The Bank of England is in danger of losing the currency war

Over the weekend the Bank of England found itself being left behind by events. Perhaps it took the concept of the late summer Bank Holiday too seriously as whilst Governor Andrew Bailey was present at Jackson Hole and presumably enjoyed the hospitality he said nothing of note and thus did not respond to this.

The other path is one of determination. On this path, monetary policy responds more forcefully to the current bout of inflation, even at the risk of lower growth and higher unemployment. This is the “robust control” approach to monetary policy that minimises the risks of very bad economic outcomes in the future.

Three broad observations speak in favour of central banks choosing the latter path: the uncertainty about the persistence of inflation, the threats to central bank credibility and the potential costs of acting too late.

In many ways this was an extraordinary speech from Isabel Schnabel of the ECB who spent quite some time dismissing the inflation surge as we note “Transitory” has morphed into “uncertainty” about the “persistence” of inflation. However we have 3 markers for the Bank of England from it. Then there was more.

Policymakers should also not pause at the first sign of a potential turn in inflationary pressures, such as an easing of supply chain disruptions. Rather, they need to signal their strong determination to bring inflation back to target quickly.

Then she suggested a policy response.

Both the likelihood and the cost of current high inflation becoming entrenched in expectations are uncomfortably high. In this environment, central banks need to act forcefully.

Now let me switch to what all this means and I will do so from the perspective of Frederik Ducrozet because he is about as much an ECB insider as you can be whilst working elsewhere.

@Isabel_Schnabel‘s speech in Jackson Hole is as powerful as Powell’s, only more documented. A strong case for determination over caution, for the ECB to act forcefully as high inflation risks becoming entrenched. It’s possible that she calls for a 75bp hike in September.

The takeaway from this is simply that the ECB is now expected to raise interest-rates by 0.75% next time around. A response to this was the German two-year yield rising over 1% yesterday.

If we switch now to the Bank of England it was caught asleep by the development and is left in a world where it thinks a 0.5% increase in interest-rates is a big deal or bazooka. I have previously called it a “peashooter” and with the US Fed having raised by 0.75% and the Bank of Canada by 1% and now the ECB is floating the idea of it raising by 0.75% it looks even more so.


The UK Pound £

Regular readers will be aware that I have long argued that we should set policy to support the UK Pound as it is anti-inflationary. Actually that has taken a further nuance this year because with the US Dollar being so strong it has been a type of competition between central banks as to how they respond to this. As an example this is why I argued some time ago that the Bank of Canada would copy US interest-rate moves which they have tried to do in spite of their meetings being before the US.

Thus over the weekend the Bank of England was caught out by the hawkish shift meaning we fell below US $1.17 versus the US Dollar. We also moved through 0.85 versus the Euro. So in the new era where a facet of monetary policy is via your exchange rate they were caught napping.

UK Bond Yields

This is another area where the moves at the moment are usually international. In response to the central banking rhetoric which was reinforced at Jackson Hole we see higher bond yields. So we have a two-year yield of 2.94% now as markets look to price in the rhetoric. It has also got Reuters excited.

LONDON, Aug 30 (Reuters) – British government bonds are on course for their biggest monthly fall since 1994, as surging energy prices create a perfect storm of higher inflation, tighter monetary policy and the prospect of greater government borrowing.

What this makes me think of is this from the last Bank of England set of policy minutes.

In the minutes of its meeting ending on 3 August 2022, the MPC said that it was provisionally minded to commence gilt sales shortly after its September policy meeting, subject to economic and market conditions being judged appropriate and subject to a confirmatory vote at that meeting. The Committee asked the Bank to be in a position to begin a sales programme before the end of September.

Selling into a declining market is really rather silly as they will exacerbate the fall. I have argued for many years that their plans for unwinding all their QE bond purchases were none too bright and they are proving me to be correct. They are essentially maximising their losses in capital terms if we look at recent events and prices.

As an aside this is something of a generic as central banks bought at record high prices for bonds and are now holding them at much lower ones. There is an issue of how all this will be accounted for. They cannot go broke as they can simply print but they have passed on interest profits to national treasuries.

Returning to the Bank of England the two-year yield is up by nearly 1.2% since it announced its QT plan to sell £40 billion a year of its bond holdings. How long can it last and will it even start are now relevant questions for it?

Today’s Data

That has not gone well either, because if we start from the basics we see that annual money supply growth rose from 4.4% to 4.8%. The M4 numbers are erratic on a monthly basis ( as last month’s fall now seems to highlight) but we have had 2 strong numbers out of the last 4 which is not quite what one might expect in a tightening round.

Also mortgage lending remains firm.

Net borrowing of mortgage debt by individuals decreased slightly to £5.1 billion in July, from £5.3 billion in June. This is above the pre-pandemic average of £4.3 billion in the 12 months up to February 2020.

As is consumer credit.

Individuals borrowed an additional £1.4 billion in consumer credit in July, on net, following £1.8 billion of borrowing in June (Chart 2). This is above the 12-month pre-pandemic average up to February 2020 of £1.0 billion. The additional consumer credit borrowing in July was split between £0.7 billion on credit cards, and £0.7 billion through other forms of consumer credit (such as car dealership finance and personal loans).

Indeed it did this.

The annual growth rate for all consumer credit increased to 6.9% in July; the highest rate since March 2019 (7.2%).


Events are presently fast moving and the Bank of England has been caught napping here. There is a further nuance because the Schnabel critique has a blatant flaw.

the potential costs of acting too late.

Collectively they are a year too late and maybe more. Also this is a laugh out loud moment.

the threats to central bank credibility

It is tempting to suggest that only a central banker could say that but there are more than a few around that believe that. Although if we exclude those who hope for a job at a central bank the field does thin out.

But her U-Turn left the Bank of England looking out of touch as events developed.







Why is the Euro exchange-rate so weak?

The economic features of 2022 have consequences for exchange rates and this morning has brought us closer to a symbolic event. You do not need to take my word for it as here after a curious period of silence on the subject is Financial Times markets editor Katie Martin on the subject at hand.

the technical term for EURUSD here is Squeaky Bum Time. parity watch is ON

It has fallen to below 1.01 versus the US Dollar after starting the week above 1.04 so it has been a week that Hard-Fi would describe like this.

Can you feel it?
Feel the pressure… rising
Pushing down on me, oh lord!
Pressure, pressure, pressure pressure pressure
Feel the pressure
Pressure, pressure, pressure pressure pressure

It would be the second time for people to wear their parity hats this week as after a period of dancing around parity the Euro moved to below 1 more decisively versus the Swiss Franc and is now at 0.9874. I will return to it as there are important signals and lessons here with regular readers no doubt already thinking of both the Carry Trade and the period when the Swiss National Bank promised “unlimited” foreign exchange intervention at 1.20 before eventually folding like a deckchair.

One issue I will point out is that markets often move to a level like this and fail first time around before moving when mainstream attention has departed. Not this time though.

Why is this happening?

One clear factor is relative interest-rates. James Bullard of the St.Louis Fed said this yesterday.

With respect to the policy rate: The FOMC has increased the rate’s level at the last three meetings and is poised to make further increases at coming meetings.

The bond market is suggesting that they will raise towards 3% so for foreign exchange purposes that will be what you are thinking. Now let us switch to the ECB. Here we start with a problem because in spite of inflation being above 8% it has not raised interest-rates and still has one of -0.5%. All we have so far are promises.

Second, monetary policy normalisation in the euro area was expected to proceed at a significantly faster pace than at the time of the Governing Council’s 13-14 April meeting, with a rate lift-off expected in July.  ( ECB Minutes released yesterday)

But a 0.25% rise would be both slower than the US and still leave interest-rates in negative territory. If we switch to bond markets we see that the ten-year yield in Germany is 1.25% reflecting I think the view on ECB interest-rate policy. As Oasis would put it Definitely Maybe.

Next up is the wider issue of ECB credibility being low and an example of this has come from a past policymaker former Vice-President Vitor Constancio.

There is already a lot of noise around the exchange rate EUR/USD going to 1. However, what matters for competitiveness and import prices is the trade-weighted effective exchange rate v. main trade partners. Since Dec. the EURUSD is down 9%, but the effective rate is down only 2%.

If you think it through that is worse rather than better. The Euro has fallen against the US Dollar which will raise inflation via energy costs. The ECB Minutes did refer to this issue.

Since May 2021, oil prices had increased by 88% in US dollar terms but by 111% in euro terms.

At the same time it has rallied versus the currencies the Euro area trades with thus worsening the position there too.

Also in terms of psychology the release at the beginning of the week suggested an organisation unable to concentrate on its main task which is inflation.

The Governing Council of the European Central Bank (ECB) has decided to take further steps to include climate change considerations in the Eurosystem’s monetary policy framework. It decided to adjust corporate bond holdings in the Eurosystem’s monetary policy portfolios and its collateral framework, to introduce climate-related disclosure requirements and to enhance its risk management practices.

If we return to the economics there is also the influence of this.

The euro area goods trade balance had deteriorated owing to the rising cost of imported energy and food. The overall trade balance had deteriorated by about 4 percentage points since the start of 2021, of which about 2.5 percentage points was due to the energy and food balance. This captured the real income cost of having to pay more money to the rest of the world. ( ECB Minutes)

We gad become used to what was essentially the German trade surplus providing support for the Euro but it is no more.

The Swiss Franc

We can move on from the issue of the US Dollar which has been something of a bulldozer this year as it rolls over other currencies and switch to the Swissy for both a regional and relative comparison. This is in spite of the fact that it is becoming increasingly clear that they nave been making the same mistakes as the rest of us.

Moreover, Swiss politicians have failed in recent years to push ahead with the expansion of energy facilities that would reliably supply power in the winter – despite repeated warnings from Elcom, the regulatory authority. (

But the Swiss National Bank did act on the 16th of June.

We have decided to tighten our monetary policy and to raise the SNB policy rate and the interest rate on sight deposits at the SNB by half a percentage point to −0.25%. In doing so, we are seeking to counter increased
inflationary pressure.

It also came with something of a U-turn on the subject of the Swiss Franc exchange-rate.

Since the last monetary policy assessment, the development of the Swiss franc exchange rate has also contributed to the rise in inflation. The Swiss franc has depreciated in trade-weighted terms, despite the higher inflation abroad. Thus the inflation imported from abroad into Switzerland has increased.

So the former currency devaluer is now in favour of currency appreciation! Whilst circumstances do change there is no mechanism for central planners like these to ever be challenged or brought to heel. What about the enormous US equity position that they have or the even larger one in European bonds?

So the SNB is now persuaded of the virtues of a strong currency.


The currency issue often gets ignored but I look at it regularly because whilst moves are sometimes symbolic it is also true that not only are genuine economic forces often at play it can also drive them. We have been following the decline in the Japanese Yen for a while now and it reached 136 again versus the US Dollar overnight. I think with the Euro joining it we have an interesting situation as these were both places with a strong trading position which supported the currency. Ironically that was part of the reason why they ended up with negative interest-rates. So far that continues to look like this.

We’re caught in a trap
I can’t walk out
Because I love you too much, baby ( Elvis )

The problem is that the weaker currency adds to the issue of inflation especially as it is versus the US Dollar.

Anyway as the chart below shows it is not how things are being reported in the UK with the media trying to tout the UK Pound £ as an emerging market currency. Which one looks like that below?


The Bank of England faces a new era as even the Swiss raise interest-rates

Today we have woken up to something of a new reality as we review that rather panicky actions of central banks yesterday. It turned out that the ECB emergency meeting was something of what is called in modern language a nothing burger. They took their time to tell us they were planning something so pretty much what we knew anyway. Putting it another way the ten-year yield in Italy is 4% this morning so “trouble,trouble,trouble” as Taylor Swift would say.

But the main event was this which had several condequences.

At today’s meeting the Committee raised the target range
for the federal funds rate by 3/4 percentage point, resulting in a 1-1/2 percentage point increase
in the target range so far this year. The Committee reiterated that it anticipates that ongoing
increases in the target range will be appropriate ( Chair Powell)

In terms of a market response and expectations he also said this.

As shown in the SEP, the median projection for the appropriate level of the federal funds
rate is 3.4 percent at the end of this year, 1.5 percentage points higher than projected in March
and 0.9 percentage point above the median estimate of its longer-run value.

So we learnt that Nick Timiraos of the Wall Street Journal is the way that the Fed now leaks its intentions. That is the new intended reality to which the Bank of England needs to respond. Before we get to that let me just point out two issues here. Frstly aiming for the end of the year raises a smile when only last week they intended to raise interest-rates by 0.75%. Then their forecast of 1.7% economic growth looks too optimistic to me in an economy which is certainly slowing and may see a recession.

A Swiss Surprise

I was not necessarily surprised that the Swiss National Bank acted but the size of the move does provoke a wry smile.

The SNB is tightening its monetary policy and is raising the SNB policy rate and the interest rate on sight deposits at the SNB by half a percentage point to −0.25% to counter increased inflationary pressure.

This cocks something of a snook at the ECB which last week decided not to raise interest-rates as the Swiss. For them this level of inflation is too high.

Inflation reached 2.9% in May and is likely to remain at an elevated level for the time being.

Whereas Italy has updated us this morning with this.

In May 2022, according to preliminary estimates, the Italian harmonised index of consumer prices (HICP) increased by 0.9% on monthly basis and by 7.3% on annual basis (from +6.3% in April),

Next comes the issue of all the equity purchases to weaken the Swiss Franc.Perhaps not only are they no longer necessary but the SNB will sell some.In which case I can see why equity markets are falling today. This also leaves the Bank of Japan looking even more isolated in its role of The Tokyo Whale.In addition to its 2.2 trillion Yen purchases of government bonds on Tuesday, it bought some 70 billion Yen of equities on Monday.

The Bank of England

The issue now for the Bank of England is of international comparisons and the UK Pound £. We find that monetary policy has rather switched from trying to get your currency to fall to trying to get it to rise.Well apart from the United States which has the reserve currency and in something of an irony has been seeing a King Dollar phase. There is another way of putting this.

It’s hardly a coincidence that the Fed, ECB, SNB or RBA all came up with surprise moves in the past week. It started with the IMF meetings, and there’s been an implicit coordination since then. ( @fwred)

There is some spinning here on behalf of the ECB as the others have raised interest-rates whilst it has not. But there is an underlying drumbeat for everywhere but the Euro area.

The most important exchange rate is versus the US Dollar right now because that is what commodities are priced in. So a stronger currency is one way of helping to control inflation. Regular readers will know I have made that point many times but central bankers are much slower on the uptake as we saw from the Bank of England last time around.

The MPC sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. At its meeting ending on 4 May 2022, the MPC voted by a majority of 6-3 to increase Bank Rate by 0.25 percentage points, to 1%

Although three of them were more on the case.

Those members in the minority preferred to increase Bank Rate by 0.5 percentage points, to 1.25%.

The other six may have been deterred by the fact that the Monetary Policy Committee has never raised interest-rates by 0.5%. But in terms of a currency which has fallen versus the US Dollar and slipped a little versus the Euro whilst rising against the Yen we need to do this I think.

(Back it up baby) I found out love just ain’t enough
I need devotion to back it up (Back it up now) ( Nils Lofgren)

Interest on Reserves

The Financial Times is pushing this.

Rishi Sunak would save up to £57bn for taxpayers over the next three years if he stopped the Bank of England paying interest on money held by commercial banks at the central bank, according to a new report seen by the Financial Times.

Sounds superficially good albeit immediately unlikely so how?

The report by the New Economics Foundation, a left of centre think-tank, recommends the BoE reforms the way that its interest rate underpins the financial system — by no longer paying interest on most of the nearly £1tn reserves held by commercial banks overnight.

Oh hang on it is not actually £57 billion but might one day be.

The interest on the reserves cost taxpayers almost nothing when rates were at rock bottom after the global financial crisis, but would cost up to £57bn by 2025 if rates follow market expectations of a rise to 2.5 per cent.

Now there is a glaring flaw which is if interest-rates are 2,5% then how are you going to implement them as a monetary policy when you also have an interest-rate of 0%? So you would be cutting one interest-rate as you raise the others!

Maybe I have misunderstood and April 1st gas been moved.


The situation is now one where central banks are competing to raise interest-rates and after considering moves as small as 0.1% are now competing to move by the largest amount. Whilst they claim this is about inflation it is as much a foreign exchange move for most. Also we see that after the decade of competing for a lower exchange-rate they have now joined me in wanting a higher one. Whilst it is a compliment their timing is out because the time to do this was late last summer so it would be helping reduce inflation now.

When we look back on this week the epoch move may be from the Swiss who not only a pushing for a higher exchange-rate from a position of strength. But the possibility that they may sell some of their large equity portfolio has seen equity markets fall 2% this morning.

Shame on You

I can only say I am embarrassed on behalf of my alma mater.

ECB’s Lagarde all dressed up to receive an honorary doctorate from the London School of Economics! ( @david_milliken )

On the day of the emergency meeting that produced nothing too. So we can add Italians to the Greeks and Argentinians writing letters and emails of complaint.


Meet Japan the new currency devaluer

Last night as the UK bank holiday weekend was coming to an end I took a look at financial markets and noted a new low for the Japanese Yen as the big figure versus the US Dollar became 127. Back on the 28th of March I quoted this from Nikkei Asia.

The yen weakened to more than 121 against the dollar on Tuesday, a level not seen since February 2016.

They went on with this.

“I think we could see an exchange rate of 125 yen to the dollar by the end of the year,” said one forex dealer who further shorted the yen. The Japanese currency last hit this range in August 2015.

Why does this matter? There are the issues for Japan I will come to later but the Yen is an internationally significant currency as again I pointed out back then.

The Japanese Yen (world’s third most-traded & third-largest reserve currency) is on track for one of its worst months ever. ( @DavidInglesTV )

Today the Japan Times is reporting events like this.

The yen posted its longest losing streak in at least half a century on bets further divergence between U.S. and Japanese interest rates is inevitable.

The yen fell to the ¥128 range against the U.S. dollar in Tokyo Tuesday, marking a fresh 20-year-low after breaking the ¥127 line in New York overnight.

There was more.

Monday’s decline marked its longest losing streak since records compiled by Bloomberg begin in 1971, when the U.S. left the gold standard.

Also there was a bit of echoing of the view in Nikkei Asia on the 28th of last month as we learn something about how things are being presented in Japan itself.

The emerging consensus among traders in Tokyo is that it will reach ¥130 against the dollar in coming months.

What is causing this?

Interest-Rate Expectations

The issue here was revved up last night by a policymaker at the US Federal Reserve.

April 18 (Reuters) – U.S. inflation is “far too high,” St. Louis Federal Reserve Bank President James Bullard said on Monday as he repeated his case for increasing interest rates to 3.5% by the end of the year to slow what are now 40-year-high inflation readings………..Bullard’s preferred rate path would require half-point interest rates hikes at all six of the Fed’s remaining meetings this year.

Just in case he had not ramped this enough here is the Wall Street Journal.

St. Louis Fed President Jim Bullard: Raising the federal-funds rate by 75 bps at a meeting shouldn’t be ruled out, but it’s not my base case “at this point”

Whereas in Japan there are no such thoughts.

Kuroda, however, repeated his view the BOJ must maintain its massive stimulus programme to support a fragile economic recovery. ( Reuters)

Of course talk is merely that and the US Federal Reserve has only raised interest-rates to the 0.25% to 0.5% range. But currency moves often look at short-term bonds and at the 2 year maturity there is a 2.5% carry or if you prefer interest-rate differential in favour of the US Dollar.

Energy Problems

This is a major issue for Japan as the trade ministry METI put it a few years ago.

Originally, Japan is poor in resources such as oil and natural gas. The energy self-sufficiency ratio of Japan in 2015 was 7.4% which was a low level even compared to other OECD countries.

The Fukushima disaster had made a bad situation worse leaving Japan even more exposed to the sort of thing we are seeing now. With the rises in the price of gas this from the International Energy Agency poses a problem.

Because Japan is one of the top global natural gas consumers and has minimal production, the country relies on imports to meet nearly all of its natural gas demand. Japan was the largest global liquefied natural gas (LNG) importer in 2019…….In 2019, Japan’s natural gas consumption reached an estimated 3.6 trillion cubic feet of natural gas per year (Tcf/y), about 4% higher than a decade ago

It also pointed out the reliance on oil imports.

Japan’s oil consumption was an estimated 3.7 million b/d in 2019, making it the fifth-largest petroleum consumer in the world behind the United States, China, India, and Russia.

With prices at current levels this poses an increasing problem. The price of Brent Crude Oil is above US$112 today and even in the US gas prices are soaring.

Holy moly, US natural gas is on a mission to hit $8/mmbtu for the first time since 2008 ( @SStapzinski )


The energy issue is a major factor in changes here too. Over time we have got used to Japan racking up trade surpluses even if that was dented for a while by the Fukushima crisis. This meant that Japan built up large foreign asset holdings. But now things are starting to look rather different.

Amid soaring commodity prices, the country logged a trade deficit for the seventh straight month in February. And increasing red ink means Japanese companies need to sell more yen to acquire dollars to pay for imports, thereby putting downward pressure on the yen.  ( Japan Times)

The issue is one of increasing concern within Japan.

However, due to the structural change in Japan’s trade balance, concerns are growing that the country may even post an annual current account deficit. Because of the increasing red ink in the trade arena, Japan posted a current account deficit in December and January. Although February saw a ¥1.64 trillion current account surplus, the figure was down by 42.5% year on year.

After all it has been a while.

The last time the nation recorded an annual current account deficit was 1980, following the 1979 oil crisis, according to a Finance Ministry official.

So there are shifting sands here.


As so often Japan seems to be dodging the inflation bullet with the leading indicator for Tokyo at 1.3%. But there is this pointed out by the Bank of Japan.

dissipation of the effects of a reduction in mobile phone charges

So soon we will have numbers without that and there have been factors keeping the price of rice low.

Rice farmers are particularly vulnerable. Unlike wheat and corn, which have seen prices skyrocket as the war jeopardizes one of the world’s major breadbaskets, rice prices have been subdued due to ample production and existing stockpiles. That means rice growers are having to deal with inflated costs while also not getting more money for their grains. ( Japan Times)

That cannot continue.


It is time to remind ourselves of our 2 major themes in this area. The first was the years of Yen strength as like is “Currency Twin” the Swiss Franc  it got further boosted by the Carry Trade. Well as Bob Dylan sang.

For the loser now
Will be later to win
For the times they are a-changin’

But also there was the period where Prime Minister Shinzo Abe pursued a policy called Abenomics which was designed to weaken the Yen except after an initial move it didn’t. He must be furious right now. Along the way we found out some unexpected developments for economics 101 as this did not do the trick.

The Bank will purchase Japanese government bonds (JGBs) so that their amount outstanding will increase at an annual pace of about 80 trillion yen……The Bank of Japan will conduct money market operations so that the monetary base will increase at an annual pace of about 80 trillion yen.

A big problem for this was that so many were ( and in some cases still are) at the same game.

Also imagine how this is going down in Beijing as China has been accused of being a currency devaluer for years whereas it seems that it is Japan who is at that game. One Renminbi buys more than 20 Japanese Yen now which is up nearly 20% over the past year.



The Swiss Franc is soaring again reaching parity versus the Euro

Situations like the present one bring up all sorts of situations that had gone quiet along the lines of the Paul Simon lyric.

Hello darkness, my old friend
I’ve come to talk with you again

But a subject we looked at many times in the past is back giving us a nudge.

LONDON, March 7 (Reuters) – The euro briefly sank below parity versus the Swiss franc for the first time in seven years on Monday and held at a 22-month low versus the dollar as soaring oil prices stoked fears of a stagflationary shock that could hammer Europe.

My interest is not this new phase of Euro weakness but the strength of the Swiss Franc and its rise to parity with the Euro. Let me illustrate the point by taking you back to the 15th of January 2015.

The Swiss National Bank (SNB) is discontinuing the minimum exchange rate of CHF 1.20 per euro. At the same time, it is lowering the interest rate on sight deposit account balances that exceed a given exemption threshold by 0.5 percentage points, to −0.75%.

It is hard now to explain what a big deal this was at the time but let me start by noting that it was 1.20 then and 1.00 now and this is how they described 1.20 at the time.

The minimum exchange rate was introduced during a period of exceptional overvaluation of the Swiss franc and an extremely high level of uncertainty on the financial markets. This exceptional and temporary measure protected the Swiss economy from serious harm. While
the Swiss franc is still high, the overvaluation has decreased as a whole since the introduction of the minimum exchange rate.

They thought it was so bad they promised this.

The SNB is prepared to purchase foreign currency in unlimited quantities and to take further measures, if

Hedge Fund

They ended up with so much currency intervention that the SNB became a hedge fund holding over 938 billion Swiss Franc’s worth of foreign currencies. As central banks mostly hold shortish term bonds it was one of the forces driving Euro area yields lower and into negative territory in a form of international QE. In addition it started buying equities ( 20% of the fund) in an attempt to diversify and mostly invested in the US pumping up the price of Apple and Google and the like.

This morning the annual results were released and we were told this.

The profit on foreign currency positions was CHF 25.7 billion (2020: CHF 13.3 billion)

Underneath this there was quite a lot going on.

There was a divergence between bond and equity valuations. A price loss of CHF 16.1 billion was
recorded on interest-bearing paper and instruments. Equity securities and instruments on the
other hand registered a price gain of CHF 37.1 billion

Also Switzerland plunged into the icy cold world of negative interest-rates something from which it has never escaped as they remain at -0.75%. After all that it is now at parity.


There are various reasons for the rise of the Swiss Franc and we can start with its reputation as a safe haven. So to an extent the situation is a bit circular as it is rising because people think it will! Another factor leading to Euro weakness and hence relative Swiss Franc strength is the amount of energy imported by Euro area countries.

Another factor is the relative lack of inflation.

03/03/2022 – The national consumer price index (CPI) increased in February 2022 compared to the previous month by 0.7% and reached the level of 102.4 points (December 2020 = 100). Compared to the corresponding month of the previous year, inflation was +2.2%. This is the result of figures from the Federal Statistical Office (BFS).

As you can see this is much lower than being experienced elsewhere except for Japan and is particularly noticeable in its difference to its neighbour the Euro area. One reason for this is below.

Switzerland has the lowest carbon intensity among all IEA countries, owing largely to the carbon free electricity sector that is dominated by nuclear and hydro generation.  ( IEA)

Ironically they had decided to meddle with this.

However, following the 2017 decision of the Swiss people to gradually phase out nuclear power, Switzerland’s energy sector is now undergoing a considerable transition.

I think a change of mind may be on its way but for now Switzerland is in a relatively strong position in an area that this morning is causing a of trouble elsewhere.

UPDATED: European natural gas prices zoom to a fresh all-time high, rising >75% today. Benchmark TTF is trading above €345 per MWh. ** That’s equal to more than $100 per million Btu, or more than to $600 a barrel of oil equivalent ** (I promise you there are not typos there). ( @JavierBlas )

Switzerland does import oil and will be unable to avoid inflation from what seemed to be one of the hot topics on social media over the weekend which was petrol/diesel/gas prices at the pump. But is relatively in a strong position.

Also the economy recovered from the pandemic with relative speed.

According to provisional results available, GDP for 2021 grew by 3.7%.4 The Swiss economy
thus recovered relatively swiftly from the slump experienced in 2020 (–2.4%). By summer
2021, value added had already exceeded pre-pandemic levels.

The SNB has been indulging in the online equivalent of open mouth operations this morning. Via @PriapusIQ

The Swiss Franc Continues To Be Highly Valued

They seem to have forgotten the word “more” in that statement. Followed by the usual promise.

Swiss National Bank Says The Snb Remains Prepared To Intervene In The Foreign Exchange Market If Necessary.

Eastern Europe

Regular readers will recall that the run-up to the collapse of the SNB exchange-rate peg had as a feature a lot of borrowing in Swiss Francs across eastern Europe.It happened because the interest-rates were lower but ended up losing far more in capital losses as the Swiss Franc soared. There were a lot of Swiss Franc mortgages for example.

Let me start with Hungary this morning.

The forint led the losses among central Europe markets and hit all-time lows of 400 to the euro. By 0909 GMT, it was down 3.4% at 399.0 to the euro…….Last week, the forint posted its biggest weekly loss and has lost more than 8% since Feb. 24, the beginning of Russia’s invasion,  ( Reuters)

If you are in trouble against the Euro ( and there was also borrowing in it) you will be in even more trouble against the Swiss Franc.

Now Poland.

Poland’s zloty was down 2.25% at 4.9615 to the euro, just off a record low of 4.9625 hit in the session. Last week, the Polish central bank also sold foreign currency for zlotys to prop up the currency. ( Reuters )


The Czech central bank said last week that it was intervening in markets against excessive fluctuations and depreciation of the crown. It did not comment on Monday whether it was active in markets.

The crown was down 0.8% on the day at 25.854 to the euro, falling less than peers in central Europe.


The issue of a strong Swiss Franc has a range of implications. The most obvious is for Switzerland itself where it will help with inflation but will make exports more expensive and imports cheaper. There were stories about the Swiss shopping across the border in the past but for now whilst their Francs go ever further prices have risen by more abroad.

But there is a large international issue from this and the borrowing problem may be reduced but has not gone away as this from January 29th shows.

Legislators in Slovenia will vote on Monday on a measure to make banks repay hundreds of millions of euros to foreign currency borrowers, with lenders warning that the measure would undermine their operations in the Alpine nation. Slovenia was one of a number of eastern European countries where consumers seized on the opportunity to borrow at low interest rates more than a decade ago in currencies such as the Swiss franc, only to face a big hit when exchange rates moved against them during the financial crisis. ( Financial Times)

Slovenia is a Euro area nation so will be affected by its fall. But as we have noted borrowers elsewhere will have been hit even harder as the crown, forint and zloty have been hit harder.

Then there is the issue of the Swiss National Bank which via its foreign currency intervention now has a hedge fund wing. It has lost hand over fist on the intervention which is an issue for the Swiss. This is more complex when we add in the equity and bond profits from its investments although the equity investments are presently in a rough patch. Then there is the wider issue of many markets being effectively propped up by SNB buying.

As a final point I expect them to be defending the parity level so the saga continues.



The road to negative interest-rates is paved with central bank digital coins

It was only yesterday we took a look at a central bank raising interest-rates and operating in a conventional manner. Today we can note what is pretty much a binary opposite which is the European Central Bank or ECB. Regular readers will be aware that as well as its negative interest-rates ( -0.5% Deposit Rate and -1% for banks)it has been tilling the ground for even deeper negative interest-rates for some time now. The last few days have seen an acceleration in the PR campaign for this as to continue the imagery Farmer Panetta of the ECB Executive Board has given not one but two speeches on the subject. Here he is from this morning.

A digital euro would be a central bank liability made available in digital form for use in retail payments
• Aim: maintain public access and full usability of central bank money in a world where consumers and firms are turning increasingly towards electronic payments.

He has not made much of a case here has he? For example last night I went to the supermarket for a few things and paid electronically without any need for any central bank involvement. Indeed only last week he pointed out that the world is innovating at pace.

Payments are no exception: innovative forms of private digital money are emerging in response to changing needs, which are transforming how we pay and the payment landscape more broadly.

I remember the first time I saw someone pay via their smartphone and feeling a little antediluvian as I had put some cash in my bag to pay for my physio appointment. But we do not need Farmer Panetta for this as it is going well without him.Unless of course that is his fear.

It has been argued that such a central bank digital currency (CBDC), if issued, would be redundant given the vast supply of private digital monies available, including bank deposits, credit cards, electronic money and mobile applications, and possible future payment solutions based on stablecoins.

The War on Cash

Farmer Panetta seems to have forgotten the war on cash undertaken by the ECB. The scrapping of the 500 Euro note for example with the claims that it was used by terrorists, money launderers, drug dealers and the like.

Convertibility at par provides confidence in private money because it reassures us regarding its ultimate value and its usability for payments. For example, when we go to our bank’s cash machine and convert our deposits into an equivalent amount of cash, we are safe in the knowledge that our deposits have kept their value.

Nobody seems to have told him about the present inflationary burst which means that cash has not kept its value. Over the past year it has reduced the value of cash by 4.1% according to Eurostat and of course more if you are a first time buyer of property. Fortunately most retail savers have avoided negative interest-rates but some are losing an extra 0.5% via negative interest-rates on deposits. Although of course not on cash which is a moot point.

It did not take too long for a familiar line of attack to appear.

Today we have access to central bank money in the form of cash. The importance of cash in payments is declining, however, as people increasingly prefer to make digital payments and shop online.

Even the pandemic can be deployed as it has led to a boost for electronic payment.

If given the choice, almost half of euro area consumers would prefer to pay with cashless means of payments, such as cards. Internet sales in the euro area have doubled since 2015.

As so often with central bankers the real world diverges from their rhetoric. He has been cherry-picking the data because in fact the demand for cash has risen as he is forced to admit.

And while the cash stock has continued to increase and has even been boosted by the pandemic owing to higher precautionary demand for cash, only about 20% of the cash stock is now used for payment transactions, down from 35% fifteen years ago.

Yes cash is in such a bad way there is more demand for it! Just like with inflation he has to cherry-pick components as otherwise he has just torpedoed his own argument. Mind you the desperate link to postage stamps leaves him splashing around for relevance.

If these trends were to persist and accelerate, cash would end up losing its central role and becoming a means of payment that people would be reluctant to use because it would be less adapted to their needs. Just as the postage stamp lost much of its usefulness with the arrival of the internet and email, so too could cash lose relevance in an economy that is becoming increasingly digital.

So if the trend for higher cash demand were to persist cash would lose its central role Fabio? He gets more desperate here as again as reality is inconvenient he has to climb on his cherry-picker yet again.

Even central banks’ pledge to continue to supply cash would do little to guarantee that cash would remain an effective anchor if there was insufficient demand for it as a means of payment.

Here it comes!

As people start to use cash more as a store of value rather than a means of payment, having a digital euro would enable them to continue using central bank money as a means of exchange in the digital era.

Actually the private sector has been doing rather well as Fabio was forced to admit earlier and that of course is the source of the problem. The technology companies have done so well that they have grabbed a technological and comparative advantage. To return to my earlier example the use of smartphones to pay has proven both safe and convenient meaning it has spread like wildfire as a means of payment bypassing the banks. That is one fear for Fabio and the other is that what if they ran a choice of currency with the US Dollar picking up ground? The Euro itself could be under threat as a high-tech version of the Dollar competes with the Zombie Euro banks.

In fact a central bank digital coin is so good people may not realise it.Presumably in the same way that they do not realise that inflation is good for them.

Users may lack sufficient incentives to fully appreciate the public benefit created by the availability of a CBDC and – given the vast supply of private digital monies – could express insufficient demand for it.

Indeed it would allow people to do what they er do already….

For consumers, the digital euro would offer a cost-free and convenient way to pay digitally anywhere in the euro area. I

Hands up who can recall the record of public bodies with what was private data before they got their hands on it?

It would also increase privacy in digital payments: as a public and independent institution, the ECB has no interest in monetising users’ payment data and it could only process them to the extent necessary for the functions of the digital euro, in full compliance with public interest objectives and EU legislation.

Back in the real world the state would immediately know all your transactions.

So a 100% monopoly is better than an oligopoly?

Moreover, a digital euro could contain the cost of payments through its potential to mitigate the market power of dominant digital payment providers, which already control around 70% of European card payments.

Even worse for Fabio is that the oligopoly has provided a wave of innovation as he was forced to admit earlier.


The central banks are afraid of the increasing digitalisation of money. It weakens their power and of course weakens their most precious institution the banks. The tech companies have proven to be far more light-footed than the banks. This provides a particular problem for the Euro area as its leaden-footed banks find that the US tech companies are like Mo Salah dribbling through them. This is a deeper issue as the last decade has essentially been one of protecting the banks who now are under fire from another source.

This is linked to the particular problems of the Euro which have led it to go as far as it thinks it can with its -0.5% and -1% interest-rates. But it fears (correctly in my view) that on its present road it will be singing along with Madonna.

Deeper and deeper and deeper and deeper
Sweeter and sweeter and sweeter and sweeter

But by providing access to a 0% interest-rate cash money stands in the way. So they need a digital Euro to take us to the -3% that Fabio Panetta has mentioned in the past. The only real delay I can see is that to save the banks they will have to destroy them! As a -3% interest-rate will see people dash to both cash and the US tech companies. They want and indeed need to go first but also fear the consequences as what if there is a run on the digital Euro?

Oh and as to the apparent support for cash money. Remember that to stab something in the back you first have to get fully behind it.


Do negative interest-rates make Switzerland a currency manipulator?

When we consider the impact of negative interest-rates then we can learn a lot from Switzerland which qualifies by both how low they have gone and how long it has had them. The saga began back pre credit crunch when the combination of low Swiss interest-rates and ones higher elsewhere particularly in Eastern Europe was seen as an opportunity by some bright sparks. They organised deals where for example mortgage borrowers in Eastern Europe could borrow at near ( there was a fee of course) Swiss Franc interest-rates.Everyone’s a winner or so it appeared although the risk ( that borrowers had a currency position short the Swiss Franc) was there.

When the credit crunch hit the latter issue came to the front of investor’s minds and indeed to foreign currency borrowers wallets and purses. The safe haven status of the Swiss Franc saw it rally from its artificially depressed level and this was added to by the beginning of reversals of the carry trade. If we look at the Hungarian Forint we see that a pre credit crunch exchange rate of 143 was replaced by one of 200 in about 6 months and 260 at the end of 2011. As monthly mortgage payments were based in this there was a house of pain but from the point of view of the Swiss their currency rapidly became expensive.

Currency Manipulator

We can in fact bring this up to date.

WASHINGTON (Reuters) – The U.S. Treasury labeled Switzerland and Vietnam as currency manipulators on Wednesday…….. the Treasury said that through June 2020 both Switzerland and Vietnam had intervened in currency markets to prevent effective balance of payments adjustments.

Let me now switch to this mornings policy meeting at the Swiss National Bank.

In the light of the highly valued Swiss franc, we remain willing to intervene more strongly in the
foreign exchange market. In so doing, we take the overall exchange rate situation into consideration.

Not much rolling back there and President Thomas Jordan went further here.

Second, the negative interest rate and our foreign exchange market interventions counter the upward pressure on the Swiss franc. This pressure is especially high in periods of uncertainty,and a strong appreciation would weigh particularly heavily on the economy in the crisis. We
have therefore made considerable foreign exchange purchases this year to maintain appropriate monetary conditions.

More precise details were given by board member Maechler.

On a trade-weighted basis, the Swiss franc is almost 1.5%
stronger in nominal terms than at the end of June. It thus remains highly valued. As reported in our interim results, we carried out foreign exchange market interventions
totalling CHF 90 billion in the first half of this year. On a trade-weighted basis, the Swiss franc has strengthened some 5% in real terms since the beginning of 2020.

Indeed there was also this.

Indeed only last night the US Federal Reserve confirmed my To Infinity! And Beyond! Theme.

In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.

For the moment it would appear that the US Federal Reserve is winning the currency wars.

Before I move on there is something of a curiousity in currency markets.

It may, then, provoke some alarm that the latest auction of three-month loans from the Swiss National Bank saw $1.2bn-worth of dollars granted, leaving the total amount of these loans outstanding at just short of $5bn. While that is nowhere near as high as during the spring — when around $11bn was outstanding — a few months ago the figure was less than $1bn. ( FT Alphaville 1st of December)

Actually I have just checked and it is now some US $7.2 billion according to the New York Fed. An extra US $1.34 billion was borrowed on the 9th for 84 days so taking us comfortably beyond the year end as someone sings along with Aloe Blacc.

I need a dollar, dollar a dollar is what I need
(Hey hey)
Well I need a dollar, dollar a dollar is what I need
(Hey hey)
And I said I need dollar dollar, a dollar is what I need
And if I share with you my story would you share your dollar with me

The Policy Rate

This saga starts simply.

The SNB is keeping the SNB policy rate and interest on sight deposits at the SNB at −0.75%.

It is the leader of the negative interest-rates pack for official rates although of course banks in the Euro area can access cash at -1%. Also it looks as though it will not be rising for quite some time.

In the longer term, the inflation forecast is unchanged from
September. The forecast for 2020 is negative (−0.7%). The inflation rate is likely to be higher again next year (0.0%) and slightly positive in 2022 (0.2%). The conditional inflation forecast is based on the assumption that the SNB policy rate remains at −0.75% over the entire
forecast horizon.

Indeed even if that were not true this would keep it there.

However, in October coronavirus also spread rapidly again in Switzerland. This has resulted
in a renewed deterioration in the economic outlook. The containment measures implemented
thus far are restricting economic activity less than was the case in the spring. Nevertheless,
momentum is likely to be weak in Q4 2020 and Q1 2021.
The SNB expects that GDP will shrink by around 3% this year.

So the idea that negative interest-rates would stop recessions has not worked.

Also there is this.

A moderate decline in yields was also observed in Switzerland. For example, the latest reading shows the yield on 10-year Confederation bonds just below the
mid-year values, at around –0.6% ( SNB)

As you can see the Swiss yield curve is almost flat and having just checked the thirty-year yield ( -0.37%) we see that not only does that continue but the Swiss are being paid to borrow across the yield curve. I wonder if they issued a century bond whether that would remain true?


I have left until now the point that this has lasted nearly 6 years. So any argument that this would be temporary has long gone and in fact it looks ever more permanent. Indeed 2020 has been more likely to see a further cut than a rise. This means that long-term investment has a problem as Swiss Info pointed out earlier this year.

Savers: For some years now, savings have been earning interest at rates just above zero.

Pension funds: Until about ten years ago, pension funds were able to pay substantial interest to their policyholders, thereby making a significant contribution to the growth of their old-age assets. This is no longer the case………The state pension scheme also faces similar problems, although to a lesser extent.

On the other side of the coin the SNB is in fact setting policies which help the government finance itself.

The State: With a total debt of almost CHF200 billion, the government, cantons and municipalities have largely benefited from the low cost of money.

Oh and the housing market.

Property owners: Because mortgage interest rates have been at unprecedentedly low levels for several years, property owners also benefit from negative interest rates. At the same time, the prices of houses and apartments in many regions of Switzerland have practically doubled within a decade.

Who gave the central bankers the power to transfer money from one group to another?

Japanification and Turning Japanese

As we approach the end of 2020 the subject of Japan and its economy should be in our thoughts.There is the traditional Japanese policy of introducing moves when us gaijin are celebrating Christmas and the New Year. Also there is the issue of us turning Japanese a subject we have been noting for years but has been rebadged as Japanification.

Interesting article in Asia Times, addressing how the Japanese government basically nationalized the Japanese stock market ( The Market Ear)

Here is the Asia Times.

The concept of a creature dining on its own tail – suggesting a self-generated growth cycle – is a macabre one. So how about blowing it up to its logical limit: A whale eating its own tail?

In fact, this “whale of a tale” – excuse the puns – is exactly what is happening in Japanese financial circles.

Slightly different from The Restaurant At The End Of The Universe where it is a cow which advises you to eat it but in line with out Tokyo Whale theme. It then goes further.

The Bank of Japan recently became the nation’s top holder of stocks, owning more than US$430 billion’s worth. That means Japan’s monetary authority is now the nation’s investment “whale” – pulling the title away from its Government Pension Investment Fund, or GPIF.

There are several contexts here. It is interesting that the state and the central bank are not being separated in a trend I welcome. It is only really those who want a job at a central bank who plug the line that they are independent these days. On a technical level such purchases have to be backed by the national treasury in case of losses at which point the central bank is singing along with Colonel Abrams.

Oh, oh I’m trapped
Like a fool I’m in a cage
I can’t get out
You see I’m trapped
Can’t you see I’m so confused?
I can’t get out

As to nationalisation I think we are on that road but not fully there yet. You can indeed control something by owning less than 100% of it but I do not think that 35.1 trillion Yen and rising is enough. So far in December the Tokyo Whale has contented itself with a light snack of 1.2 billion Yen a day of purchases. On the other side of the coin it has been associated with a much higher equity market with a succession of near 30 year highs being recorded on its way to 26.732.

Looking at from a flow point of view with the Tokyo Whale buying large amounts on down days we do get closer to a nationalisation point of view. Anyway it is in at around 19,500 so has a profit which is over 10 trillion Yen according to the NLI ( Nippon Life) Research Institute. Of course taking the profit is rather problematic because we are at these levels because of the purchases. A perspective on this is provided by the fall in March to 16.358 when the Tokyo Whale was losing quite a bit. Been quite a rocker ride since then hasn’t it? So well done if you have been long.

The Yen

Here I plan to look at the Yen versus the place which looks in most danger of Turning Japanese which is the Euro area. First let me address the US Dollar where if we ignore the March moves the Yen has been around 104 for a while. There is a cautionary note because many of you may remember that it going there in early 2019 in the “flash rally” was a shock and indeed an overnight one. So the Yen has been both strong and mostly stable neither of which fits with the Abenomics arrow for this area.

Now let me switch to this morning and here is the Reuters Global Markets Forum.

#ECB‘s Panetta Says Inflation Will Remain Subdued For A Protracted Period… Panetta Says For Monetary Policy, This Means Providing Certainty About Financing Conditions Well Into The Future; Says The #PEPP Envelope Can Be Further Expanded And Extended, If Warranted.

He could be describing Japan where inflation has been subdued for decades now. As of October there was a complete failure for the Bank of Japan as the CPI was -0.4% as opposed to the 2% which is apparently always around the corner. In the Euro area inflation was -0.3% and is expected to be -0.3% for November as well.

The idea of QE bond purchases being extended is very Japanese too as I stopped counting when we were on the nineteenth version of it in Japan. Indeed it must have been seen as a loss of face as it was officially renamed QQE to solve that problem. Or as the Asia Times put it.

Two years ago, the BOJ’s balance sheet surpassed the size of Japan’s $5 trillion economy amid governor Haruhiko Kuroda’s quest to end deflation.

Switching to interest-rates then in theory at least the Euro has the advantage in the global depreciation game with a deposit rate of -0.5% versus the -0.1% of the Bank of Japan. But the crucial point here is that it is the Euro which has been rallying and is at 126 Yen. It has a way to go to reach the 135 of January 2018 but over the past year it has been rising.

Conventional metrics may be failing us here and it may be the interest-rate differential that is weakening the Euro via a new carry trade. If so it may be stronger than it looks.

The economy

This is far from inspiring as this from the NLI ( Nippon Life) Research Institute highlights.

The real GDP growth rate is forecast to be minus 5.2% in FY 2020, 3.4% in FY 2021 and 1.7% in FY 2022. It will take
time for the level of economic activity to return to pre-Corona levels, as securing social distance will continue to curb the consumption of face-to-face services. Real GDP levels will recover to pre-Corona levels (October–December
quarter of 2019) in the July–September quarter of 2022. The economy will return to its most recent peak (July–
September 2019) before the consumption tax hike in FY 2023.

This morning has brought some slightly better news from the Tankan survey.

TOKYO (Reuters) -Japanese business sentiment improved at the fastest pace in nearly two decades in October-December, a key central bank survey showed, a welcome sign for the economy as it emerges from the initial hit of the coronavirus pandemic.

But companies slashed their capital expenditure plans for the year ending March 2021 and a measure of near-term sentiment worsened, as a resurgence of infections reinforces expectations any recovery in the world’s third-largest economy will be fragile.

Again we are left mulling something of a similarity between the Euro area and Japan in terms of economic prospects.


There is another familiar beat to all of this so let me dip back into last week.

TOKYO (Reuters) – Japan announced a fresh $708 billion economic stimulus package on Tuesday to speed up the recovery from the country’s deep coronavirus-driven slump, while targeting investment in new growth areas such as green and digital innovation……..The package, approved by cabinet on Tuesday, would bring the combined value of coronavirus-related stimulus to about $3 trillion – roughly two-third the size of Japan’s economy.

Money is being fed into the system and looking back this is a case of same as it ever was. Yet the problems do not get solved as we observe a feature of Japanification we have all copied which is the central bank financing its government via its bond purchases. Not explicitly but implicitly.

In spite of the issues with this we have copied it and I have pointed out before the Euro area seems nearest with its trade surplus and strong currency giving it a touch of The Vapors.

I’m turning Japanese
I think I’m turning Japanese
I really think so
Turning Japanese
I think I’m turning Japanese
I really think so



What is happening to the economy of Germany?

As both the largest economy and indeed the bellweather for the Euro area Germany is of obvious importance. This morning has brought us more up to date in the state of play. Firstly the statistics office has continued to update its data on the quarter just gone.

WIESBADEN – The gross domestic product (GDP) rose by 8.5% in the third quarter of 2020 compared with the second quarter of 2020 after adjustment for price, seasonal and calendar variations. Thus, the German economy could offset a large part of the massive decline in the gross domestic product recorded in the second quarter of 2020 due to the coronavirus pandemic. However, the price-, seasonally and calendar-adjusted GDP was still 4.0% lower in the third quarter of 2020 thanin the fourth quarter of 2019, that is the quarter before the global coronavirus crisis.

That is an improvement of the order of 0.3% on what was previously thought. This does in fact give us a partial V-Shape as you can see below.

In the circumstances that is a reasonably good performance and the statistics office puts it like this.

For the whole EU, Eurostat released a preliminary result of -4.3% for the third quarter of 2020. The United States also recorded a strong decline of their gross domestic product (-2.9%, converted figure) compared with the third quarter of 2019. In contrast, year-on-year GDP growth as published by the People’s Republic of China amounted to 4.9% in the third quarter.

There is another context which is that the German economy had previously been struggling. This began with the 0.2% decline at the opening of 2018 which was claimed to be part of the “Euro Boom”. Economic growth was a mere 1.3% in 2018 which then slowed to 0.6% in 2019 so we can see that there were pre pandemic issues.

The Breakdown

I thought that I would switch to the labour market for this and an ongoing consequence for other areas.

The labour volume of the overall economy, which is the total number of hours worked by all persons in employment, declined even more sharply by 4.0% over the same period.

I am using a measure of underemployment as the international definition of unemployment has simply not worked. Next we can switch to wages.

According to first provisional calculations, the compensation of employees was down by just 0.7% year on year, while property and entrepreneurial income fell sharply by 7.8%. On average, gross wages and salaries per employee fell by 0.4%, while net wages and salaries rose slightly by 0.5%.

So we see a familiar situation of income being supported by the furlough scheme although outside it there has been quite a hit. But as there have been restrictions on spending we see a surge in saving.

According to provisional calculations, the savings ratio was 13.5% in the third quarter of 2020.

We wait to see what will be the full economic impact of a surge in involuntary saving but here is the flip side.

Household final consumption expenditure at current prices, however, showed a decrease of 4.0%.

What about now?

This morning has brought the latest update from the Ifo Institute.

Munich, November 24, 2020 – Sentiment among German managers has deteriorated. The ifo Business Climate
Index fell from 92.5 points in October to 90.7 points in November. The drop was due above all to companies’
considerably more pessimistic expectations. Their assessments of the current situation were also a little worse.
Business uncertainty has risen. The second wave of coronavirus has interrupted Germany’s economic recovery.

It is the services sector which has taken the brunt of this.

In the service sector, the Business Climate Index dropped noticeably. For the first time since June, it is back in
negative territory. Assessments of the current situation are much less positive than they were. Moreover,
substantially more companies are pessimistic about the coming months. The indicators for hotels and
hospitality absolutely nosedived.

The one area which has managed some growth is manufacturing.

This month’s bright spot is manufacturing. The business climate improved here, with companies assessing their
current situation as markedly better. Incoming orders rose, albeit more slowly than last month. However,
expectations for the coming months turned notably less optimistic.

Although as you can see the new restrictions due to Covid-19 have affected expectations. But the picture for the overall economy was that things continued to improve in October but have now reversed. So the vaccine news has not impacted expectations there yet and the V-Shape above will see at least a kink. The general view is similar to that given yesterday by the Matkit business survey.

New lockdown measures to curb the spread of
coronavirus disease 2019 (COVID-19) led to an
accelerated decline in services activity across
Germany in November, latest ‘flash’ PMI®
from IHS Markit showed. However, the country’s
manufacturing sector continued to exhibit strong
growth, helping to support overall economic activity.

They did however hint that the Far East is helping German manufacturing.

which the survey shows is
benefitting for growing sales to Asia in particular.

Financial Conditions

These remain extraordinarily easy. There is the -0.5% deposit rate of the ECB with the -1% interest-rate for the banks. Then there is the enormous amount of bond buying which under the original programme ( PSPP) totaled some 562 billion Euros at the end of October. It is a sign of the times that there is another buying programme as well as the ECB tries to muddy the waters and as of the end of September it had bought another 125 billion.

Today Germany issues a two-year bond and it will be paid to do so as the yield is -0.75% as I type this. Furthermore this yield has been negative for over 5 years now as that state of play looks ever more permanent. Indeed with the thirty-year at -0.16% the whole yield curve is negative.

Switching to the Euro exchange-rate things are not so bright. If we take a long-term context Germany joined to get a weaker exchange-rate. However in recent times it has been rising and the effective index is at 121.5 or 21% higher than when the Euro began. Whilst November has seen a dip the index started 2020 at 115.


The context is that at the end of the third quarter the German economy had grown by 2.7% compared to the 2015 benchmark. But the news restrictions mean that it has “And it’s gone” to quote South Park. There are vaccine hopes for 2021 now but 2020 looks like being a year to forget.

This brings us to the role of the ECB which is already heavily deployed. Can it respond to the latest dip? Not in any timely way as we note the lags in the system. Also for Germany there is not a lot more that can be done in terms of interest-rates or bond yields as all are heavily negative. The wheels of fiscal policy are being oiled by this as well. Looking at it like that only leaves us with the Euro exchange-rate. Can ECB President Lagarde fire a “bazooka” at that? As I pointed out yesterday looking at the UK with all central banks easing that is easier to say than do.

Meanwhile returning to the world of finance there is this.

FRANKFURT (Reuters) – Germany’s blue-chip DAX index will expand to 40 from the current 30 companies with tougher membership criteria, exchange operator Deutsche Boerse said on Tuesday.

In general a good idea as it is too narrow an index for an economy the size of Germany, especially in the light of this.

The most recent departure was payments company Wirecard, which in a blow to Germany’s capital markets, filed for insolvency just two years after its promotion to the index. The payments company owed creditors billions in what auditor EY described as a sophisticated global fraud.

The perils of indexation?



Will the rally in the Turkish Lira last?

This week has brought a pretty much text book example of what can happen when a currency is in distress as well as a reminder of perspective. Let me start with the trigger for some changes which came last weekend.

The shock departure of finance minister Berat Albayrak, who is President Tayyip Erdogan’s son-in-law, and central bank chief Murat Uysal over the weekend gave the lira its best day in over two years on Monday.

Investors hope their successors will deliver another of the country’s pirouettes, where long-suppressed interest rates are lifted dramatically, providing the currency with some much-needed relief. ( Reuters)

There is a lot going on there. But let’s start with a possible end or at least reduction in cronyism. There we have an unusual mention of a Lira rally followed by a curious mention of “long-suppressed interest-rates”. That depends on your perspective because in these times the rate below is rather extraordinary as it is.

keep the policy rate (one-week repo auction rate) constant at 10.25 percent,

Back on October 12th we noted a change in swap rates to 11.75% to try and support the Lira but in what may seem extraordinary a 1.5% move in these circumstances is not much. The real issue when an interest-rate is trying to support a currency is the gap between it and others. This week we have looked at an interest-rate maybe reaching 1% in the US ( ten-year bond yield) and Japan where we are around 0% so there is quite a gap. Even those are high relative to the -0.5% of the Euro and the around -0.5% of the German ten-year yield and of course there is a lot of trade between the Euro area and Turkey.

The textbook

Put mostly simply a currency is helped by an interest-rate advantage as investors include it in their calculations of expected capital gains. The problem in practice is that in times of real distress the expected currency falls are much larger than any likely interest-rate increase. I provided an example of this back on the 12th of October.

Because of the economic links the exchange-rate with the Euro is significant. Indeed some Euro area banks must be mulling their lending to Turkish borrowers as well as Euro area exporters struggling with an exchange-rate of 9.32. That is some 43% lower than a year ago.

So even with a pick-up of the order of 11% you have lost 32% over the past 12 months.

However this can change rapidly because the moment there is any sort of stability the carry is suddenly rather attractive. After all you can get more in the Turkish Lira in a month than most places in a year and in some cases you can do that in a week. This leads to the situation suddenly reversing and giving us this.

ISTANBUL (Reuters) – Turkey’s lira firmed on Friday to its strongest level in seven weeks, notching a weekly gain of some 12%, after President Tayyip Erdogan’s pledge to adopt a new economic model raised expectations of a sharp rate hike from the central bank.

So we have seen a jump higher in the Lira with expectations now of this.

The central bank is seen raising its policy rate next week to 15% from 10.25%, a Reuters poll showed. Erdogan’s speech was viewed as implying he would condone such a hike.

So the expected carry is even higher and for once there is a capital gain. Some will like this although I have to confess if I had been long the Lira this week I would be considering the advice of the Steve Miller Band.

Hoo-hoo-hoo, go on, take the money and run
Go on, take the money and run
Hoo-hoo-hoo, go on, take the money and run
Go on, take the money and run

As whilst there may be changes there are icebergs waiting for this particular Titanic.

In contrast to previous episodes of lira turmoil, the central bank is estimated to have burnt through more than $100 billion of reserves this year, leaving it effectively around $36 billion overdrawn on those reserves, according to UBS.

The central bank has not commented on analysis suggesting its reserves are ‘net’ negative, though it has said its buffers fluctuate naturally in times of stress. ( Reuters)

So “buffers fluctuate in times of stress” can be added to my financial lexicon for these times.

The economy

There has been some better economic news this morning especially from consumption.

There was better news for retail sales in the country on Friday. The volume of goods purchased by consumers increased by an annual 7.8 percent in September after 6 percent growth in August, the statistics institute said. The monthly increase was 2.8 percent, more than three times the August figure of 0.9 percent. ( Ahval)

Also industrial production rose although Ahval is rather downbeat about it.

Industrial output in the country expanded at the slowest pace on a monthly basis since the outbreak of the coronavirus in March, official data published on Friday showed. Production increased by 1.7 percent month-on-month in September compared with 3.4 percent in August and 8.4 percent in July……..Manufacturing of non-durable goods in the country grew by just 0.6 percent month-on-month in September, the Turkish Statistical Institute said. Production of intermediate goods expanded by 0.7 percent.

There is a catch though in that the better retail sales news rather collides with one of the ongoing economic problems which is the trade deficit.On Wednesday the central bank ( CBRT) updated us about this.

The current account posted USD 2,364 million deficit compared to USD 2,828 million surplus observed in the same month of 2019, bringing the 12-month rolling deficit to USD 27,539 million.

So the passing twelve months have brought a switch from a monthly surplus to deficit and we see that the annual picture is the same. The driving forces of this are below.

This development is mainly driven by the net outflow of USD 3,709 million in the goods item increasing by USD 3,044 million, as well as the net inflow of USD 1,692 million in services item decreasing by USD 2,869 million compared to the same month of the previous year.

One of the issues of economic theory is applying theory to practice. But the expected J-Curve improvement in the trade balance has collided with another currency plunge starting the clock all over again. It has created quite a mess as one clear impact of the Covid-19 pandemic has been on a strength for Turkey which is tourism. Back on October the 12th I noted the numbers for this.

 If we look at the year so far we see this is confirmed by a surplus of US $4.15 billion as opposed to one of US $19.17 billion in the same period in 2019. Another way of looking at this is that 3,225,033 visitors are recorded as opposed to 13,349,256 last year.

Next at a time of currency crisis comes inflation as imports become more expensive.

A rise in general index was realized in CPI (2003=100) on the previous month by 2.13%, on December of the previous year by 10.64%, on same month of the previous year by 11.89% and on the twelve months moving averages basis by 11.74% in October 2020. ( Turkey Statistics)

That may look bad enough but there are two additional kickers. The first is that this is on the back of previous inflation and the second is that far from responding wages have gone the other way putting quite a squeeze on living-standards.

Gross wages-salaries index including industry, construction, trade-services sectors decreased by 8.4% in the second quarter of 2020 compared with the same quarter of the previous year. When sub-sectors are examined; industrial sector decreased by 5.2%, construction sector decreased by 8.6% and trade-services sector decreased by 10.5%. ( Turkey Statistics)


I promised at the beginning to give some perspective and we get some from looking at the exchange-rate on October 12th which was 7.87 versus the US Dollar and considered a crisis then and the 7.67 as I type this. So better but not by a lot as the rally memes are compared to the 8.58 of last Friday. Thus we have a move for financial markets but for the real economy not so much. It can be looked at in terms of what used to be described as the Misery Index where you add inflation to the unemployment rate which gives you a number around 25% or very bad.

The CBRT looks to have rather boxed itself in on an increase in interest-rates to 15% next week. But whilst it may provide some currency support for a time these are Catch-22 style moves. Because such an interest-rate will provide yet another brake to the domestic economy just at a time it can least afford it. After all whilst a vaccine provides hope for the return of mass tourism in the summer of 2021 that is a while away and is still just a hope, albeit a welcome one. Then there is the vaccine hopium of this week as we mull how much of this week’s Lira rise was due to it?