Month: September 2011

The Bangko Sentral ng Pilipinas held its overnight borrowing rate unchanged at 4.50% and the overnight lending rate at 6.50%, and kept reserve requirements unchanged at 21%.  The Bank said: “The Monetary Board is of the view that the risks to the inflation outlook may be receding as global inflationary pressures are expected to ease with the slowdown in the recovery of advanced economies. Food prices have also remained tame with favorable supply conditions in both domestic and international markets. The abating price pressures give monetary authorities sufficient room to keep policy rates on hold.  A pause in the policy stance allows for careful assessment of inflation risks amid signs of sluggish global economic growth. The Monetary Board believes that the current monetary policy stance remains in line with the need to safeguard price stability and support sustained economic growth.”

The Philippine central bank last raised its interest rate in May this year by 25 basis points to 4.50%, and increased reserve requirements by 100bps at its previous meeting.  The Philippines reported annual consumer price inflation of 4% in July, down from 4.7% in June, 4.5% in May and 4.3% in April.  Inflation is currently tracking inside the Bank’s inflation target range of 3%-5%.  The Bank said: “Latest baseline forecasts continue to indicate that average annual inflation is likely to settle within the 3-5 percent target range for 2011-2013 while inflation expectations remain firmly anchored given the moderating commodity prices and the recent string of stable inflation rates.”  The Bank next meets on the 20th of October.

The National Bank of Serbia cut its 2-week repo rate by 50 basis points to 11.25% from 11.75% previously as global financial market and economic conditions created uncertainty.  The Bank said: “The decision on further relaxation of monetary policy was adopted to ensure that inflation returns to the target, without major volatility. The Executive Board expects that inflation will continue to decline until the end of the year and that it will enter the target tolerance band in the first half of the next year. Future path of the key policy rate will depend on the materialisation of risks, primarily in the international environment, and those relating to fiscal policy at home.”

The Bank had paused in August, after the Bank reduced the 2-week repo rate by 25 basis points to 11.75% at its July meeting, and cutting the rate 50 basis points at its June meeting to 12.00%.  Serbia reported inflation of 12.1% in July, down from 12.7% in June, 13.4% in May, 14.7% in April, and above the bank’s inflation target range of 3-6%.  On global developments the Bank said “The deepening of global economic problems remains a possibility. Concluding a precautionary arrangement with the IMF will help ease possible implications regarding the risks in some advanced economies and currency zones.”  The Bank next meets on the 6th of October.

Indonesia’s central bank, Bank Indonesia, kept the BI reference rate on hold again at 6.75%.  The Bank also widened the interest rate corridor band for monetary operations to 150 basis points below the BI rate from 100bps previously.  The Bank said:”The decision was taken by considering the importance of maintaining macroeconomic stability amid the heighten uncertainty in the global financial system triggered by the US and Euro area debt. Although the impacts of uncertainty in the global economy on domestic economy are so far limited, Bank Indonesia continues to monitor the developments and assess their impacts on Indonesian economic performance going forward.”

At its August meeting, the Bank also maintained the key monetary policy rate (the BI Rate) unchanged at 6.75%.  Previously the Bank raised the BI rate by 25 basis points to the current 6.75% in February 2011.  Indonesia reported annual inflation of 4.79% in July, 4.61% in June, 5.98% in May, 6.16% in April, and 6.65% in March, and just inside the inflation target of 5% +/-1% in 2011 (which changes to 4.5% +/-1% in 2012).  Bank Indonesia has previously forecast GDP growth of 6.3-6.8% in 2011 and 6.4-6.9% in 2012 for the Indonesian economy, meanwhile Indonesia reported annual GDP growth of 6.5% in the June quarter this year.

Now that the SNB has set a floor for the EUR/CHF having promised, “To buy foreign currency in unlimited quantities,” traders will be forced to look outside the CHF for a new safe haven currency. Given that many of the currencies currently available in the market have a cloud hanging over their heads, this sets the stage for a potential USD rally.

Between the traditional safe haven currencies of the USD, CHF, and JPY, as of late all three have a dark cloud hanging over their heads with each suffering from their own particular faults though the most relevant may be government attempts to artificially weaken the currencies.

Following a 20 standard deviation move in the EUR/CHF when the SNB put a floor beneath the pair the CHF appears to be off limits temporarily. This policy will enable those looking to get out of the EUR a much better price versus the 1.10 level the EUR/CHF was trading at prior to the announcement. While the market may end up testing the resolve of the SNB to hold the 1.20 level the Swiss National Bank appears to have temporarily halted the appreciation of the CHF, thus limiting the upside for using the currency as a safe haven play.

The JPY is another traditional safe haven despite the country carrying a debt to GDP ratio of 1.2. The country is a net creditor and a majority of the Japanese debt is held by local financial institutions. The cloud hanging over the head of the JPY is the possibility the Japanese Ministry of Finance will intervene once again in the market to artificially weaken the JPY as it did in early August and in March. Japan will likely attempt to rally support for further coordinated intervention at the G7 meeting on Friday and Saturday.

The forex trading blogs have been overflowing with ideas for moving into the NOK as a safe haven play. This idea does have some talking points with the high cost of oil, a 10.5% budget surplus in 2010, and an AAA credit rating. The price action looks to confirm this theory as the EUR/NOK has breached its August low of 7.63. However, liquidity is sometimes a problem with the Scandinavian currencies; therefore, we turn to the most liquid currency, the USD.

Despite a struggling economy that continues to run out of gas every time the Fed’s quantitative easing programs end, an interest rate close to 0% and the Fed weighing even more measures to loosen monetary policy, investors who are seeking yield were previously inclined to search elsewhere. However, the USD does offer the most liquidity for real money investors with the US Treasury bond market being the largest bond market in the world. The USD, the most heavily traded currency in the 6.5 tn per day foreign exchange market has ample liquidity. For those investors that are concerned following the credit downgrade by S&P, the recent agreement between President Obama and Republicans to increase the US debt ceiling and to implement real budget reforms may be put the US on the path to fiscal austerity. Thus, when compared to the fiscal trouble the euro zone is experiencing, the USD may be well positioned to benefit from the European debt crisis. Given the recent price action that has the EUR/USD testing its June 2010 uptrend, the USD may be poised for further gains.

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Sept. 8 (Bloomberg) — Andrew Economos, head of sovereign and institutional strategy Asia ex-Japan at JPMorgan Asset Management in Hong Kong, talks about regional economies and financial markets. Economos, speaking with Susan Li on Bloomberg Television’s “Asia Edge,” also discusses U.S. and European economies and central banks’ monetary policies. (Source: Bloomberg)

Sept. 8 (Bloomberg) — Richard Yetsenga, global head of foreign-exchange strategy at Australia & New Zealand Banking Group Ltd., talks about Europe’s debt problems and European Central Bank monetary policy. Yetsenga speaks in Hong Kong with Susan Li on Bloomberg Television’s “First Up.” (Source: Bloomberg)

The euro (EUR) was last seen dropping against the US dollar (USD) late Thursday following the European Central Bank’s (ECB) latest announcement regarding interest rates, known as the Minimum Bid Rate. Stuttering mildly ahead of the decision, there was an atmosphere of EUR avoidance in the market even prior to the statement by ECB President Jean-Claude Trichet.

With nearly every analyst anticipating today’s move, and the accompanied dovish statement by Trichet, the market followed suit with expectations and witnessed a quick plummet in EUR values. Several reports have begun to assume a possible rate reduction as early as mid-2012 by the ECB, though future economic growth will factor heavily in such a decision. For now, traders appear to be looking to a weakening of the EUR through the remainder of the week.

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In a sign that a weakened US dollar (USD) is perhaps aiding the US economy’s growth, today’s trade balance figure came in below the forecasted deficit. Though not an entirely positive signal, the trade deficit grew by only $44.8B instead of the anticipated $50.6B.

Weakening the value of the USD both increases the ability of American firms to export goods while simultaneously reducing America’s buying power abroad (i.e. reducing imports). The expected result is a less-than-stellar, but better-than-forecast widening of the trade deficit, which should help improve America’s standing in the global arena.

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The value of the Australian dollar (AUD) took a hit in today’s early trading following reports from the Australian Bureau of Statistics that employment saw sharp contraction in August. The Employment Change figure was forecast to see an expansion of roughly 10,700 jobs; the actual figure shocked even market pessimists.

A surprise contraction of nearly 9,700 jobs in August has generated wide concern that the Aussie economy is facing an impending crisis, especially considering last month’s 4,100 job contraction. The unemployment rate also increased from 5.1% to 5.3% this month. The AUD is losing value and could enter a longer-term downtrend if things are not changed soon.

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Sept. 8 (Bloomberg) — Shen Jianguang, chief economist for greater China at Mizuho Securities Asia Ltd. in Hong Kong, talks about China’s currency policy. Shen speaks with Rishaad Salamat on Bloomberg Television’s “On the Move Asia.” (Source: Bloomberg)