Gavin Jones
MARKETS still digesting an unexpectedly cautious message from the Federal Reserve will get more food for thought this week with US inflation data and potentially rising risks of a Greek exit from the euro zone.
The massive monetary stimulus programmes deployed by advanced economies are producing fierce foreign exchange swings and fuelling talk of a currency war.
The euro hit a 12-year low below $1.05 (R12.60) against the dollar at the start of last week only to jump back to $1.10 on Wednesday – its biggest one-day rise in six years – after the Fed signalled it was in no hurry to raise rates after all. By Friday the euro had eased back to $1.08.
The Chinese yuan reversed a long declining trend to post its strongest weekly rise against the dollar since 2007 due to a rush of dollar sales by major state-owned banks.
Bank of Japan (BOJ) governor Haruhiko Kuroda dismissed talk of competitive devaluations to spur economic growth, saying on Friday that the Fed, the BOJ and the European Central Bank (ECB) had all printed money “to achieve their price stability targets, not to depreciate their currencies”.
Currency war or not, as long as foreign exchange movements remain so sharp, crucially determining the outlook for growth and inflation, currencies will remain uppermost in policymakers’ minds.
The ECB may be hoping the euro continues to slide towards dollar parity as it frets over deflation and tries to help a fledgling euro zone economic recovery.
US inflation figures for February tomorrow will be particularly closely watched after the Fed removed its reference to being “patient” about raising rates from last week’s policy statement, but indicated it would be very much data-dependent in deciding when to tighten policy.
“We think annual inflation will remain in negative territory, so that should give more fuel to the doves that they don’t have to hike just yet,” said ING senior economist James Knightley.
“Any downside surprises will hurt the dollar and see bond yields fall further.”
There will be plenty more opportunity to decipher the Fed’s message this week with several Federal Open Market Committee members speaking.
In the euro zone, ECB president Mario Draghi is to address a European Parliament committee today, with Greece and the progress of the ECB’s quantitative easing programme sure to be high on the agenda.
Tomorrow, preliminary purchasing managers surveys (PMIs) for March will indicate the strength of manufacturing in the world’s major economies, following the currency gyrations and the plunge in oil prices. In the euro zone, PMIs are expected to continue a generally positive recent data trend, as the region benefits from cheaper energy costs and the weaker euro. Banks took nearly e100 billion (R1.3 trillion) in cheap, long-term loans from the ECB on Thursday, far exceeding expectations.
The German Ifo index of business confidence on Wednesday is expected to signal further buoyancy in the region’s biggest economy.
While investors have been focused on ECB bond-buying, as well as the timing of US rate hikes and the plunge in oil prices, the stand-off between Greece and its euro zone partners has been steadily worsening. At an EU summit on Friday German Chancellor Angela Merkel said Greece would only receive fresh funds to ease a cash crunch once its creditors approved a comprehensive list of reforms it had promised but so far failed to produce.
Sweetener
European leaders spoke of “a spirit of mutual trust” and offered Athens a e2bn sweetener to alleviate poverty, but there was little sign of the concrete progress that will be needed to avoid Greece stumbling towards an exit from the currency bloc, with unpredictable consequences.
Prime Minister Alexis Tsipras insisted his country faced no short-term liquidity problem, contradicting comments by EU officials that Athens could run out of money in mid-April.
Barclays Capital, in a research note on Friday, said it saw a growing risk that Greece would soon have to impose restrictions on bank withdrawals to avoid the “self-destructive spiral of a full-fledged bank run”.
With officials in Brussels, Berlin and the ECB now openly acknowledging the risk that Greece could leave the euro zone, a meeting between Tsipras and Merkel in Berlin today will be closely watched for signs of a breakthrough or hardening of positions.
In China the manufacturing PMI will be the only major data release to gauge the cooling of the world’s second-largest economy. The calendar is fuller in Japan, where the PMI tomorrow is followed by inflation data, unemployment and retail sales on Thursday.
While no monetary policy meetings are scheduled at the world’s major central banks this week, interest rate decisions are due from South Africa, Nigeria, Israel, the Czech Republic and Hungary. – Reuters