FX markets

China, the USA and the “Potemkin Villages” of FX stability

The USA and China are on the verge of making a breakthrough to a new trade treaty. The subject of “foreign exchange” is said to play a key role and there are apparently “exactly defined structural agreements” in place – we wait with bated breath to see what they look like. The speculation to date is that China has promised to take the lid off its interventions in the foreign exchange market. Meaning the emphasis is not on forgoing interventions and also not on ex-ante information or even US permission, but simply on making the interventions more transparent after the event. That said, we should not forget that China has long since ceased to keep the Yuan on the desired track only by resorting to the entrance-level model of forex-policy, namely simply cash market interventions. The structure today is far more complex and includes a mixture of outright, forward and…

Shift in sentiment: currency markets react calmly, while bond markets do not

The view taken by financial market participants vis-a-vis the global fundamental environment has changed considerably in recent months. While economic momentum in the eurozone had already eased noticeably during 2018, estimates in particular for the growth prospects of both the US and the global economy have become less favourable in the past few weeks. Potential reasons for this are easily identifiable: on the one hand, we have the trade disputes between the world’s most important economic powers, the longest government shutdown in US history and the uncertain outcome of Brexit, to name a few. Various central banks have reacted to the new environment impacting on monetary policy. Examples include the downward revision of growth prospects and warnings about heightened risks for the still dominant economic outlook. On the other hand, central banks such as the Federal Reserve and the Reserve Bank of Australia have rejected the idea of previously envisaged…

Bleak monetary conditions in Switzerland

The only thing that the monetary conditions in Switzerland currently have in common with the wonderful winter landscape in many areas of the Alpine republic is the frosty temperatures. Not only did the economic momentum experience a severe setback in the autumn of 2018, the hopes of a return to the robust growth rates recorded between spring 2017 and mid-2018 have now also vanished. The same applies to the vague assurance that the inflation rate would move visibly close to the Swiss National Bank’s target level in the foreseeable future: even the economists of the SNB now expect the 2% threshold to be reached in the second half of 2021 at the very earliest. The domestic leads were not the only factors spawning doubts among the Swiss central bankers over a turnaround in key interest rates towards the end of this year – which until recently had been considered possible….

Eurozone gaining ground: ECB crowding-out effects dwindling

Having only recently focussed on the latest portfolio flow data from the USA, we are now casting a glance at the Eurozone. As is the case in the USA, thus far “only” data up to and including November 2018 have been released, but the trends for the year are nevertheless clearly discernible. While the USA has in recent years benefited from massive repatriation of capital, in the Eurozone capital outflows outweighed, on the part of both foreign investors and above all their local counterparts. In the years 2015 to 2017 this led to capital totalling EUR 940 billion being withdrawn from Euroland, whereby capital exports by local investors came to no less than EUR 1.4 trillion. In 2018 a recovery set in at long last. Domestic investors continued to send capital abroad, but the volume amounted to EUR 155 billion and was thus well down on the figures seen the…

Bank of Japan – the doves are soaring again

The challenges that the Bank of Japan (BoJ) faces when it comes to monetary policy have changed noticeably in recent months. Initially, global factors in the form of the sharp rise in yields on US Treasury bonds put the interest rates on Japanese government bonds (JGBs) under pressure. From November 2018 onwards, the key factor has mainly been an outflow movement not induced by monetary policy. The fact that 10-year JGBs at the end of the year actually slipped into negative territory temporarily was an “occupational accident” in thin trading comparable to the “flash crash” on the foreign-exchange markets. Yet even after the latest correction, JGB yields have not succeeded in significantly climbing past the 0.00% mark. The latest trend in the JGB market may fit into the picture of domestic developments in Japan, especially the setback as regards inflation and growing economic concerns. We should not trick ourselves into…

CE3 countries divided over greater European integration

The European Union (EU) published its latest „Standard Eurobarometer“ at the end of November 2018. Among other things, this survey provides insight into the attitude of the population of the small CE3 countries (Poland, the Czech Republic and Hungary) towards the EU and greater European integration. The majority of the population in all three small Eastern European countries believes that their country is better equipped for the future inside rather than outside the EU. The reasons clearly include financial aspects as well as the desire for economic prosperity. Poland, for example, has been the largest net recipient of EU funds since 2009, and Hungary and the Czech Republic rank fourth and fifth in the league table of net recipients in terms of the corresponding figures for 2017. However, the recent EU survey has also shown that the incentives to join the EU go beyond this financial aspect, with the desire…

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