Category Archives: Interest Rates and Currencies

Asset prices down, money chasing security. What’s the problem?

While there has been enthusiasm for a recovering global economy, optimism is being dampened by market movements.

There are some fundamental concerns about projected consumption levels and production costs.

There are a number of geopolitical risks festering around the world:

The strife in Hong Kong is being calmed by force.  That will be re-assuring now, but has shown the inability of Xi to lead a new path and China to manage the inevitable progression to maturity.  Hong Kong is China’s best testing ground for political innovation, which must manifest in China soon otherwise social tension will disrupt economic strength.

The middle east …!  Syria and IS are immediate and top of the list, but they are set to be a decades long drama of death.  Iraq, Afghanistan, Iran., Libya, and more.  Israel/Palestine … so sad.  These are are drain on the consciousness, but are inconsequential as long as the oil flows.  Phew.

Ebola is gaining momentum rather than being contained.  That might change.  But it’s scary to imagine a wierd disease like that becoming a global epidemic.  Managing a cataclysm like that might bring people together.

Everything’s going to be fine, in the short term.  But the underlying systemic risks, economic, social and ethical,  remain.

A holonic prescription for success without growth beckons.  Will our leaders lean in that direction?

BBC: Global shares slide on growth fears

BloombergBusinessWeek:  U.S. Oil Producers May Drill Themselves Into Oblivion

 IMF: World Economic Outlook (WEO) Legacies, Clouds, Uncertainties

 

 

 

A single global currency.

China has suggested the adoption of a single global reserve currency citing the dangers of relying upon one national currency (US$). The currency would be underwritten by the IMF.

It would certainly be helpful to move towards a more balanced global currency regime. The euro is a step in this direction because it is weighted by a number of large economies.

A single Asian currency has been mooted for some years, one of its underpinning rationales being monetary integration.

A single global currency would be a big step towards the inevitable emergence of energy becoming the single currency of humanity allowing integration with the biosphere.

See BBC China suggests switch from dollar.

See FT China calls for new reserve currency.

See People’s Bank of China essays Reform International Financial Regulatory Framework: A Few Remarks (pdf here) and Reform the International Monetary System.

Next, the FED will pay you to borrow their money.

The US FED has dropped interest rates to the floor: zero to a quarter of a percent.  That probably won’t have a big impact, except short term (a day or so)  on stock market sentiment.  But if banks aren’t actually lending to businesses, then its not going to stimulate economic activity.

So, maybe negative rates would help.  “We’ll pay you to borrow our money.  But you’ve got to promise to lend it out.” It might be cheaper, more efficient and more effective than a fiscal stimulus.  Though a fiscal stimulus is needed too.

As we’ve noted for months, the interest rate is not what’s going to make or break the economy.   The behaviour of players in the debt and equity markets is.  And right now, they’re hardly even playing at all which is why the economy is stagnating.

Chinese Yuan XR volatility – Q and A

Reuters published an interesting analysis of the recent depreciation of the Yuan here, including implications, dangers and analyst expectations.  It’s copied here below.

If depreciation is market driven, a big if, then the depreciation may be appropriate and help revitalise Chinese exports and in turn western consumption.  Whether or not the value has been engineered, it is not dissimilar to the gross fluctuations of other currencies that have been seen over the past few months, eg US$, €, Yen, GBP etc.

Unfortunately only the traders benefit from this kind of volatility, whether it be in currency, stock or asset prices.

Q+A-Why is speculation over China’s yuan heating up?

Thu Dec 4, 2008 2:24am EST

(For related stories see MARKETS-CHINA-YUAN-MIDDAY or [ID:nSHA270570]; CHINA-USA/ or [ID:nPEK36920])

Dec 4 (Reuters) – U.S. officials are expected to urge China to engineer appreciation of the yuan <CNY=CFXS> against the dollar at a two-day Strategic Economic Dialogue between the countries, which opened in Beijing on Thursday.

But the yuan has instead weakened against the dollar this week to a five-month low and the currency market is speculating that it will drop further.

China has not confirmed any policy change, but most traders believe official thinking has shifted to a degree.

Here are some facts about the long-simmering spat over the value of China’s currency.

WHY IS THE YUAN IN THE NEWS?

* This week has seen the greatest turmoil in China’s foreign exchange market since the yuan’s fixed peg to the dollar was scrapped in July 2005.

* After keeping the yuan within a tiny range of about 6.82-6.85 against the dollar for four months, China’s central bank let the yuan drop unusually sharply this week.

* It was trading at 6.8837 per dollar at 0717 GMT on Thursday.

* The yuan’s value is tightly controlled by the Chinese central bank; it sets a daily mid-point <CNY=SAEC> against the dollar, and trades against the dollar can only occur in a band extending 0.5 percent either side of the mid-point.

WHAT’S BEHIND THIS WEEK’S MOVES?:

* Domestic political pressure to help the country’s struggling export sector is believed to be a major factor. Thousands of small factories making shoes, clothes and toys have closed in recent months, raising unemployment and sparking worker protests which the government says threaten social stability.

* Many factories were pushed into the red as the yuan appreciated over 7 percent against the dollar earlier this year to a peak of 6.8099 in September, analysts say.

* Depreciating the yuan would make made-in-China goods cheaper, better insulating exporters from global recession.

WHAT ARE THE INTERNATIONAL IMPLICATIONS?:

* Engineering a yuan rise against the dollar would help ease trade tensions with the United States, which runs a significant deficit with China. The two countries’ lopsided trade relations are closely watched, and may reflect a shift of global economic power to East from West.

* Critics of China, such as U.S. manufacturers, say it has kept the yuan undervalued, giving its firms an unfair advantage in world markets that has cost millions of jobs in the West.

WHAT’S DANGEROUS ABOUT A DEPRECIATION?:

* DOMESTICALLY — Extended, sharp depreciation could prompt capital outflows from China, complicating the central bank’s efforts to bring interest rates down to help the economy. The central bank has declared it is determined to prevent large-scale outflows.

* INTERNATIONALLY — A big drop by the yuan could set China up for a confrontation with U.S. President-elect Barack Obama, who said in September that the yuan was “artificially low” and that he would press for appreciation.

* REGIONALLY — Yuan weakness could trigger competitive depreciations of other Asian currencies, worsening instability in global markets. During the Asian crisis of 1997/98, China’s decision to keep the yuan steady against the dollar, as other emerging market currencies tumbled, helped the region recover.

WHAT DO ANALYSTS THINK WILL HAPPEN?:

* The yuan may not be allowed to fall below 6.90 before the end of this year, according to a dozen dealers and analysts informally polled by Reuters in Shanghai this week.

* It could depreciate as much as 3 percent further in the first half of 2009, to around 7.1 — but only if the dollar continues to rise globally and if China’s economic downturn continues to worsen, they said.

* To fend off charges of currency manipulation from trading partners, China could simultaneously begin reforms to its currency system, such as widening the yuan’s trading band to 1.0 percent on either side of the daily mid-point, traders think.

Source: Reuters

(Compiled by Gillian Murdoch, Singapore Editorial Reference Unit; Editing by Andrew Torchia)

US interest rates – how low can you go

Well not much lower.  US interest rates were cut from 1.5% to 1.0% today.  Soon they’ll be emulating Japan’s interest rate environment – hovering around 0.5%.  And Japan’s economic reputation for the past decade or so has not been good.

As we’ve said before, the interest rate level is not the problem.  This reduction may act as a signal, but it will only be short term and will not reinvigorate confidence in a system which has proven to be untrustworthy.  Moral hazard must be addressed.

Interest rates cut in desperation …

 

Six central banks have cut their interest rates by half a percentage point.  The US Federal Reserve has cut rates from 2% to 1.5% and the European Central Bank (ECB) trimmed its rate from 4.25% to 3.75%.  The UK trimmed the interest rate to 4.5% from 5%.  The central banks of Canada and Sweden and Switzerland all took similar action in the coordinated move.  China also cut its rate, but by 0.27 percentage points.

The unprecedented step is aimed at steadying a faltering global economy and slumping stock markets.  But will it work?  Does the interest rate have anything to do with the real economy?  Does it bolster trust in the financial industry?  No, not really.  There might be brief relief and a short rise in confidence, but the underlying fundamental picture is not changing.

It is another knee jerk reaction.  It is good to send a signal that regulators are “doing something” but it does not mean it is has been thought out or is the right thing to do.  It is unlikely to help the people least able to weather economic hardship.

What regulators have not admitted is that there is no quick fix.

A resuscitation of financial markets must be underpinned by integrity.  At first this means honest communication.  It might also mean that privately owned banks are required to lend again (eg the UK government acquisition of preference shares might help leverage this liquidity), because without credit well over half of western economies evaporate.

Financial market players also must change their thinking to operate happily in markets of deflation and negative growth.  This means changing metrics and objectives.  These adjustments take time, but should be considered by regulators sooner rather than later.  And have repercussions for all other policy areas.

The saga continues …

EU interest rates up …

The ECB raised EU interest rates yesterday to 4.25% as expected.

The stated rationale is to control inflation in the medium term (18 months). That’s the accepted wisdom anyway.  But mostly its a signal to the market.  Interest rates have been relatively stable over recent years and much of the volatility is underpinned by leveraging balance sheets more than history suggests is reasonable – whether that is banks’ capital ratio or trader’s margin requirements.

But inflation is being driven by the cost of oil (more than the discount value of time) whose price increase is leveraged through most of our consumption from food to cars.  It has been a very inexpensive replacement for natural power.  And it seems that a slowdown in consumption is already upon us, driven by both rising oil prices but more importantly a rapid tightening of credit.

The challenge still remains to implement policies which will encourage development of alternative consumption patterns which give high value, but have a low impact on the planet.  Unfortunately standard economic metrics are not sophisticated enough to measure this so policy makers and politicians are still pushed to encourage “growth” when it is quite plain that humanity has outgrown the planet and we need to consumer less (as a species).  It is necessary to educate ourselves, populations and administrations alike, of the need to move beyond gdp and look at other indicators like quality of life.

Another Fed rate cut … how low can you go, Ben?

The US Fed cut again from 2.25% to 2%. 

Now is the time to be reducing rates.  But they’ve already come down so much in the past 2-3 quarters, while behaviour of policy makers and fiduciaries remains behind the game. I’m sure Ben would like to have additional room to reduce rates in case stimulation is required in the coming 6 months.  (They can’t be negative.)
People and businesses unaffected by the housing market depression are now feeling the pain of energy and food inflation.  (Oil is now at an all time high in real terms.)  Its not just the US of course, but rich economies generally do not seem to be able to see their way to encouraging system change.  There remains optimism (or hope) in equity markets – stock indicies are not that depressed but surely forecasts must have been reduced to account for recessionary dynamics.  The global economy is fortunate to have China, India and other emerging economies to provide some stability while richer countries get used to the idea that growth must be replaced by equity in politics, society and even business.

US rates down again

The US central bank lowered rates to 3% from 3.5% after a two-day meeting. Last week, the Fed slashed the cost of borrowing by the largest amount in 25 years in a shock move to calm tumbling global stock markets.  If you consider the double reduction over 9 days as one event, that’s a 1.25% drop – the largest ever.

The Fed is hoping the cuts will cushion the US economy from the worst effects of the credit crunch and housing slump. But it will not.  It may buoy sentiment for a while, but reality will bite again soon.  It is necessary that the behaviour of market participants becomes less volatile, and that requires a cultural change , an improvement in  fiduciary behaviour and regulatory removal of moral hazard from Wall Street.

(The US economy at a glance.)