The Swiss National Bank on Thursday reiterated its commitment to maintaining a minimum exchange rate for the Swiss franc, noting that in its opinion the currency was still strong. Inflation numbers were slightly better, though not enough to encourage a shift in the SNB’s long term inflation forecast, which remained unchanged for 2015 at 0.7 per cent.
By Yukon Huang That China’s growth is unbalanced is a fact. Consumption as a share of GDP has declined steadily over the past decade to 35 percent — the lowest of any major economy — while its investment share rose to above 45 percent, correspondingly the highest (Figure 1). But are these imbalances a vulnerability — as most observers believe — or a consequence of China’s economic rise and therefore not inherently problematic?
From a recent Citi presentation, a chart stressing the potential risk of negative-feedback loops in the options available to those emerging market countries now trying to stem capital outflows and defend their currencies:
In last week’s post about when does a growth deceleration become a crisis, we looked at the likely inevitability of change in China’s economic systems and growth rates. While timing is difficult to predict, it does seem very hard to argue that the economic model can continue along with the social, political and legal status quo, all while maintaining recent high rates of growth.
Thanks to Monument Securities’ Marc Ostwald for directing our attention to an interesting report from MNI on Tuesday regarding changing attitudes to the renminbi: The PBOC made a “big mistake” in letting the yuan rise so quickly earlier this year because it has only swelled the level of foreign exchange onshore, creating potential problems when depreciation expectations rise and capital starts flowing out of the country, regulators contend.
In the last few years China has become the single largest producer of gold. It is also, by some measures, the second largest global consumer of the precious metal outright. Given this, some goldbugs are befuddled as to why, despite all this Chinese buying and scenes like this… ….gold prices are still falling like this:
The level of debate for a lot of money in emerging markets on Thursday must have been whether or not to hide under the desk with a bottle of bourbon. So, kudos to Olgay Buyukkayali and Tony Volpon, top EM strategists at Nomura, for standing back and raising the tone a little… The bank’s published a debate between the two about the sell-off. Tony’s vaguely bearish and Olgay’s vaguely bullish. But that doesn’t do justice to what’s quite a nuanced debate on EM:
Bloomberg on Wednesday brought us the exclusive story that currency traders may have been manipulating benchmark foreign-exchange rates, which are used to set the value of trillions of dollars of investments, for more than a decade. From Bloomberg:
That’s the new black according to Citi’s Steven Englander: Since May 1 the median increase in 10-year local bond yields in 47 major EM and developed markets (DM) is 39bps (Figure 1). Among major EM economies (light blue) it is 83bps; among major DM (dark blue) economies it is 29bps. The US 10-year Treasury yield increase (red) is only at the median of developed economies and well below the overall median. In both EM and developed economies, the fat tail of rate increases is to the upside, so average increases are even higher. The paradox is that the run-up in US interest rates, which is arguably the primary driver of these global rate increases, is well below the average and median globally.
Vodafone in early talks to buy Kabel Deutschland in €7bn deal || Traders accused of manipulating currency rates || Glencore picks former Morgan Stanley boss John Mack for board || Sir Roger Carr confirmed as BAE chair || IEA predicts steeper-than-normal summer spike in crude demand || Dimon pledges to fight ‘whale’ suits ||
Header credit goes to UBS’s Paul Donovan, the source of the piece of Japanese skepticism that follows. He takes us first to Sherlock Holmes’ “Silver Blaze”: Gregory: “Is there any other point to which you would wish to draw my attention?” Holmes: “To the curious incident of the dog in the night-time.” Gregory: “The dog did nothing in the night-time.” Holmes: “That was the curious incident.” A strong opening gambit, as yen tales go.
Bank of Korea has done its bit to stoke the currency wars… Although they insist that it’s not. From BAML’s Jaewoo Lee: In the press interview, the Governor cited a few main changes since April which led the BoK to cut in May rather than in April: the supplementary budget was finalized; many central banks, including the ECB, turned to easing mode; and the easing can help further with improving sentiments. The Governor, on the other hand, stated that today’s decision was not a response to the yen weakness, contrary to the often-voiced speculation.
A surging stock market, increased corporate earnings (check out Toyota) and frothy domestic consumer spending are lending some real optimism to Japan’s Abenomics but the main avenue through which hope flows might be narrower than originally thought. Consider this chart from Citi’s Steven Englander:
Back in July, 2012 the Danish central bank, Nationalbanken, lowered the deposit rate to -0.2 per cent. Back then we wrote that it was going to be costly for the banks, and that money market rates were going deeper into negative territory. With Draghi’s comments last week, how did that whole negative deposit rate action turn out for Denmark? Nordea had a note out last week on that very subject. Now, before we move, let’s remember that Danish monetary policy is tailored around the FX peg. The deposit rate was there to assure outflow because of mounting pressure on the EUR/DKK pair.
(Or ‘goldilocks syndrome’ if you’d prefer) An existential cry has been sounded once again in the world of FX which has suddenly been reduced to trading short term signals in a fickle market. Shocking. Gone are the days of simple carry, Risk on-Risk off and easy reifying market stories. And it seems they are missed, almost as much as they were once bemoaned… From HSBC’s ever excellent FX team:
We thought the following from TD Securities’ Richard Gilhooly on Tuesday was a rather insightful way of looking at the whole BoJ effect (our emphasis): While it remains a contentious point and as yet unproven, Japan’s devaluation and soaring Nikkei vs slumping DAX or Bovespa has all the hallmarks of a competitive devaluation. While competing factions debate the Monetary expansion/QQE, versus beggar-thy-neighbour interpretation, one positive aspect of the Japanese Yen collapse and fear of exported deflation has been collapsing commodity prices with weak growth in export countries (China, Germany, S Korea) and a stronger USD helping a supply story (crude inventories at 22yr highs) and weak demand send commodities into a bear market.
Some post-Cyprus thoughts from Citi’s Buiter et al… first on rolling capital controls and the chances of a new Cypriot pound being forced into existence (our emphasis): The lack of internal convertibility of euro notes (through the limitations on cash withdrawals and on electronic payments) will, if they persist for more than a few weeks, likely lead to a search for alternative media of exchange for internal transactions. IOUs of large, respected enterprises could for example be countersigned and start to circulate more widely as media of exchange and means of payment. This was the case, for instance, during the 1970 bank strike in Ireland, uncleared cheques were made negotiable (like bills of exchange) and pubs and shops served as credit verifiers. These could later develop into more full-fledged parallel currencies, if internal euro liquidity in Cyprus remains very scarce.
Asian stocks mixed, Nikkei slightly higher || Brussels to climb down on data privacy rules || BoJ holds policy in final Shirakawa meeting || Time Warner to spin off magazines || S&P raises Portugal outlook || Gavyn Davies on financial risk
HSBC lifts dividend 50% || Kuroda says ‘will do whatever we can’ at BoJ || Nikkei rises, yen little changed || New Chinese property tightening announced || New Look to open shops in China || Swiss vote for pay curbs || Steinmetz launches $2bn distressed European property fund || New homes bonus ‘a flop’ || No end in sight for Italian gridlock
Strong currencies are the bane of every triple-A rated, QE-less economy in currency war-torn 2013, it seems. It’s become an increasingly irksome point in Australia, where the initial exuberance over cheap foreign holidays has been slowly replaced by worries that it’s squeezing the non-mining sectors. An FOI request by Bloomberg yielded a bunch of documents from the Reserve Bank of Australia about the currency’s overvaluation problem. Specifically, how bad it is and who’s to blame. Well, who among other central banks*, at least. Here’s list of the definitely-implicated:
Japanese stocks rallied and the yen fell on Monday as the G20 did not single out the country for criticism over currency manipulation. The yen weakened 0.6% to 94.12 and the Nikkei rose 2.3% by early afternoon in Tokyo, pulling the MSCI Asia Pacific Index 0.5% higher. (Bloomberg)(Reuters) G20 to Japan: Just don’t talk about it. At the weekend, global finance ministers “signaled Japan has scope to keep stimulating its stagnant economy as long as policy makers cease publicly advocating a sliding yen”.(Bloomberg) Meanwhile Japan’s president Shinzo Abe on Monday referred again to changing the BoJ’s remit: “It would be necessary to proceed with revising the BOJ law if the central bank cannot produce results under its own mandate,” he said, referring to the new 2% inflation target. (Wall Street Journal)
The currency war meme rumbles on as the G7 does its very best to avoid a coherent message amid arguments about whether drawing a distinction between “domestic objectives” that weaken a currency and just plain weakening it actually matters. Ho hum.
Little or none seems to be the answer… I wrote on Monday about the ECB’s options for expanding its balance sheet but skimmed over the idea of direct FX intervention on the presumption it just wasn’t going to happen and the ECB would push via less obvious channels. As I was (justifiably) rebuked, the aim here is to make quick amends.
North Korea confirms nuclear test || Vice-chair of Fed urges focus on jobs || US Treasury comment triggers fall in yen || Finmeccanica head arrested over bribery allegations || Pay-by-tweet service launched on Twitter || Companies hit by Venezuela move || UK accounting body probes Autonomy || Nasdaq held buyout talks with Carlyle || Markets update: Bulls struggle to inject fresh impetus into the rally
North Korean nuclear test suspected after earthquake || Currency wars anticipation heightened ahead of G20 || Yen falls, Nikkei soars || Autonomy accounts to be investigated || Barclays’ big day || EDF wants state backing for UK reactors || Nasdaq and Carlyle held ill-fated talks || Currency wars or just monetary policy?