29 January 2014 The Big Picture • The Turkish Central Bank surpassed expectations by more than doubling its key interest rate to 10% from 4.5% in a late-night meeting last night, as well as raising other benchmark rates. The move was particularly significant as PM Erdogan said yesterday that he was opposed to higher rates, but the central bank defied his wishes. The TRY immediately strengthened by 2.6%, but this just erased the last two weeks of weakening and still leaves the currency as the second-worst-performing currency in the world over the last month or two (after the ARS, which was devalued). Nonetheless the fact that it was willing to take these steps, coming after India’s surprise hike in rates yesterday, improved sentiment in markets and most Asian stock markets were up this morning. Risk-sensitive currencies such as the NOK, AUD and NZD were higher as well and the safe-haven JPY and CHF were lower. In this context the weakness of CAD stands out as indicative of the negative sentiment surrounding the currency. (AUD and NZD may also have been boosted by a report that investors in a troubled high-yield trust will be bailed out, thus averting a possible credit crunch in the country.) Most EM currencies that we track were also higher, with INR, ZAR, MXN and IDR all gaining 1% or more. RUB and CZK were lower however, suggesting that their troubles are more idiosyncratic. • However, if the recent bout of EM turmoil necessitates general tightening of monetary conditions in EM countries, then it is likely to slow down global growth. In this context, I wonder how long the high-beta G10 currencies can continue to gain. Moreover, are the EM countries willing to make the fundamental reforms necessary to renew investor confidence? The independent central banks may be willing, but the governments are a different story. I don’t think the EM turmoil is over. • As mentioned yesterday, EUR is positively correlated with TRY, yet EUR/USD moved slightly lower. This may be because of a story in a German newspaper that the decision by the German constitutional court on the legality of the Eurozone bail-out system has been delayed until April because of intense differences of opinion among the eight judges. A decision was initially expected last October, after the German elections. The longer the case drags on, the less likely it is that the court will agree to the German government’s request for a ruling that underpins the agreed bail-out machinery. The court can force German institutions to withdraw support for EU operations, which would cause the system to lose all market credibility and probably spark another Eurozone crisis. This is potentially a very serious problem that bears watching. It is potentially a big negative for the euro. • The focus of attention today will of course be on the FOMC meeting. The market expects a standard statement following the meeting. From what all the Fed speakers have said, I expect them to continue tapering off their bond purchases at the same pace. The economic data since the last meeting has been mixed but generally positive; although the December payrolls were disappointing, it’s likely that growth in the second half was faster than the Fed expected, so the low level of new jobs may be attributed to the weather. In any case the unemployment rate continues to decline. Inflation is below target but stable. Although unemployment is getting near to their 6.5% threshold, I wouldn’t expect any change in that threshold at the current meeting. The statement is unlikely to mention the recent turmoil in EM, since the Fed has consistently said that it sets monetary policy with regards to the US, not the world. As for the market reaction, at their last meeting in December they were not widely expected to begin tapering and the decision to do so sent EUR/USD lower by around 1 euro-cent. On the other hand, back in September when they were expected to begin tapering and didn’t, EUR/USD immediately jumped by about 2 euro-cents. Those two reactions give the possible extremes in case of a surprise. If they act as the market expects and continue tapering by USD 10bn, EUR/USD could decline slightly, given that there are probably some people who think it might not happen, but I wouldn’t expect a major impact. There is no press conference after the meeting. • As for the indicators, the UK Nationwide house price index is forecast to have slowed in January on a mom basis but to accelerate modestly yoy. Eurozone’s M3 annual growth is estimated to accelerate in December, but the 3-month moving average is expected to slow. Italy’s business confidence for January is estimated to be higher than in December and Norway’s AKU unemployment rate for November is forecast to remain unchanged at 3.3%. There are no major US indicators out. As for the speakers, BoE Gov. Carney speaks at a lunch in Edinburgh. He will hold a press conference after the event. There is also a South Africa Reserve Bank policy board meeting that will probably be more closely watched than usual, given the recent moves by India and Turkey. No change is expected.
Posted on: Wed, 29 Jan 2014 08:30:23 +0000
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