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.
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.
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.
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.
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.
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.