First the regulatory bodies are telling the banks to hold more capital in reserve, to guard against further banking melt downs, but the next minute the ECB inflict a negative interest rate on bank deposits. This effectively charges banks for holding onto capital and encourages them to lend. The ECB also slashed the bench mark rate of interest to 0.15%, from 0.25%, to try and stimulate the Eurozone.
These measures where expected by the market so have had little effect but the GBP continues to charge ahead against its continental neighbours and their US cousins as the UK economy continues to show signs on growth while the others splutter.
The topic of this week has been government intervention to influence the direction of their economies and has given good examples of the different methods at play.
Firstly the Chinese governments attempt to strengthen their own currency by using their huge reserves to buy up the yuan to keep up the price. However the adverse impact of this is high inflation, which would impact domestic wages, which then would effect exports, which would eat into their reserves. So a delicate balancing act.
Then there is Europe who, despite several other economies showings signs of solid growth are bouncing along the bottom and the European Central Bank are considering loosening the taps of economic stimulus to try to boost growth and ward off deflation. Considering their interest rates are already at a rock bottom at .025% there is little movement there, so their only recourse left is government investment or printing money. Having a centralised Bank but not a centralised government means that the ECB’s arsenal is limited to financial tricky rather than large scale capital injections into the economy like new roads or railways. The GPB has strengthened 0.8% against the Euro in the past week. (1.4% on the month)
Finally at the other end of the spectrum is the US where they have been living and free with financial stimulus for years now and are facing the prospect of going cold turkey, which is worrying a few that the economy is not strong enough and that any weaknesses would soon be exposed by any financial stress. The GPB has strengthened 0.8% against the Dollar in the past week.
The Post Office have realised a report that shows that Brits waste over £12m a year by waiting until they get to the airport to buy their holiday money. On average they spend an extra 5% on their exchange rate when buying at the airport compared to buying on the high street on ordering online.
Something that we all probably knew but seeing it in figures puts it into perspective.
Today’s financial news is littered with stories of companies that have been hurt by fluctuations in the world’s currency markets. Firstly the consortium that purchased the Gherkin, the now famous London landmark, did so using leveraged Swiss Francs. The strengthening of the Swiss Franc meant that their repayments were going up and eventually it became too much. Well the keys have now been handed to the administrators and they failed to restructure their debts.
Secondly Visa have warned investors that it is facing slower growth than analysts would like due to the strengthening of their reporting currency, the USD. Although turnover was up 12% the strong green back looks to take its toll on the final numbers.
Finally Croda International’s sales fell 3.2% even in the face of increasing revenue, up 2.9% and a hike in pre tax profits which the company blamed on adverse currency changes.
The current trend is for central banks giving forward indications on future decisions which is designed to steady the markets and give extra confidence to businesses and individuals. This method was introduced to the UK by the incoming Bank of England Governor Mark Carney and now the incoming Chair of the FED Janet Yellen has tried the same trick over the pond but while at first this seem to have the desired effect now the markets have run ahead of the news and are reacting to the slightest diversion from the plan. This week the FED has indicated that although it will start to taper off its quantitive easing, interest rates will remain lower for longer than expected, which resulted in stock markets rallying after what was a torrid week for shares.
Hornby has announced that it lost a further £200m on a single deal since announcing its results in January, due to adverse exchange rate movements, when the company paid £600m to end its partnership with a Chinese company. This has added further to their forecast loss of £1.2m for the year.
According the press this week the UK is facing another Black Wednesday over the levels of foreign currency held by the central bank. In 1992 the Tory government tried to prop up Sterling while exiting the exchange rate mechanism by buy its own currency using its foreign exchange reserves, which turned out not to be enough. This reportedly cost the economy over £3bn.
Today the country holds only $70bn in foreign exchange which according to the press ranks us 24th in the world behind even Poland! And compared to China’s reserves of over $3trillion we do look a little light but what these stories fail to point out is that the Eurozone is counted as one place on the board and consists of 18 separate countries that in total only hold $220bn in reserve. Compared to that we are looking better.
Meanwhile in the Eurozone inflation has fallen from 0.7% to 0.5% prompting more fears of deflation that would have a direct impact on their member’s debt repayments. The ECB has a target of 2%, which it hasn’t met in years, and with interest rates reduced recently to .25% the bank has little left in its arsenal to promote growth.
The USD has seen further gains in anticipation of strong employment growth when their latest report is out today, which will place increased pressure on the FED to cease to financial stimulus and consider raising interest rates.
Those eager beavers who rushed out to book themselves a place at this years World Cup might have done themselves a favour by securing the best hotels and tickets but those that booked a year ago would have paid 33% more than those booking today due to the huge decline in the Brazilian currency, the real, against the Sterling. The British Pound has also seens its value rise similar levsl against other currencies such as Turkey and Indonessia and significant rises against Russia, Australia, Thailand and the Czech Repulic.
China causes a stir
Concerns over the Chinese Renminbi (and increased tension in Ukraine) has caused the increased flow of money from emerging economies, such as Russia, Brazil and Chinese currencies into so called safe havens such as the Swiss Franc and the British Pound.
Another week and an other Bank of England target is reached. Last month UK inflation breached the Bank’s own 2% target with a CPI (consumer price index) of 1.9%. There were worries that high utilities prices would push inflation above the 2% mark and force the new governor to write his first letter to the Chancellor explaining the reasons behind the rate was above 2%.
For the first time we can not immediately link this with an imminent rise in UK interest rates due to the reassurances given last week that rates would not be going up any time soon.
In other UK news the Scottish Nationalists suffered a double blow this week as all three major political parties ruled out entering into a currency union with an independent Scotland and the European commissioner José Manuel Barroso said that Scotland would not be entitled to automatic entry to the Union and any application to join could be “difficult, if not impossible.”
This will mean various things to the UK economy as businesses trading between the two nations would be in different currencies, the newly independent Scottish central bank would hold large amounts of British Sterling in reserve and North Sea Oil companies would need to decide where to base themselves for the most security.
Following, what seemed to be a bold move of laying out the conditions that it would look to start raising interest rates, the Bank of England this week was forced to reiterate its position following back to back better than expected data.
In his original statement Mark Carney said that the Bank would only start to raise interest rates once the unemployment figure fell below 7%, but barely a month later and the figure was in touching distance at 7.%, which is now expected to be reached by Spring.
So rather than settling the markets as per his original intentions, this sent the markets into disarray as analyst predictions for rate rises were adjusted and readjusted.
To add fuel to the markets the Bank increased it’s UK growth forecast from 2.8% to 3.4% which forced Carney to make another statement.
“Forward guidance is working…….expected interest rates have remained low even as the economy has recovered strongly, uncertainty about interest rates has fallen, and most importantly, UK businesses have understood the message.”
But to clarify he stated that even when rates do eventually rises will be gradual. Analysts now predict that rates will start to rise in the first quarter 2015 and will only reach 2% by 2017.