Currency concerns everywhere

March 24, 2015

A bureau de change operator counts U.S. currency notes in Abuja

Currency concerns in the central banking world have come to the fore again.

Sweden cut interest rates further into negative territory out of the blue last week, fearing its strong currency will engender deflation. The Swiss National Bank said it would aim to weaken what it sees as a “significantly overvalued” franc. And the Bank of England flagged the risk that sterling could strengthen further and leave inflation below target for longer.

Governments around the world dismiss talk of a currency war (so far) but the issue is clearly uppermost in policymakers’ minds.
Today, the theme continues with Nigeria’s central bank holding its second policy meeting of the year. It devalued the currency by 8 percent last November and has been struggling to defend the naira in the wake of falling oil prices.

The Federal Reserve has markets convinced that a first U.S. interest rate rise will not now come until September rather than June. That probably removes a little of the pressure on emerging markets which have been under the cosh from a soaring dollar.

Nigerian President Goodluck Jonathan faces an election this weekend, challenged by former military ruler Muhammadu Buhari in a contest analysts say is the closest since the return of democracy in 1999. A Reuters poll of economists predicted uncertainty about the outcome of the election will prompt the central bank to keep interest rates at 13 percent today, but a rise is likely in the second quarter.

The Hungarian central bank is expected to resume interest rate cuts with a 10-20 basis point reduction and flag more policy easing ahead due to anaemic inflation. Morocco’s central bank also has a policy meeting.

It’s a big economic data week. From a low base, euro zone reports have largely been positive so far in 2015. Tail winds of cheap energy, a weak currency and ECB money printing should ensure that continues for a while. In Germany, inflation-busting pay rises are helping to boost domestic demand.

Flash March PMI surveys for the euro zone, Germany and France will flesh out the first quarter picture today, comfortably outdoing China’s PMI which showed factory activity dipped to an 11-month low in March as new orders shrank.

The European Central Bank appears to have launched its money-printing programme just as the euro zone economy picks itself off the floor. ECB Vice President Vitor Constancio and Bundesbank chief Jens Weidmann are both due to make speeches. Bank of France Governor Christian Noyer presents the French central bank’s 2014 results while hawkish Federal Reserve policymaker James Bullard is speaking in London.

The Germany finance ministry’s monthly report, published overnight, said the economy got off to a good start in 2015 and data point to continued growth. Chancellor Angela Merkel meets the government’s panel of independent economic advisers who may revise up their Autumn economic forecasts later this week.

Britain’s inflation rate could drop to zero. That will push back the timing of a first interest rate rise but the Bank of England has made it clear it is not concerned for now, viewing cheap energy and food as a boost to disposable incomes. That view holds good despite BoE chief economist Andy Haldane saying last week that the chances of a rate cut versus a hike were evenly balanced. His boss, Mark Carney, said it would be “extremely foolish” to loosen policy in the face of lower oil prices which have taken inflation to a record low.

Intriguing revelation from Britain’s David Cameron last night that he would serve no more than two terms as prime minister. When Tony Blair declared he wouldn’t seek a fourth term before he was re-elected in 2005, leadership speculation caught fire and he was gone less than half way through his third term.

Of course, Cameron may not be prime minister in seven weeks time if he fails to win the election but if he does, his potential successors will want time to demonstrate their leadership credentials well before the 2020 election. Cameron has promised a referendum on EU membership by 2017. Whatever happens there, he could be gone soon after despite his professed determination to serve the full five years (the same declaration that Blair made 10 years ago).

No great revelations from the Merkel/Tsipras meeting yesterday evening but that in itself could be a telling sign.

The Greek government’s willingness to talk freely, and often in contradictory fashion, has been a journalist’s dream but has substantially added to its problems. If premier Alexis Tsipras has learned that lesson it could prove to be a valuable one.

A government spokesman said Athens would present its proposed package of reforms to its euro zone partners by Monday in the hope they will release much needed cash. The package of reforms Athens would not contain recessionary measures but would offer structural changes. Despite warm exchanges between Merkel and Tsipras, it was unclear if they had narrowed differences on actions required to win urgently needed cash from its creditors.

Today, Tsipras will meet Economy Minister Sigmar Gabriel, leader of the centre-left SPD and Merkel’s coalition deputy. He will also see Foreign Minister Frank Walter Steinmeier, also of the SPD, and the leaders of the Left Party and the Greens.

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