ECB lowers rate hike expectations

Since reaching a one-year high over the summer, the Euro has been punished in forex markets, due primarily to a less favorable outlook for ECB rate hikes. Previously, analysts were expecting the ECB to raise rates three to four more times, raising the base rate to 4%. Now, however, analysts have revised their models to reflect one to two rate hikes. Forecasts for the Euro have been adjusted proportionately to undo the narrowing of interest rate differentials that Euro appreciation had been predicated on. The Daily News reports:

Canada promises to forego intervention

The role of Central Banks in forex markets has become a hotly debated topic, as banks around the world continuously to intervene to prevent their currencies from appreciating. Canada is one of the few countries that has not attempted to stifle a significant rise in its currency. By all accounts, Canada should be an obvious candidate for intervention, for a strong Canadian Dollar (“Loonie”) has punished its export-driven economy. Canadian leaders, however, argue that the appreciating Loonie has forced Canadian businesses to become more efficient, and thus, welcome a more expensive currency. It has pledged to stay out of currency markets and allow market forces to determine the value of the Loonie. Bloomberg News reports:

Canada, which buys more U.S. goods than any other country, suggested it will keep out of currency markets for another five years and warned other nations to follow suit or face a global slowdown from trade imbalances.

Read More: Canada to Keep Out of Exchange Markets, Wants Others to Follow

China’s forex reserves on track to reach $1 trillion

This month, the locomotive that is China’s stockpile of forex reserves surged ahead, to $954 Billion, with economists now predicting that the $1 Trillion mark will be breached in October. Export-dependent countries-notably China and Japan- have accumulated gargantuan reserves over the last decade, as an

Commentary: RMB’s appreciation is tied to inflation

A couple weeks ago, I posted on this very subject- that the value of the Chinese Yuan is largely tied to inflation and interest rate differentials. With this week’s commentary piece, I wish to further expound upon this theory, because it appears to really carry weight. Most traders who have an opinion on the Chinese Yuan base their forecasts for the Yuan’s appreciation on political developments: how much diplomatic pressure the world will apply to China and how much China will capitulate on this most delicate of economic issues. A Stanford economist, however, has demonstrated that political guesswork might not be necessary, by connecting the Yuan’s appreciation to several important economic indicators.

Commentary: RMB’s appreciation is tied to inflation

A couple weeks ago, I posted on this very subject- that the value of the Chinese Yuan is largely tied to inflation and interest rate differentials. With this week’s commentary piece, I wish to further expound upon this theory, because it appears to really carry weight. Most traders who have an opinion on the Chinese Yuan base their forecasts for the Yuan’s appreciation on political developments: how much diplomatic pressure the world will apply to China and how much China will capitulate on this most delicate of economic issues.

A couple weeks ago, I posted on this very subject- that the value of the Chinese Yuan is largely tied to inflation and interest rate differentials. With this week’s commentary piece, I wish to further expound upon this theory, because it appears to really carry weight. Most traders who have an opinion on the Chinese Yuan base their forecasts for the Yuan’s appreciation on political developments: how much diplomatic pressure the world will apply to China and how much China will capitulate on this most delicate of economic issues. A Stanford economist, however, has demonstrated that political guesswork might not be necessary, by connecting the Yuan’s appreciation to several important economic indicators.

US trade imbalance to eat into GDP

The US Bureau of Economic Statistics today released its monthly report on America’s trade balance, and the numbers were not pretty. The monthly current account deficit has reached a new high, at $68 Billion, attributed primarily to soaring commodity prices. As the trade balance (exports minus imports) represents one of the components of production, economists are now revising their GDP growth estimates downward to reflect this latest development. The Federal Reserve Bank would love to see the USD depreciate in order to stem the balance, but it may have to wait for interest rates to narrow further before it sees its wish fulfilled.

Read More: Dollar survives knee-jerk selling after record US trade deficit

Inflation may drive UK rate hike

The UK Pound has stood in virtual lockstep with the Euro, as both currencies have steadily appreciated against the USD. The UK Pound is poised to breakout, however, due to relatively high inflation. Inflation, in and of itself, would theoretically be expected to erode purchasing power and thus lead to currency depreciation. In this case, the opposite will likely obtain, as the byproduct of inflation will likely be a rate hike by the UK Central Bank to keep pace with price levels. The move will bring the short-term UK rate to 5%, just below the US Federal Funds Rate. AFX News reports:

”With consumer price inflation unexpectedly moving back up in August and core inflation rising, another interest rate hike in November remains very much on the cards.”

Read More: Pound gets lift from stubbornly high UK inflation

Inflation may drive UK rate hike

The UK Pound has stood in virtual lockstep with the Euro, as both currencies have steadily appreciated against the USD. The UK Pound is poised to breakout, however, due to relatively high inflation. Inflation, in and of itself, would theoretically be expected to erode purchasing power and thus lead to currency depreciation. In this case, the opposite will likely obtain, as the byproduct of inflation will likely be a rate hike by the UK Central Bank to keep pace with price levels. The move will bring the short-term UK rate to 5%, just below the US Federal Funds Rate. AFX News reports:

”With consumer price inflation unexpectedly moving back up in August and core inflation rising, another interest rate hike in November remains very much on the cards.”

Read More: Pound gets lift from stubbornly high UK inflation

Inflation may drive UK rate hike

The UK Pound has stood in virtual lockstep with the Euro, as both currencies have steadily appreciated against the USD. The UK Pound is poised to breakout, however, due to relatively high inflation. Inflation, in and of itself, would theoretically be expected to erode purchasing power and thus lead to currency depreciation. In this case, the opposite will likely obtain, as the byproduct of inflation will likely be a rate hike by the UK Central Bank to keep pace with price levels. The move will bring the short-term UK rate to 5%, just below the US Federal Funds Rate. AFX News reports:

”With consumer price inflation unexpectedly moving back up in August and core inflation rising, another interest rate hike in November remains very much on the cards.”

Read More: Pound gets lift from stubbornly high UK inflation

China and Japan discuss currency appreciation

For the first time, officials from China’s Central Bank will meet publicly with their counterparts in Japan, a nation that knows a thing or two about currency appreciation. Over 20 years ago, the world’s industrialized nations signed the Plaza Accord Agreement, which laid out a plan for devaluation of the USD against the Japanese Yen. The purpose of the agreement was to help the US stem its current account deficit and simultaneously emerge from an economic recession. [Note the similar circumstances which currently surround the attempt by the US to depreciate the USD against the Yuan.] Anyway, the result of the agreement was a Japanese recession, and ultimately, an asset price bubble which continues to plague Japan to this day. Chinese officials hope to learn from Japan’s travails and avert a similar economic implosion.
Read More: China seeks to learn from mistakes of 1985 Plaza Accord

China’s forex reserves near $1 trillion

China’s foreign exchange reserves may soon surpass the mystical threshold of $1 trillion. This month, they soared to $950 Billion, as China’s current account surplus was promptly reinvested in foreign securities. If China allowed the new Yuan to circulate in the money supply, the result would be double-digit inflation. Instead, China holds all of the surplus yuan in the form of foreign currency, a habit which exerts severe upward pressure on the yuan and may soon overwhelm China’s monetary system to the point where it has no choice but to allow the yuan to appreciate. China Daily reports:

“We will take comprehensive measures to avoid further significant growth in the foreign exchange reserves,” said the vice president of China’s Central Bank.

Read more: China forex reserves hit $954.5 billion

ECB rate hikes appear uncertain

Speculation has been building in forex markets over whether the European Central Bank (ECB) will raise interest rates at this week’s meeting. Previously, the consensus among traders was that the ECB would continue to tighten through the end of this year in order to keep pace with inflation. Since then, however, new data has been released, indicating that the European economies may