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).
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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.
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Why are commodity prices falling?

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