IMF data to include Australian dollars. Getty
It is often forgotten that central banks are major players in global capital markets. At the last count, monetary authorities held reserves worth $10.5tn, according to International Monetary Fund data.
Most of this stockpile is thought to be invested in “safe” assets, such as government bonds of highly-rated sovereigns and gold. But, while some of the more open monetary authorities, such as the Swiss National Bank, provide some information about the currency composition of their reserves and asset allocation, most of the big reserves holders, located in Asia, don’t.
Not a lot is known about what’s held in central banks’ coffers. This matters because changes in central bank reserve managers’ behaviour can endanger financial stability. Read more
What constitutes success for the world’s one-day yen policy? To minimise “excess volatility and disorderly movements in exchange rates,” if the G7 statement is anything to go by.
But then “volatility” is all a matter of time period. For instance, it has gone up over the one-day time horizon, with the very sharp weakening of the yen since central bank intervention began this morning. “Disorder” gives a little more wiggle room because it is defined by its effects. It might include, for instance, exchange rate movements that lead to a credit crunch. (One wonders, though, whether a rapid weakening of the yen would also have been classed as “disorderly”.)
Some pundits are saying the G7 action is at least partly self-interested. Certainly their participation is likely to cost them: their domestic currencies will appreciate, and the trades themselves are very likely to lose money as the yen eventually rebounds. Perhaps the tumbling Nikkei – and stocks elsewhere following – made these costs seem smaller. Success in these terms has been achieved – for today. American, European and British equities have gained today.
Other commentators suggest the moves are about defeating the speculators. If we could Read more
The Group of Seven industrialised nations have agreed to co-ordinated currency intervention for the first time in a decade to help Japan recover from its devastating earthquake, tsunami and nuclear crisis.
Authorities in Japan, the eurozone, the UK, Canada and the US agreed on Friday to help weaken the yen in a rolling intervention that began at 9am in Tokyo, which immediately pushed the yen down from above Y79 against the US dollar to below Y81. Read more
In an effort to tame inflation, Vietnam has increased both the refinancing and discount rates to 12 per cent. This is a huge increase of 5 percentage points for the discount rate, which was last raised from 6 to 7 per cent in November of last year. (Note: The chart, right, shows only the refinancing rate, which has been raised by a still-large 1 percentage point.) The statement made no mention of the base rate, which has been used as the benchmark and which appears to remain at 9 per cent.
The move comes hot on the heels of a raft of tightening measures last month, including a 2 percentage point rate rise in the refinancing rate and a 1 percentage point rise in the reverse repo rate. Read more
Fighting currency appreciation is an expensive business. It cost the Swiss SFr 21bn ($23bn) before they gave up and let the franc rise. New figures out from the Bank of Israel show it cost them NIS 17.6bn ($4.8bn). The Bank’s overall loss was NIS 17.9, of which 98 per cent can be attributed to exchange rate moves.
Israel’s foreign exchange stockpile has been growing – but the governor says these reserves might prove useful if there is a reversal of capital flows. Israel has been raising rates to contain inflation and dampen the too-buoyant housing market. The governor has called for international rules on foreign exchange markets and capital flows, just as exist currently for trade.
A dramatic reversal of direction occurred in the currency markets today after a central banker spoke of “pre-emptive action” on interest rates.
The euro reversed its fall at lunchtime on Friday, just as Bloomberg news wire published details of an interview with ECB executive board member Lorenzo Bini Smaghi. Read more
The Vietnamese central bank has devalued its currency by about 9.3 per cent, the third devaluation of the dong in a year and the sharpest since at least 1993. Despite high inflation, the State Bank of Vietnam fixed the currency’s reference rate at 20,693 per dollar today versus 18,932 yesterday.
The move is an attempt to address the gap between official and black market exchange rates, which was roughly 8.5 per cent yesterday. A weaker dong will also help exporters and should address the country’s trade deficit.
But the devaluation could be disastrous for inflation, already high at 12.2 per cent last month. The target is 7 per cent. The move suggests the bank is prioritising growth over inflation, which is supported by recent comments from the government. “One of our top priorities now is to stabilize the macro economy in order to maintain the pace of growth,” Bloomberg quotes Nguyen Van Thao, deputy chief administrator of the ruling Vietnamese Communist Party’s Central Committee, saying on January 19. Read more
Domestic inflation seems a much likelier explanation for the recent appreciation of the yuan than American pressure. Many commentators have referred to the Chinese “bowing to pressure” or otherwise implied that the authorities have – without apparent trigger – capitulated to Western pressure. A quick look at the timing suggests otherwise. China is in the middle of a tightening extravaganza, raising interest rates and reserve requirements to tackle inflation. A strengthening yuan can have exactly the same effect, by making imports cheaper. Timing is only circumstantial evidence, of course, but it is something.
Germany’s heavyweight Frankfurter Allgemeine Zeitung is the voice of the country’s conservative establishment. So it is interesting to see almost the entire front page of Thursday’s “Feuilleton” (arts features) section devoted to a piece on Germany’s relationship to the euro by Werner Plumpe, an economic historian at Frankfurt’s Goethe university.
Headlined “The euro is not our destiny,” Plumpe takes issue with the claim by Angela Merkel, Germany’s chancellor, that Europe’s future is bound to the fate of the eurozone. Read more
Chile’s Finance Minister says the Fed’s second round of quantitative easing put upward pressure on the peso, as he welcomed central bank plans to weaken the currency.
The peso has fallen very sharply on news that the Banco Central de Chile plans to buy $12bn in the foreign exchange markets. On the shopping list is $50m per day from January 5 to Feburary 9.
Thereafter, the central bank aims to offset the liquidity effects and “soften the impact on the prices of debt market instruments” by selling $10bn-worth of peso-denominated bonds plus $2bn-worth of short-term maturities. Read more
Hawkish comments from Poland’s central bank governor, following ambiguous data from the last minutes. The Bank kept its reference rate on hold at 3.5 per cent, as expected, but comments from Marek Belka suggest a rate rise is on the horizon.
Commenting on what he said was a decreased risk of strong capital inflows into Poland in the event of an interest rate rise, Reuters reports the governor telling a news conference: “This changes slightly the risk balance in favour of rate hikes or in favour of the start of a tightening cycle.” Mr Belka also reiterated his view that the Polish zloty has strong potential to appreciate. Read more
Say what you will of the dizzying rise of South Africa’s rand, it has certainly helped to restrain inflation by keeping a lid on import prices. Consumer price inflation – which was over 10 per cent in late 2008 – has been running towards the bottom of the Reserve Bank’s target range, 3 to 6 per cent.
But data released this week suggest that inflationary pressures may be starting to build again – and that they could return with a vengeance when the currency weakens. At 6.2 per cent, November’s producer price inflation figure, released on Wednesday, surprised on the upside. So did the previous day’s consumer price inflation number of 3.6 per cent. Read more
By Ralph Jennings in Taipei
It hasn’t been an easy year for Taiwan’s central bank. The authority – which uses exchange rates to manage the economy – grappled in early 2010 with rapid currency gains as investors expected the Chinese yuan to pull the rest of emerging Asia higher.
In October and November the central bank fought back as the Taiwan dollar surged about 3 per cent as hot money flowed into Asia after the United States launched a new round of monetary easing. On Tuesday the currency went at it again, but the central bank may stay on the sidelines this time.
The Taiwan dollar broke its key psychological barrier of T$30 per US dollar, rising as high as T$29.927 in the first hour of trade. An intra-day break past the T$30 mark was last seen in early 2008 on euphoria over the election of Taiwan President Ma Ying-jeou as markets expected him to forge new trade ties with economic powerhouse China. It has not closed a session above T$30 since 1997, before today’s central bank Gov. Perng Fai-nan took control. Read more
Berlin’s approach – and that of the European Central Bank – to handling the eurozone crisis, has come under strong attack from Peter Bofinger, economics professor at Würzburg university and an independent adviser to the German government. Without a profound change of strategy there was a “major risk of an unraveling of the euro area,” he has said.
A “dangerous” adjustment process is being forced on eurozone countries, he told a Financial Times/Credit Suisse conference in Frankfurt. The weakest spot is Greece, which faces rising unemployment and debt levels. As a result, political opposition to euro membership would grow, according to Prof Bofinger. “Sooner or later we will have a discussion in Greece: ‘why not leave the euro?’” A new currency could then be devalued and much of the government’s debt cancelled out. Once Greece had left, others would follow. Read more
Blink and you may have missed it.
But last Friday, Ben Bernanke probably made his most important speech since his ‘helicopter money‘ talk almost eight years ago.
According to author and economist Richard Duncan this is the first time the Federal Reserve chairman has publicly pointed out that the international monetary system may have a structural flaw. In the dollar standard.
As Duncan told FT Alphaville this weekend:
In it he conceded the Dollar Standard is flawed. He said, “As currently constituted, the international monetary system has a structural flaw: It lacks a mechanism, market based or otherwise, to induce needed adjustments by surplus countries, which can result in persistent imbalances.”
Officials from Taiwan’s central bank have rejected the implication of currency undervaluation in a chart used by Ben Bernanke. The offending graph – to the right – shows changes in the real effective exchange rate on its vertical (y) axis. Taiwan’s currency weakened by 2.8 per cent in real terms between September 2009 and 2010, according to this Fed chart. Taiwan says it fell by just 0.2 per cent, and argues that REER is not a good measure of undervaluation anyway.
At stake is responsibility for volatile capital flows that add to inflation in emerging markets and threaten to destabilise recovery. Emerging markets point to the Fed’s stimulus programme. But Mr Bernanke argued in his speech that the Fed’s $600bn stimulus programme was good for the world economy, refusing to accept responsibility for the extra inflationary pressure flowing through to emerging markets. In spite of former chair Alan Greenspan’s comments to the contrary, the Fed also continues to deny any attempt deliberately to weaken the dollar.
Indeed, Mr Bernanke accused emerging market economies of spending their reserves to slow the appreciation of their currencies. Hot money, he argued, was flowing into emerging markets regardless of Fed actions, because investors expected currencies they were buying to strengthen further. Since – by this chart – Taiwan’s currency has strengthened the least (indeed, has weakened), the implication is that Taiwan is one of the worst ‘offenders’. Read more
Seoul raised its base rate 25bp to 2.5 per cent today, citing rising inflation and an appreciating currency, as well as – more positively – continued growth expected in South Korea.
Growth in the country has moderated recently, slowing to 0.7 per cent in the three months to September, from 1.4 per cent in the three months prior. Nonetheless, continued growth is expected, and Goldman Sachs analysts expect the base rate to reach 3.25 per cent by the end of 2011. Read more
The renminbi is 17 per cent undervalued against the dollar while the yen is 8 per cent overvalued…
William Cline and John Williamson at the Peterson Institute for International Economics have done a service to the currency wars debate by releasing an update to their estimates of fundamental equilibrium exchange rates (FEERs) for various countries against the dollar in a very interesting policy brief. Read more
China’s central bank has signalled a shift toward rate normalisation, following its recent rate rise. The People’s Bank said it will “gradually guide monetary conditions back to the normal state while continuing the comparative loose monetary,” according to Xinhua. The remarks were made in the Bank’s third quarter Monetary Policy Implementation report released before the Fed meeting and not yet available in English.
China’s change in tone may usher in a new period of tightening, as inflationary pressures mount. The Fed’s decision to pump $600bn into the US economy will push down the dollar. Since the renminbi closely tracks the dollar, the Chinese currency will not be allowed to strengthen proportionately, and the extra money in the system will increase the supply of renminbi, adding to inflationary pressure. Read more
Australia’s cash rate has been raised 25bp to 4.75 per cent, increasing demand for the nation’s currency enough to tip the Australian dollar past parity with its American counterpart. The move follows bullish minutes after the last rate-setting meeting, and the statement accompanying the move predicted more tightening ahead.
Australia was one of the first countries to start raising rates after the rapid cuts characteristic of the financial crisis. This is the first rate rise since the Reserve Bank started holding in Spring (see chart, right).
Wage growth is beginning to pick up, and upward pressure is expected on consumer prices – which have been kept artificially low by soft food prices in the past quarter: Read more