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