The Greek parliament approved a reform bill required to unlock €12bn from the bailout agreement. The bills passing wasn’t a foregone conclusion, but it got through by 153 to 137 votes, with some resistance due to measures like limiting protection for defaulting mortgage holders. It’s way too soon to say that that particular crisis is over, but this is definitely a positive step. Whether Greece is ultimately able to repay these loans is an entirely different question. I think what most are hoping is that this can has been kicked far enough into the future that we can focus on other issues in the present. Elsewhere in the Eurozone, the October minutes of the ECB policymaker discussions shows clear evidence that additional quantitative easing measures were being considered. So here we are, even as the Federal Reserve looks to raise rates, the ECB seems to be looking at effectively cutting rates. You don’t need to be a currency guru to know that it’s looking bleak for the euro against the dollar!
President Dilma’s administration in Brazil lurches from bad to worse. In fact it almost brings back memories of the bad old days in Brazil. Inflation has climbed to its highest level in over a decade, at over 10%, and the economy is contracting. It is a shame that the more economically orthodox on the right of the political spectrum proved unable to find a candidate or at least a narrative in the last elections to win the votes of the Brazilian electorate, I fear the damage that economic mismanagement in the South American giant can create. Let’s not forget that the Brazilian economy is significant on a global scale now, with an economy roughly the same size as Italy’s. This matters! One can only hope we don’t end up with an old style collapse there. Thankfully we are a long way away from that, it’s just the trend that raises concerns at the moment. And when I think back to the tightening by the Federal Reserve in 1994 which led to the Tequila crisis in Mexico, I can’t help wondering if this time it’s a Cachaça crisis that will capture the imaginations of future economic historians.
The only one of the BRICS (Brazil-Russia-India-China- South Africa) that looks in reasonable shape at the moment is India. I don’t need to go into what ails the Russian economy, and we speak about the slowdown of growth in China frequently enough on this blog, so I’ll add a brief word about South Africa. Perhaps a somewhat fortuitous to be a member of the BRICS club, being so much smaller than the other economies, but the central bank, SARB, raised interest rates yesterday somewhat surprisingly. It’s been a tough year for South Africa, the rand has fallen over 20% against the US dollar, but inflation, which had been trending higher over the last few years, seemed to have stabilised and perhaps even begun to retreat. In light of that it really was a surprise that the central bank chose this moment to hike, but it turns out the fear is because of externalities. SARB is very concerned about a Federal Reserve rate hike and the detrimental impact it could have on the rand. This is clearly a pre-emptive strike, but it has rather more value than that. Anyone who thinks that central bankers don’t talk to each other is naïve in my view. This, in addition to the recent FOMC minutes and assorted comments from US policy makers, is as clear a sign as you will get that a US interest rate hike is very very likely on December 16th.
I confess I was somewhat surprised at the strength of the pound yesterday. Despite rather disappointing retail sales data in the UK, GBP/USD was able to achieve a two week high in the afternoon, trading as high as 1.5330. The move seemed to be more about the dollar than sterling, and it wouldn’t shock me if that high caps the recent bout of dollar consolidation. All the signs point towards more dollar strength the closer we get to the December 16th FOMC meeting. It would take big news for something to hijack the strengthening impact of tighter monetary policy on the greenback.
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