Monetary Policy

  • Market participants are still assessing the SNB decision.

    After the SNB Decision, the Reverberations Continue

    Saying the US dollar had a good week even though it lost 18.5% against the Swiss franc may be a bit like the old joke about asking Mrs. Lincoln, "besides that, how was the play?"

    The Swiss National Central Bank's unexpected decision to abandon it cap will be a day recorded in foreign exchange history, ranking up there with Nixon's closing of the gold window and the UK leaving the ERM. In all three cases, officials balked at the costs/risks of pursuing their national strategies. 

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  • The SNB eliminates a franc cap and India cuts rates.

    Swiss and Indian Central Bank Surprises Rile Financial Markets

    Seemingly, out of the blue, the Swiss National Bank abandoned its cap in the Swiss franc (euro floor) and moved deeper into negative interest rates.  This has seen the Swiss franc rocket higher against the euro and dollar.  It sent the euro briefly below $1.1600. 

    The SNB lowered its 3-month LIBOR target to between -0.25% and -1.25%.  The charge for sight deposits over the exemption threshold to -0.75%.  Previously the LIBOR target range was -0.25% and -0.75%.  

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  • The EMU tide may be turning to favor debtors over creditors

    Are EMU Debtors Getting the Upper Hand Over Creditors?

    The key axis in Europe is between creditors and debtors.  Each pushes their own interests.  The regime of austerity in Europe indicates that the creditors have had the upper hand.  However, two developments in the last two days suggest the tide is turning. 

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  • The U.S. economy seems mostly resistant to Europe's woes, so far.

    Dollar Strength, ECB QE and Aussie Economic News

    The combination of the outright deflation in the Eurozone and the seemingly immunity of the US economy to the poor global developments has encouraged investors to extend the dollar's gains.  The euro has been pushed below $1.18.  Sterling neared $1.50.  And the dollar, which was at three week lows against the yen on Tuesday, near JPY118, is knocking on JPY120 again.    

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  • The world's major currencies swing more on news in thin markets

    Spain Surprises, the ECB Money Supply and Chinese Monetary Policy

    The approaching New Year thins market participation.  This makes for some choppy price action.  The result is weaker equity markets and a softer US dollar.  The greenback is lower against the euro and sterling.  Sterling held just above $1.55 in Asia before recovering a bit in Europe.  The euro slipped to a new low of $1.2125 in Asia before steadying in Europe, and recovered toward $1.2185.  The biggest mover was the yen. The dollar hit an air pocket and slid to JPY119.20 before recovering back to JPY119.80 in Europe, but it is not clear that the move is over.

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  • The Fed's monetary policy will still be data-driven.

    Some Additional Thoughts on the Fed Statement, plus a Swiss National Bank Surprise

    The Swiss National Bank surprised the market by announced a negative 25 bp rate on sight deposits and lower the 3-month Libor range to -0.75% to 0.25%. Although SNB President Jordan revealed that inflows from Russia compelled it to intervene in recent days, the fact of the matter is that the negative rate goes into effect the same day as the ECB's next meeting, January 22. 

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  • The Fed will eventually raise rates, but when?

    Will the U.S. Fed Need to be 'Patient' for a 'Considerable Period'?

    The Federal Reserve upgraded its assessment of the labor market, and changed the future guidance from "considerable time" to "can be patient in beginning to normalize the stance of monetary policy."  The statement also draws a distinction between market-based measures of inflation expectations, which have fallen, and survey-based measures, which are stable.  We expect Yellen to indicate that the change in wording is not a change of intent. 

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  • What will the Fed say?

    The U.S. FOMC Statement is on Many Minds

    The US dollar's recovery that began yesterday continues today.  The euro reached the 50% retracement objective of its slide since mid-October (~$1.2565) and now is more than a full cent lower.  The dollar's slump against the yen ended just above the JPY115.50 level, also a key technical retracement level.  The dollar's high today was JPY117.50.  

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  • The ECB needs to be more flexible

    Notes on the Second ECB TLTRO Participation

    Today we learn of the participation of the second opportunity to borrow funds from the ECB under the Targeted Long-Term Repo facility.  Recall that this year's access was limited to 7% of a bank's loan book (loans to households and businesses excluding mortgages).  Next year's access is somewhat linked to growth of that loan book. 

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  • ECB meets, but what will they decide?

    Mario Draghi Takes Center Stage

    The ECB meeting or more precisely, the press conference, is the main event of the day, and possibly of the week and month.  ECB President Draghi and Vice President Constancio have expressed heightened urgency to boost inflation as fast as possible.  This has been countered by others arguing to give other new initiatives, including the second TLTRO (next week) a chance to work.  Moreover, Bundesbank's Weidmann has argued that the drop in oil prices will also provide stimulus that had not been counted on previously.  

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