The Big Easy
Joachim Fels, Global Economics Team, Morgan Stanley
Hike, hike, hike: A cursory glance at the headlines on central bank actions over the recent past would seem to suggest that the global tightening cycle is in full swing. Over the past week alone, the central banks in Brazil, India and Israel raised interest rates, and New Zealand is expected to follow tomorrow. Since the global recession ended around the middle of last year, no less than 14 out of the 32 central banks we cover regularly have started to raise policy rates. In addition, the People's Bank of China (PBoC), while not raising official interest rates, has tightened monetary policy through other means such as credit restrictions, reserve ratio hikes and currency revaluation. And those central banks that were still cutting rates in 1H - mostly in Central and Eastern Europe and South Africa - are now done easing, in our view.
FX: EUR Has Wind in its Sails
John Hydeskov, Senior Analyst, Danske Bank
EUR has had the wind in its sails over the past month, with EUR/USD climbing from 1.20 to almost 1.27. This appreciation follows a series of disappointing US data which have pulled down US yields, while European yields have risen with the ECB withdrawing liquidity from the market.
The FX market is also focusing less on the risk of collapse in the European bond market, and the risk premium the market previously attached to EUR has shrunk. Finally, it may be that buybacks of short EUR positions have accentuated the latest movement. In this context we recommend following the weekly IMM data published every Friday night. These provide an overview of speculative positioning in the FX market, which may be crucial in the short term – not least over the summer when liquidity can be limited.
International – Europe’s Sovereign Debt Woes, Gone With the Wind?
Martin Schwerdtfeger, Economist, TD Bank Financial Group
This week Europe caught some wind in its sails, with good news blowing from several quadrants. Indicators showing better than expected results began to accumulate a week ago with the release of strong second quarter GDP data for the United Kingdom -up by 1.6% Y/Y- well ahead of market expectations, and the stress test results on 91 European banks. Granted, the design of the stress scenarios was seen as too lenient (for instance, they ignored the possibility of a Greek debt restructuring), and the resulting low failing rate and small recapitalization needs were received with some skepticism by analysts. Nonetheless, the market took some comfort on the detailed disclosure of information regarding the exposure of European banks to sovereign debt. Investor sentiment continued to build with strong second quarter earnings and the publication of some new regulation details by the Basel Committee on Banking Supervision that looked to be less stringent than previously anticipated. As a result, financial stock prices rose during the week, while the spread on credit default swaps of financial institutions also came down. The euro also benefited from this bout of positive sentiment, and was trading up by roughly 9.7% from its June lows vis-à-vis the US dollar.
World Growth Still On Track
Trevor Williams, Chief Economist at Lloyds TSB Corporate Markets
Fears are growing that the global economic recovery is already running out of steam. A plethora of economic data in a number of countries over the last month or so have shown that economic growth is slowing. In the US, the housing market is under renewed downward pressure as official support is gradually withdrawn. At the same time, US employment growth remains sluggish. In Europe, the problems of Greece, Portugal, Italy and Spain dominate the agenda as high levels of government debt have led to a crisis of confidence in financial markets about sovereign risk. Even in the fast growing emerging market economies, survey data suggest that the pace of growth is easing. But this is not in fact unusual: no recovery occurs in a straight line, and this one is no exception. This means that setbacks during the recovery phase should be expected and are not a reason for doubting it and expecting a double-dip.
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Compiled by Michael Wright, Currency Analyst
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Michael Wright is the author of FX Headlines, Fundamentals vs. Technical's, Weekly Spotlight, and Forex Trading Weekly Forecast
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