* Kiwi, Canada’s dollar gaining on ‘improved risk sentiment’
* Swaps traders pricing in lower probability of RBA rate cut
Australia’s dollar led gains in commodity currencies after first-quarter economic growth was stronger than expected, stoking expectations the Reserve Bank of Australia will refrain this month from cutting interest rates again.
The Aussie advanced against all but one of its 16 major peers on Wednesday after a government report showed gross domestic product increased 1.1 percent in the first quarter from the previous three months, compared with the median estimate of 0.8 percent in a Bloomberg survey of economists. The New Zealand dollar climbed for a second day, while the Canadian currency snapped a three-day decline.
“This was a strong headline,” said Gareth Berry, a foreign-exchange and rates strategist in Singapore at Macquarie Bank Ltd. “This reduces the risk of an immediate RBA follow-on rate cut to the cut they delivered in May. They could afford to be a little bit more patient now.”
Australia’s dollar rose for a third day, advancing 0.4 percent to 72.65 U.S. cents as of 7:46 a.m. in London. The kiwi added 0.2 percent to 67.77 U.S. cents, after jumping 1 percent on Tuesday, while the Canadian dollar climbed 0.1 percent to C$1.3081, snapping a three-day, 0.9 percent drop.
The kiwi and the Canadian dollar have gained with “the improved risk sentiment within the commodity block,” which eases pressure for their respective central banks to act, said Robert Rennie, the global head of currency and commodity strategy at Westpac Banking Corp. in Sydney. A gauge of commodities is hovering near a six-month high.
The Australian dollar has weakened about 5.2 percent since May 2, the day before the RBA unexpectedly cut its benchmark to a record 1.75 percent to combat weakening inflation. The central bank will set rates again Tuesday.
The Reserve Bank of New Zealand, which surprised markets with a cut to its benchmark rate in March, will next meet on June 9. Bank of Canada announces its policy decision on July 13.
Swaps traders are pricing about a 46 percent probability that the RBA will cut its benchmark again by August, according to data compiled by Bloomberg. They had been pricing 54 percent odds at the end of last week.
“There are a number of arguments for the Aussie to improve at least in the short term,” said Westpac’s Rennie. “One, we’ve come long way in a short period of time; two, commodities in general look like they are consolidating; and three, the probability of RBA moving this month is falling and today’s data adds a bit to that.”
* Brent crude rises above $45 a barrel after production drops
* Australian dollar leads gains as greenback swings before data
Currencies of nations that export all kinds of commodities benefited from a jump in oil prices following news of a drop in U.S. production.
Australia’s currency vied with its Canadian counterpart to lead gains as Brent oil, the international benchmark, climbed above $45 a barrel, extending an advance that’s seen it climb more than 70 percent from a 12-year low earlier this year. The Bloomberg Commodity Index rose for the first time in four days.
Natural-resource-linked currencies have advanced during the past three months as oil has rebounded after a precipitous slide from almost $116 per barrel in mid-2014, to under $30 in January. Investors see a global glut that’s depressed prices easing after U.S. oil output declined the most in eight months last week.
“These are the currencies that tend to trade as proxies for commodities,” said Bipan Rai, executive director of foreign-exchange strategy at Canadian Imperial Bank of Commerce in Toronto. “A large part of it is oil driven. We’ve got a couple of headlines over the past couple of days that are suggesting supply might be compromised, at least in the near term.”
The Aussie rose 0.4 percent to 74.87 U.S. cents as of 9:49 a.m. in New York, rebounding from an almost two-month low, while Canada’s loonie strengthened 0.3 percent to C$1.2837 per greenback. The Brazilian real and Mexican peso also rallied.
Oil has rallied for four of the past five weeks even as policy makers failed to agree production curbs at last month’s OPEC meeting. Iran, which refused to join a push to freeze output in April, could be ready to start discussions on production quotas within one or two months. A wildfire in Canada meanwhile threatens to stem supply there.
* Effectiveness of sub-zero rates at ECB and BOJ doubted
* SNB will go lowest; only Denmark has achieved its objective
Haruhiko Kuroda and Mario Draghi may be among the few economists who still think negative interest rates are a good idea.
The Bank of Japan governor’s decision last month to charge banks on some excess reserves, a year and a half after his counterpart at the European Central Bank took a similar path, means that a quarter of the world economy is now in the sub-zero club.
Yet just 27 percent of respondents in a Bloomberg survey say negative rates will help Kuroda reach his goal of boosting feeble inflation, and only 42 percent say the policy is succeeding in the euro area. While the strategy has shown it can weaken currencies — one channel for spurring consumer prices — the discussion over how long that can last and the likelihood of unintended consequences is getting louder.
“Since more and more central banks are applying negative rates, this instrument is becoming less effective,” said Kristian Toedtmann, senior economist at DekaBank in Frankfurt. “All these currencies can’t devalue at the same time. The result may be an excessive use of negative rates with harmful side effects.”
What started in 2012 as a consequence of Denmark’s fight to defend its currency peg to the euro has now become a mainstream policy pillar, mulled even by the U.S. Federal Reserve. The survey of 63 economists shows that while some say negative rates helped avert even worse downturns, the strategy is only really appropriate for small economies shielding themselves against speculative capital flows.
Ninety percent of respondents said the Danish Nationalbank is on the right track and 70 percent approved of the Swiss National Bank’s use of the measure. Both are protecting their currencies. Less convincing was Sweden’s Riksbank, which lowered the repo rate to minus 0.5 percent last week to bolster inflation, and which had the support of just 41 percent of economists.
Even so, the skepticism doesn’t seem to be deterring monetary officials in Tokyo, Frankfurt or Stockholm from signaling deeper cuts.
In the euro area, overnight index swaps indicate that investors expect the deposit rate, now at minus 0.3 percent, will fall a further 20 basis points by mid year. Draghi has indicated the next step could come as soon as March. In Japan, Kuroda told parliament on Thursday that the central bank will stick with stimulus as long as needed. The Riksbank said last week that it has the scope to reduce rates further, though economists in the survey said it’s probably reached the floor.
Euro-area inflation was 0.4 percent in January and the ECB says it may turn negative in coming months. Japanese consumer prices probably stagnated last month. Sweden’s rate was 0.8 percent. The central banks for all those economies have inflation goals of around 2 percent.
The standard central-banker defense to criticism of apparently inert stimulus is the counterfactual — things would have been even worse without it. That’s a sentiment echoed by some respondents in the survey.
The ECB’s policy “has prevented a larger decline in inflation and has helped to push lending rates to the economy lower,” said Philippe Gudin, chief European economist at Barclays Plc.
When it comes to actually boosting inflation, not to mention wages and economic growth, negative rates can’t do much and they distort foreign-exchange markets, according to Elwin de Groot, an economist at Rabobank in Utrecht, the Netherlands. In a sign that currency traders have started to rebuff both the ECB and the BOJ’s easing efforts, the euro and yen have risen against the dollar this year.
ECB policy makers acknowledged the issue at their Jan. 21 meeting in Frankfurt. An account of the session published this week stated that while the exchange rate’s role in transmitting monetary policy is still important, the channel has weakened.
“Negative rates may have started to backfire,” said de Groot. “For small central banks, negative rates can be an effective tool to steer their currencies. When major central banks cut rates further into negative territory, they simply raise the global currency war to a higher level.”
Economists foresee that war continuing for a while yet, with a majority of respondents predicting negative rates will be in place at the ECB and Riksbank until at least the first quarter of 2018 and at the BOJ until at least the end of that year.
Switzerland, long seen as a haven for investors from the euro area which surrounds it, will have to plumb the greatest depths, cutting from the current minus 0.75 percent to minus 1 percent, the survey indicated. The SNB was forced to abandon its currency cap in 2015 under pressure from the ECB’s oncoming quantitative easing.
“Policy makers have slashed interest rates to zero or lower in some cases and pumped up markets with trillions of dollars of stimulus, yet inflation and bond yields have stubbornly refused to rise,” said Alan McQuaid, chief economist at Merrion Capital Group Ltd. in Dublin. “The bottom line is that negative interest rates are not the answer to the world’s economic problems and central bankers need to have a serious rethink — and soon.”
* Street currency rates in Nigeria, Egypt are near records
* Uzbekistan, Tajikistan hurt by trading partner devaluations
Only on the streets of cities like Cairo, Abuja or Tashkent can you gauge just how much pressure developing countries are under to ease controls on their currencies.
Individuals and businesses in five nations across central Asia, the Middle East and Africa are paying anywhere from 4 percent to 136 percent more than official exchange rates to get their hands on dollars, according to a Bloomberg survey. So-called black markets flourish at times when there’s a shortage of greenbacks and are one indicator of how much a currency should be allowed to depreciate to reach its fair value.
Central banks that uphold pegs have been under strain after tumbling commodity prices and slowing global growth weakened currencies from Brazil to Russia by at least 19 percent in the past year. In the four months that followed China’s shock devaluation of the yuan in August, Kazakhstan, Argentina and Azerbaijan abandoned control of their exchange rates to boost competitiveness and avoid draining reserves.
“There is enormous pressure on some of the pegs in emerging markets, with the unofficial rate diverging significantly from the official one,” said Bernd Berg, an emerging-markets strategist at Societe Generale SA in London. “Countries like Nigeria are maintaining fixed exchange rates that are unsustainable. Once the pegs break, investors in the local currency face significant losses.”
In Argentina’s case, the move to a free float in December eliminated the 4.2-peso gap between the official and black market rates. In the months prior to the move, it cost as much as 50 percent more to buy the currency on the street than at the central bank rate.
That premium is similar to what currency vendors in Nigeria’s capital Abuja are charging for dollars now, while hawkers in Tashkent are demanding more than double to convert the Uzbeki soum. The cost to buy the U.S. currency in unregulated trading in Egypt keeps rising even after the central bank devalued the pound three times last year.
The street rate “is a better reflection of where a market-based rate should be,” said Simon Quijano-Evans, the chief emerging-markets strategist at Commerzbank AG in London. It shows “how domestic participants and individuals really feel about their currencies,” he said.
The existence of a black market isn’t the only indicator that a country may be on the verge of changing currency policy. There wasn’t a parallel rate in Kazakhstan when the country relinquished control of the tenge to boost competitiveness for its goods in neighboring China and Russia.
Below is a selection of countries where thriving unregulated trading may be forcing central banks to reassess currency policy as oil prices trade near 12-year lows, unrest in the Middle East chokes revenue from tourism and devaluations in key export markets hurt trade. To see the countries on a map, click here.
Since Africa’s biggest crude producer started managing the naira at 197-199 per dollar in March 2015, oil prices tumbled more than 40 percent. Under these pressures, central bank reserves fell to $28 billion this month, the lowest in at least five years, while an executive director at the nation’s biggest company, Dangote Group, said last week the currency policy has created an “extremely tight” supply of foreign exchange. Non-deliverable forwards predict the naira will drop another 30 percent from the official rate to 288 in 12 months, approaching the black market level that exceeds 300 per dollar.
The stress may be even greater further south in the continent’s second-largest oil producer. Angola has been reducing the amount of foreign exchange it makes available to banks and businesses over the past two years to stem the drain on reserves that fell to the lowest levels since 2011 last year. The central bank let the kwanza depreciate 24 percent in 2015 and another 15 percent last month. But that may not be enough, with hawkers selling the currency at a premium of 136 percent to the official rate at 161 on Friday.
Egypt’s ability to defend the currency with reserves has been crippled since the so-called Arab Spring uprising five years ago triggered political instability, drove out foreign investors and curbed tourism, one of the country’s biggest sources of hard currency. The pound, which has fallen 26 percent since the end of 2010, is still under pressure as street vendors in Cairo charge 8.75 to buy dollars, compared with an official rate of 7.83. Since taking over as central bank governor in November, Tarek Amer has sought to shore up confidence in the pound in part by paying foreign stock and bond investors the money owed to them that had been trapped in the country and by limiting some imports.
A slowdown in China and a plunge in the currencies of Russia and Kazakhstan, Uzbekistan’s biggest export markets, are weighing on the central Asian economy. While low external debt and “large” international reserves provide a cushion, Uzbekistan is likely to allow the soum to weaken at least 15 percent this year to restore competitiveness, according to Per Hammarlund, chief emerging-market strategist at SEB SA in Stockholm. The black market rate of 5,950 in soum is more than double the official level at a record-low 2,837, according to data compiled by Bloomberg and the American Chamber of Commerce in the country. The central bank let the exchange rate slide 13 percent in 2015, compared with drops of 20 percent for the ruble and 46 percent for the tenge.
This country of 8 million people borders Uzbekistan, Kyrgyzstan, China and Afghanistan in the heart of Central Asia. It relies on remittances from workers abroad, notably in Russia, for about half of its gross domestic product, according to SEB’s Hammarlund, who predicted the somoni will depreciate by about 30 percent against the ruble in the coming months. The Tajik currency dropped 25 percent last year and trades at 7.84 per dollar, compared with an unofficial rate of 8.15, according to data compiled by Bloomberg and figures from the American Chamber of Commerce in the capital Dushanbe.
* Krona stronger versus most peers as Sweden considers action
* China’s devaluation prompts central banks to weigh responses
As a new round of competitive devaluation looms, evidence is mounting that currency interventions are losing their potency.
Mexico’s peso fell to a record as Cantor Fitzgerald LP criticized the nation’s efforts to strengthen the exchange rate as “mostly futile.” A study by Brazilian central bankers last week found “no evidence” that their intervention program was affecting currency volatility. And far from driving a sustained decline in the krona, mooted sales by Sweden’s Riksbank may actually be a buying opportunity, according to Citigroup Inc., the world’s biggest foreign-exchange trader.
China’s efforts to depreciate the yuan have raised the stakes as other nations seek to weaken their own currencies to stay competitive or strengthen them as a plunge in commodity prices ravages their citizens’ buying power. Mexican Finance Minister Luis Videgaray said Jan. 7 that the world’s No. 2 economy risks triggering competitive devaluations — known as a currency war– while Sweden put in place measures that will help it step in to curb the krona’s gains and boost inflation.
“There’s a big question mark over the ability of individual central banks — particularly for small, open economies — to really influence exchange rates through intervention in anything other than a short-term perspective,” said Ken Dickson, the Edinburgh-based investment director for currencies at Standard Life Investments Ltd. ,which manages about $360 billion. In Sweden’s case, “it’s very difficult for the central bank to fight the market if it wants to go the other way.”
While the krona has declined more than 1 percent versus the euro since the Riksbank said Dec. 30 it was ready to intervene, it’s stronger against most other major currencies. Minutes of the central bank’s December meeting, published Friday, showed a number of policy makers said intervention may be necessary.
Standard Life’s Dickson expects the krona to gain versus the euro, and the median forecast in a Bloomberg strategist survey is for an advance to 9.2 per euro this quarter, from 9.28 on Monday. The krona will strengthen, with a gain to about 9.1 a likely trigger for intervention, “but not a floor,” London-based Citigroup analyst Josh O’Byrne wrote in a Jan. 8 report.
It’s almost a year to the day since the cost of intervening to weaken the franc prompted Switzerland to scrap its exchange-rate ceiling for a mixed policy of franc sales and negative interest rates. Yet its currency is still 10 percent stronger than the 1.20-per-euro limit it was forced to abandon.
Ending the cap reverberated around financial markets — just as China’s devaluation is doing now.
“It’s very difficult for a central bank to sustain an artificial foreign-exchange rate for an extended period of time,” said Peter Rosenstreich, head of market strategy at Swissquote Bank SA in Gland, Switzerland. “We saw that very clearly in Switzerland, in a very scary, dramatic sense: what happens when you extend your good luck too long. It’s generally extremely expensive and doesn’t work out particularly well.”
Nations across the developing world stepped back from currency intervention last year, embracing the boost to exports a weaker exchange rate tends to bring and easing pressure on their foreign reserves.
Many of the interventions happening now are to boost currencies rather than weaken them. Colombia’s central bank governor said last month it was getting closer to the conditions where it might need to step in after the peso slid to a record. Brazil’s real has fallen almost 2 percent against the dollar since September, when policy makers resumed sales of swap contracts and credit lines to support the currency.
Mexico’s peso has slumped 18 percent since the nation began its latest intervention program in December 2014. Rafael Elias, head of emerging-market strategy at Cantor Fitzgerald in New York, wrote in a report last week that the “daily interventions are proving to be mostly futile, and the depreciation is only partially reduced with these dollar sales.”
Surprise and coordination are key to intervening successfully, according to a 2015 paper by Harvard University Professor Jeffrey Frankel. The report examined the history of interventions since the 1985 Plaza Accord, a coordinated effort by the U.S. and other countries to weaken the dollar. It argued that the strategy is doomed to fail if markets are determined to move a currency in the opposite direction.
Joint action is no guarantee of success. An attempt by Japan and nations including the U.S. to weaken the yen after the tsunami and earthquake of 2011 spurred only a fleeting decline in the currency, which strengthened against all of its major peers over the next two months.
More distant history also shows the challenge of going against the tide. In 1992, the U.K.’s inability to stave off speculative attacks on sterling forced it to pull out of the European Exchange Rate Mechanism, a precursor to the euro.
“There are episodes where speculative market pressure is basically larger than the willingness, or ability, of the central bank to rule against it in terms of intervention,” said Ulrich Leuchtmann, head of currency strategy at Commerzbank AG in Frankfurt. “The pound was a good example.”