For the first time in nearly five years, the European Central Bank (ECB) has hiked interest rates, from 2% to 2.25%. Three weeks ago, Jean Trichet, President of the ECB, signaled that the ECB would likely raise rates at its December meeting. For that reason, the markets did not react strongly to the news. Moreover, Trichet cautioned investors not to expect additional rate hikes. However, as inflation is still hovering well above the ECB’s target of 2%, thanks in part to high energy prices, it seems the ECB will likely follow up with another round of rate hikes next month, which should provide broad support for the Euro. The Economist reports:
In the last year, the Korean Won has soared against the USD, while the USD, in turn, has appreciated significantly against the Japanese Yen. In line with the laws of triangular arbitrage, the Korean Won has pummeled the Japanese Yen, appreciating over 30% in less than two years. As a result, Korean exporters are having extreme difficulty competing with their Japanese counterparts. While economic fundamentals still seem to support Won strength, a Japanese trade surplus should soon force the Yen back up. In addition, we could see South Korea’s Central Bank intervene in forex markets in order to hold down its currency. The Korean Herald reports:
Japanese Yen “in line with fundamentals”
at 2005-12-12 18:19:42
In a recent interview, the Finance Minister of Japan shrugged off claims that the Yen was undervalued and stated his conviction that the currency is consistent with Japan’s current economic situation. Japan’s economy has performed well in recent quarters, spurred by an increase in exports, which were in turn driven by a weak Yen. An influx in foreign capital has buoyed Japanese equities, and the Bank of Japan is currently mulling an interest rate hike. Meanwhile, the USD is moving towards a 3-year high against the Yen, and currency traders and economists, alike, are laboring to reconcile the increasingly positive outlook for Japan’s economy with the dismal performance of the Yen. The Japan Times reports:
Kaoru Yosano, economic and fiscal policy minister, separately said the dollar's surge was not so much due to economic fundamentals as to the fact that long-term interest rates are significantly higher -- and climbing -- in the United States.
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OPEC nations shift forex reserves into USD
at 2005-12-12 18:19:42
Many economists and currency traders have suspected that the nations of OPEC (as well as other net oil exporters) were reinvesting the proceeds of rising oil sales into dollar-denominated assets. This theory was recently borne out by a release of official OPEC statistics, which indicate that OPEC nations have collectively shifted their forex holdings into USD. Specifically, 69% of OPEC forex reserves are now held in USD, which represents an 8% increase from last year. Many experts believe OPEC to be extremely sensitive to changes in interest rates. Accordingly, as the US Federal Reserve has repeatedly raised interest rates, OPEC nations have moved capital into the US in order to earn higher returns. The Financial Times reports:
If interest rate differentials are key to Opec behaviour, the start of the eurozone tightening cycle could end the dollar’s newfound popularity.
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Canadian Dollar approaches 14 year high
at 2005-12-12 18:19:42
Last week, political pundits feared the worst when it was announced the Canadian Parliament had received a vote of no-confidence, and snap elections would be held next month. Currency traders, however, have reacted with indifference, sending the Canadian Dollar (Loonie) towards a 14-year high against the USD. Canada’s economy has boomed this year, on the back of record high commodity prices and strong exports. As a result, the Bank of Canada will likely to begin monetary tightening next week, by raising interest rates to 3.25%. If the Bank fulfills investor expectations by continuing to hike rates in the following months, the Loonie may continue to soar. The Edmonton Journal reports:
“The employment picture is solid, GDP growth is better than the bank expected and the U.S. economy is still rolling. Some are beginning to wonder if the bank won't soon pick up the pace of rate hikes.”
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