on the strength of the currency and the optimism in the global economy and the markets. The irony is when the sentiment turns both of these parameters will change at the same time. So there is indeed a risk that Hungary may be come under pressure again. Besides let’s not forget the potential Latvian devaluation and regional contagion. Opportunistic cuts may be short lived.