FX markets

China’s 3 trillion dollar question

We face the same scenario year after year: the Christmas holidays have only just ended, the New Year hangover is cured and the first resolutions for the New Year thrown overboard, when China attracts attention with alarming headlines. Unlike the doomsday mood of January 2016, the current uncertainty is no more than a storm in a teacup. Rather than being worried about the global implications of a hard economic landing in China, markets are currently more concerned about the lack of success in the relentless battle to stem the outflow of capital. China’s most recent reserves data are rubbing salt in the wounds again this year and bringing China’s intervention policy to the international stage. Even though China’s reserves just about managed to stay above the psychologically important USD 3,000bn mark, the question is how far can they fall before the situation becomes precarious. The ARA (Assessing Reserve Adequacy) is…

The US Capital Account Disaster

The spotlight is on the Federal Reserve Bank, this cannot be avoided by traditional fundamental data let alone the special topics such as the capital account. Nonetheless, we should pay particular attention to the latest portfolio flow data from the US, which reflect the unfavourable development of the last few months. The massive liquidation of international Treasury holdings stands out most. While the first signs that demand was easing became apparent already at the end of 2014, the trend was not reinforced before mid-2015. Foreign investors have sold USD 420m in US Treasuries since then. Net purchases were last seen in February and March of this year. Since then sales have been on the agenda – and this trend is rising. These sales are dominated by foreign central banks, which have been net sellers of US Treasuries since as early as the end of 2014 and have sold an almost…

EMU reports persistently high capital export

Once again, the latest capital account data from the eurozone give little cause for encouragement. In August, capital withdrawals amounted to a sizeable EUR 34bn – albeit an improvement on the two preceding months but still at a worrying level. All in all, the development of the capital account in the eurozone has assumed ominous dimensions in recent years: While the region was still profiting from net capital inflows even in the crisis years 2010-2012, since the end of 2014 the situation has dramatically changed. In the third quarter 2014, net capital withdrawals of EUR -100bn were not only deep in the red but at the same time marked a new record low. And the data still show no sign of recovery. Quite the reverse in fact, with the capital flight from the eurozone having accelerated further since then. This trend is being driven not only by foreign investors but…

Central banks – when the exception becomes the monetary policy rule

Almost a decade after the start of the financial market crisis, the big industrialised nations still find themselves in an exceptional situation when it comes to monetary policy. In view of weak economic growth, ongoing disinflation and shocks exogenous to the market, such as the Brexit vote, three of the four major central banks are relying on “extraordinary” monetary policy measures – the ECB, BoJ and BoE. Criticism has been voiced that the central banks’ decision to take extremely expansionary measures is not purely the result of external circumstances. The central banks’ asymmetrical response functions (to economic cycles) are also said to have favoured these developments. The duration and scope of QE measures mean that they hardly deserve the attribute of “extraordinary” any longer. Instead, it looks like they might become the new monetary policy rule. The US central bank already stopped taking unconventional measures two years ago. Nonetheless, the…

Japan: Sluggish economy in the second quarter

The Japanese economy did little more than stagnate in the second quarter, growing only 0.2 per cent (q-o-q, annualized). This setback does not come as a complete surprise given the surprisingly strong figure in the first quarter, when GDP grew 2.0 per cent (also q-o-q, annualized). Nevertheless, the latest figure fell short of the market’s expectations. All the same, compared to the year-earlier period Japan’s economy climbed back into the black again, with a growth rate of +0.4 per cent (y-o-y) after two quarters in the red. Major reasons contributing to the weak performance in the spring quarter include external influences such as production shutdowns in April in the wake of the earthquake on south island Kyushu, where many companies have automobile and IT production plants, which are export-intensive industries. Exports then also fell steeply in the second quarter (-1.5% q-o-q, simple rate). But inventory depletion (-0.2 % q-o-q) also…

Expansionary central bank policies act as a sedative for the markets

We have seen an increase in economic and political risk factors in recent weeks. While the consequences of the Brexit decision can only be speculated on up to now, the implications of the negative consequences are already evident in the first confidence surveys and purchasing mangers‘ indices. Political uncertainty in countries such as Spain or Portugal, where the formation of the government is a never-ending process, is being suppressed in the face of new major issues. Many investors reacted anxiously to the problems in the Italian banking sector, which prompted speculation about the necessity of another bank bailout by the state. In France and Germany, several terrorist attacks rather than economic issues are fuelling mounting uncertainty. One might have expected that a heightened mix of risks would impact on investor sentiment and that volatility on the markets would remain high. In fact, the situation on the foreign exchange markets has…

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