It’s the Aussie and kiwi that were hurting overnight, the kiwi taken to a five-week low vs. the USD. Whilst there were domestic factors that were evident in both moves, the wider tone is one of more caution so far this month.
There’s a certain dynamic at play, in that there is a concern that the large amount of cash that European banks are currently sitting on could shift the euro into becoming a carry currency. But the more important issue is that where the cash might go. Video:
There are concerns with all the high yielders that have done well in recent months, such as Brazil’s desire to weaken its currency and the simple fact that many are viewing the dollar bloc as looking rich, especially if we are entering a period of slower growth in China.
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Furthermore, the impetus to invest in eurozone debt is less than was the case in December, given the rally in yields seen over the past two months. For now, the cash seems happy to sit at the ECB, but we’ve got to watch the numbers given this situation is unlikely to last.
Commentary
The ECB numbers. Ahead of the central bank’s meeting on Thursday, the focus has been on the numbers out from the ECB. Overnight deposits by eurozone banks jumped once again to a record high of EUR 821bln. This is not so surprising given the recent liquidity-injection via the 3Y LTRO. For the third week in a row the ECB has also not made any bond purchases under its bond-buying program (SMP) despite the jump higher in Portuguese yields see towards the end of last week to back above the 13% level. It’s likely that the ECB will be under pressure on Thursday over both aspects of its policy with regards to liquidity and bond purchases, leaving the debate about rate cuts or otherwise off the agenda.
Russia’s slow road to ruin. Already, Russia’s relatively poor performance poses a question mark over retention of its place within the BRIC ‘bloc’ (Brazil, Russia, India and China) given that it has failed to keep up with its major emerging-market counterparts on most measures. Whilst China and India (to a lesser extent) have played major roles in keeping the global economy moving in recent years, the Russian economy stood virtually still during a time that China has grown 32% in real terms (2008 to 2011). But this hasn’t drastically impacted on the currency, the ruble still holding up well vs. Eastern European currencies. Most of this is owing to the strong performance of the oil price, together with Eastern Europe’s exposure to the eurozone crisis. But there have been more protests this time around and now Putin has a new six-year mandate. When Putin came to power in 2000, life expectancy in Russia was below the global average and still has yet to close the gap. Other data reflects a similar picture of Russians being left behind and, as the world has shown over the past year, populations are increasingly inclined to vent their frustrations. Russia risks embarking on a road to ruin from which it will struggle to recover, and the currency’s reliance on the oil price as a driver of value is and may well continue to fall.
China’s subtle shift. China wants to see less dependence on net exports, less investment and greater domestic consumption. Of course, wanting and achieving these are two very different things. In nominal terms, investment is still running at nearly 50% of GDP whilst household spending is just one-third of GDP, with both trends heading in the opposite direction to that desired. So what are the implications of the announced reduction in their target to 7.5% for those that have aligned themselves to China’s growth story? For now, it’s probably not going to be as much as feared. For one thing, we have to take into account the fact that this is a growth target; actual growth has invariably been above that stated for all the time it has been in place, by 3% on average over the period from 2004 – 2011. Furthermore, there are always issues surrounding the reliability of the data. As such, beyond what we already know, there is probably little to fear from China’s announcement. As many developed countries have found, shifting the balance of growth can often takes years and, to become a nation of spenders, China will require the social infrastructure to give its people the confidence to do so. Today’s announcement is merely a reflection of the fact that the current leadership recognises the need for change, but the change of course will be very gradual and will take years to achieve.
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