- Interest rates being cut as central bank tries to boost growth (3rd cut in 6 months).
- Rates expected to continue lower this year.
- Growth slowing as China economy makes inevitable move from export-led smokestack industries to domestic-demand-led (consumption & services).
- After WW2, US established Bretton Woods Institutions (IMF & World Bank) - by doing so it underwrote, and hence set the tone for the global economic system (post Cold War known as "Washington Consensus").
- Over the last few years, due to pressures from the right, the US refused to give developing countries a bigger say in these institutions.
- China has therefore set up rival institutions, and recently managed to get US allies to join - represents comprehensive failure of US strategy & tactics of global economic policy.
- The biggest single structural issue in global financial markets for 2015 is the timing of the US Fed rate rise - a fundamental driver of where the global savings that swish around the planet are parked.
- As the US is poised to tighten monetary policy (interest rates up) and most other major countries are loosening or neutral, the US$ has soared.
- The health of the US job market is the key determinant of timing - 1Q15 was looking strong so markets expected rate rise in June, but recent job market numbers weaker - for dinner party kudos, fine to suggest it will happen between June and Aug :)
- Central Bank worried about currency getting too strong (as euro weakens and investors seek higher returns).
- So have made (by announcement) policy interest rates more negative (i.e. depositors need to PAY to have their money in banks) hence making krona less attractive for foreign investors.
- Central bank also expanding its bond buying program (QE), i.e. aggressively buying krona-denominated bonds from the market (this results in a flood of krona into the market, hence if anyone wants to own krona, there are plenty available - this is an effective form of currency intervention, but without the Central Bank actually having to be active in the FX market).
- As a huge importer of commodities, when China's growth slows, global commodity prices head lower.
- Results in difficulties for commodity exporting economies (mainly emerging markets).
- Also resulting in increased divergence between US economy and rest of world (US is growing fast and not so reliant on demand from China).
- Having a strong currency (US$ near parity with euro) is nice for the ego - looks good, feels good, but in reality it's a complicated mixed-blessing.
- Structural (permanent-ish) currency shifts can cause problematic imbalances (e.g. if US$ stays strong, US exporters will suffer, US companies with big foreign earnings will suffer, and US trade deficit will balloon).
- Also makes US monetary policy decisions harder, i.e. US growing nicely now so Fed should raise interest rates soon, but if they raise rates, dollar will strengthen further.
- Europe growth slow and US growth solid.
- Europe pushing interest rates lower (QE) and US interest rates expected higher.
- Investors (pension funds, insurance companies and speculators) put their money where yields (interest rates) are higher, so they're moving from euro to US$.