Will the 2020’s be a decade of currency devaluations?

Sometimes financial markets set the agenda for the week and as this week began they did so as the Renminbi ( Yuan) of China passed what some might call lucky number 7. The New York Times has put it like this.

The renminbi traded in mainland China on Monday morning at roughly 7.02 to the dollar, compared with about 6.88 late on Friday. A higher number represents a weaker currency. The last time China’s currency was weaker than 7 to the dollar was in 2008, as the financial crisis mounted.

In itself a 0.01 move through 7 is no more significant than any other. But that would be in a free float which is not what we have here. Also there has been a move of the order of 2% in total which is significant for an exchange rate which is both closely watched and would be more accurately described as a sort of managed free float. Anyway you do not have to take my word for it as in a happy coincidence the People’s Bank of China has been explaining its position.

China implements a managed floating exchange rate system based on market supply and demand with reference to a basket of currencies. Market supply and demand play a decisive role in the formation of exchange rate. The fluctuation of RMB exchange rate is determined by this mechanism . This is the proper meaning of the floating exchange rate system. From the perspective of the global market, as the exchange rate between currencies, exchange rate fluctuations are also the norm.

There are more holes than in a Swiss Cheese there as we observe an official denial that China has done this deliberately.

Affected by unilateralism and trade protectionism measures and the imposition of tariff increases on China, the RMB has depreciated against the US dollar today, breaking through 7 yuan, but the renminbi continues to be stable and strong against a basket of currencies. This is the market. Supply and demand and the reflection of fluctuations in the international currency market.

The PBOC clearly does not follow UK politics as otherwise it would know “strong and stable” means anything but these days! For example  the Reminbi has fallen by 1.8% versus the Japanese Yen if we stay in the Pacific and by 1.7% versus the Euro if we look wider.

Time for a poetic influence

I regularly report on the rhetoric of central bankers but I am not sure I have seen anything like this before.

It should be noted that the RMB exchange rate is “ breaking 7” . This “7” is not the age. It will not come back in the past, nor is it a dam. Once it is broken, it will bleed for thousands of miles. “7” is more like the water level of the reservoir, and the water is abundant. The period is higher, and it will fall down when it comes to the dry season. It is normal to rise and fall.

Perhaps the online translator does not help much here but there is a lot more going on than for example the English translation of the Japanese government always being “bold action” for the Yen.

Up is the new down

If your currency is falling then the obvious “Newspeak” response is to suggest it is rising.

In the past 20 years, the nominal effective exchange rate and the real effective exchange rate of the RMB calculated by the Bank for International Settlements have appreciated by about 30% , and the exchange rate of the RMB against the US dollar has appreciated by 20% . It is the strongest currency among the major international currencies. Since the beginning of this year, the renminbi has remained in a stable position in the international monetary system. The renminbi has strengthened against a basket of currencies, and the CFETS renminbi exchange rate index has appreciated by 0.3%

However if you are telling people this is due to the market it might be best to avoid phrases like “control toolbox,”

In the process of dealing with exchange rate fluctuations in recent years, the People’s Bank of China has accumulated rich experience and policy tools, and will continue to innovate and enrich the control toolbox.

So let me finish this section by pointing out that the PBOC has “allowed” the Reminbi to go through 7 this morning in response to something we noted on Friday.

Trade talks are continuing, and…..during the talks the U.S. will start, on September 1st, putting a small additional Tariff of 10% on the remaining 300 Billion Dollars of goods and products coming from China into our Country. This does not include the 250 Billion Dollars already Tariffed at 25%…

As the Frenchman puts it in the Matrix series of films.

action and reaction, cause and effect.

Bond Markets

One immediate impact of this has been that bond markets have surged again and we are reminded of my topic on Friday. The totem pole for this has been the bond or bund market of Germany where we see two clear developments. Another record high as the ten-year yield falls to -0.52% and as I type this the whole curve has a negative yield. Over whatever time span you choose Germany is being paid to borrow.

Japan

I do not envy the person who had the job of explaining market developments to Governor Kuroda at the Bank of Japan daily meeting. Firstly the Yen has surged into the 105s versus the US Dollar which is exactly the reverse of the Abenomics strategy of Japan. Then there was the 366 point fall in the Nikkei 225 index which is not so welcome when you own 5% of the shares on the Tokyo Stock Exchange. At least the trading desk will have been spared the job as they will have been busy buying the 70.5 billion Yen’s worth of equities that are typically bought on down days like this. This is neatly rounded off by the Japanese Government Bond market not rallying anything like as much as elsewhere due to the “yield curve control” policy backfiring and providing a clean sweep.

Oh and the day of woe was rounded off by the South Korean’s buying much fewer Japanese cars.

Switzerland

Regular readers will recall the period that I labelled the Yen and the Swiss Franc the “currency twins”. Well they are back just like Arnie and in fact with a 2.2% rally against the Renminbi it is the Swiss Franc which is the powerhouse today. It has rallied against pretty much everything as we remind ourselves of the last policy statement of the Swiss National Bank.

The situation on the foreign exchange market continues to be fragile. The negative interest rate and the SNB’s willingness to intervene in the foreign exchange market as necessary remain essential in order to keep the
attractiveness of Swiss franc investments low and thus ease pressure on the currency.

Well they were right about “fragile”. Do not be surprised if we see the SNB intervening again which will be further bullish for overseas bond and equity markets as that is where they invest much of the money.

Mind you equity markets are falling now meaning this from last week is already out of date.

SNB‘s pile of U.S. shares hits a record $93 billion on buoyant markets ( Bloomberg)

The Ashes

As I hope that England’s sadly rickety batting order can resist the pressure from a land down under today I have been mulling something else. Both countries have weak currencies at the moment and are perhaps singing along with Level 42.

The Chinese way
Who knows what they know
The Chinese legend grows

I could never lie
For honour I would lie
Following the Chinese way

 

Comment

Just like in the 1920’s will the 2020’s open with some competitive devaluations?

President Trump seems to quite like the idea if his tweets are any guide. In the Euro area we see a central bank that seems set to follow policies which in theoretical terms at least should weaken the Euro although the ECB is swimming against the trade surplus. I have covered the Swiss and the Japanese. So let me leave you with two final thoughts.

In the confused melee has the UK stolen something of a march?

Is there a major economy who wants a stronger currency?

Podcast

 

 

 

 

 

Argentina looks trapped in a now familiar downwards spiral

Just over a year ago on the 3rd of May 2018 I gave some advice on here to Argentina about its ongoing economic and currency crisis.

The problem is twofold. Firstly you can end up chasing your own tail like a dog. What I mean by this is that markets can expect more interest-rate rises each time the currency falls and usually that is exactly what it does next. Why is this? Well if anticipating a 27,25%% return on your money is not doing the job is 30.25% going to do it? Unlikely in my view as we note that the currency has fallen 5% this week.

Events accelerated later that day as the Argentine central bank the BCRA did this.

This article came to late for the BCRA it would appear as just before 5 pm UK time they raised interest-rates to 33.25%. I would place a link bit nobody seems to have told the English version of their website yet.

That backed up my point and that theme just carried on as this from Reuters on April Fools Day highlights.

Argentina has established an interest rate floor of 62.5 percent, the central bank said in a statement on Monday, as the country looks to rein in stubborn inflation and ease concerns about a run on the local peso currency.

As of yesterday the interest-rate was 71.44% which must feel somewhat bizarre to ordinary Argentine’s in a world of low and indeed negative interest-rates. Another sign of trouble is the gap to deposit rates which were 51.94% yesterday.

The Argentine Peso

Let me hand you over to the Buenos Aires Times.

Argentina’s peso, the worst-performing emerging-market currency this year, could see more volatility as investors learn how to connect the latest pieces of the country’s complex political puzzle……..So far this year, the peso has slumped by about 16 percent against the US dollar and equity assets have been shaky.

As you can see the situation has continued to deteriorate. In fact there has been something of a double-whammy as interest-rates have soared above 70% and the Peso has gone from 21.52 versus the US Dollar when I wrote my post to 45.2 as I type this. Indeed things are so bad that even Bitcoin supporters are trolling the situation.

If an Argentinian had bought Bitcoin at the highest point of the “biggest bubble in history”, in 2017, he would have been better off than leaving his money in his Argentinian bank account. So tell me again how Bitcoin is a horrible store of value. ( @josusanmartin )

Of course you can look at that the other way which is that he has gone to the outer limits of cherry-picking by choosing the Argentine Peso.

Inflation, Inflation,Inflation

The currency fall was always going to led to inflation and the situation is such that as the Buenos Aires Times reports the government has resorted to direct controls.

The government agreed with leading supermarkets that the price of 60 essential products of the food basket will be frozen for at least six months.

The list includes 16 manufacturing companies of rice, sugar, milk, yoghurt, flour, tea and coffee, among others, whose products will be available at 2,500 outlets as from April 22.

At the same time, the Macri administration agreed with slaughterhouses to offer beef cuts at 149 pesos per kilo (120,000 kilos weekly), which will be available at the Central Market and at other retail outlets.

I am pleased that they are focusing on such an important area that is regarded by central bankers as non-core.  I fear however that this is a sign that some people are in real trouble.

However the statement below is something of a hostage to fortune.

“We are entering into a new phase. Currency instability is now something of the past, which guarantees a lower inflation rate,” Economy Minister Nicolás Dujovne said at a press conference

Moving to the present situation there is this.

The government plan was announced in the same week as March’s inflation data of 4.7 percent was revealed, sending alarm-bells ringing among Macri administration officials. Prices have now increased 11.8 percent increase in the first quarter of the year and 54.7 percent in the last 12 months.

As you can see we now have a triple-play of economic woe with high interest-rates, a devalued currency and high inflation

Fourmidable

Let us advance on the economic situation with trepidation and an apology to Manchester City for appropriating their current punchline. A chill is in the air from this.

Consumption in supermarkets also dropped 8.7 percent in March compared to the same period last year, accumulating a 7.3 percent decline so far this year, according to a report by the consultancy Scentia. ( Buenos Aires Times)

The OECD has updated its economic forecasts this morning and in spite of its efforts to cheer lead for the present IMF programme it has downgraded economic growth from the -1.5% of March to -1.8% now. This is something we have become familiar with in IMF programmes as we note that last summer the government was forecasting 1.5% growth for this year. This comes on top of the 2.5% contraction in 2018. So recession and depression.

Consequently the OECD finds itself reporting that the unemployment rate has risen by 2% since 2017 to 9.1%.

100 Year Bond

Here is Bloomberg from yesterday.

Argentine bond spreads against US Treasuries rose 19 basis points to 962, double the average for Latin America……..The country’s five-year credit default swaps also rose 1.3 percent to 1,274 basis points.

There was a bit of a rally today but in general the bonds of Argentina trade about 9.3% over their US equivalents. However bonds in Peso’s yield more highly with the 9-year being at 23%.

The 100 year bond is trading at 68.5, but I suppose you have 98 or so years left to get back to 100.

Comment

Those who have followed the recent history of the International Monetary Fund will find the statement below awfully familiar.

The authorities’ policies that underly the Fund-supported arrangement are bearing fruit. The high fiscal and current account deficits – two major vulnerabilities that led to the financial crisis last year – are falling. Economic activity contracted in 2018 but there are signs that the recession has bottomed out, and a gradual recovery is expected to take hold in the coming quarters. ( Managing Director Christine Lagarde)

There are similarities with her “shock and awe” description for Greece as I note the OECD 2.1% economic growth forecast for next year is the same number as was forecast for it at this stage. I also note that the “exports fairy” is expected to make an appearance although so far the trade adjustment in the first quarter of 2019 has involved them falling slightly and imports falling by around 27%. Again familiar and as Japan showed us yesterday the import plunge will flatter the next set of GDP numbers. There is a different situation in that the currency has devalued although Argentina rather than defaulting on some of its debt is finding the foreign currency part of it ever more expensive whilst it is in the teeth of a fiscal contraction.

Even the Financial Times is questioning the IMF and Christine Lagarde.

When the IMF completed its third review of Argentina’s economy in early April, managing director Christine Lagarde boasted that the government policies linked to the country’s record $56bn bailout from the fund were “bearing fruit”.

The IMF has strongly supported the present government.

Even former senior fund officials are concerned by the organisation’s exposure to Argentina, and the potential fallout should its biggest ever programme implode.

Of course we do not know who will win the election in October but we face a situation of economic crisis which follows other crises in Argentina. Also most of us unlike the FT live in a world where Lagarde lost her credibility years ago.

In truth this was always going to be a really difficult gig along the lines of when Neil Young decided to stop playing his hits and just play his new (unpopular) album. As the comment below suggests what is really needed is long-term reform which is exactly what the IMF has not provided in Greece.

“Argentina has signed 22 agreements with the IMF, most of which ended with bitterness on both sides.”

Clearly neither side has heard the phrase ‘once bitten, twice shy’! ( Donald in the FT)

 

 

 

Will central banks forever cry “To Infinity! And Beyond!”

Some days pieces of news just leap off the screen at you and this morning has seen a strong example of that. One event has encapsulated many of the themes of this website already so let us crack on as I temporarily hand you over to the Riksbank of Sweden.

Riksbank to purchase government bonds for a further SEK (Swedish Kronor) 45 billion and repo rate held unchanged at -0.50 per cent.

This is a bit like one of those Russian dolls so let us open them up one by one. Firstly for newer readers the Riksbank has been operating in an icy Nordic world of negative interest-rates for over a year now and its deposit rate is the lowest of all at -1.25%.  It was relatively late to the policy of QE (Quantitative Easing ) starting it in February last year but has since expanded and expanded the effort from the original 10 billion Kronor toe in the water. Indeed there is a new front being opened today.

The purchases cover both nominal and real government bonds, corresponding to SEK 30 and SEK 15 billion, respectively.

I like the idea of inflation linked bonds being called “real” and the others? There is an additional risk here if you think about it as an exchange between the treasury and an “independent” central bank. Or if they are one and the same well what are they playing at? I will answer that later. But we are left with the thought that the Riksbank may have been running out of conventional or nominal bonds to buy.

As to the pace of purchases context is not easy. As you can see it is much faster than the plan from this time last year but also represents a slowing on the first half of 2016 so take your pick.

The Swedish economy

Students of economics are no doubt taught these days by those living in Ivory Towers that monetary easing is a response to economic difficulties so let us check that out.

Sweden’s GDP increased 1.3 percent in the fourth quarter of 2015, seasonally adjusted and compared to the third quarter of 2015. GDP increased 4.5 percent, working-day adjusted and compared to the fourth quarter of 2014.

Even the most casual observer will have to admit that this is an odd and indeed bizarre type of economic difficulty as the Swedish economy looks both turbo and super-charged. As to fears of the economy slowing, well the Riksbank raised its economic growth forecast for 2016 this morning to 3.7%. Now I do not know about you but there was a time when economic growth of 8% in only two years would have a central bank applying the brakes and raising interest-rates.

The excuse is low inflation and in particular it being below the 2%. Readers of this website will be aware that I think the trend has changed illustrated by the new theme for the price of crude oil. Some of this was evident in the latest Swedish inflation numbers.

The inflation rate was 0.8 percent in March, up from 0.4 percent in February. The Swedish Consumer Price Index (CPI) increased by 0.5 percent from February to March 2016.

Indeed if you exclude mortgage rates which have been driven lower by the Riksbank then the picture changes again.

The inflation rate according to CPIF was 1.5 percent in March 2016. CPIF increased by 0.5 percent from February to March 2016.

For those of you wondering where all the money has gone well you do not have to look too far for it.

 (House)Prices increased by almost 12 percent on an annual basis during the first quarter 2016, compared to the same period last year.

So the list of casualties in the QE wars has both first time buyers and those looking to trade up the property market in Sweden on it.

Oh and the list of winners starts with asset owners again a feature regularly denied by central bankers.

Meanwhile GDP per head may not be all you think it might be. From Sweden Statistics.

In the next few years the population in Sweden is expected to increase by about 1.5 percent per year.

Currency Wars

Todays policy action is explicitly described as such by the Riksbank.

With continued expansionary monetary policy abroad, there is a risk that the krona will appreciate earlier and faster than in the forecast…..The continued asset purchases will reduce the risk of the krona appreciating faster than in the forecast and of a break in the upturn in inflation.

Oh and just in case this does not work.

The Riksbank is also prepared to intervene on the foreign exchange market if the krona appreciates so quickly as to threaten the upturn in inflation.

Some of you may be wondering how did that work out for the Swiss National Bank ( and indeed the Bank of Japan)? Well according to market observers it opened fire itself last night.

as per usual the SNB busy buying EUR selling CHF ahead of the ECB tomorrow

The link and indeed casual factor here is the Euro. You may note that something which is regularly badged by supporters as an example of stability is clearly not for the surrounding nations. Some of this is caused by the monetary policy response to the lack of economic stability and growth within the Euro area to which other nations respond. Only a couple of weeks ago even Hungary joined the negative interest-rates club albeit only -0.05%. Mind you it always starts like that.

Of course another part of the Nordic region will be closely following events as the Nationalbanken which is presumably meeting right now in Copenhagen Denmark mulls how to respond to all of this. When you are pegged to the Euro you have no choice at all. After all with it expecting economic growth of 1.3% in 2016 it is in danger of being a “lenny lightweight” when it meets the Riksbank at international meetings.

An Inconvenient Truth

All this effort to weaken a currency and yet? Well Twitter does have its uses and takes up the story.

Robert Bergqvist Riksbank delivers more QE (SEK+45bn) but SEK is strengthening!

Katie Martin: Riksbank boosts QE to cool the krona. Krona jumps.

So the Riksbank joins the Swiss National Bank, ECB and Bank of Japan is seeing that monetary easing leads to a stronger rather than a weaker currency. Also the half-life of the  initial easing response has shortened dramatically to a few second now if that.

Oh and this sums it up although we are left wishing that his parents had called him Rick.

European Central Bank

The Euro and the monetary policy of the ECB are the main drivers of the events above. Muse sing about a “supermassive black hole” and the Euro has been like that for the interest-rates and currencies of its neighbours. Today Mario Draghi is on deck and we are left wondering whether he has been subject to some early morning economic policy trolling from the Riksbank!

Personally I think that the Riksbank was catching up from the last ECB move and whilst mice do upset elephants I am only expecting some minor policy changes if at all today. Along the lines of a definition change or two around for example the “assets” of Italian banks and similar.

Comment

By the time you read this many of you will know the ECB decision and if it sticks to rhetoric and Open Mouth Operations it will be mimicking the Bank of Japan.

BoJ Officials Are Said To Share Rising Concern About Yen’s Gain… (@livesquawk)

But we see that negative interest-rates and QE are a clear example of junkie culture where the central banking addict needs ever higher doses with ever more side-effects or unintended consequences. For a while now the main game has been trying to devalue or depreciate your currency which can also be called exporting deflation. Of course it is not going well as we see exactly the reverse often happening. Time for some Outkast.

I’m sorry Ms. Jackson (oh)
I am for real
Never meant to make your daughter cry
I apologize a trillion times.

In these inflated times a trillion seems a bit undercooked but as to how long this will last the duo do have an opinion.

Forever, forever, ever, forever, ever?