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