Are we in an “unspoken” currency war? The People’s Bank of China (PBoC) cut its reserve requirement ratio (RRR) by 50 bps to 19.5%. This will lower the amount of deposits that each bank hold as reserves and add new liquidity into the banking system. The move came after the central bank cut its benchmark interest rate in November, in an attempt to keep the Chinese economy stable. Australia and New Zealand, whose economies are heavily dependent on exports to China, saw their currencies jump on the news but gave back all the gains in the following hour.
Many central banks in their attempt to fight low inflation, which has been intensified by the plunge in oil prices, have taken unprecedented stimulus measures and eased their policies to spur growth. But with interest rates near zero for many countries –or even negative in many cases- and with binding fiscal constraints, it seems that the only tool left to stimulate growth is a weaker exchange rate. A weak currency is likely to boost the countries engaging in currency devaluation, as it will make their exports cheaper and will support growth in their economy. But if everyone is playing the same game and everyone devalues its currency, then who wins? The only “sure” thing is more and higher FX volatility and higher cross-border transactions, whether it is trade in goods or capital flows.
The European Central Bank toughened its stance with Greece’s new government by restricting financing to its direct liquidity lines. In a statement following the meeting they decided to lift the waiver on using Greek debt as collateral. The decision was based on the fact that it is currently not possible to assume a successful conclusion of the program review. The Greek banks can still access funding through the Emergency Liquidity Assistance (ELA), but at a much higher cost to the banks. According to a Greek newswire, the interest rate is 1.55% compared with 0.05% on regular ECB financing. The Greek finance minister will meet his German counterpart during the day, to win support to tackle Greece massive debt burden, even though Germans remain opposed to such plans.
On Wednesday, the US ADP report estimated that the private sector created 213k jobs in January, down from 253k in the previous month, missing expectations of 223k. With just one day ahead of the US employment report, the ADP report suggested that Friday’s non-farm payroll figure may come in over 200k again, consistent with a firming labor market (although there is a lot of variation between the ADP and the NFP reports). In the meantime, the US ISM non-manufacturing PMI moved further into its expansionary territory a touch below it’s almost 9 year peak in June. The strong figure added to the dollar’s gains which recovered some of its previous days loses.
In Canada, the Ivey PMI fell again below the 50 threshold which separates expansion from contraction. The index fell to 45.4 in January from 55.4 in December, missing market expectations of 54.0. USD/CAD surged above the 1.2500 figure ahead of the release and gained another 50 pips as soon as the number was out. Given the recent rate cut by the Bank of Canada, and the slowdown in the headline CPI, I believe that it won’t take us long before seeing USD/CAD challenging again the resistance hurdle of 1.2800, as soon as the oil rally ends.
Today’s highlights: In the UK, the Bank of England meets to decide on its policy rate. There’s little chance of a change in rates, especially after the two policy makers who had been voting for a rate increase dropped their call at the last meeting in the face of falling inflation. As a result, the impact on the market should be minimal, as usual. The minutes of the meeting however, should make interesting reading when they are released on 18th of February, as they may reveal how the Bank plans to act if the inflation turns negative eventually.
From Sweden, industrial production for December are expected to rebound from the previous month. This could prove SEK-supportive.
In the US, initial jobless claims for the week ended Jan.31 and trade balance for December are coming out.
We have several speakers on Thursday’s agenda: ECB Governing Council member Jens Weidmann, Boston Fed President Eric Rosengren and ECB Executive Board member Peter Praet speak. ECB Governing Council member Klaas Knot will speak in Dutch Parliament on ECB’s quantitative easing program.