Brazil has its very own currency war

This week has been one where the political topic of impeachment has affected financial markets. Like so many things these days it started with the Donald but then as the week developed headed south to the sound of samba music. From the BBC.

Brazilian President Michel Temer says he will not quit, amid allegations he authorised paying bribes to silence a witness in a huge corruption scandal……….Opposition parties have been demanding snap elections and his impeachment.

This would add to the impeachment of the previous President Dilma Rousseff in what must now seem something of a conveyor belt to ordinary Brazilians.

The Real

As events unfolded I was reminded of the famous statement from Brazil’s Finance Minister from September 2010.

“We’re in the midst of an international currency war, a general weakening of currency. This threatens us because it takes away our competitiveness,” Mr Mantega said. By publicly asserting the existence of a “currency war”, Mr Mantega has admitted what many policymakers have been saying in private: a rising number of countries see a weaker exchange rate as a way to lift their economies. ( Financial Times)

Back then he was complaining mostly about the US Dollar which had fallen by around 25% against the Brazilian Real as the US Federal Reserve expanded its balance sheet after large interest-rate cuts. Well presumably he would have been happier with what happened yesterday although probably not the cause.

The real tumbled 8 per cent to 3.38 against the US dollar, wiping out all of this year’s gains and taking the currency back to its level of last December. The real had been trading below 3.10 to the dollar as recently as Wednesday.

If we look back we see that Finance Minister Mantega has in more recent years much to cheer if he was a fan of a lower currency. Back in September 2010 when he made his speech some 1.7 Reals purchased a single US Dollar so approximately half the current rate. In fact the Real had been even lower as it had fallen to more than 4 versus the US Dollar in late 2015 and early 2016. In more recent times it has rallied as foreign investors purchased Brazilian assets in the hope that the reforms of the current President would improve the economy.

You may like to note that the currency fall took place in spite of the fact that Brazil has interest rates that seem rather extraordinary from our continent of near zero and indeed negative official ones.

the Copom unanimously decided to reduce the Selic rate by one percentage point, to 11.25 percent per year, without bias.

Although as you can see they have been easing policy in 2017.

Equity markets and leverage

These plunged as well and led to a moment which will have Snoopy from the Peanuts cartoons back on the roof of his kennel wailing “When,when,when will I ever learn……?”

The 3x Brazil ETF ends the day down 48.2%, the largest single day decline for an ETF in history. Maravilhoso.  ( @charliebilello ).

Ouch! Although someone did suggest there has been a worse decline.

Not quite. There was a certain Europe listed 5x Swiss Franc ETF that did worse on a certain Jan day in 2015. ( @garobhai)

What was that about sorrows coming in battalions rather than single spies?

An economic depression

I have looked at the economic woes of Brazil before and note the central banker euphemisms of the Central Bank of Brazil.

The economy continues to operate with a high level of economic slack, reflected in the low industrial capacity utilization indices and, mainly, in the unemployment rate.

Yesterday the Brazilian statistics office released its latest unemployment data.

In the 1st quarter of 2017, the compound labor underutilization rate (which aggregates the unemployed persons, time-related underemployed persons and potential workforce) stood at 24.1%, which represents 26.5 million persons. In the 4th quarter 2016, for , this rate was of 22.2% and, in the 1st quarter of 2016, it was 19.3%.

Well played to them in having an underemployment rate rather than an unemployment one. Unfortunately it is not only high it is rising quite sharply and as an aside it reminds us that Brazil has a large population. It is not quite so easy to find the unemployment rate itself but I did finally spot it.

The unemployment rate ( 13.7%) advanced in all Major Regions in the 1st quarter of 2017 in relation to 4th quarter of 2016.

If the double-digit rate of unemployment is to fall then Brazil will need some economic growth but last Friday’s service data showed the reverse.

In March, the services sector recorded decrease of 2.3% in the volume of sales over the previous month (seasonally-adjusted series), after having recorded a growth of 0.4% in February (reviewed) and 0.0% in January (reviewed). This is the highest decrease of the series initiated in 2012….

Compared to a year ago there has in fact been a sharp decline.

In the non-adjusted series, in the comparison with March 2016, the sector posted decrease of 5.0%, following the downward trend of 5.3% in February (reviewed) and 3.5% in January. With such results, the cumulative rate in the year stood at -4.6% and, in 12 months, at -5.0%.

The retail sales sector is not helping either.

In the seasonally-adjusted series, the extended retail trade – which includes retail plus the activities of vehicles, motorcycles, parts and pieces and of construction material – once again registered a negative change in volume of sales over the immediately previous month (-2.0%)…….Compared with March 2016, the extended retail trade retreated 2.7% in volume of sales (34th consecutive negative rate) and -1.2% in nominal revenue.

34 months of declining retail sales is yet another depressionary signal is it not?

What about inflation?

The picture had been improving although the level is high for these times.

The Extended National Consumer Price Index (IPCA) of April recorded a change of 0.14%……..In the last twelve months, the index was down to 4.08%, below the 4.57% result of the previous month, becoming the lower rate in 12 months since July 2007, when it was at 3.74%

The fall was mostly due to something of a shambles on the electricity front although of course Brazil is far from alone in that.

The 6.39% drop in the item electricity represented discounts over bills, as a result of the decision of the Brazilian Electricity Regulatory Agency (Aneel), so as to make up for the overcharge, in 2016, of the so-called Reserve Energy Charge (EER) destined to pay the Angra III power plant.

The price of chocolate went up by 10.23% on an annual basis which is yet another country that does not reflect falls in the price of cocoa.

Comment

So far I have avoided looking at the economic depression in growth or Gross Domestic Product terms so let us now catch up with that.

In 2016, the GDP fell 3.6% in relation to the previous year, slightly lower than the 2015 result, when it had been 3.8%. There were drops in Agriculture (-6.6%), Industry (-3.8%) and Services (-2.7%). The GDP totaled R$ 6,266.9 billion in 2016.

The GPD fell 0.9% in the 4th quarter of 2016 against the 3rd quarter, considering the seasonally adjusted series. It is the eighth consecutive negative result in this kind of comparison. Agriculture grew 1.0%, whereas Industry (-0.7%) and Services (-0.8%) fell.

The only real ripple of good news I can find is that wheat production has been strong in 2017 so far so maybe agriculture will continue to grow. I note that the central bank was not especially optimistic in its April report and neither was the Markit manufacturing survey from earlier this month although it did not expect a further decline.

However, rising from 49.6 in March to 50.1 in April, the latest reading was indicative of broadly unchanged business conditions facing goods producers.

So the political and financial crisis as so often is hitting an economy when it is already down. I also note that when a shock hits even interest-rates of 11.25% do not protect a currency which is a lesson that has been taught many times before. Although for buyers of the Real at current levels there are likely to be fewer interest-rate cuts in 2017 now for obvious reasons. For s start the lower currency if sustained will lead to higher inflation.

As to quality of life even the recent Olympics has been seen to have a dark side. From the Guardian yesterday.

The area where most of our homes once stood is now a large concrete car park that is usually empty and insufferably hot. It is sad. There used to be 650 families here. Today, there are 20……..Hosting was a mistake. When the Games were over, those that already had money and investments – the hotel owners, businessmen, building companies, tourist agents and government officials – were better off, while the country and the people were left with the bill.

What is the economic impact of the post Brexit UK Pound fall?

Yesterday saw England rudderless and confused with a poor performance from Sterling. But enough about the football although let me congratulate Iceland and wish them good luck in the next round. As we have a spell of market calm this morning with the FTSE 100 up 2% at 6100 as I type this and even the poor battered UK Pound £ rising above US $1.33 there are opportunities to take stock. An early lesson is a type of shock effect both emotionally and in the way that financial markets can move far far faster than the economy can respond. Whilst it has many flaws in other areas rational expectations economics has some success here although of course the obvious rejoinder is what do we rationally expect now?

Ratings Agency Downgrades of the UK

Once upon a time these bodies bestrode the world and economic agents were afraid of them . If they sliced a notch off a credit rating then the “bond vigilantes” would ride into town driving sovereign bond yields higher and making it more expensive for that country to borrow. The credit crunch hurt them in two ways starting with the way that debt they rated as “AAA” turned out to be a lot further down the alphabet in reality. Also as events like the Euro crisis hit they ended up chasing events rather than leading. They have survived because the need for measurement and analysis has risen in the credit crunch era and that has offset to some extent the plummet in their credibility.

So let us get to what they told the UK yesterday. From Standard and Poors

Ratings On The United Kingdom Lowered To ‘AA’ On Brexit Vote; Outlook Remains Negative On Continued Uncertainty.

This had particular emphasis for headline writers as it was the last of the ratings agencies to have the UK as AAA. Around 5 years ago I pointed out that we did not really deserve such a rating as whilst we have our own currency and could always print as much as we wanted that would likely be accompanied by a lower value of the UK Pound £. Also Fitch wanted a slice of the action as Reuters reported.

Fitch Ratings cut Britain’s credit rating on Monday and warned more downgrades could follow, joining Standard & Poor’s in judging that last week’s vote to leave the European Union will hurt the economy.

Fitch downgraded the United Kingdom’s sovereign rating to “AA” from “AA+” and said the outlook was negative – meaning that it could further cut its judgment of the country’s creditworthiness.

Some kept a sense of humour about it all.

Fitch downgrades UK to AA/neg now (@NicTrades )

A Wider Perspective

These days the story does not end there as you see there are much wider trends and themes at play. Overnight we have seen yet another example of the move lower in sovereign bond yields.

| *JAPAN’S GOVERNMENT BONDS ALL YIELD LESS THAN 0.1% FOR 1ST TIME

Apologies for the capitals used. If we move beyond that there is plenty of scope for reflection that the highest sovereign yield in Japan is not even 0.1%! Each time we see such a move I point out that business models which depend on yield such as pensions and annuities cannot work anymore.  The ten-year yield is now -0.22% which fits poorly with all the proclamations of economic recovery. Overall we see this.

Japan’s long yields on the road to zero. 40-year falls to record 0.08%, some 80% of JGB market is now sub-zero ( @HaidiLun )

Back in the UK

The story of the bond vigilantes riding into town has quite a reverse here. It was only yesterday that I pointed out that our benchmark 10 year Gilt had seen its yield fall below 1%. So yields are surging today in response to the downgrade? Er well no, as it is at 0.97% as I type this so on the edge of all-time lows ( since 18th century according to Ed Conway of Sky). This is a little higher than the lowest of yesterday but not much and this of course is a response to the higher level of the stock market. The thirty year Gilt yield is at 1.83% which in terms of my time following it is simply incredible.

So those looking for a response to the ratings downgrade only have inverse responses with Gilt yields extraordinarily low and the stock market and UK Pound £ rallying.

The impact of the lower UK Pound £

There have been a lot of headlines about the UK Pound £ saying it is a 31 year low or was yesterday. Many have forgotten to point out this is against the US Dollar which of course has been in a strong phase and overall we have seen falls but mostly smaller ones elsewhere such as to 1.20 versus the Euro.

As we have reached a calmer phase I can complete some calculations as the Bank of England only compiles its trade weighted index daily and is based on yesterday’s close. Thus we came into 2016 at just over 90 and are now at approximately 80. So using the old Bank of England rule of thumb we have seen a move equivalent to a Bank Rate reduction of 2.5% so far in 2016. Compared to this time last year it is more like 3.25%.

We can expect an inflationary push as well especially as the fall has been loaded towards the US Dollar. Many basic commodities will be seeing a push higher from this as it added to a falling trend anyway although there will be some offsetting from the falls in the oil price over the past few days. Over the past year the oil price (Brent crude oil -24%) has fallen more than the UK Pound £ (-15%) but over the last week it has fallen by less. So upwards but not by as much as those who have missed the oil price fall have suggested.

Comment

There continues to be much to consider as a multitude of economic events occur together. What it shows us is how tightly the world financial and economic system is tied together. Some of this is good as in manufacturing efficiency but some of it is not so good as complacency and bluster about the banks turns to near panic in an instant. On that subject whilst he is not always right this poses a question. From De Welt.

George Soros is betting 100 million Euros against Deutsche Bank

Meanwhile we have received an increase in uncertainty followed by an inflationary economic boost provided by the fall in the UK Pound £. Just what some at the Bank of England have called for over the years so it is no surprise to see former Governor Baron King reappearing in the news. In fact quite a few economists have called for that although it is nice to see the Resolution Foundation backing up one of my themes.

Housing wiped out 2/3 of post-2002 income gain. RF report on underplayed role of housing in living standards squeeze.

Steve McClaren

If you need some light relief at a difficult time you should watch this rather spectacular effort.

 

 

 

Monetary policy seems to have been delegated to the currency markets

Last night was simply superb at what might be called the battle of Stamford Bridge where at times an exciting football match broke out leading to a 2-2 scoreline which meant that previously lowly Leicester City are champions of the premier league. Well done to them and their fans and it was a shame that the sonic booms of the RAF Typhoons in the air were over another town beginning with a L namely Leeds. It makes me think how bad we are as humans at comparing events with perceived ultra low probability. From Hilary Evans.

Betting odds in August. Leicester to win Premier League 5000-1 Elvis to be found alive working in a chip shop in Macclesfield 2000-1

Oh and the 2000-1 bet was probably influenced by fans of this song from Kirsty MacColl.

There’s a guy works down the chip shop swears he’s elvis

However there is another event or two be precise two events taking place now that according to economic theory should not be happening and we find them in the currency markets.

The currency depreciators in fact appreciate

There has been a change in 2016 and what it represents is that the two main central banks which are trying to lower their currency have in fact seem them rally. This morning there were two clear notable sights in markets as the Euro pushed towards 1.16 versus the US Dollar and the Japanese Yen strengthened though 106 to 105.6. This will have Mario Draghi of the ECB spluttering on his morning espresso or cappuccino and perhaps ordering an extra glass of chianti with his lunch. Actually as Mario notes that around a third of the new bank rescue fund for Italy has already been used he may raise his chianti order to the whole bottle!

Meanwhile in Japan Governor Kuroda will not be in a mood to celebrate the 3 day Golden Week break and of course if anyone has had an anti-Midas touch it is him. As in essence the policy of Abenomics he was appointed to enforce involved a lower Yen there is an obvious problem with it rising. In fact even hard-core supporters must be struggling to name an arrow of Abenomics that is even partially working right now and I wait to see how the many in the media deal with this reality.

Let us analyse the scale of what has taken place here. It reminds me of quite a few instances in UK economic policy where the UK Pound £ has done exactly the reverse of both plans and hopes for it.

The Euro

As a backdrop we need to recall that the ECB has cut its deposit and current account interest-rate to -0.4% and raised its monthly amount of QE (Quantitative Easing) bond purchases to 80 billion Euros a month, or just shy of a trillion a year. What has it got for that?

If we look at the chart against the US Dollar we see that the falls were in 2014 and early 2015 and that over the past year the Euro is now up by over 3%. This fits with my theory that the main currency falls from a policy of QE happen in advance of it as expectations build and that the reality of it sees a situation where the boat often has already sailed. If we look at the effective or trade weighted exchange rate it fell from 104 to 89 in early April 2015 but has since rallied to 95.

A couple of years ago we did get a “Draghi Rule” for measuring the impact of all this.

Now, as a rule of thumb, each 10% permanent effective exchange rate appreciation lowers inflation by around 40 to 50 basis points.

So the same inflation which he is trying to raise will in fact be reduced by around 0.3% by the Euro strength.

Oh and the ECB is also pot-shotting at the behaviour of other central banks. Whilst I welcome that it is catching up a little with my “early-wire” theme it seems to have forgotten that it used to give private-briefings to hedge funds.

Eleven out of these 21 announcements exhibit some pre-announcement price drift in the “correct” direction, i.e., in the direction of the price change consistent with the announcement surprise. For seven of these announcements the drift is substantial.

 

The Yen

Whilst the Yen has been something of a currency twin with the Euro it has been in the worst place as you see it has rallied against it as well. Cue more pictures of Governor Kuroda with his face in his hands. Back in late 2014 it just failed to make 150 Yen per Euro compared to the 122.5 now. Thus the Yen has surged and with apologies for it being tardy with updates but the trade weighted Yen courtesy of the Bank of England has risen from 127 to 141 over the past year.

Sadly the Bank of Japan has not published any form of the Draghi Rule as I suppose it is anti their culture. But of the rules we do have I think it applies the most so we see that inflation will be some 0.6% lower due to the appreciation over the past year. The calculation assumes we remain here as do the ones above and they give plenty of food for thought.

Another way of looking at the situation is that Abenomics has jumped into the TARDIS of Doctor Who and travelled back to November 2013.

The UK

There has been a reversal here too as the falls of early 2016 have been followed by a recovery to US $1.47. The trade weighted index has recouped about half of its earlier losses with in essence the 2016 falls being against the two currencies discussed above. Of course so much is in flux but with UK manufacturing weak and the Pound stronger we could easily see someone at the Bank of England vote for a Bank Rate cut. At which point we see yet another reversal for Forward Guidance.

Australia

If we look to the land “down under” we see that the Reserve Bank of Australia cut interest-rates by 0.25% to 1.75% this morning. This did seem to be aimed at one particular target.

though an appreciating exchange rate could complicate this.

As the “Aussie” has fallen I guess they will be happy. Those familiar with the UK experience will feel a chill down their spines as the note the use of “rebalancing” in a situation proving central banks all borrow from each other.

The US Dollar

Here we get the most awkward situation for economic theory as it is raising interest-rates and therefore should have a strong dollar. Reality by contrast fits much more nicely with my anticipation and expectation theme especially as the Federal Reserve seems to have forgotten and redacted its own Forward Guidance. The Dollar Index had a couple of goes at passing 100 but now is at 92. According to US Federal Reserve vice-Chair Fischer that will raise GDP by between 0.8% and 1.2%

So we have the country which was tightening monetary policy via interest-rate rises ( although in reality we do not need the plural as only one has happened so far) and a higher currency is now seeing easing via currency falls. Oh what a tangled web and all that..

Comment

I have left one elephant in the room until now which is the supposed existence of a Shanghai Accord. Some elements of it do seem to be in play but I am cautious about conspiracy theories especially in currency markets. Maybe that is because I am British as the UK Pound £ has spent so much time at the “wrong” level meaning that we have not been able to control it! Maybe just the existence of the theory has contributed to what we have seen especially as we note that the moves were already in play well before the accord.

But as the moment most currencies seem to be getting what their central banks do not want! Still according to the Rolling Stones that may not be all bad.

You can’t always get what you want
But if you try sometime you find
You get what you need

 

 

 

 

Currency Wars continue to rage in the Far East

Today we travel to the other side of the world to review a small country which departed from a larger companion in 1965. But do not worry I am not looking at implications for Brexit today but noting the salvo fired this morning in the currency wars by the city-state of Singapore. Here is the statement from the Monetary Authority of Singapore or MAS.

 MAS will therefore set the rate of appreciation of the S$NEER policy band at zero percent, beginning 14 April 2016.

This replaced this.

 In October 2015, MAS kept the Singapore dollar nominal effective exchange rate (S$NEER) policy band on a modest and gradual appreciation path, but reduced its rate of appreciation slightly.

Which replaced this from January 2015.

MAS will therefore continue with the policy of a modest and gradual appreciation of the S$NEER policy band.  However, the slope of the policy band will be reduced.

These policy moves represent a clear change from the previous policy of currency appreciation. This started in 2012 and was an anti-inflation measure. However back in January 2015 the MAS was noting this.

The depreciation of the S$ against the broad-based strength of the US dollar was partly offset by the appreciation of the S$ against the Malaysian ringgit, euro, and Japanese yen. Thus, movements in the S$NEER have been relatively muted compared to bilateral S$ movements against the major currencies.

So they were seeing a feature of the times as we note that in addition to its domestic neighbour we see that 2 of the main currency depreciators are on the list and on the other side the strong US Dollar was on the list too. Even effective or trade weighted exchange rates can be an example of “you can’t always get what you want” to quote the Rolling Stones. The switch today seems to be an example of trying “to get what you need” as Singapore sets out a plan which no longer includes a rising currency.

At this point let me pose the question, how many countries these days will accept a rising currency and where does that leave those who want theirs to fall?

Why have they done this?

If we look at the outlook for inflation and growth we see this.

CPI-All Items inflation will remain negative throughout 2016……..According to the Advance Estimates released by the Ministry of Trade and Industry today, the Singapore economy registered 0% growth on a quarter-on-quarter seasonally adjusted annualised basis in Q1 2016, following the 6.2% expansion in Q4 2015.

Ouch! That is quite a growth slow down is it not? Anyway in a familiar theme it is all apparently Johnny Foreigner’s fault.

The outlook for the global economy has dimmed since October…….held down by sluggish external conditions….a less favourable external environment……subdued growth in Singapore’s major trading partners.

Can we continue all blaming each other? That is a clear central banking theme these days as they all sing along with Lilly Allen’s album “It’s not me it’s you” Also I note the use of the current central banking buzzword “vigilant”.

Also you may note that there is no change to interest-rates. I suspect that having reduced its deposit rate to 0% the MAS has – wisely in my view – decided not to plunge into the icy cold world of negative interest-rates, for now at least.

Oh and there was a time where mild disinflation and a growth rate expected to be between 1 and 3% in 2016 would have been seen as an economic nirvana. How times change….

Never believe anything until it is officially denied!

From the MAS

This is not a policy to depreciate the domestic currency,

From Bloomberg

Singapore’s dollar slid 1.2 percent to S$1.3667 to the U.S. currency as of 6:51 a.m. in London, the biggest drop since Aug. 11.

Actually it also took a few other currencies with it as the phrase “competitive devaluations” came back into use.

New Zealand’s dollar tumbled 1.2 percent to 68.38 U.S. cents, the ringgit declined 0.9 percent to 3.9088 per dollar and Indonesia’s rupiah weakened 0.4 percent to 13,210.

Actually the South Korean Won fell by as much too.

Japan and the Yen

There is quite an irony in the Yen being described as an appreciator and there will be much chuntering into their sake at both the Bank of Japan and the Ministry of Finance at this description. But we know that in spite of this weeks decline the Yen at 109.2 versus the US Dollar is up some 8.5% on a year ago. They are of course still “watching” it although today’s spokesman seems to have been smoking something strong.

CHIEF GOVT SPOKESMAN: CAUTIOUS OF ONE-SIDED FOREX MOVES, READY TO TAKE APPROPRIATE STEPS IF NEEDED. (h/t @moved_average)

Oh and as of this morning the Yen has strengthened against many of its neighbours as they follow the Singaporean Dollar lower. Indeed the Yen weakened after comments like this. From Bloomberg.

Even if Japan wants a weaker yen, any government action would be futile as “Abenomics is nearing its best-before date,” said Eisuke Sakakibara, in charge of intervention at the Ministry of Finance from 1997 to 1999. He said an expansion of Bank of Japan stimulus would only temporarily slow the yen’s gains to 100 by year-end.

He picked the turn nicely.

China

Here the foreign exchange news gets swamped by the US Dollar exchange rate but the official communique at the beginning of this month said this.

On March 31, 2016, the CFETS RMB exchange rate index closed at 98.14, losing 1.50 percent from the end of February;

The new effective exchange rate has fallen from 100.94 at the turn of the year to 97.64 now so China’s leaders will have been reflecting on a gradual depreciation so far in 2016. This will be welcome as they struggle to keep the dream alive.

However whilst a 0.8% fall against the Singaporean Dollar to 4.75 may not be a major factor in Chinese calculations the fact that other currencies have fallen with it changes things. We will have to wait and see how they respond to this. They will also be noting that the Euro has drifted lower like the Yen this week as the currency environment shows a hint of ch-ch-changes.

Comment

The MAS has decided that a lower currency is something to which they can sing along to with The Cars.

I guess you’re just what I needed
I needed someone to feed
I guess you’re just what I needed
I needed someone to bleed

The environment has changed as they usually only make such a move in response to a recession and further food for thought is provided by the fact that at the end of last year economic growth was at 6.2%. Is that a new lower bound?

As to other devaluation/depreciation efforts we wonder in terms of album titles, Who’s next?

Still I guess those selling property near me in Nine Elms and at Battersea Power Station will be very grateful if new Far Eastern buyers emerge ahead of any future competitive devaluations. According to the mood music from there they may be sorely needed……

BP

Large losses seem to have been accompanied by a large pay rise for the Chief Executive and this response raised a smile.

think of how much bigger the loss could have been if he wasn’t being properly incentivised! (h/t @RealFinney)

 

 

The Yen for Yen is a big problem for both Japan and Abenomics

This morning the main economic developments are taking place in the Far East and UK markets have opened with this being reported. From @RANsquawk.

sub-111.00, paves way for retest of the March low of 110.67 which would be the lowest since Oct 2014, when BoJ last expanded QQE (Quantitative and Qualitative Easing).

There was talk that an option barrier at 110.50 might hold the rise of the Japanese Yen against the US Dollar but in fact in rose to 110.30 and is now at 110.44 as I type this. The reason for the slight dip back was a familiar one.

BRIEF-Bank of Japan checking USD/JPY rate – Nikkei

As you can see hints of intervention do not seem to be achieving much anymore along the lines of the story of the boy who cried wolf. Indeed overnight we saw one of the weapons of modern central banking deployed as Bank of Japan Governor Kuroda indulged in some Open Mouth Operations. From Marketwatch.

Speaking in parliament, Kuroda reiterated his stance to “undertake additional monetary easing without hesitation” if necessary, either by increasing the central bank’s asset purchases or by lowering its deposit rate further below zero, or both.

According to Bloomberg news he went on to say that he is “monitoring” foreign exchange markets which in Kuroda speak is the equivalent of “closely watching from the Ministry of Finance. The problem is summed up by Bloomberg below.

The yen’s 8.7 percent surge this year makes it the best performing Group-of-10 currency.

The rise is exactly the opposite of the plan under the Abenomics policy of Shinzo Abe under which it is supposed to keep falling. It is now 7% stronger than a year ago. These days QQE or QE do not guarantee a currency fall as I discussed only yesterday in reference to the Euro well those in Tokyo will have spotted that since last summer when it nudged over 140 the Yen has been strengthening against the Euro as well as finds itself at 125. 4 .

Of course Japan has its concerns about currencies much closer to home so if we switch to the effective or trade weighted Yen it has risen from 128 to 137 in 2016 so far.

The many faces of Governor Kuroda

An increasing problem for Governor Kuroda is that he is contradicting himself more and more. From The Times of India a month ago.

TOKYO: Bank of Japan Governor Haruhiko Kuroda said on Monday he is not currently thinking of taking additional steps to ease monetary policy.

So either he was not telling the truth or he has undertaken another U-Turn in the way that he introduced negative interest-rates only 8 days after publicly rejecting the idea. Speaking of India I guess Governor Kuroda would love to be cutting from 6.75% to 6.5% as the Reserve Bank of India did this morning.

Where next for monetary policy?

There are problems here for Governor Kuroda. In terms of currency intervention he must be singing along to the Alan Parsons Project.

I just can’t seem to get it right
Damned if I do
I’m damned if I don’t

If he intervenes here again he faces the prospect of the Bank of Japan morphing into an international hedge fund in the way that its “currency twin” the Swiss National Bank has. If you build up foreign currency assets you then need to put them somewhere and the old stand-by of short-dated bonds increasingly brings a guaranteed loss in terms of negative interest-rates. So they increasingly choose equities which mostly means hoping the price of Apple does not fall and the occasional embarrassment as they get caught holding a lemon such as Valeant.

If he does not then if the technical analysts are any guide the Yen is on its way to 107 or maybe 106 when Kuroda will be singing along to Hard-Fi.

Can you feel it?
Feel the pressure rising
Pushing down on me, oh Lord

Of his other options he could do more QQE but it is increasingly damaging the underlying Japanese bond market. From @moved_average

CURRENT 30-YR JGBS HAVE NO TRADE FOR FIRST TIME IN SIX MONTHS

I have been arguing this from the early days but they have ploughed on and pretty much broken the market by buying so many. This is more of a flow problem or the speed of purchases than a stock one but if they keep this up then that will be along eventually as well. It speaks for itself that the Bank of Japan rounds its announcements to 100 million Yen! Oh and one thing it does do which as far as I am aware is unique is that it buys inflation or index-linked bonds as well. Any port in a storm I suppose.

Promises of further steps into negative interest-rate territory have the problem that the first one saw the Yen strengthen substantially afterwards. What if that happened again?

Both the Bank of Japan and the ECB seem to have entered a zone where further monetary easing strengthens the respective currencies. We find ourselves tearing yet another page out of the economics textbooks and soon we will be left only holding a spine.

Helicopter Money

There are louder and louder calls for this with for example Lord Turner regularly suggesting it in the UK. I do still enjoy the description of him having had a “talentless ascent” in a comment to this blog. Actually Japan gave it a go a decade or more ago giving everyone the equivalent of £142 if I recall correctly which they promptly saved! Please remember that as I see some many articles claiming that this is not only new but in fact has guaranteed success.

Also we find ourselves here on a path where monetary policy is also fiscal policy.

What about fiscal policy?

The Japan Times suggests this is also on the cards.

At a meeting of the Council on Economic and Fiscal Policy on Monday, the prime minister instructed ministers to formulate “bold and convincing measures” to be included in a fiscal and economic blueprint to be compiled in or around June.

Japan is going to press for such moves to be international when it hosts the next G-7 meeting. Presumably this is part of this promise by Shinzo Abe that looks very much like tilting at windmills only a short time after.

Abe has pledged to lift GDP by around 20 percent from the current level, to ¥600 trillion by around 2020.

This poses yet another problem for Abenomics as the initial fiscal boost was supposed to trigger economic growth which would allow Japan to cut its fiscal deficit and thereby get some control over its national debt to economic output (GDP) ratio. According to the Ministry of Finance the fiscal deficit was 6% of GDP in 2015 and the national debt was 229.2% of it. The IMF has it nearing 250% and the Bank of Japan if it throws in all its assets has a net reading of 130%. Take your pick or note the 1.075 quadrillion Yen it has become or 1,075,217,800,000,000.

Comment

If we step back for a moment we see three major themes at play. Firstly the economy of Japan has had every form of economic stimulus thrown at it. A continuing fiscal stimulus has seen ever more monetary stimulus and a lower exchange rate added to it. Each time we have been assured of success by the government and mainstream media but if that was true we would not be seeing Agent Smith continually crying “More! More!” would we? In addition the latest phase is that monetary easing is having an inverse and perverse effect on the Yen and the Euro as both rally in response to ever lower interest-rates and yields. Oh what a tangled web and all that. Also please remember that this is happening when lower energy prices should be giving Japan an enormous boost.

One irony is that today has seen a rare outbreak of a real wage rises in Japan but I guess whilst 0.4% is welcome it is not that material. Oh and as to the promised third arrow of reform. From Reuters.

Japan is witnessing a record number of compensation claims related to death from overwork, or “karoshi”, a phenomenon previously associated with the long-suffering “salary man” that is increasingly afflicting young and female employees.

That is neither the reform nor the type of equality required.

 

 

The central banking wars of 2016 are being fought in the currency markets

Today the Bank of England announces its monetary policy decisions. In this era of leaks and early wires it is a particular shame that it voted yesterday as this morning some are no doubt more equal than others. Although in the arena of interest-rates this may not be that big a deal as after all it is 7 years now since they changed Bank Rate.  Also Governor Carney is probably weary and to tired for another u-turn after competing in the ski marathon in St. Moritz at the weekend. However Sir Humphrey Appleby might  describe as masterly inaction has consequences if we move to the currency markets and look at the UK Pound’s response to a slowing economy.

UK Pound £

The stronger phase for the UK Pound £ has faded and been replaced by falls. In the media the falls are currently being blamed on Brexit risks and any rallies ignored. In round numbers it has fallen from the US $1.49 of late 2015 to US $1.43 now but in many ways more remarkably from 1.36 against the Euro to 1.27 now. The latter is more remarkable because Mario Draghi and the European Central Bank have only recently cut interest-rates and added an extra 20 billion Euros a month of QE asset purchases to help drive the Euro lower.

The UK trade-weighted or effective exchange-rate has fallen from 90.42 to 85.42 in 2016 so we have under the old rule of thumb the equivalent of a Bank Rate cut of 1.25%. Quite a difference to the actual rate! Also the 5 year Gilt yields ( think fixed mortgage rates) has fallen from 1.35% to 0.84%. So there you have it financial markets have eased policy for Governor Carney whilst he waffles along with Forward Guidance Mark 15.

The US Federal Reserve

Last night Janet Yellen and her colleagues on the US Federal Reserve gave us their thoughts. There was after the consumer inflation report an opportunity to be hawkish and even to raise interest-rates. Whilst the media obsessed on a monthly fall there were rises in the services area of 3.1% in annual terms telling us what will happen as the good price disinflation fades. But instead we got this.

However, global economic and financial developments continue to pose risks.

This scapegoating by central bankers has been repeated this morning by the Swiss National Bank on that subject what is Swiss for “Johnny Foreigner” please? But of course as we all live on the same planet you find that in the arrow points back at you. The net effect of all this was that now the number of interest-rate rises promised by the Fed has dropped from the rather odd “3-5” to a maximum of two.

The US Dollar

This dropped like a stone giving us an easing of US monetary policy if sustained. In a way the most remarkable move was against the UK Pound which had fallen to below US $1.41 in response to the UK Budget news. Suddenly the only way was up for the UK Pound as it bounced to US $1.43 and pretty much went back to where it began as Janet gazumped George.

If we move to the trade weighted Dollar Index we see that it fell to 95.1 so that we note that in 2016 it has fallen in broad terms from 99 to 95. Whilst this is not the measure used by the Federal Reserve Stanley Fischer gave us a rule of thumb last November which indicates that if this continues there will be around a 0.5% boost to Gross Domestic Product or GDP.

Adding in the impact of bond yields shows a further easing as it is the 30 year yield or long bond which impacts on US fixed-rate mortgages and it has fallen from 3.03% to 2.66% so far this year.

An odd mix is it not where the Bank of England has found policy loosened for it and the US Federal Reserve which is supposed to be tightening has eased as well?!

Where have currencies tightened policy?

The Euro

Mario Draghi must be crying into his glass of Chianti as he reviews a Euro exchange-rate that has pushed up above 1.13 versus the US Dollar this morning. In fact it is going up as fast as economist can predict it is heading for parity. I pointed out earlier the rise of the Euro versus the UK Pound £ as Mario surveys failure on more than one front.

The trade-weighted exchange-rate tells us the story as the recent nadir was 90.4 in late November and it started 2016 at 92.7. With all the easing it should be lower right? Er no as the ECB had it at 94.14 yesterday and as it used a US Dollar exchange rate of 1.106 a large upwards move can be expected today. After all his monetary policy easing Mario Draghi may well get out his copy of Alice In Wonderland.

My dear, here we must run as fast as we can, just to stay in place. And if you wish to go anywhere you must run twice as fast as that.

Bank Pictet estimate that the latest ECB easing will add around 0.3% to inflation. Whereas a rise in the effective exchange rate from 89.7 to 95ish over the past year will probably subject more than that.

The Yen

If there is upset in Frankfurt well that must be a tea party to how current foreign exchange developments are seen in Tokyo! Economic policy or Abenomics is essentially predicated on a lower value for the Japanese Yen and this weeks announcement of only minor changes to monetary policy has found the same response as the interest-rate cut to -0.1% which is a stronger Yen. That is also supposed to support the rise in inflation to the 2% target whereas in fact a rise of 8% over the past year means that it is cutting inflation. A problem for Abenomics and its many media cheerleaders – readers may like to note they seem to have gone quiet – if not for Japanese workers and consumers.

Of course the Bank of Japan is also concerned with the competitive devaluations going on in Asia so let us look at its trade-weighted exchange-rate. According to the Bank of England it has risen from 128 to 135 in 2016 so far. So all that easing and monetary policy has tightened via the exchange rate. Time to move from trillions to Quadrillions? So far it has all been a BitterSweet Symphony.

I’ll take you down the only road I’ve ever been down
I’ll take you down the only road I’ve ever been down

Comment

As we stand central banks are like Janus as they try to look in two directions at once. However the old rule of monetary policy that you can only look at the internal economy or the external one is coming bank to haunt our supermen and wonder women. As fast as they move policy they find that their exchange rate is mostly offsetting it and sometimes more than negating it. But still they plough on. Over to you Norway.

At its meeting on 16 March, the Executive Board decided to lower the key policy rate by 0.25 percentage point to 0.50%.

Oh and what is it with Scandanavians and negative interest-rates?

Should the Norwegian economy be exposed to new major shocks, the Executive Board will, however, not exclude the possibility that the key policy rate may turn negative.

Seems a bit after the Lord Mayor’s Show now the oil price has shown signs of stability.  Also this happened.

Norway cuts rates&…krone strengthens!

 

 

Egypt is suffering from both the lower oil price and the currency wars

Today I intend to take a trip to a country which has a rich history. There are of course the Pyramids for starters but also the city of Alexandria which has been described thus in the Guardian today.

“Alexandria was the greatest mental crucible the world has ever known,” claim Justin Pollard and Howard Reid, authors of a book on the city’s origins. “In these halls the true foundations of the modern world were laid – not in stone, but in ideas.”

The lighthouse,library and museum went on to achieve great fame but the man whom it was all named after never lived to see it as Alexander the Great went off on other campaigns and met his own demise. However this rich history is clashing with a very troubled present as the groundswell of the Arab spring meet a lower oil price and both actual terrorism and the fear of it impact.

The Egyptian Pound

This morning’s news comes to us from Arab Economic News.

The Egyptian central bank devalued the pound by almost 13 percent at an “exceptional” sale of dollars on Monday.

The central bank said it sold $198.1 million to local lenders at 8.85 pounds per dollar. That compares with a previous exchange rate of 7.73 pounds. It wasn’t immediately clear whether the lower price is just limited to Monday’s dollar sale. Central bank officials weren’t immediately available for comment.

I do like the idea that you could devalue just for one day! Especially as we are immediately given a clue as to why this has happened.

Egypt is grappling with a dollar squeeze that is threatening economic growth in the most populous Arab country. Foreign-currency reserves have tumbled by more than 50 percent since 2011, though they have stabilized at just over $16 billion in the past six months.

When a country sees a rush for US Dollars that is invariably a sign of what Taylor Swift would call “trouble,trouble,trouble” and can end up in the sort of situation I have described in the past in Ukraine were it becomes a parallel currency for some anyway.If we return to the foreign reserves situation we see another familiar tale as Reuters take up the story.

Egypt’s reserves have dropped from $36 billion in 2011 to $16.53 billion at the end of February.

Over this time the currency has been falling as @RtrsAgAnalyst points out.

As you can see the period after the Arab Spring has seen both currency declines and foreign exchange reserve falls in a familiar pattern for a fixed exchange rate. According to Renaissance Capital it had the most overvalued currency in real terms of any of the Emerging Markets. That is no doubt related to pegging your currency against the strong US Dollar. In a way this from Gerry Rice of the International Monetary Fund in January confirms this.

We would like to stress the need to raise exports in order to promote growth and for exchange rate flexibility to support this, allowing the exchange rate to move to a market clearing rate where supply meets demand, would boost exports, and prevent foreign exchange shortages.

Those who have followed the disastrous policies the same IMF has applied to Greece may reasonably be wondering why a “market clearing (exchange) rate has been denied to it? Perhaps it might provide an antidote to the usually sycophantic media coverage of its Managing Director Christine Lagarde if style could be replaced by substance. After all the quote about is a clear critique and indictment of IMF policy in Greece.

Why are devaluations invariably too late?

I think that there are three major reasons for this. The first is that establishments and what are considered to be elites tend to be much less intelligent than they think they are. Secondly reality is rarely a friend of theirs. Thirdly and interrelated to all this is that they usually try to get their own money out first! In a way this news from China from Saturday highlights this. From Bloomberg.

China is tightening restrictions on the use of third-party payment providers to buy insurance products in Hong Kong as authorities move to stem outflows of the yuan.

I am sure we will find investment elements in these products as we note how inventive people can be. Personally I believe that sometimes the authorities are slow to close down such channels – after all some US $1 Trillion has reported fled China in the last year -because they want a slice of the pie!

The economy

Last September the IMF pointed out that it was not all bad news.

Macroeconomic figures also point to some improvement, with growth rebounding to 4.2 percent in 2014/15, and inflation has declined.

However we feel a chill down our spines as we see the word “resilience” applied to the banking sector as that usually means it is either going to need it or a bailout will be required. Also at a time of political disquiet we are reminded of “trouble,trouble,trouble” again.

At the same time, unemployment remains high notably among the youth

Only six months before Christine Lagarde had pointed out this.

Over the coming five years, there will be more than 600,000 new entrants to the labor market per year.

Have you noticed how according to the world establishment both growing and shrinking workforces are a bad idea?! Poor old Goldilocks never seems to have her porridge just right or in IMF speak.

This is a moment of opportunity.

For those of you wondering things are not as bad a being “on track”. Although perhaps the IMF will inform us as to how raising taxes such as introducing the same VAT which has cause so much economic pain in Greece will help the poor in Egypt.

What now?

The currency controls imposed a year ago had created a bit of a crunch on the economy according to Reuters.

At the same time, the central bank lifted caps on withdrawals and deposits of foreign currencies for individuals and companies importing essential goods, easing forex controls imposed a year ago that had all but paralysed trade……..Businesses who saw a devaluation as inevitable were holding back on investment.

Also there is the issue of lower receipts from tourism as the impact of the Russian plane crash in Sinai and as we mull lower figures for the Baltic Dry Index this consequence from the Middle East Monitor.

a decline in revenue from the Suez Canal

The latest economic growth numbers showed 4.5% but they are from the middle of last year and with the workforce growth we note that per capita growth will be less. Any slowing will only reduce progress on that front and reinforce Egypt’s long-standing problems with poverty and inequality. As to interest-rates some 15% is being offered to investors today on some 3 year bills as long as you can provide some foreign exchange and inflation is 9.1%. For a description of that mixture let me hand you over to Ms. Britney Spears.

Don’t you know that you’re toxic

Comment

Any economic woe poses its own problem in a country that is already so troubled. For example lawmakers have accused the European Parliament of being influenced by the Muslim Brotherhood which as far as I know not even Nigel Farage accuses them of. Meanwhile the economy is one of those being affected by the lower oil price as the US EIA indirectly highlights.

Egypt is the largest non-OPEC oil producer in Africa and the second-largest dry natural gas producer on the continent.

Also Egypt has relied on loans from Saudi Arabia and the United Arab Emirates to finance its balance of payments problems and such funds must be in shorter supply. Add the issues described above and 2016 will be hard going especially as the troubles have seen falling gas production in spite of new fields being found.

On the upside there is this from the IMF research although of course it is not clear how this can coexist with the spread of fundamental Islam.

For instance, Aguirre and others (2012) suggest that raising female labor force participation to country-specific male levels would boost GDP in the United States by 5 percent,
in Japan by 9 percent, in the United Arab Emirates by 12 percent, and in Egypt by 34 percent.

Oh and who always benefits from establishment moves?

Commercial International Bank surged 7.0 percent and investment bank EFG Hermes jumped 9.9 percent. Real estate developers Egyptian Resorts and Talaat Mostafa Group each climbed more than 8.0 percent. (Reuters)