Central Banks

The British Pound has been reeling since the Bank of England cut rates at the beginning of this month, from 5.75% to 5.50%.  Last week, the minutes for the meeting were released.  They revealed that that members of the Bank were growing increasingly nervous about the state of the British economy and are worrying particularly about how fallout from the credit crunch will impact growth.  British interest rates are still among the highest in the industrialized world, behind only Australia and New Zealand.  Thus, it seems investors are punishing the Pound indirectly for the rate cuts, because of fears concerning the near-term prognosis for the British economy.  At the same time, the minutes indicated that members of the Bank were adamant about not lowering rates further, so some of the concerns may be overblown.

Read More:  Pound weakens after BoE minutes show concerns for growth

Original post by Jimmy Atkinson and software by Elliott Back

In recent speeches, two high-ranking officials from

America

’s
Federal Reserve Bank gave conflicting indications regarding the likelihood of
rate cuts next month. Both officials were deliberately ambiguous in their
speeches, though one went so far as to rule out a rate cut while the other
hinted at its inevitability. Nonetheless,
analysts used the speeches to buttress their conclusion that a rate cut is
probable. In fact, the futures market
has priced in a 94% chance that rates will be cut by 25 basis points at the
next meeting, on December 11. Likewise,
it seems a rate cut has already been priced into the USD, which was virtually unaffected
by this story. MSNBC reports:

On the currency markets, the heightened expectations of a US
rate cut cut did little to hurt the dollar, as investors took the view that the
currency’s recent weakness had gone far enough.

Read More: Fed stance sends equities soaring

Original post by Jimmy Atkinson and software by Elliott Back

India’s
forex reserves are growing at nearly $20 Billion every month and are quickly
approaching $300 Billion.  Of course,
accompanying this windfall are the inevitable questions about what to do with
the money.  The Royal Bank of India (RBI)
had determined that at most, the Indian economy can absorb $50 Billion a year.  Accordingly, the bulk of the capital inflows
are “sterilized” through the issuance of forex stabilization bonds, which are
aimed both at controlling inflation and limiting the appreciation of the Indian
Rupee.  Unfortunately, due to
already-high inflation in India,
the RBI must pay a higher rate of interest on the stabilization bonds than it
is earning on the underlying assets, which means the scheme is a losing
proposition.  The Economic Times reports:

The RBI is also hesitating to allow further appreciation in
exchange rate. While it can allow appreciation of the exchange rate to avoid
injecting liquidity (by way of buying dollars and selling rupees), it is
concerned about the fact that it is already over-valued.

Read More: The 250-bn dollar question of capital inflows

Original post by Jimmy Atkinson and software by Elliott Back

For nearly two months, the Central Bank of Brazil was content to sit on the sidelines and watch its currency, the Real, appreciate rapidly against the Dollar.  Beginning on October 8, however, the Central Bank has intervened in forex markets every day as part of a targeted effort to depress the Real.  Its efforts have been relatively straightforward; rather than issue currency stabilization bonds, the Central Bank has opted to purchase massive quantities of Dollar-denominated assets in the open market, bringing its foreign exchange reserves to $168 Billion.  Moreover, its efforts have been largely successful, as the Real has fallen slightly against the Dollar during this period of intervention.  However, logic (and past experience) dictate that as soon as it stops intervening, the Real will resume its  previous (upward) course against the Dollar. Bloomberg News reports:

Foreign flows into Brazilian financial markets and booming
commodity exports have made the real the best performer against
the dollar this year among the 16 most-actively traded
currencies tracked by Bloomberg, gaining 20 percent.

Read More: Brazilian Currency Falls After Central Bank Buys U.S. Dollars

Original post by Jimmy Atkinson and software by Elliott Back

In a recent speech, a prominent Federal Reserve Board governor strongly hinted that the Fed would maintain US interest rates at current levels at the Fed’s next meeting.  The Fed is caught in the delicate position of trying to balance economic growth with the specter of inflation.  While technically the Fed is always trying to meditate between these two outcomes, its current position is especially tenuous since the US economy is trending downward while inflation trends upward.  Despite the emphatic claims to the contrary, futures markets are still pricing in a rate cut, setting the stage for a showdown with the Fed.  As usual, the Dollar’s fate hangs in the balance.  The Financial Times reports:

Mr Kroszner said that in the near term "the economy will probably go through a rough patch" with falls in house prices, home construction and subdued consumer spending. He did not rule out a future cut in rates.

Read More: Fed and markets set to clash

Original post by Jimmy Atkinson and software by Elliott Back

Yesterday, we posted about the Central Bank of Australia, which intervened on behalf of its currency over the summer. In fact, several Central Banks have either intervened or are in the process of intervening, all with the goal of holding their currencies down (against the US Dollar) rather than lifting them up, as Australia had effected to do.  Columbia has already imposed strict rules governing the inflow of foreign capital, intended to discourage speculation, which is driving up the South American nation’s currency.  Indian regulators have since followed suit with similar rules.  South Korea’s Central Bank, meanwhile, is using slightly different tactics, undertaking a review of forex forward contracts, which it believes (probably erroneously) are interfering with its ability to hold down the Korean Won.  Bloomberg reports:

"Central banks are trying noninterest rate methods to stabilize growth and capital flows.  It’s something extraordinary. They haven’t used these venues for a long time. It’s sort of the last resort the central banks would like to tap."

Read More: Currency Controls Return as Central Banks Fight Gains

Original post by Jimmy Atkinson and software by Elliott Back

According to recently-released documents, the Central Bank of Australia intervened on behalf of its currency in August, marking the first such intervention in over six years.  Surprisingly, its purpose in intervening was to lift up its currency, rather than hold it down, which is the reason most central banks intervene.  Apparently, the global credit crunch that flared up over the summer, generated tremendous volatility in forex markets.  As a result, many carry traders- for whom volatility is anathema- quickly unwound long positions in the high-yielding currencies Australia and New Zealand, causing them to plummet.  However, both currencies have since resumed their appreciation, which means any future intervention will likely be aimed at holding the Australian Dollar down. Bloomberg News reports:

The Australian dollar underwent "a particularly sharp depreciation in mid-August as the increase in global risk aversion arising from the credit-market crunch triggered an unwinding of carry trades."

Read More: Australian Central Bank Bought Currency to Ease Market Turmoil

Original post by Jimmy Atkinson and software by Elliott Back

At its last meeting, the European Central Bank (ECB) voted to maintain rates at current levels.  Nonetheless, inflation risks persist, and the ECB has not ruled out the possibility of hiking rates at its next meeting. At the same time, the Euro-zone economy is stalling, and the Bank has the onerous task of balancing these risks in trying to facilitate a "Goldilocks" economy. As a result, the ECB is in "information-gathering mode." Additionally, most of this information is publicly available economic data, and forex traders would be wise to do their own research, since the Euro-USD exchange rate outlook is tied closely to the monetary policy outlook. The Guardian Unlimited reports:

The ECB has said that slower growth in the 13-nation region would have an impact on its policy-relevant medium-term inflation outlook, and Gonzalez-Paramo said currency movements were one factor affecting growth.

Read More: ECB still in data-gathering mode

Original post by Jimmy Atkinson and software by Elliott Back

A recent speech by Ben Bernanke, chairman of the US Federal Reserve Bank, sent the Dollar spiraling downward to fresh lows against all of the world’s major currencies.  This is perhaps surprising, given that Bernanke used the speech to warn that higher-than-expected inflation may drive the Fed to hike rates, which is exactly what Dollar bulls wanted to hear.  The downside of the speech, reflected in the markets’ reaction, was that the primary cause of the inflation is rising oil prices, would could plunge the US economy into stagflation: slow growth and high inflation, an unenviable position if there ever was one.  Forbes reports:

Rhonda Staskow at Thomson’s IFR Markets said: ‘There is no Goldilocks
scenario from Bernanke, who sees risks from inflation and an economic
slowdown - the worst of both worlds.’

Read More: Dollar sinks after Bernanke speech

Original post by Jimmy Atkinson and software by Elliott Back

The European Central Bank (ECB) will likely maintain its benchmark interest rate at 4.00% at its meeting his week.  The Bank of England is also expected to hold its lending rate in place, at 5.75%.  While these two moves should be seen by Dollar bulls as acts of clemency, they are more akin to a stay of execution than to a commutation of its death sentence.  The reasoning is that it is inevitable that the US-EU interest rate difference will be bridged over the next few months, as the Fed continues to lower rates while the ECB is in the process of hiking them.  The only question is when.  Accordingly, analysts will be paying close attention to the language employed by the heads of the various Central Banks at their next meetings to get a sense of timing.

Read More: Dollar hovers above lows

Original post by Jimmy Atkinson and software by Elliott Back

A high-ranking official in China’s government recently gave a
speech urging the Central Bank to (continue to) diversify its vast holdings of
foreign exchange, currently estimated at $1.4 Trillion and rising.  The speech was atypical in its level of directness,
as Chinese officials tend to speak with a certain degree of circumspection if
they think there is any possibility that their comments will reach the
public. Specifically, he advocated making
a play on the current volatility in forex markets, by selling “weak currencies”
in favor of “strong currencies.”  In
fact, the most recent data shows that China is already doing just that: its holdings of US government bonds have declined
even as its reserves have risen.  The Financial
Times reports:

Although he later tried to play down his comments, saying he
had not been speaking in an official capacity, the damage was done.

Read More: Dollar sinks to new lows

Original post by Jimmy Atkinson and software by Elliott Back

Yesterday, I posted about how market volatility could spell the end of the carry trade, bringing down the Australian Dollar in the process. Today, I will explore the opposite side of the debate, by looking at the factor(s) which support a continued appreciation of the AUD.  A rise in global commodity prices have provided a windfall to Australia, which is rich in natural resources. Unfortunately, the boom in exports and the surge in domestic demand has trickled down in the form of inflation.  As a result, the Central Bank of Australia recently embarked on a campaign of tightening monetary policy.  While this may curb domestic demand, it may attract more foreign capital in the form of carry trades. The gap between US and Australian interest rates is now 2.25%, and looks set to widen further. The Australian Business reports:

The [Australian] dollar’s trade-weighted value rose by 20 per cent between late 2002 and early 2004 but was much slower to respond in the 1970s boom, when the exchange rate was set by government.

Read More: Action needed as current boom echoes overheating of 1970s

Original post by Jimmy Atkinson and software by Elliott Back

This week, the Central Bank of Hong Kong intervened in forex markets for the first time in nearly two years, by purchasing over $1 Billion in US government securities.  The intervention was precipitated by fluctuation on the HK Dollar, which had been tending towards the upper end of its tightly controlled trading band.  Strength in the HK economy combined with a strong performance in HK capital markets have sucked large amounts of foreign capital into the Chinese-controlled city-state, which exerted upward pressure on its currency.  Hong Kong’s Central Bank also matched the recent rate cut by the Fed with a rate cut of their own.  Many analysts had put forth the idea that Hong Kong would scrap its peg when the Chinese Yuan slid past it, but this recent move suggests the Dollar peg is here to stay.  The Financial Times reports:

Joseph Yam, HKMA chief executive, said on Thursday: “We again reaffirm that the [Hong Kong] government has been clear in its financial policy and is committed to maintaining the peg.”

Read More: Hong Kong to stick with US dollar

Original post by Jimmy Atkinson and software by Elliott Back

The Canadian Dollar, or Loonie, recently cleared a 47-year
high against the US Dollar.  Its next
major milestone is crossing a level last seen in the late 19^th century!
There are a few reasons for the Loonie’s
continued strength, namely interest rate parity and economic strength.  As a result of the Fed cutting rates for the
second time in as many months, the Canadian benchmark interest rate is now
equal to the American federal funds rate, both at 4.5%.  In addition, record-breaking oil and commodity
prices will ensure that Canada’s
economy will expand further, perhaps as the same pace as its currency.  Reuters reports:

If the U.S. Central bank signals another rate cut in December, or if it goes against
expectations and chops rates by 50 basis points, it could pull the rug out from
under an already unsteady U.S. dollar and clear the way for the Canadian
currency to shoot higher.

Read More: Loonie eyes 130-year high if Fed makes big rate
cut

Original post by Jimmy Atkinson and software by Elliott Back

Australia’s
benchmark interest rate, at 6.50%, is already the highest in the industrialized
world, after New Zealand.
Ignoring the pleas of the Treasurer, the Central Bank of has all but decided to
hike rates even further into the stratosphere at its next meeting.  The country is in a bit of a pickle, since a
booming economy and the consequent inflation seems to demand a rate hike.  At the same time, this rate hike will ensure
that Australia continues to
be on the receiving end of Japanese carry trades, and this is precisely what irks
Peter Costello, Australia’s
Treasurer. In other words, the world’s
massive economic imbalances will only be exacerbated by an Australian rate
hike, but this may be a moot point as far as the Central Bank is concerned.  The Sydney Morning Herald reports:

Instability on global financial markets between now and the
next Reserve Bank board meeting on Melbourne Cup day is seen by economists as
the only force that could stay the bank’s hand from raising rates to the
highest level in a decade.

Read More: Look out for the tsunami, says Costello

Original post by Jimmy Atkinson and software by Elliott Back

The Dollar is still reeling from the 50 basis point rate cut
imposed by the Fed last month. Nonetheless,
some analysts are predicting that the Fed will cut rates again on October 31,
this time by a quarter of a percentage point, to 4.5%. The looming fall in real estate prices
(termed the sub-prime crisis) has officially spread to the rest of the economy,
and the Fed is trying to preempt a complete collapse in investor and consumer
confidence.  Experts remain divided as to
whether the Fed will cut rates now or next month. Either way, you can expect the Dollar to drop
to fresh lows against the Euro.  Thomson
Financial reports:

“The combination of weak US data, rising expectations of
aggressive Fed easing and a stable, albeit fragile, Wall Street is a perfect
recipe for euro-US dollar and Australian dollar-US dollar strength,” said one
analyst.

Read More: US dollar hovers near all-time low vs euro on
chances of Fed rate cut

Original post by Jimmy Atkinson and software by Elliott Back

Asian currencies, with the exception of the Chinese Yuan and
Japanese Yen, have notched stellar performances this year.  The currencies of Thailand, Malaysia,
Singapore, South Korea, to name but a few, have experienced double-digit
increases (in percentage terms) against the Dollar. Worried about the impact of a rising currency
on export growth, Asian central banks are in the process of intervening in
forex markets.  Singapore,
which uses currency manipulation as a form of monetary policy, believed to have
already made purchases of US government bonds in order to depress the Singapore
Dollar. South Korea, as well, has a history
of forex intervention, albeit unsuccessful intervention, and may issue currency
stabilization bonds before year-end.  The
Gulf Daily News reports:

The Bank of Korea has repeatedly stated that it would
closely monitor currency markets, expressing concern about the level of the won
and money supply growth.

Read More: Asian banks calm currency surge

Original post by Jimmy Atkinson and software by Elliott Back

Continuing our coverage of BRIC countries (see previous post), the Brazilian Real has climbed 20% in value this year alone, on top of gains recorded in previous years. Fearing that an expensive currency will adversely affect its economy, Brazil’s Central Bank announced its plans to intervene in forex markets on behalf of the Real. The Central Bank will buy Dollars at the spot rate, which should bring down the Real slightly.  However, the Central Bank also intervened about two months ago, with limited effect on the Real.  And it doesn’t hold that this time around will be any different.  Ultimately, there are economic forces beyond the control of the Central Bank which are propelling the Real upward.  Reuters reports:

"But I don’t think the bank is going to be able to prevent the real from strengthening further," said one analyst. "The dollar inflows into the country are too strong."

Read More: Brazil stocks, currency slip as c.bank intervenes

Original post by Jimmy Atkinson and software by Elliott Back

Among the so-called BRIC developing countries (Brazil, Russia, India, China), India is probably the second hottest economy at the moment, after China of course. And following in the footsteps of other developing countries, it is quickly building a massive stock of foreign exchange reserves in order to hold down inflation. Previously, I resisted covering India, because its reserves were small compared to those of China and Japan and hence its potential impact on the Dollar was limited. However, having set another record, India’s forex reserves now top $250 Billion, which rank the country among the highest in the world in this regard. In fact, India is accumulating reserves at the blistering rate of $3 Billion/week!  The breakdown of the reserves (in terms of foreign currency) is unclear, but it seems reasonable to believe that it is dominated by Dollar assets.

Read More: India’s forex reserves rise to record $251 billion

Original post by Jimmy Atkinson and software by Elliott Back

The UK Pound has been on a tear recently, both against the
USD and more surprisingly, against the Euro.  The currency has been given a boost by the
Bank of England’s reluctance to cut its benchmark interest rate, which at
5.75%, remains the highest among the world’s major currencies.  However, many economists feel the case for a
rate cut is growing stronger every month, whether or not the Bank of England is
willing to acknowledge it.  Inflation is
only moderately high, while the fall in housing prices-exacerbated by a prolonged
period of tight money-threatens to drag down the entire economy.  The markets are still pricing in a rate cut by
year-end, which would surely drag down the Pound should it obtain.  Dow Jones Newswires reports:

“We strongly suspect that market pessimism in this respect
will continue to grow, in reverse proportions to its expectations of a further
hike in U.K. interest rates,” said…a senior currency strategist.

Read More: Sterling’s Strength Can’t Last Much Longer

Original post by Jimmy Atkinson and software by Elliott Back

As expected, the Bank of Japan left its benchmark interest
rate unchanged at its latest meeting.  The current rate of .5% remains the lowest in
the industrialized world and thus will continue to fuel the Japanese carry
trade.  The Bank fended off the criticism
of several European Ministers, wary of the Yen’s continued appreciation against
the Euro, including a 5% increase in the last month alone. The EU has insisted that Japan should
hike rates immediately both to avoid global economic imbalances and to prevent its
own economy from overheating.  Japan defended
its decision by pointing to certain small business indicators, which suggest
the sector is still underperforming.  Carry
traders, rest easy. Bloomberg News
reports:

“The Bank of Japan will probably need to put off a hike at
least until December to nail down its assessment of global growth as well as
the performance of small companies,” said Masaaki Kanno, a former central bank
official

Read More: Bank of Japan Votes 8-1 to Keep Key Rate at 0.5%

Original post by Jimmy Atkinson and software by Elliott Back

Japan’s Central Bank now controls over $950 Billion in foreign exchange reserves, second only to those of China.  While Japan is not accumulating significant new reserves, its existing reserves have appreciated in value due to the Euro’s recent ascent.  Analysts are keeping a close eye on the reserves of both countries, which represent close to 50% of the world’s foreign exchange reserves.  In addition, analysts will be watching China, which may take a cue from Japan and diversify some of its reserves into Euro-denominated assets in order to offset the effect of the declining Dollar.  AFX News Limited reports:

Japan’s reserves are closely watched for evidence of how the country is managing its foreign currency holdings. Its actions are seen as having a significant impact on exchange rates and bond markets around the world, particularly the US government bond market.

Read More: Japan’s forex reserves rise to record

Original post by Jimmy Atkinson and software by Elliott Back

After much delay, China finally launched the bureau charged with diversifying its $1.4 trillion foreign exchange reserves. The agency will be capitalized with $200 billion and will invest in assets slightly more risky than US treasury securities. Most currency analysts view diversification as tantamount to the sale of dollar-denominated assets, but in practice, this may entail only the movement of funds into riskier dollar-denominated assets. In fact, the investment arm’s opening move was a $3 billion investment in The Blackstone Group, an American financial conglomerate. Dollar bulls can hold off on worrying just yet.

Read More: China’s trillion-dollar kitty is ready

Original post by Jimmy Atkinson and software by Elliott Back

The Central Bank of the UK will likely lower interest rates at its next meeting, following the lead of the Fed. The most recent British economic data indicated that inflation has fallen to its lowest level in over a year.  Moreover, UK (and European for that matter) monetary policy prioritizes price stability over employment, by unofficially targeting an inflation benchmark.  Thus, without regard to economic growth, the Bank of UK will adjust interest rates accordingly.  While the Pound-Dollar exchange rate is less sensitive to relative interest rates, the Pound has already fallen against the Euro, since the two countries compete over foreign capital.  Bloomberg News reports:

"The move down is probably going to continue. Sterling will remain under pressure. If any major central bank is going to emulate the Fed and cut rates, it’s going to be the BOE.” 

Read More: U.K. Pound Falls for Third Week Against Euro on Rate Cut Views

Original post by Jimmy Atkinson and software by Elliott Back

Alan Greenspan, former President of America’s Federal Reserve Bank, gained notoriety as well as universal trust based on his perceived ability to conduct monetary policy in exactly the way that the US economy demanded.  It was initially thought that his successor, Ben Bernanke, who has been in office for over a year, would have a more difficult time facilitating economic growth and avoiding recession because his primary goal was to control inflation. In practice, however, the two leaders have conducted monetary policy in much the same way, balancing the dual risks of inflation and unemployment. Thus, even though inflation remains above the Fed’s comfort zone, Bernanke engineered a 50 basis point rate cut at the last meeting of the Fed in order to avoid economic recession.  However, whether the Fed will prioritize unemployment (rate cuts) or inflation (rate hikes) is anyone’s guess.  Dollar bulls will no doubt be watching with bated breath, praying that he prioritizes inflation.  The New York Times reports:

“Where Greenspan had to hold off raising rates when the economy was strong. Bernanke’s challenge will be to hold off cutting rates when the economy slows down.” 

Read More: In Crisis, 2 Fed Chiefs Seem Alike

Original post by Jimmy Atkinson and software by Elliott Back

The Brazilian Real is one of a string of currencies which is
rising against the USD on the heels of speculation that the Federal Reserve
Bank will cut US interest rates at its next meeting. If
the meeting conforms with market expectations, the Fed will cut the benchmark federal
funds rate by 50 basis points, to 4.75%. Such a move would further widen the gap between American and Brazilian
interest rates, which are currently among the highest in the world.  The Brazilian Real has already climbed 10.5%
against the USD during 2007, a run which should continue if the Brazilian
economy further outperforms the US.
Bloomberg News reports:

“Markets pressing the Fed for a rate cut will remain the
story in global currency markets for a few more days,” said a local trader of Brazil’s
foreign debt. “A rate cut would allow investors in Brazil to focus on the
fundamentals, which point toward a stronger currency.”

Read More: Brazil’s Real Advances on Bets U.S. Will Cut Rates Next Week  

Original post by Jimmy Atkinson and software by Elliott Back

The Euro is closing in on the record high it achieved
against the Dollar in July.  Once again,
it is the interest rate story which is driving the currency skyward.  The continued rise of the collective economies
of the EU is coinciding with a decline in the American economy, spurred by
falling prices in the real estate and capital markets. As a result, economists are forecasting that
this month’s respective central bank meetings will bring about a rate hike in
the EU and a lowering of rates in the US. This prediction, which is also supported by the prices of interest rate
futures, would narrow the EU-US interest rate differential to just 75 basis
points!  Bloomberg News reports:

Traders also added to wagers the euro will strengthen against the U.S.
dollar, figures from the Washington-based Commodity Futures Trading Commission
showed on Sept. 7.

Read More: Euro Rises to
Month-High Against Dollar on Growth, Rate Views

Original post by Jimmy Atkinson and software by Elliott Back

The U.S. Central Bank voted unanimously to hold interest rates steady on Tuesday, resisting pressure from Wall Street calling for an rate cut. The federal funds rate has now been at 5.25% for over a year. The Fed feared that a rate cut would only do more damage to the USD, which is already weak overseas. According to the Chicago Tribune:

About the only consolation for financial markets was the fact that the
central bank at least mentioned these concerns in a statement after its
meeting. That acknowledgment gave Wall Street faint hopes of an
interest-rate cut later this year if credit conditions continue to
deteriorate.

Tightening credit, combined with a continuing
housing correction, have slammed stock prices over the past weeks. A
high level of volatility has signaled to many that the bull market is
over and that the credit crunch could be worse than believed.

Read more: Central bank holds line on interest rates

Original post by Jimmy Atkinson and software by Elliott Back

Most Dollar bulls cringe when they hear the word “diversification.”
Within the context of forex,
diversification usually refers to the shift towards non-Dollar denominated
assets among Central Banks.  The thinking
is that with the declining Dollar, it probably makes sense to hold reserves in
non-US investments.  However, analysts
have begun to realize that this only represents a small segment of entities
that could harm the Dollar by diversifying.  The world’s Central Banks probably hold at
most $5 Trillion of reserves, whereas US institutional investment funds
probably have over $20 Trillion collectively invested in US assets.  Thus, diversification in this segment probably
poses a much greater threat to the long term health of the USD.  The Economist reports:

American mutual funds have gradually increased their
overseas allocation of equities since 2003 from 15% to 22.5% of assets. If this portfolio shift mirrors the behaviour
of all pension, insurance and mutual fund managers, it would imply an outflow
from dollar assets of $1.16 trillion since 2003.

 
Read More: Soft currency

Original post by Jimmy Atkinson and software by Elliott Back

It has been a while since forex markets have been as focused
on interest rate differentials as they are now. With the exception of the Canadian Loonie and Australian Dollar,
all of the world’s major currencies are rising and falling almost entirely on the
basis of interest rates. Until
recently, the USD had forestalled its inevitable decline because interest rate levels
were significantly higher than in other countries, and foreigners remained
willing to finance the US trade deficit. Since the respective Central Banks of Britain and the EU began hiking
rates, however, the Euro and British Pound have risen while the Dollar has plummeted. 

Meanwhile, the Japanese Yen is near historic lows because
carry traders are borrowing at low Japanese rates and investing abroad. On the flipside, the New Zealand Dollar has
surged, and the country is having a difficult time keeping investors away
because its interest rates are so high. Interest rates have achieved such force that even changes in expectations,
rather than changes in actual rates, are now more than capable of moving the
market significantly.

Read More: Back to Interest Rate
Expectations

Original post by Jimmy Atkinson and software by Elliott Back

The political furor surrounding the soaring Euro is reaching
fever pitch, as European politicians clash with central bankers over the role
of the state in determining exchange rates. Jean-Claude Trichet, President of the European Central bank (“ECB”) has
argued that the Euro should be valued strictly by the markets. Politicians from EU-member states, on the
other hand, have frequently argued that the surging Euro is hampering economic
growth and should be used as a tool in economic policy-making. The newly-elected president of France,
Nicolas Sarkozy, has been a vocal critic of the ECB, arguing that the Euro
should actively be held down. The
Financial Times reports:

In contrast to the
US and Japan, where the finance ministry sets the exchange rate regime and
intervenes in exchange markets, eurozone central banks hold and manage foreign
exchange reserves and have responsibility for any market intervention.

Read More: ECB takes aim at Sarkozy over euro

Original post by Jimmy Atkinson and software by Elliott Back

The Bank of England raised interest rates for the second
time in as many months yesterday, to 5.75%. As a result, the UK has widened its lead over the US as the country with the highest interest rates in the industrialized world,
after New Zealand. Moreover,  the UK is becoming an increasingly viable alternative to the US as a target for risk-averse investors. The
British Pound is hovering around a record high against the USD, which can
probably expect to suffer prolonged decline against the world’s majors if it
falls behind in attracting risk-free foreign capital. The Financial Times reports:

“The statement accompanying the rate hike gives few firm
clues as to future interest rate movements, with the Bank of England…concluding
that the risks to the inflation outlook are still tilted to the upside.”

Read More: BoE rate decision boosts pound

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