Category Archives: Currencies
Romney to Take China ‘to the Mat’ on First Day in Office
I can’t even read this stuff any more.
And, worse, it ‘forces’ his opposition to take a harder stance as well.
Romney to Take China ‘to the Mat’ on First Day in Office
October 14 (Reuters) — Republican presidential candidate Mitt Romney on Saturday accused President Barack Obama of failing to “stand up to China” after the U.S. Treasury put off releasing a politically sensitive report on the currency policies of major U.S. trading partners.
“Four years after promising to take China ‘to the mat’ for its manipulative currency practices, President Obama has once again failed to live up to his word,” Romney spokeswoman Andrea Saul said in a statement released by the campaign office.
“We can’t afford another four years of President Obama’s failure to stand up to China. Mitt Romney will do it on day one of his presidency,” she said.
Swiss Central Bank Chief: Currency Intervention Rescued Economy
Yes, as it reduced demand in the euro zone
Swiss Central Bank Chief: Currency Intervention Rescued Economy
October 12 (Nikkei) — A year after the Swiss National Bank made a direct intervention in the the foreign exchange market to halt the overvaluation of the Swiss franc, Chairman Thomas Jordan told the Nikkei in a recent interview that the move helped to stabilize the country’s economy and stave off deflation.
Draft for Oct. 26 Rome Presentation
Mafin 2012 Genova, Italy presentation
Very good!
One suggestion, in caps:
In reality, BECAUSE AN OVERDRAFT AT A CENTRAL BANK *IS* A LOAN FROM THAT CENTRAL BANK, central banks have no option other than supplying the amount of reserves banks require to settle payments through standard operations, bilateral lending, or intra-day overdrafts.
Yet, it can unilaterally set the interest rate on reserves borrowing and reserves holding.
Revising the quantity theory of money in a financial balance approach
St. Louis Fed gets it?
Email from Scott Fullwiler:
Check this out . . .
“As the sole manufacturer of dollars, whose debt is denominated in dollars, the U.S. government can never become insolvent, i.e., unable to pay its bills.6 In this sense, the government is not dependent on credit markets to remain operational. Moreover, there will always be a market for U.S. government debt at home because the U.S. government has the only means of creating risk-free dollar-denominated assets”
Somehow they then go on to say that there can be crowding out if the US is not dependent on credit markets. Doh!
Cliff on ECB
Over 6 weeks ago we distributed the attached Eurosystem Solutions paper.
It described the unique non-standard measures being used for by the Eurosystem and ECB to address bank solvency and national solvency issues and the movement towards a real solution involving the ECB.
Now the ECB has announced what is very close to the real solution: unlimited bond purchases.
Regardless of conditionality, or even in spite of conditionality, this is the crossing of the line into the notion that there is an entity that can credit accounts in Euro in unlimited amounts.
While conditionality is the apparent necessary circumstance, and it’s likely national authorities will play along, these ECB purchases will have to take place regardless of conditionality. If Spain says they can’t comply, is the ECB going to let them default? The ECB has done all this to avoid Spanish default.
The best case is for the markets to recognize the ECB backstop and so regular purchases aren’t very necessary. There will be lots of movement towards coordination of budgets and banking supervision.
But the ECB line has been crossed.
Sixteen years after our AVM/III July 1996 Bretton Woods conference that identified the severe credit problems with the looming Maastrict rules (1/1/99), and eleven years after Warren’s famous paper on the potential European credit crisis “The Rites of Passage” we are finally seeing the necessary repair to the EMU.
There still remain political obstacles, court challenges and the like, but the imperatives to avoid a complete collapse of the Euro financial system have driven virtually all the important constituents to this necessary path of solution.
Euro-Area Exports Rose 2.4% in June
Unfortunately this is will also be spun as ‘austerity works’ as they don’t realize exports are real costs and imports as real benefits, meaning this is in fact evidence of deteriorating real terms of trade.
And, of course, globally it’s a 0 sum game as for every export there is an equal import. But while we can’t all net export, we can all attempt to net export with overly tight fiscal/low aggregate demand/high unemployment etc. in a very ugly race to the bottom.
Additionally, a rise in net exports from euro zone domestic policy comes with upward pressure on the currency that continues to the point where there are no net exports.
That’s why the ‘export models’ include the govt building foreign exchange reserves, as it sells its currency vs the currency of the region targeted for exports. Hence the growing hoards of $US reserves by all the nations targeting the US for exports.
However, the euro zone, unlike Germany under the mark, doesn’t do that for ideological reasons. They don’t want to buy $US and build $US reserves and give the appearance that the $US is the ‘reserve currency’ backing the euro. And so instead of sustaining net exports, the euro goes up to the point where there are no net exports. Note that the euro appreciated from about 85 to 160 to the dollar during its first decade before backing off to under 120 due to portfolio shifting from blind fear of oblivion. And during that time the currency movement always kept net exports in check.
This is all why the ECB doing ‘whatever it takes’ which means conditional funding to sustain solvency while keeping fiscal ‘overly tight’ is extremely euro friendly.
Euro-Area Exports Rose 2.4% in June, Led by Germany: Economy
By Simone Meier
August 17 (Bloomberg) — Euro-area exports rose for a second month in June, driven by a surge in shipments from Germany, as companies tapped into emerging markets to offset declining demand at home.\
Exports from the 17-nation currency bloc advanced a seasonally adjusted 2.4 percent from May, when they gained 0.4 percent, the European Union’s statistics office in Luxembourg said today. Imports stagnated in the period and the trade surplus widened to 10.5 billion euros ($13 billion) from 6.8 billion euros.
Europe’s economy contracted 0.2 percent in the second quarter as tougher austerity measures pushed at least six member states including Italy and Spain into recession. With households and companies across the region cutting spending, exporters such as L’Oreal SA, the world’s largest cosmetics maker, have relied on faster-growing Asian markets to bolster sales.
“The euro-region economy is undergoing a mild recession,” said Alexander Krueger, chief economist at Bankhaus Lampe KG in Dusseldorf. “The global growth dynamic has eased somewhat, but exports will continue to support development to a certain extent in the second half of the year.”
German exports jumped 6.6 percent in June to 40.9 billion euros, while imports in Europe’s largest economy rose 1.5 percent. Shipments from Italy increased 2 percent in the period.
France and Spain reported gains of 1 percent and 1.4 percent, respectively.
ECB August Meeting
Not to forget this is the just the beginning of ‘doing what it takes’ to sustain the euro, and make it ‘safe’ for investors.
That’s all inclusive, though not necessarily immediate.
And ‘anchoring’ the short end ‘automatically’ goes a very long way towards anchoring the long end with regard to risk premium.
Karim writes:
Draghi announced significant philosophical changes today. The key announcements were:
- The ECB was ready to renounce seniority on its bond purchases.
- The size of future purchases was open-ended: ‘size adequate to reach its objectives’.
- Future purchases may not be sterilized, as they have been with the SMP so far.
- Purchases would be front-end focused as that ‘falls squarely in line with monetary policy instruments’. A key instrument is obviously the LTROs. So would imagine purchases would be 3yrs and in on the curve.
The adherence of governments to their commitments and the fulfilment by the EFSF/ESM of their role are necessary conditions [for some action on the ECB side]. The Governing Council, within its mandate to maintain price stability over the medium term and in observance of its independence in determining monetary policy, may undertake outright open market operations of a size adequate to reach its objective. In this context, the concerns of private investors about seniority will be addressed.
Other news was that:
- As in the excerpt above, purchases would be subject to strict conditionality via the EFSF (i.e., Spain has to accept a Memorandum of Understanding). Fiscal consolidation and structural reform were listed as the key conditions.
- He threw cold water on the ESM getting a banking license, saying he was ‘surprised by the attention this has received’.
- Logistics and objectives on bond purchases were TBD by a committee.
- Further non-standard measures were forthcoming.
- Rate cuts were discussed but unanimously voted down; as for a negative depo rate he said ‘we are in unchartered waters’, implying the hurdle may be high.
Relative to levels before Draghi’s London speech last week, Spanish 2y yields are 200bps lower, and 10yr yields are 50bps lower.
ECB notes?
An interesting move by the ECB would be to offer short to medium term notes in the market place.
As discussed over the years, unlike other currencies, the euro has no ‘risk free deposits’ available to anyone other than member banks and foreign governments.
This has probably caused substantial numbers of investors to sell their euro for other currencies rather than hold any of the available euro denominated financial assets.
If so, ECB notes could mark the return of these portfolio to ‘normal’ allocations to euro denominated financial assets, which would offer strong support for the euro vs other currencies.
And with the ECB measuring success by the strength of the euro, this could be an attractive proposition.
It would attract euro deposits from the banking system, which the ECB can easily accommodate by continuing its current policy of liquidity provision for its member banks as needed.
Additionally, and not that it actually matters for inflation, lending, aggregate demand, etc., most monetarists would not include these notes as part of the ‘money supply’ but instead as an anti inflationary ‘sterilization’ measure.