ECB President Draghi in his first major speech since last week’s brutal sell off has reiterated that the European monetary authority stands “ready to do its part”, if further stimulus is required they will act. It’s very likely that, based on this pronouncement, there will be something done at next month’s meeting. Not surprisingly the euro fell significantly (1.1%) in the wake of his speech. You’ll note that, like the Bank of Japan, the ECB has already moved to negative interest rates, with the key rate at -0.3%. Personally, I find it hard to believe that investors are going to be rushing to deposit funds in Euro savings accounts when it’s only going to cost them money for their troubles, but maybe that’s just me! Yes, it’s clear that investors were disappointed with recent Eurozone stimulus efforts and this caused EUR/USD to bounce in December, but that’s a far cry from euro accounts becoming an attractive place to hold your savings, to me that was more of a trading move. Those who had shorted the euro were closing out their positions, disappointed at the ECB’s less than aggressive meeting.
In Japan, we are seeing the limitations of monetary policy, or at least the latest round of stimulus (the move into negative rates), is yet to have an impact on the economy. Latest data shows that the economy contracted by more than forecast to -1.4%. Domestic demand remains weak with wage growth failing to rise fast enough to encourage more consumption. Abenomics is not working as it should, but why would it? Weak wage growth is a global paradigm, the sooner we all recognise this the better the solutions we’ll come up with. Are these not the same concerns the Federal Reserve and Bank of England have repeatedly highlighted over the last year, despite solid increases in employment? It is very clear that this is not a country specific issue.
The unfolding disaster afflicting the Nigerian currency sees a further acceleration in the fall of the naira. Worse still, there are rumours that “China Export & Credit Insurance Corporation also known as Sinosure a provider of export credit insurance for the export of high-value added goods in China has blacklisted Nigeria on account of the difficult foreign exchange environment in the country”. This is not good news. Nigeria is heavily dependent on importing products and China in recent years has become a key supplier. I don’t know if this will have an impact on the current thinking within FX policy circles in Nigeria, but surely they’ll have to take note? Perhaps they’ll be happy, as it might stem the bleeding, but if the desires of consumers aren’t met it could also lead to instability. This is clearly something to monitor.
The energy markets are awaiting news of a meeting between top officials from some of the world’s top oil producers which has spurred speculation that a deal to tackle the supply glut could stabilise prices. Prices have recovered strongly over the last week and they’re 2% higher already this morning. Whether oil producing countries will have the discipline to maintain any agreements is open to conjecture, I, myself, am a sceptic! Too many of them are in dire economic straits at the moment.
For now the general tone of markets this week has been one of recovery. As you’ll recall, last week, I expressed the opinion that the rout might just be exhausting itself. I’m not ready to pat myself on the back, but for sure I haven’t embarrassed myself yet either. We’ll continue to keep you updated on how general risk sentiment is playing out within the currency markets.
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