Faith in the lira has slipped as the political power struggle continues, with accusations of an attempted coup, which some say dates back to 2003 and others say never existed. No clarity is needed for traders to want to exit the currency, however. Uncertainty is sufficient incentive.
The lira has fallen about 2 per cent against the euro and dollar this week (see chart). It is likely to continue falling. Bloomberg is reporting a surge in demand for put options on the currency. Put options give the holder the right, but not the obligation, to sell the currency for a specified amount on a set date in the future. Read more
Topically, it was Zhu Min who raised this troubling issue at Davos recently. “The big risk this year is the dollar carry trade,” he said. “Estimates are that the dollar carry trade is $1,500bn – which is much bigger than Japan’s carry trade was.”
A carry trade is where investors borrow in a low-interest currency to invest in a high-interest currency. Historically, the borrowing currency of choice was the yen. Recently the dollar, with record low interest rates, has apparently become popular. Read more
The central bank of Brazil has announced a rise in reserve requirements for larger banks, reversing the lower levels permitted during the crisis.
Two moves are intended to soak up 71bn reais ($39bn) from the Brazilian financial system: (1) reserve requirements for time deposits will be raised to 15 per cent from 13.5 per cent; (2) additional requirements for demand and time deposits will be raised to 8 per cent from 5 and 4, respectively. The moves will take place on March 22 and April 9. Read more
Zhu Min is to become a special advisor to IMF head Dominique Strauss-Kahn. Mr Zhu has been a deputy governor of the Chinese central bank since October last year. Highly respected in international financial circles, Mr Zhu will start his new role in May. His appointment follows the selection in 2008 of Justin Yifu Lin, the Chinese academic, as chief economist of the World Bank. One sticky topic might be the renminbi, which Mr Strauss-Kahn has repeatedly said should appreciate (more from Geoff Dyer).
Someone, somewhere, has been counting. They have counted, for example, the number of times Ben Bernanke has said ‘inflation’ in the past few years in his testimony to Congress (it has been falling, and the word ‘deflation’ doesn’t show up at all*).
Discussion of institutions is rising fast, however. ‘Federal’ and ‘reserve’ are the biggest winners – ‘federal’ was said 46 times in the latest speech, almost 7 times the wordcount three years ago, and double the wordcount six months ago. ‘Congress’ and indeed ‘institutions’ are new entrants, as is ‘system’. ‘Facilities’, not shown on chart, made a strong entrance this year, with a count of 18. Read more
Analysts agree that Ben Bernanke’s prepared testimony ahead of the House Financial Services Committee this morning was largely uneventful.
“You know Bernanke did not say very much, when there is an active debate as to whether weak new home sales or Bernanke’s testimony was moving markets more. Oddly the home sales data may have even won that contest,” wrote Alan Ruskin, chief international strategist at RBS.
So what hasn’t changed?
The Federal funds rate, as Mr Bernanke and everyone else at the Fed have stated repeatedly, is likely to remain low for an ‘extended period’, even after the discount rate – the rate at which banks borrow money directly from the Fed – rose by 25bp last week.
But his testimony to Congress wasn’t limited to his written statement. Among his comments during the question and answer period:
- Bernanke on the cost of interest rates on reserves: Unless I’m mistaken, this is the first time Mr Bernanke has addressed the cost of paying interest on bank reserves. He has said previously that it will likely be the most important means of tightening monetary policy when it’s time to begin tightening, but not estimated its cost. In the hearing, he said the cost would be ‘within tens of basis points’ of increasing the federal funds rate. “[It's] not a tremendous difference.”
Ben Bernanke will welcome an audit, defend the Fed’s independence and make a case for the Fed’s role in regulation when delivering his monetary policy report to Congress today.
Temporary inventory sell-offs contributed to 4 per cent growth in the second half of last year, Mr Bernanke will say in this speech. Demand must grow in the private sector to plug the gap when the inventory bounce ends. Private sector demand is already growing at a moderate pace, driven in part by a recent pick-up in consumer spending and business investment in equipment and software. Read more
The Polish central bank has kept the 7-day reference rate on hold at 3.5 per cent, as expected. The economy has been growing while inflation has been falling, making the timing of a rate rise uncertain.
This month’s board contained three new members, whose relatively bearish views made a rate rise this month less likely. Traders are also becoming more cautious, pricing in a 0.7 percentage point rise in the next six months. Last month they were pricing in a 0.8 percentage point rise. Read more
The People’s Bank of China’s current account increased by 69 per cent during 2009, ending the year at $42.6bn, while its financial account enjoyed a net inflow of $14bn, the first net inflow since 2005. Taiwan News said the record balance surplus reflected an increase in the bank’s reserve assets – which are likely to rise further this year as China uses banks’ reserve ratios as a means to limit the amount of money in the economy. The last such move was on February 18.
Russia is getting richer. The rouble is gradually being allowed to strengthen, which will allow Russians to import more, addressing their trade surplus. The process is being carefully managed, however, with the central bank cushioning each move.
Local dealers are again reporting a $700m purchase of foreign exchange with a 5 kopeck reduction in the floating rouble band boundary. (A kopeck is one hundredth of a rouble.) Read more
Neighbours Namibia and Botswana have kept their main rates on hold today. Namibia has kept its repurchase rate at 7 per cent for the fourth consecutive month, while Botswana has kept its main lending rate at 10 per cent. Namibia and Botswana neighbour South Africa, the continent’s largest economy, and Namibia generally follows South African monetary policy. South Africa kept its rate at 7 per cent for the fourth month, on January 26.
Inflation in all three countries is at similar levels, albeit in different directions. South African inflation ran at 6.2 per cent in January, above the 3-6 per cent range for the second month, but falling toward it from December’s level of 6.3 per cent. Inflation in Namibia – also above target but slowing – is currently about 6.3 per cent. Botswana has just exceeded its target range of 3-6 per cent, with inflation rising to 6.1 per cent in January. Read more
China might soon be littered with incomplete building projects and half-built roads.
Chinese banks have been ordered to trawl through existing loan agreements that are ultimately used by local governments to raise funds – and stop lending to those projects backed only by expected fiscal revenues. The aim is to reduce the chance of default. Read more
The FDIC’s deposit insurance fund balance, an expression of its net worth, is -$20.9bn, because of provisions taken against failing banks. (To be scared further on that subject, see Calculated Risk.)
There were 2,860 mass layoffs during January in the US. Mass layoffs are from establishments that have at least 50 initial claims for unemployment filed against them in a five-week period.
The numbers are up 24 per cent on last month, which was itself up 24 per cent on the month before. On average, 97 people are laid off at each of these layoff ‘events’.
I was once refused a mortgage because I had never had a credit card. Prudence apparently made me a dubious debtor. Might Estonia’s prudence imperil its bid to join the euro? With government debt below 10 per cent of GDP, Estonia has not needed to issue a benchmark bond. Such a bond would give evidence of low and stable interest rates, a pre-requisite for entry into the euro, slated for 2011, argues Sakari Suoninen of Macroscope blog, adding that other indicators can probably substitute.
As Sakari points out, it will be very impressive if Estonia meets the eurozone’s entry requirement: no country already using the common currency would qualify to join the bloc this year.
For emerging markets, at least.
Adair Turner is such a trend-setter. He backed a Tobin tax, and the world laughed. Then the world paused and considered. And now there is a great deal of support for the idea. Read more
Apparently, sterling has fallen on the back of zero QE news from Mervyn King at parliament’s Treasury Committee this morning.
The policy of quantitative easing – whereby the central bank increases its credit balance and buys assets – finished in early February. But its resumption was never ruled out. Time and again, Mr King has said the policy would be reinstated if needed. Read more