Good morning and welcome to today’s foreign exchange market commentary on Friday, the 15th of March.
Every economic crisis counts many victims. While some manage to fight back, others may experience long-term or even permanent damage. While growth has been a resilient victim since the global crisis broke out in 2008, central bank independence seems to have been undermined seriously and possibly lost forever.
The developed world witnessed a unique phenomenon in the 70s; negative economic growth along with rising inflation. Germany was one of the few exceptions and its success in taming inflation was attributed to the independence of the Bundesbank from the German government. Many countries followed the German example and adopted legislation to free the central banks from political interference. Soon, inflation started to fall.
With rapid economic growth generating higher-than-estimated income for western governments, separating the central banks from the government was easy. Governments didn’t need the central banks to print money for them.
However, as the tides turned, governments became dependent on money printing as alternative to that was painful adjustments and difficult structural reforms. Indeed for developed economies, fiscal policies have taken precedence over monetary policies.
Developments in Japan are the most recent example of this worrying trend. Newly elected Prime Minister Shinzo Abe decided who should head the Bank of Japan. The BoJ decision to buy unlimited government bonds to push inflation up to 2 percent has effectively ended the central bank’s autonomy.
Similarly, the Bank of England is buying up every security that the British government is issuing, even as annual inflation breaches the legally permissible ceiling of three percent. Inflation in the UK has been higher than four percent recently, but the BoE has decided to pursue loose monetary still to stimulate economy. Across the Atlantic, the Federal Reserve buys more than 90 percent of all Treasury securities issued by the US government.
By continuing to rack up government securities, the central banks have violated the basic tenet of central-banking – not to engage in financing of government spending.
Independent central banks may soon become a thing of the past. The fact that inflation has started to spiral in many western countries despite severe recessions indicates financial markets have started taking into account this fundamental shift in policy. The age of low inflation may very well be over if the central banks’ key responsibility of maintaining long-term price stability is compromised.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.1608
GBP/US$ – 1.5131
GBP/CHF – 1.4306
GBP/CAN$ – 1.5456
GBP/AUS$ – 1.4486
GBP/ZAR – 13.8254
GBP/JPY – 145.32
GBP/HKD – 11.7337
GBP/NZD – 1.8394
GBP/SEK – 9.7052
EUR: Euro started the day on weak note yesterday after European employment data printed weaker than forecast; employment rate fell 0.3 percent quarter on quarter against expectations for a 0.1 percent declined. The EUR/USD pair fell close to the 1.29 level, triggering buying interest from option holders. The single-currency tracked higher through the North American session, supported by comments emanating from the EU Economic Summit in Brussels. While Jean Claude Juncker was hopeful about a deal on Cyprus by the weekend, other EU member states called for greater flexibility on deficit targets and a focus on growth over austerity. The EUR/USD pair traded at 1.3011, up 0.39 percent and has somewhat consolidated above that level overnight, opening at 1.3015 this morning. The GBP/EUR cross made rapid gains too after cable’s rally yesterday and the pair opens at 1.1620 this morning.
USD: The pound surged against both the greenback and the euro yesterday, breaking through the 1.51 level against the dollar and the 1.16 level against the euro after a Financial Times report suggested Qatari officials held discussions about investing in UK infrastructure projects and the Middle Eastern country may invest up to GBP 10 billion, without divulging the source of the information. Also after building up weeks of short sterling positions, investors chose to unwind on good demand of the GBP versus the Japanese yen and some Scandinavia currencies. Breaking stops, cable rallied from 1.4920 to an intraday high of 1.5110. US data released yesterday was not supportive of the pound’s strength as initial jobless claims fell to 332,000, the lowest number since January and well below the 350,000 forecast. Separate reports showed US producer prices rose 0.7 percent in February, due in part to a rise in the price of gasoline. It’s another busy day for data in the US today with releases including industrial production statistics, core inflation reading and consumer sentiment figures. The GBP/USD pair is trading around 1.5140 this morning.
Have a great weekend!
