ECB signals further rate hikes

Yesterday, I reported that Central Banks are becoming more transparent in matters of monetary policy. As if on cue, today the European Central Bank and Bank of England offered separate insight into the directions of their respective interest rates. The ECB hinted that it would likely raise interest rates twice in the next year from the current level of 2.25%, while the Bank of England indicated that a cut in its interest rates would take place in March. The corresponding changes in interest rate differentials should benefit the Euro and hurt the British Pound. Reuters reports:

But some analysts see U.S. rate rises stopping there. The latest report about the ECB is seen as likely to boost the euro. “It’s a reminder that not only the Fed but also the ECB is raising interest rates,” said one currency strategist.

Read More: Euro jumps briefly on rate speculation, pound down

China revises GDP figures

Several weeks ago, Chinese officials suddenly announced they had reason to believe China’s economy is much larger than past GDP figures indicate, and they immediately began amassing data and building models to prove their point. Yesterday, the same group of officials released a revised set of GDP figures, which raised the value of China’s economy by 17% and catapulted the country into 6th place in global nominal

UK signals possibility of rate cut

The US Federal Reserve Bank is currently in the process of raising interest rates. Meanwhile, the European Central Bank and Bank of Japan are preparing to begin implementing tighter monetary policies at unknown dates in the short term. The Bank of England, however, is moving in the opposite direction, having recently announced that it may cut rates in the first half of 2006. The Bank of England is caught in the unenviable position of trying to simultaneously manage a housing bubble, rising inflation, and slowing growth. Previously, Britain’s Central Bank had prioritized housing and price stability. This latest announcement, however, represents a change in tack. As investors price in the possibility of multiple rate hikes, the UK Sterling should add to its 6% decline against the USD so far this year. Bloomberg News reports:

“The market was always complacent about the performance of the U.K. economy,” said a currency strategist at Royal Bank of Scotland. “Comments…play into the hands of a bad performance for sterling against the dollar next year.”

Read More: Pound Drops, U.K. Bonds Rise as Bean Hints First-Half Rate Cut

China may widen trading band on Yuan

In theory, the Chinese Yuan can fluctuate (read appreciate) by .3% per day. In reality, the Central Bank allows the currency to appreciate by less than .01% per day, which has limited the Yuan’s net appreciation against the USD to only .4% since the 2.1% revaluation in July. As a result, the G8 governments are clamoring with renewed vigor for China to further revalue. In fact, a rumor has been circulating that China

Timetable for Yuan revaluation estimated at 1-2 years

A leading adviser to China’s Central Bank recently confirmed what many analysts have suspected for months: a revaluation of the Yuan or RenMinBi will likely take place over the course of the next 1-2 years. The advisor publicly warned Chinese firms to make the necessary adjustments, in order to prevent the revaluation of the Yuan from severely harming their prospects for success. While not indicating the size of the revaluation, Yu Yongding hinted that it would be significant, in order to help China rein in its burgeoning trade surplus. Reuters News reports:

He said China’s big current account surplus, just like the large U.S. current account deficit, fundamentally reflected savings-investment imbalances in the two countries. “The rise in the renminbi’s exchange rate will definitely have an impact on China’s trade surplus.”

Read More: China firms told to prepare for stronger yuan

Canadian Dollar approaches 14 year high

Last week, political pundits feared the worst when it was announced the Canadian Parliament had received a vote of no-confidence, and snap elections would be held next month. Currency traders, however, have reacted with indifference, sending the Canadian Dollar (Loonie) towards a 14-year high against the USD. Canada’s economy has boomed this year, on the back of record high commodity prices and strong exports. As a result, the Bank of Canada will likely to begin monetary tightening next week, by raising interest rates to 3.25%. If the Bank fulfills investor expectations by continuing to hike rates in the following months, the Loonie may continue to soar. The Edmonton Journal reports:

“The employment picture is solid, GDP growth is better than the bank expected and the U.S. economy is still rolling. Some are beginning to wonder if the bank won’t soon pick up the pace of rate hikes.”

Read More: Loonie hovers near 14-year high

Canadian Dollar Unaffected by Political Turmoil

Earlier this week, the Canadian government received a vote of no-confidence, effectively bringing an end to months of allegations that Canada’s ruling Liberal Party was corrupt. As a result, the Canadian Parliament will be dissolved, and a snap election will be held at the end of January. In the past, currency traders have responded to episodes of political uncertainty be selling that nation’s currency. In this case, however, the Canadian Dollar was virtually unaffected. Canada’s economy continues to outperform on the heels of strong exports and lofty commodity prices, and its Central Bank is set to hike interest rates again next week. Reuters reports:

“With underlying support for the loonie from developing M&A deals, the geopolitical risks are still seen as taking a backseat to positive flows and fundamentals,” said [a senior currency strategist.]

Read More: Canadian dollar helped by GDP data, energy prices

Canadian Dollar Unaffected by Political Turmoil

Earlier this week, the Canadian government received a vote of no-confidence, effectively bringing an end to months of allegations that Canada’s ruling Liberal Party was corrupt. As a result, the Canadian Parliament will be dissolved, and a snap election will be held at the end of January. In the past, currency traders have responded to episodes of political uncertainty be selling that nation’s currency. In this case, however, the Canadian Dollar was virtually unaffected. Canada’s economy continues to outperform on the heels of strong exports and lofty commodity prices, and its Central Bank is set to hike interest rates again next week. Reuters reports:

“With underlying support for the loonie from developing M&A deals, the geopolitical risks are still seen as taking a backseat to positive flows and fundamentals,” said [a senior currency strategist.]

Read More: Canadian dollar helped by GDP data, energy prices

US fails to mention China in currency Report

The US Treasury Department finally released its annual currency report; which contained a notable absence: China. Politicians and lobbyists were outraged that the Bush Administration did use the report to formally accuse China of manipulating its currency. Senators Schumer and Graham are already threatening to reintroduce a bill that would slap a 27.5% tariff on all imports from China. Secretary of the Treasury, John Snow, tried to brush off criticism that the administration was being too soft on China, by publicly urging

Canadian Dollar Continues to Appreciate

Canada’s economy grew at 3.8% in 2005 Q3, marking its fastest quarter of growth in over a year. The Canadian economy has historically been driven by exports of commodities. In this latest quarter, however, retail sales data indicate consumers have started to pick up some of the slack in the economy. As a result, Canada’s Central Bank has hinted that it will further raise short term interest rates from the current level of 3%. Currency strategists will likely remain bullish on the Canadian Dollar, as longs as its economy continues to hum and the differential between Canadian and US interest rates continues to narrow. Bloomberg News reports:

Yields on interest-rate futures indicate traders expect the central bank will raise its benchmark rate a quarter percentage point…on Dec. 6 and Jan. 24. The yield on the March futures contract was 3.86 percent, about the highest this year.

Read More: Canada’s Dollar Poised for Biggest Weekly Advance Since July

China inches towards further revaluation

Perhaps in response to recent pressure from American politicians and the IMF, the Central Bank of China made another push towards floating the Yuan by introducing foreign exchange swaps. Swaps function like futures, by enabling partied to buy and sell currencies at a fixed exchange rate on a fixed date in the future. In this case, the Central Bank has agreed to buy USD one year from now at a rate of 7.85 Yuan/USD. Investors and analysts are speculating that the swaps lend explicit insight into where the Central Bank

IMF presses China on Yuan

Last week, this correspondent reported that American politicians, frustrated by their inability to convince China to further revalue the Yuan, were planning on using the IMF as a vehicle for applying pressure to China. Yesterday, the IMF fulfilled this request during a conference call with Chinese officials. IMF representatives referred to the Yuan’s marginal .33% rise since the July revaluation in their plea for China to

US to pressure China via IMF

Despite its best efforts, the US has not any success in convincing China to further appreciate the Yuan, since the monumental revaluation in July. Meanwhile, American politicians are toying with the idea of legislating a tariff on all Chinese imports, and trade groups are lobbying for the Treasury Department to officially label China a ‘serial currency manipulator.’ Lately, however, those in favor of Yuan revaluation have embarked on a new strategy, by attempting to enlist the help of the IMF (International Monetary Fund) in applying

Bush to urge China to revalue Yuan

Next week, George Bush will visit China as part of his week-long junket to Asia, in which it is expected he will personally urge Hu Jintao, Prime Minister of China, to continue revaluing his nation’s currency. Bush is under pressure from unions and trade lobbyists, who allege China’s artificially cheap currency is responsible for the outsourcing of millions of jobs. American politicians are demanding that Bush give China an ultimatum: either revalue, or face the consequences, in the form of tariffs and other trade restrictions. In addition, the

China to limit currency hedging

In a move designed to quash speculation that China will continue to revalue its currency, Chinese financial regulators have enacted new rules to limit indirect hedging of the Yuan. Apparently, many businesses with operations in China had been delaying payments to their American suppliers, with the expectation that another revaluation of the Yuan would indirectly lower their payment obligations. As a result of the new rules, these accounts payable will now be treated as foreign exchange accounts and will be subject to certain rules and fees. The Wall Street Journal reports:

Friday’s move also suggests Beijing sees signs that companies continue to position themselves for a further movement beyond July’s 2.1% revaluation of the Yuan, as the US and other governments pressure Chinese authorities to do more.

Read More: Chinese Rule Aims to Check Currency Hedging

Still no signs of Yuan revaluation

Last week, the Group of 20 industrialized and developing nations met in Beijing to discuss pertinent economic issues. As you can probably guess, the Yuan revaluation was at the forefront of the agenda. When criticized over the nominal 2% revaluation that China effected in July, the chairman of China’s Central Bank offered a Chinese proverb: “crossing the river by touching the stones,” meaning China would prefer to take small steps towards revaluation rather than one or two giant leaps. China also insists it must improve its banking system and financial institutions before it will consider floating the Yuan. While the testimony was predictable, analysts nonetheless reacted with dismay. Dow Jones News reports:

“The long term position is for the Chinese market to liberalize, to become more liquid and to be accessible to international investors…but I would be at the long end of 3-5 year period at least.”

Read More: Currency Flexibility Still Distant for China

America businesses have competing views on Yuan revaluation

While nearly 3 months have passed since China famously revalued its currency, the subject remains a hot political issue in America. Several politicians, led by Charles Schumer, are again fighting to pass a bill that would levy a 27% tariff on all Chinese imports, if China fails to fully revalue within one year of the bill’s passage. This bill is supported broadly by small businesses and middle market American companies that feel they are being squeezed by low-cost Chinese labor. On the other end of this debate stand multinational companies, many of whom have opened production facilities in China to take advantage of this low-cost labor. These multinationals, which are understandably against Yuan revaluation, have much more political clout, which may explain why President Bush has stubbornly refused to take action against China.

Canadian Economy Picks Up Quickly

The Canadian economy has grown quicker than expected in the latter part of this year. This has raised fears of inflation arising in the economy. As a result experts now predict that the Bank of Canada will again be forced to raise interest rates, making this the third such increase inside of a year. According to a recent Forex Reader article the central bank will not likely curb increases until it hits the projected 4% target. Experts see the economy finally starting to show signs of responding to the slow down pressure via the increased rate as evidenced in the drastic turn in small-cap stocks which are profiled in PennyStocksBook.com

British economy is lackluster

In a recent report, Britain’s Central Bank warned that the nation’s economy would likely grow at a pace of 1.75% in 2005, which would represent the worst year of growth in over a decade. This latest forecast is significantly from earlier forecasts of 3-3.5%, that the Central Bank had released earlier this year. According to experts, rising energy prices are responsible. Others pin the blame squarely on the slowing real estate market, which has spurred a sharp decline in the consumption component of GDP. Ironically, other G7 countries, including Germany and Japan, are finally showing signs of growth. Britain’s economy, however, seems headed in the opposite direction. The Wall Street Journal reports:

Calling 2005 “the toughest and most challenging” of his eight years as treasury chief, Gordon Brown blamed “a virtual doubling of global oil and commodity prices.”

Read More: British Growth, at 1.75%, Is Slowest Since 1992

Canadian Dollar continues to outperform

The Canadian Dollar has reached a 13 ½ year high against the USD. The reason, you may have guessed, has a lot to do with oil. A recent report on Canada’s oil resources estimates Canada’s famous oil sands may be worth more than $1 trillion. And that is a conservative estimate. Since the price of oil seems likely to remain above $50 in the long run, Canadian oil producers have reevaluated the viability of certain oil fields, now concluding that oil can be profitably extracted and sold. At this point, it seems nothing short of a complete collapse in the price of oil could halt the momentous run of the Canadian Dollar. The Ottawa Sun reports:

“The study … showed the oil sands are going to significantly contribute to the GDP growth over the next 15 years. That refocused a lot of international accounts on the whole ‘Canada as a big oil producer story.’ “

Read More: Loonie takes off for high

China adjusts currency fluctuation bands

In the latest chapter of the revaluation saga, China will allow the Yuan to fluctuate more against most major currencies, excluding the USD. While this move has already ignited speculation among currency traders that another revaluation is imminent, closer analysis reveals this latest decision was motivated chiefly by practical considerations. For all intents and purposes, the Yuan remains pegged to the USD but can freely fluctuate against other currencies.

Policymakers reflect on Yuan revaluation

Today marks the two-month anniversary of China’s landmark decision to revalue the Yuan. American policymakers have since had much time to reflect on the move, and the consensus is predictably, that China still needs to do much more. In theory, because China permits the Yuan to fluctuate .3% daily against a basket of currencies, the Yuan should appreciate by .3% every day. However, China has massive forex

New report defends Asian forex reserves

Two prominent economists recently conducted a thorough analysis of Asia’s increasing foreign exchange reserves, the majority of which are held in US Treasury Securities, which are of course denominated min USD. The economists argue that the while the collective forex reserves of Asian nations have indeed skyrocketed in recent years, this does not necessarily signify that outright currency manipulation is taking place. Rather, they believe that these nations use their reserves as tools of monetary policy. For example, Japan may have grown its reserves to try to mitigate the possibility of deflation. Other nations view their

Will UK continue to lower rates?

Last week, the UK Central Bank voted to lower interest rates for the first time in two years, to 4.5%. Economists and analysts are already mooting the possibility of another decline before year-end, in anticipation of lower-than-expected UK economic growth. Several UK policy makers, however, are reluctant to lower rates any further, lest they incite another housing bubble. Rising home prices have already fuelled excessive borrowing and a proportionate rise in consumer spending. Officials, however, are worried that these spending levels have reached dangerous levels, rising twice as fast as wage growth statistics would seem to imply. The upshot is a very low likelihood of continued rate cuts. The Economist reports:

It is unlikely that Britons are in for a series of interest-rate cuts. The Bank of England knows that no good will come of re-inflating the housing bubble, which would only result in worse pain down the road, as more consumers fall into the trap of too much debt.

Read More: http://www.economist.com/agenda/displayStory.cfm?story_id=4246182

UK lowers interest rates

Britain recently became the first developed country in two years to lower interest rates, guiding its repo rate downward to 4.5%. However, representatives from the Central Bank effectively dismissed speculation that other rate cuts would follow, calling the move “economic fine-tuning.” They will continue to target inflation, which is likely to resurface once Britain’s economy resumes its expansion. Many analysts believe policy-makers in other developed regions will soon follow suit, ushering in a period of tight monetary policy. Those analysts may be forced to wait, however. The Financial Times reports:

The European Central Bank maintained its main interest rate at 2 per cent. Recently, evidence from business surveys appeared to back its view that conditions in the eurozone were improving.

Read More: Bank of England makes first rate cut in two years

British rate cuts appear ‘imminent’

The release of the minutes of last month’s meeting of Britain’s Central Bank revealed a growing minority of members in favor of lowering interest rates.  The official vote was 5-4 in favor of maintaining interest rates at current levels. However, few economists and pundits had reason to believe the vote would be so close. While many traders had already begun to price lower interest rates into bonds prior to last month’s meeting, it seems a rate cut at the next meeting is a near certainty. Recent economic data not only suggests the economy is slowing down, but also that inflation is likely to be lower than expected. As a result, both the members of the Central Bank targeting inflation indices as well as those targeting general economic performance, would seem to have a solid basis for lowering rates. The Financial Times reports:

Sterling had already been on the ropes prior to the MPC announcement…Against this backdrop sterling fell to a 19-month low in trade-weighted terms.

Read More: Sterling falls as BoE votes 5-4 against rate cut

British Central Bank mulls rate cuts

At its last meeting, Britain’s Central Bank voted to leave the national interest rate unchanged at  4.75%. With new data pouring in every day suggesting Britain’s economy is in trouble, the Bank’s leaders may soon rethink their stance on interest rates. Consumer spending, considered by many British economists to be the most important growth driver, is declining. The drop in savings rates and stagnation of home prices indicates consumers have already spent all that can be expected. Moreover, last week’s terrorist attacks will likely cause consumer confidence to fall further, mitigating the possibility of a fast recovery. Economic growth is now projected at 2.1% for 2005, down from 2.75% in 2004. When the Central Bank meets next month, the upshot will most certainly be lower interest rates. Traders and investors concur, and have priced two rate cuts into British debt futures, implying a rate of 4.25% at the year’s end. Rate cuts or not, the British Pound will most likely continue to slide. The Economist reports:

The strong chance of feeble growth in the second quarter—the National Institute of Economic and Social Research is forecasting a rise in GDP of only 0.3%—means that a cut in August is on the cards. In a poll of economists on July 5th by Reuters, 26 out of 43 said that rates would fall next month.

Read More: They’re coming down soon

British Pound falls after terrorist attacks

Forex traders and investors responded to the terrorist attacks which rocked London today by sending the British Pound to near 18-month lows against the USD.  As soon as the news reached the trading floors of forex dealers, panic set in, and the Pound quickly lost 1% of its value, relative to the USD. Experts agree both the attack-and the ensuing panic in the markets-could have been far worse.  One trader spoke of a “risk premium” which has been built into the currencies of nations that are potentially susceptible to terrorism, and probably prevented the Pound from depreciating further. Investors begin to understand the relatively minor implications of this latest attack, the Pound may well recover.  Forbes reports:

“The knee-jerk reaction was quite violent across all markets and the usual safe-haven trades were being put on,” said one currency strategist.  “The market is now backing off a little and questioning the magnitude of the implications.”

Read More: Sterling hits 18-month low against dollar

British Pound may decline as growth flattens

For the last few years, speculators in search of high interest rates have poured ‘hot money’ into Britain, causing the Pound to appreciate.  Now, it seems the Pound may be overvalued, rendering British exports uncompetitive.  A new spate of economic data indicates the British economy is slowing rapidly. In addition, a British housing bubble has begun to deflate, causing a subsequent decline in consumption. As Britain’s Central Bank prepares to lower interest rates, it seems investment will follow the same downward path as consumption. It may take a massive correction of Britain’s exchange rate to stem the decline of its economy. The Times Online reports:

With sterling’s valuation the focus of renewed attention, pressure on the pound will almost certainly intensify as currency markets home in on the increasingly apparent vulnerabilities of Britain’s economy.

Read More: Faltering growth knocks pound’s potency

British GDP forecasts signal rate cuts

According to fresh economic data, growth is slowing in Britain. Real GDP growth of 2.1% is now projected, compared to earlier forecasts in the 2.7% range. Declining real GDP forecasts accompanied the release of trade data and housing statistics, which also seemed to signal economic slowdown. The situation is not as dire as the data would suggest, as much of the forecasted decline can be attributed to higher-than-expected inflation. Nonetheless, a rate cut at the next Central Bank meeting looks acutely possible. In recent meetings, a minority of central bank governors have proposed rate cuts, which were ultimately vetoed.  While the GDP data would seem to necessitate a cut at the next meeting, nothing can be assumed. For instance, traders have currently priced in a mere .03% cut (which is impossible) into the price of British interest rate futures. The Financial Times reports:

"The market can slam a currency quickly if it believes that a fundamental shift in interest rate psychology could be afoot," said  senior currency trader. Said another trader, "The sterling looked “overvalued” against the main European crosses." [He] advised his clients to build a long euro/sterling position.

Read More: Sterling hits new 8-month low in GDP downgrade

Britain, EU contemplate rate cuts

Britain recently became the latest European nation to entertain the possibility of interest rate cuts.  In its last meeting, held earlier this month, two of the Bank of England’s nine governors voted to cut the federal interest rate by 25 basis points to 4.25%.  There were other members who felt the interest rate cuts made economic sense, but should not be carried out because they would not be widely expected.  Additionally, the minutes from the most recent ECB meeting reveals it, too, is giving serious consideration to rate cuts.  Investors and traders, alike feel rate cuts by both central banks are becoming increasingly likely, reflected in changing bond prices.  The Financial Times reports:

On Wednesday the December Euribor future hit a record high, with the market pricing in about a 40 per cent chance of a cut in eurozone interest rates by the year’s end.  The euro has fallen 5 per cent on a trade-weighted basis since the start of the year, a sign of poor economic prospects, leading to market expectations of rate cuts.

Read More: Central banks flag rate cuts

Britain’s Labor party re-elected

Britain’s Labor Party has been re-elected, albeit by a narrow margin. While still a healthy 66 seats, the party’s majority in the House of Commons has been greatly diminished. This election has several important implications for Britain’s economy. First, the defeat of the conservative party mitigates the likelihood that there will be tax cuts and/or decreases in government spending over the next few years. More importantly, Britain may now become more integrated in the European Union. Tony Blair is notorious for his support of the EU. Accordingly, he will likely campaign for Britain to ratify the EU Constitution if such a referendum is posed to its people. However, this is conditional on France and the Netherlands first approving the Constitution, which is by no means guaranteed. If Britain were to ratify the EU Constitution, it could conceivably abandon the pound in favor of the Euro. However, Labor’s narrow majority over conservatives will likely preclude this from happening. Morgan Stanley reports:

All in all, the reduced Labour majority perhaps makes it more likely that continuity, rather than radical reform, will characterise economic policy over the next four years.

Read More: Closer than the last one

Britain calls for regulation of currency markets

A British regulatory agency recently announced its belief that global currency markets should be regulated. Equity and debt markets are already heavily regulated, so why not currency markets, in which $2 trillion+ worth of currencies are exchanged every day. The regulatory agency’s main suggestion was to separate analysts and traders, similar to what has been done in banks’ debt and equity departments. There is a clear conflict of interest, or ability to manipulate currency markets, when analysts and traders collude. If a bank’s analysts advise the bank’s clients on the direction it believes a particular currency to be headed, that bank’s traders could profit from the information. The analogy to equity markets is self-evident. The problem is one of jurisdiction and boundaries. Capital markets are regulated by an agency within the nation that the capital is invested in. Currencies, on the other hand, are often traded by parties outside of the currency’s home country. Scotsman.com reports:

THE Forex market’s argument is that practitioner regulation, or self-regulation, is a better tool in fighting tricks of the trade and loophole hunting, rather than forced compliance with a one-size-fits-all rule.

Read More: Banking on a regulated market for currencies