A new phase in the markets began this month.  The Federal Reserve ended its QE3+ purchases.  The Bank of Japan unexpectedly and dramatically stepped up its asset purchases under its QQE operations.  The government’s largest pension fund announced aggressive portfolio diversification plan. 

Contrary to some press reports, the ECB remained unanimous in favor of additional measures to arrest the deflationary headwinds, if needed.  The staff was instructed to accelerate work on other assets that can be purchased to expand the ECB’s balance sheet back toward the 2012 peak.  

The softening of the flash PMI, and expectations that next week’s flash HICP inflation estimate shows softer prices, underscored the likelihood that more measures will be needed, and before the weekend, Draghi expressed some urgency.  This raises the prospects of more action at the ECB meeting in early December.  Previously, it appeared more likely that the ECB would wait until next year, to see the participation in the next month’s TLTRO and the beginning of the ABS purchase plan. 

In the UK, official guidance, including the Quarterly Inflation Report, validated the investors deferring the first hike from next spring until the end of the year.  An increasing number of economists are pushing it out until 2016.   Whereas the BOJ and ECB are providing more monetary support, the BOE indicates it will not make conditions less accommodative for longer.    

The People’s Bank of China joined the party before the weekend.  It announced the first cut in the benchmark one-year deposit rate.  The 25 bp cut took many by surprise, as the PBOC was seen continuing to target liquidity injections, in part, ostensibly to minimize stimulating shadow banking activities.

The divergence has driven the dollar higher.  There are two notable exceptions among the major currencies. The New Zealand dollar has been the strongest this month, gaining 1.6% against the US dollar.  This is most a function of favorable economic news, leaving aside the decline in milk prices, for the domestic economy.  The other exception is the Canadian dollar.  As we have noted, it is common for the Canadian dollar to do well on the crosses in a strong US dollar environment.    In addition, firmer than expected inflation data ahead of the weekend helped spur a short-squeeze, helping lift the Loonie to its best level since October 31.