- 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).
- 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.
- Currently at lowest point in 5 years.
- Global oversupply.
- Drop in demand from China.
- 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.
- 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.
- 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".
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.