Category Archives: Central Bank

Currency pairs getting punished on central bank comments.

http://www.bankofengland.co.uk/publications/Documents/speeches/2017/speech986.pdf

https://www.bloomberg.com/news/articles/2017-06-28/draghi-s-prudence-warning-confirmed-by-reaction-to-his-own-words

 

 

 

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  • 78
    Press conference following the meeting of the Governing Council of the European Central Bank on 4 September 2014 at its premises in Frankfurt am Main, Germany, starting at 2:30 p.m. CET: Introductory statement by Mario Draghi, President of the ECB. Question and answer session. Registered journalists pose questions to Mario Draghi, President…
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    Runners have target times, golfers judge themselves by their swing, while Mario Draghi watches a technical measure of inflation expectations used by financial markets. Just one problem: it suggests the European Central Bank president is not achieving his objective – and that markets’ fears of eurozone deflation are mounting. Since…
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  • 74
    Press conference following the meeting of the Governing Council of the European Central Bank on 6 March 2014 at its premises in Frankfurt am Main, Germany, starting at 2:30 p.m. CET: Introductory statement by Mario Draghi, President of the ECB. Question and answer session. Registered journalists pose questions to Mario…
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Why did the market Crash ?

When stock markets are free-falling 10+% in a matter of days, it’s natural to seek some answers to the question “why now?”

Some are saying it was all the result of high-frequency trading (HFT), while others point to China’s modest devaluation of its currency the renminbi (a.k.a. yuan) as the trigger.

Trying to finger the proximate cause of the mini-crash is an interesting parlor game, but does it really help us identify the trends that will shape markets going forward?

We might do better to look for trends that will eventually drag markets up or down, regardless of HFT, currency revaluations, etc.

Five Interconnected Trends

At the risk of stating the obvious, let’s list the major trends that are already visible.

The China Story is Over

And I don’t mean the high growth forever fantasy tale, I mean the entire China narrative is over:

  1. That export-dependent China can seamlessly transition to a self-supporting consumer economy.
  2. That China can become a value story now that the growth story is done.
  3. That central planning will ably guide the Chinese economy through every rough patch.
  4. That corruption is being excised from the system.
  5. That the asset bubbles inflated by a quadrupling of debt from $7 trillion in 2007 to $28 trillion can all be deflated without harming the wealth effect or future debt expansion.
  6. That development-dependent local governments will effortlessly find new funding sources when land development slows.
  7. That workers displaced by declining exports and automation will quickly find high-paying employment elsewhere in the economy.

I could go on, but you get the point: the entire Story is over.  (I explained why in a previous essay, Is China’s “Black Box” Economy About to Come Apart? )

This is entirely predictable. Every fast-growing economy starting with near-zero debt and huge untapped reserves of cheap labor experiences an explosive rise as the low-hanging fruit is plucked and the same abrupt stall and stagnation when the low-hanging fruit has all been harvested, leaving only the unavoidable results of debt-fueled speculation: an enormous overhang of bad debt, malinvestment (a.k.a. bridges to nowhere and ghost cities) and policies that seemed brilliant in the good old days that are now yielding negative returns.

The Emerging Market Story Is Also Done

Emerging currencies and markets have soared on the back of the China Story, as China’s insatiable demand for oil, iron ore, copper, soy beans, etc. drove global demand to unparalleled heights.

This demand pushed prices higher, which then pushed production (supply) higher, as the low cost of capital globally enabled marginal resources to be put into production with borrowed money.

Now that China’s demand has fallen off—by some accounts, China’s GDP is actually in negative territory, despite official claims that it’s still growing at 7% annually—commodity prices have crashed, taking the emerging markets’ stock and currency markets down. (Source)

Here is a chart of Doctor Copper, a bellwether for industrial and construction demand:

Here is Brazil’s stock market, which has declined 54% in the past 12 months:

These are catastrophic declines, and with China’s growth story over, there is absolutely nothing on the global horizon to push demand back up.

Diminishing Returns on Additional Debt

The simple truth is that expanding debt has fueled global growth. Though people identify China as the driver of global demand for commodities, China’s growth is debt-driven. As noted above, China quadrupled its officially tracked debt from $7 trillion in 2007 to $28 trillion as of mid-2014—an astonishing 282 percent of gross domestic product (GDP).  If we add the estimated $5 trillion of shadow-banking system debt and another year’s expansion of borrowing, China’s total debt of $35+ trillion is in excess of 300% of GDP—levels associated with doomed to default states such as Greece and Spain.

While China has moved to open the debt spigot in recent days by lowering interest rates and reserve requirements, this doesn’t make over-indebted borrowers good credit risks or more empty high-rises productive investments.

Borrowed money that poured into ramping up production in emerging nations is now stranded as prices have plummeted, rendering marginal production intensely unprofitable.

In sum: greatly expanding debt boosted growth virtually everywhere after the Global Financial Meltdown of 2008-2009. That fix is a one-off: not even China can quadruple its $35+ trillion debt to $140 trillion to reignite growth.

Here is a sobering chart of global debt growth:

Limits on Deficit-Spending (Borrowed) Fiscal Stimulus

When the global economy rolled over into recession in 2008, governments borrowed money by selling sovereign bonds to fund increased state spending.  In the U.S., federal borrowing soared to over $1 trillion per year as the government sought to replace declining private spending with public spending.

Governments around the world have continued to run large deficits, piling up immense debts since 2008.  The global move to near-zero yields has enabled governments to support these monumental debt loads, but even at near-zero yields, the interest payments are non-trivial. These enormous sovereign debts place some limits on how much governments can borrow in the next global recession—a slowdown many think has already started.

Here is a chart of U.S. sovereign debt, which has almost doubled since 2008:

As noted on the chart: what structural inadequacies or problems did governments fix by borrowing gargantuan sums to fund state spending?  The basic answer is: none. All the same structural problems facing governments in 2008 remain untouched in 2015. These include: over-indebtedness, bad debts that haven’t been written down, insolvent banks, soaring social spending as the worker-retiree ratio slips below 2-to-1, externalized environmental damage that has yet to be remediated, and so on.

Central Bank Stimulus (Quantitative Easing) as Social Policy Has Been Discredited

In the wake of the Global Financial Meltdown of 2008-2009, central banks launched monetary stimulus programs aimed at pumping money into the economy via bank lending. The stated goals of these stimulus programs were 1) boost employment (i.e. lower unemployment) and 2) generate enough inflation to stave off deflation, which is generally viewed as the cause of financial depressions.

While it can be argued that these unprecedented monetary stimulus programs achieved modest successes in terms of lowering unemployment and pushing inflation above the zero line, they also widened wealth and income inequality.

Even as these programs made modest dents in unemployment and deflation, they pushed asset valuations to the moon—assets largely owned by the few at the top of the wealth pyramid.

Here is a chart of selected developed economies’ income/wealth skew:

The widespread recognition that the benefits of central bank stimulus mostly flowed to the top of the pyramid places political limits on future central bank stimulus programs.

The 2008-09 Fixes Are No Longer Available

In summary, the fixes for the 2008-09 recession are no longer available in the same scale or effectiveness.  Expanding debt to push up demand and investment, rising state deficit spending, massive monetary stimulus programs—all of these now face limitations. This means the central banks and states have very limited tools to reignite growth as global recession trims borrowing, investment, hiring, sales and profits.

 

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Eight signs a global market crash is imminent as central banks lose control

 

When the banking crisis crippled global markets seven years ago, central bankers stepped in as lenders of last resort. Profligate private-sector loans were moved on to the public-sector balance sheet and vast money-printing gave the global economy room to heal.

Time is now rapidly running out. From China to Brazil, the central banks have lost control and at the same time the global economy is grinding to a halt. It is only a matter of time before stock markets collapse under the weight of their lofty expectations and record valuations.

The FTSE 100 has now erased its gains for the year, but there are signs things could get a whole lot worse.

1. Chinese slowdown

China was the great saviour of the world economy in 2008. The launching of an unprecedented stimulus package sparked an infrastructure investment boom. The voracious demand for commodities to fuel its construction boom dragged along oil and resource-rich emerging markets.

The Chinese economy has now hit a brick wall. Economic growth has dipped below seven per cent for the first time in a quarter of a century, according to official data. That probably means the real economy is far weaker.

The People’s Bank of China has pursued several measures to boost the flagging economy. The rate of borrowing has been slashed during the past 12 months from six per cent to 4.85 per cent. Opting to devalue the currency was a last resort and signalled that the great era of Chinese growth is rapidly approaching its endgame.

Data for exports showed an 8.9 per cent slump in July from the same period a year before. Analysts expected exports to fall only 0.3 per cent, so this was a huge miss.

The Chinese housing market is also in a perilous state. House prices have fallen sharply after decades of steady growth. For the millions who stored their wealth in property, it makes for unsettling times.

2. Commodity collapse

The China slowdown has sent shock waves through commodity markets. The Bloomberg Global Commodity index, which tracks the prices of 22 commodities, fell to levels last seen at the beginning of this century.

The oil price is the purest barometer of world growth as it is the fuel that drives nearly all industry and production around the globe.

Brent crude, the global benchmark for oil, has begun falling once again after a brief rally earlier in the year. It is now hovering above multi-year lows at about US$50 per barrel.

Iron ore is an essential raw material needed to feed China’s steel mills, and as such is a good gauge of the construction boom.

The benchmark iron ore price has fallen to US$56 per tonne, less than half its US$140 per tonne level in January 2014.

3. Resource price crisis

Billions of dollars in loans were raised on global capital markets to fund new mines and oil exploration that was only ever profitable at previous elevated prices.

With oil and metals prices having collapsed, many of these projects are now loss-making. The loans raised to back the projects are now under water and investors may never see any returns.

Nowhere has this been felt more acutely than shale oil and gas drilling in the U.S. Tumbling oil prices have squeezed the finances of U.S. drillers. Two of the biggest issuers of junk bonds in the past five years, Chesapeake and California Resources, have seen the value of their bonds tumble as panic grips capital markets.

As more debt needs refinancing in future years, there is a risk the contagion will spread rapidly.

4. Dominoes falling

The great props to the world economy are now beginning to fall. China is going into reverse. And the emerging markets that consumed so many of our products are crippled by currency devaluation. The famed Brics of Brazil, Russia, India, China and South Africa, to whom the West was supposed to pass on the torch of economic growth, are in varying states of disarray.

The central banks are rapidly losing control. The Chinese stock market has already crashed and disaster was only averted by the government buying billions of shares. Stock markets in Greece are in turmoil as the economy grinds to a halt and the country flirts with ejection from the eurozone.

Earlier this year, investors flocked to the safe-haven currency of the Swiss franc but as a 1.1 trillion euro quantitative easing program devalued the euro, the Swiss central bank was forced to abandon its four-year peg to the euro.

5. Credit rollover

As central banks run out of silver bullets then, credit markets are desperately seeking to reprice risk. The London Interbank Offered Rate (Libor), a guide to how worried U.K. banks are about lending to each other, has been steadily rising during the past 12 months. Part of this process is a healthy return to normal pricing of risk after six years of extraordinary monetary stimulus. However, as the essential transmission systems of lending between banks begin to take the strain, it is quite possible that six years of reliance on central banks for funds has left the credit system unable to cope.

Credit investors are often far better at pricing risk than optimistic equity investors. In the U.S., while the S&P 500 continues to soar, the high-yield debt market has already begun to fall sharply.

6. Interest rate shock

Interest rates have been held at emergency lows in the UK and US for around six years. The U.S. is expected to move first, with rates starting to rise from today’s 0 to 0.25 per cent around the end of the year. Investors have already starting buying dollars in anticipation of a strengthening U.S. currency. U.K. rate rises are expected to follow shortly after.

7. Bull market record

The U.K. stock market is in its 77th month of a bull market, which began in March 2009. On only two other occasions in history has the market risen for longer. One is in the lead-up to the Great Crash in 1929 and the other before the bursting of the dotcom bubble in the early 2000s.

U.K. markets have been a beneficiary of the huge balance-sheet expansion in the U.S. US monetary base, a measure of notes and coins in circulation plus reserves held at the central bank, has more than quadrupled from around US$800 billion to more than US$4 trillion since 2008. The stock market has been a direct beneficiary of this money and will struggle now that QE3 has ended.

8. Overvalued U.S.

In the U.S., Professor Robert Shiller’s cyclically adjusted price earnings ratio — or Shiller CAPE — for the S&P 500 stands at 27.2, some 64 per cent above its historic average of 16.6. On only three occasions since 1882 has it been higher — in 1929, 2000 and 2007.

The Daily Telegraph

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“Economic therapy” called devaluation.

 

Low euro is like a “deflation” of the Euro. Is this good or bad ?

Lets talk about devaluation.

The idea being that the goods the nation has to offer will cost less with devaluation.

Good idea, right? Many countries have resorted to this economic maneuver in order to increase exports.

The question always is: are the benefits of the drug greater than the cost of theside effects?

The same concept needs to be applied to theEconomic therapycalleddevaluation.

Importing essential goods, like food, which must be imported because much of it is not available locally, suddenly costs more.

The increases in the cost of food adversely impacts morale.

I suggest to you that devaluation, like inflation, causes people to lose trust in the currency of the country.

The public feels ambushed by the government it has elected.

Everyone-from all socioeconomic groups-feel undermined by those they have chosen to lead their government.

Devaluation has short term benefits, but long term costs.

The benefits are easy to see: an increase in exports.

The costs are more difficult to assess or even notice.

People cut their saving, which impacts capital formation.

Consumption begins to increase as people start ridding themselves of money because it has an unstable value.

Most important of all, the lack of trust in government has its own repercussions,which are also hard to quantify, but they are there.

Devaluation is a mechanistic solution: cut prices, increase volume.

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No central bank had considered any of these measures

Who would have thought that six years after the global financial crisis, most advanced economies would still be swimming in an alphabet soup – ZIRP, QE, CE, FG, NDR, and U-FX Int – of unconventional monetary policies? No central bank had considered any of these measures (zero interest rate policy, quantitative easing, credit easing, forward guidance, negative deposit rate, and unlimited foreign exchange intervention, respectively) before 2008. Today, they have become a staple of policymakers’ toolkits.

Indeed, just in the last year and a half, the European Central Bank adopted its own version of FG, then moved to ZIRP, and then embraced CE, before deciding to try NDR. In January, it fully adopted QE. Indeed, by now the Fed, the Bank of England, the Bank of Japan, the ECB, and a variety of smaller advanced economies’ central banks, such as the Swiss National Bank, have all relied on such unconventional policies.

One result of this global monetary-policy activism has been a rebellion among pseudo-economists and market hacks in recent years. This assortment of “Austrian” economists, radical monetarists, gold bugs, and Bitcoin fanatics has repeatedly warned that such a massive increase in global liquidity would lead to hyperinflation, the US dollar’s collapse, sky-high gold prices, and the eventual demise of fiat currencies at the hands of digital krypto-currency counterparts.

None of these dire predictions has been borne out by events. Inflation is low and falling in almost all advanced economies; indeed, all advanced-economy central banks are failing to achieve their mandate – explicit or implicit – of 2% inflation, and some are struggling to avoid deflation. Moreover, the value of the dollar has been soaring against the yen, euro, and most emerging-market currencies. Gold prices since the fall of 2013 have tumbled from $1,900 per ounce to around $1,200. And Bitcoin was the world’s worst-performing currency in 2014, its value falling by almost 60%.

To be sure, most of the doomsayers have barely any knowledge of basic economics. But that has not stopped their views from informing the public debate. So it is worth asking why their predictions have been so spectacularly wrong.

The root of their error lies in their confusion of cause and effect. The reason why central banks have increasingly embraced unconventional monetary policies is that the post-2008 recovery has been extremely anemic. Such policies have been needed to counter the deflationary pressures caused by the need for painful deleveraging in the wake of large buildups of public and private debt.

In most advanced economies, for example, there is still a very large output gap, with output and demand well below potential; thus, firms have limited pricing power. There is considerable slack in labor markets as well: Too many unemployed workers are chasing too few available jobs, while trade and globalization, together with labor-saving technological innovations, are increasingly squeezing workers’ jobs and incomes, placing a further drag on demand.

Moreover, there is still slack in real-estate markets where booms went bust (the United States, the United Kingdom, Spain, Ireland, Iceland, and Dubai). And bubbles in other markets (for example, China, Hong Kong, Singapore, Canada, Switzerland, France, Sweden, Norway, Australia, New Zealand) pose a new risk, as their collapse would drag down home prices.

Commodity markets, too, have become a source of disinflationary pressure. North America’s shale-energy revolution has weakened oil and gas prices, while China’s slowdown has undermined demand for a broad range of commodities, including iron ore, copper, and other industrial metals, all of which are in greater supply after years of high prices stimulated investments in new capacity.

China’s slowdown, coming after years of over-investment in real estate and infrastructure, is also causing a global glut of manufactured and industrial goods. With domestic demand in these sectors now contracting sharply, the excess capacity in China’s steel and cement sectors – to cite just two examples – is fueling further deflationary pressure in global industrial markets.

Rising income inequality, by redistributing income from those who spend more to those who save more, has exacerbated the demand shortfall. So has the asymmetric adjustment between over-saving creditor economies that face no market pressure to spend more, and over-spending debtor economies that do face market pressure and have been forced to save more.

Simply put, we live in a world in which there is too much supply and too little demand. The result is persistent disinflationary, if not deflationary, pressure, despite aggressive monetary easing.

The inability of unconventional monetary policies to prevent outright deflation partly reflects the fact that such policies seek to weaken the currency, thereby improving net exports and increasing inflation. This, however, is a zero-sum game that merely exports deflation and recession to other economies.

Perhaps more important has been a profound mismatch with fiscal policy. To be effective, monetary stimulus needs to be accompanied by temporary fiscal stimulus, which is now lacking in all major economies. Indeed, the eurozone, the UK, the US, and Japan are all pursuing varying degrees of fiscal austerity and consolidation.

Even the International Monetary Fund has correctly pointed out that part of the solution for a world with too much supply and too little demand needs to be public investment in infrastructure, which is lacking – or crumbling – in most advanced economies and emerging markets (with the exception of China). With long-term interest rates close to zero in most advanced economies (and in some cases even negative), the case for infrastructure spending is indeed compelling. But a variety of political constraints – particularly the fact that fiscally strapped economies slash capital spending before cutting public-sector wages, subsidies, and other current spending – are holding back the needed infrastructure boom.

All of this adds up to a recipe for continued slow growth, secular stagnation, disinflation, and even deflation. That is why, in the absence of appropriate fiscal policies to address insufficient aggregate demand, unconventional monetary policies will remain a central feature of the macroeconomic landscape.

Read more at http://www.project-syndicate.org/commentary/unconventional-monetary-policies-and-fiscal-stimulus-by-nouriel-roubini-2015-02

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Why does the Central banks have a 2 per cent target?

(Source http://www.independent.co.uk/news/business/comment/david-blanchflower/david-blanchflower-we-should-fear-deflation–not-welcome-it-9986726.html )

The UK isn’t in deflation yet. While central bankers know what to do about stopping inflation, they don’t know what to do about halting deflation. The Swiss National Bank last week abandoned its attempt to defend a currency floor, which caused a sharp appreciation in its currency, which will exacerbate the deflationary forces it has already been hit by. This was largely a response to the prospect of the European Central Bank doing large-scale quantitative easing after a positive ruling on its legality from the European Court of Justice. This caused funds to rush into Switzerland from the eurozone, which has also fallen into deflation, with the latest estimate showing prices falling at 0.2 per cent a year. There is deflationary contagion in the air.

According to OECD data, inflation in Japan averaged minus 0.23 per cent between 1999 and 2013, compared with plus 2.2 per cent in the UK and plus 2.4 per cent in the US. Over that 15-year period Japan had eight years where there was deflation and two when price rises averaged zero. The UK had none where price rises were negative, while the US had one (2009). Once you have deflation it is extremely hard to get rid of it. Policymakers have no idea how to create any inflation.

In a famous speech* entitled “Deflation: making sure ‘it’ doesn’t happen here”, given in 2002, the former Fed chairman Ben Bernanke warned about the destructive nature of sustained deflation, which he argued should be strongly resisted. Prevention of deflation is preferable to a cure. America’s worst encounter with deflation was in the 1930s, when the price level fell about 10 per cent per year, which Mr Bernanke notes caused massive financial problems, including defaults, bankruptcies, and bank failures.

But he noted that a little bit of deflation is also bad. Speaking about Japan, he said: “Where what seems to be a relatively moderate deflation – a decline in consumer prices of about 1 per cent per year – has been associated with years of painfully slow growth, rising joblessness, and apparently intractable financial problems in the banking and corporate sectors.”

He argues that deflation is in almost all cases a side-effect of a collapse of aggregate demand. The economic effects of a deflationary episode, he argues, for the most part, “are similar to those of any other sharp decline in aggregate spending, namely, recession, rising unemployment, and financial stress”. Do not enter here!

The latest Office for National Statistics release showed that the UK CPI had fallen from 1.0 per cent to 0.5 per cent, largely driven by the fall in the oil price, which has more than halved since the summer, but there is a broader story. The Bloomberg Commodity Index, which tracks exchange-traded commodity futures contracts on 20 commodities, including oil, but also food, metals and gold, is down by a quarter since the summer.

The Prime Minister in a tweet, though, celebrated the fall in inflation, which he said was “good news for families. Our long-term economic plan is on track and helping hardworking taxpayers”. It remains unclear how the Coalition’s long-term economic plan, which produced the worst recession in 300 years, and lowered real wages by around 10 per cent, was able to lower world oil and commodity prices.

In its latest report on global prospects, the World Bank has argued that “the global economy is still struggling to gain momentum as many high-income countries continue to grapple with legacies of the global financial crisis and emerging economies are less dynamic than in the past”. China, they argued, is “undergoing a carefully managed slowdown”. As a consequence, they lowered their forecast of world growth in 2015 to 3 per cent, down 0.2 per cent since June 2014. Of particular note is the lowering of their forecast for China, down from 7.7 per cent in 2013 to 7.4 per cent for 2014; 7.1 per cent in 2015; 7.0 per cent in 2016; and 6.9 per cent in 2017. China continues to export deflation, with factory prices falling at over 3 per cent per annum.

Mark Carney for some time has insisted that the UK isn’t heading to deflation, but this week in a BBC interview he conceded that it is a possibility. He apparently wants to draw a distinction between what he says is “the persistently low inflationary pressures” faced in the eurozone and the situation in the UK, where tumbling oil prices have pushed the inflation rate to its lowest level since 2000.

The chart, which plots comparable consumer price inflation rates in the eurozone and the UK since the start of the recession, suggests that is a highly complacent view. The two series move very closely together; for the technically minded, the correlation is 0.74. The UK series is approximately a percentage point above that in the eurozone, and both series have moved steadily downwards together since September 2011, although with a broad flattening in the UK between around June 2012 to September 2013.

Both have fallen in tandem since June 2013, well before the collapse in the oil price. The UK looks to be about 6 months behind the eurozone. Currently inflation is 0.5 per cent in the UK, and it was 0.5 per cent in the eurozone in June 2014. Deflation is coming. It may well be here just in time for the election in May.

The Chancellor will presumably insist that very low inflation is good for the economy and all part of his “long-term economic plan”. But if very low inflation was such a good thing, then it doesn’t make much sense for the Government to give the MPC a 2 per cent symmetric target. It would be better for it to have a 0.5 per cent target or even zero.

In its Review of the Monetary Policy Framework published in May 2013, the Treasury argued “the main reason why zero inflation is not pursued as a policy goal is because, in the event of shocks, it can result in deflation, or negative inflation, which is highly undesirable. For example, deflation can impose large economic costs, in the form of low growth and high unemployment, as experienced during the Great Depression of the 1930s. In addition, deflationary expectations can limit how effective monetary policy is in accommodating large negative shocks”.

Mr Carney insisted that the MPC has tools to deal with the problem of deflation. The main one he has is more quantitative easing. The prospects of a rate rise in the UK before 2020 look remote. The UK isn’t in deflation … yet.

*“Deflation: Making Sure ‘It’ Doesn’t Happen Here” speech to the National Economists Club, Washington, 21 November 2002

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What the RBA can learn from the RBNZ

Reserve Bank of New Zealand (RBNZ) Governor Graeme Wheeler has done it again; defying expectations to intervene in a market to overcome a problem he couldn’t fix with conventional monetary policy.

Fresh from creating a macro-prudential tool to restrict the growth of riskier mortgage lending, Wheeler this week confirmed that he had intervened in the currency market to push the New Zealand dollar down.

The central bank quietly confirmed on Monday that it sold a net $NZ521 million worth of the currency in August and had bolstered its foreign exchange intervention capacity by $NZ938 million to $NZ9.558 billion.

The confirmation followed a detailed “final, final warning” statement from Wheeler last Thursday, that explained why the New Zealand dollar was extremely and unjustifiably high and why intervention was being considered.

Even so, the confirmation surprised many in the market who had become inured to the Governor’s many warnings about the currency and his previous apparent ambivalence about intervention.

The New Zealand dollar fell more than a cent on the news and has fallen more than four cents to around US78c since Wheeler’s final warning last week.

It’s still early days, but Wheeler’s second big intervention in his two years as Governor appears to have been effective.

The Reserve Bank of New Zealand has faced many of the same problems faced by the Reserve Bank of Australia (RBA) over the last year and has been one step ahead with policy innovations to deal with them.

Just as in Australia, New Zealand’s house price inflation threatened last year to gallop out of control as leveraged investors used historically low interest rates to compete for limited supplies of homes.

Yet the house price inflation has not been accompanied by the consumer price inflation that would normally trigger interest rate hikes needed to shut down the party.

Wheeler’s response in the face of much scepticism from bankers and politicians was a limit on the growth of highly leveraged mortgages.

Imposed in October last year, the bank reckons it helped reduce the pace of annual house price inflation from 10 per cent to 6 per cent and bought the RBNZ an extra three to six months of flat interest rates.

The central bank has since increased its Official Cash Rate by 100 basis points to 3.5 per cent, taking more steam out of the housing market, but also increasing pressure on the New Zealand dollar.

The currency’s surprising strength this year despite slumps in dairy and log prices has been a constant source of frustration for New Zealand’s policy makers, just as it has been for RBA Governor Glenn Stevens.

Wheeler warned about the high New Zealand dollar 13 times in the last two years, but was circumspect about the benefits of intervention for most of that time.

As recently as March, Wheeler pointed out that the New Zealand dollar was between the 7th and 10th most traded in the world, with turnover of $NZ100 billion a day – most of which was in offshore markets.

See more at: https://bluenotes.anz.com/posts/2014/10/what-the-rba-can-learn-from-the-rbnz/#sthash.mMJ1uYgc.dpuf

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ECB’s Draghi takes up new weapon in war on deflation

Runners have target times, golfers judge themselves by their swing, while Mario Draghi watches a technical measure of inflation expectations used by financial markets.

Just one problem: it suggests the European Central Bank president is not achieving his objective – and that markets’ fears of eurozone deflation are mounting.

Since late August, investors have focused on a financial gauge previously watched only by specialists – the “five-year, five-year euro inflation swap rate”. That is the average level of inflation that swaps prices imply over five years starting in five years’ time. Inflation swaps are used to protect investors against inflation.

Mr Draghi had highlighted the inflation swap rate when he addressed a global summit of central bankers in Jackson Hole, Wyoming. In a big hint of a fresh ECB effort to stimulate eurozone growth, he noted that the gauge had fallen sharply.

http://www.ft.com/intl/cms/s/0/55a3b1c4-433f-11e4-be3f-00144feabdc0.html?siteedition=intl#axzz3EIVz1QLK

 

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Is the Euro Ok now ?

A number of changes have been taken or proposed as a result of the financial crisis of August 2007 and the “Great Recession” that are worth discussing in terms of the euro crisis. Most important, though, are the changes of the period between late 2011 and 2012: strict budget rules, banking oversight stripped from national governments might make the European Central Bank (ECB) become “lender of last resort.” We concentrate on the most recent ones at some length before we reach conclusions as to whether the euro has been saved from the euro crisis.

The European Union (EU) summit meeting, 28/29 June 2012, took a number of decisions: banking licence for the European Stability Mechanism (ESM) that would give access to ECB funding and thus greatly increase its firepower; banking supervision by the ECB; a “growth pact,” which would involve issuing project bonds to finance infrastructure. Two long-term solutions are proposed: one is a move towards a banking union and a single euro-area bank deposit guarantee scheme; another is the introduction of eurobonds and eurobills. Germany has resisted the latter, arguing that it would only contemplate such action only under a full-blown fiscal union; not much has been implemented in any case.

See more at: http://triplecrisis.com/has-the-euro-been-saved/

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ECB cuts euro zone rates in surprise move. But …

Though ECB cut  was covered by the Press in great details but only a few analyzed the results of such measure.

Only independent writer/economists talked about the potential losers and winners of the situation.

In this article featured in The Telegraph , an economic writer talks about critiques the actions of the ECB and evaluates the potential repercussions of the action.

Eric Reguly in the The Globe and Mail takes a more optimistic approach on this action by highlighting to plausible upsides of cutting the interest rates. The lower exchange rate and its impact on the trade of EU is the immediate positive effect of this action.

Wall Street Journal talks about the ripple effect of reduced rates. It gives rationale behind the move and the prospective winners.

Global Research points as to how such divergences could be the source of increased global financial turbulence in the coming months.

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