Category: Markets

Why are European Central Banks setting negative interest rates?

  • Sweden's Central Bank yesterday set it's main policy rate to -0.1%
  • This follows other Central Banks setting negative deposit rates recently (ECB, Nordic countries, Swiss).
  • Aim is to stave off deflation (i.e. they want consumers and businesses to be spending and not saving).

Market response to ECB’s Quantitative Easing plans?

  • While the EUR60bn asset purchases only start in March, market reaction +ve so far.
  • Fears of deflation possibly receding (this is reflected in prices of future swap rates).
  • Euro has fallen but not precipitously.

Why are commodity prices falling?

  • Currently at lowest point in 5 years.
  • Global oversupply.
  • Drop in demand from China.

Why is there upward speculative pressure on the Danish krone?

  • Krone is "pegged" to the euro - so Danish Central Bank uses monetary policy tools to keep krone at a stable nominal rate to the euro.
  • Last month, in the face of huge inflows into the Swiss franc, the Swiss Central Bank abandoned their currency cap, and the franc appreciated massively.
  • Same happening with Danish Krone right now - large speculative inflows because of what happened in Switzerland and because ECB is about to start their QE (bond buying) program.

What tools does Danish Central Bank have to protect currency peg to euro?

  • Huge upward pressure on krone - 2 main tools to protect the peg:
  • Lowering of interest rates (now at record low of -0.75%) to make currency less attractive.
  • Neutralise impact by meeting any krone demand (i.e. selling krone and buying euros) - problem though if they run out of krone.

Why did Ukraine’s currency crash 30% in Feb ’15?

  • Central Bank abandoned "managed float" - so hyrvnia (UAH) now floats freely against other currencies.
  • Up until 05 Feb 2015, under the managed float, when people wanted to sell UAH & buy USD, the Central Bank would buy those UAH (and sell them USD), so value of UAH would be roughly-ish maintained.
  • But the Central Bank started running out of USD (foreign exchange reserves) hence the move to a "free float".

Which countries has China lent to recently?

  • Big recent lending to Argentina - funds used to boost FX reserves (Argentina has lost access to international credit markets after refusing to honour debts).
  • Has offered credits to Russia in wake of rouble crisis ($30bn to oil companies).
  • Has also provided assistance to Venezuela.
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