Serbia: That Incredible Shrinking Country

This weekend’s election results in Serbia, and in particular the gridlock state of the political process and the resilience of the vote for the nationalist Serbian Radical Party (as ably explained by Doug in the previous post), pose new, and arguably reasonably urgent questions for all those who are concerned about the future of those European countries who currently find themselves locked outside the frontiers of the European Union. What follows below the fold is a cross-post of an entry I put up earlier this afternoon on the new global economy blog: Global Economy Matters. I don’t normally like cross-posting, since I would prefer to put up original Afoe content, but my time is a bit pressed at the moment, and I feel the issues raised are important enough to merit a separate airing on this site.
Continue reading

The Perrenial Euro Story (or lack of it)

Brad Setser has a post, the perrenial dollar story, which IMHO, has one large and significant ommission: it doesn’t really mention the euro. Personally I don’t really see how you can consider the future evolution of the dollar without taking the euro into account. This realisation provoked a rather long comment from me on Brad’s blog, and it is this comment, in a slightly modifed form, that I am now posting here. (Update: incidentally, I notice that Claus Vistessen has two highly relevant summaries of the great greenback debate (here, and here) which. among other things, serve as an excellent introdiction to the issues involved).
Continue reading

More Pressure on the Yield Curve

One of the things about targeting expectations, and factoring-in changes, is that the world moves on at a very rapid clip these days. So the ECB rate rise in now, really, yesterday’s news. The big issue today is the fact that the easing cycle in the eurozone may already be over (we need to see the data going forward before we can be sure about anything here). Anyway, one thing the markets are sure about is that eurozone interest rates aren’t going anywhere very significant in the near future, and one of the consequences of this is the fact that 10 year German bund yields are on their way down again, as is the euro. (On this I continue to maintain my long held view that the situation is asymmetric: good news from the US, and bad news from the eurozone will send the dollar up, while the opposite will simply see exchange rates marking time. All of this has a floor, of course, somewhere, but I think we are still some distance from touching it). Of course all of this implies that the dangers of yield curve inversion in the US are now real and ever-present.

European bonds may gain for a second week, their first back-to-back set of increases in more than three months, on speculation any interest-rate increases from the European Central Bank will be limited.

The ECB raised its benchmark rate to 2.25 percent yesterday, the first time it has lifted borrowing costs in five years. ECB President Jean-Claude Trichet said the increase left rates in line with the bank’s goal of containing inflation, sending bond yields to a one-month low.

“There will be no additional rate hike immediately after this one, and the cycle will end at a relatively low level,” said Kornelius Purps, a fixed-income strategist at HVB Group in Munich. “That should be supportive for the bond market.” Economists at HVB forecast one more rate increase of a quarter percentage point next year.

The dollar rose for a second day against the euro on speculation a government report will show the U.S. economy added the most jobs in four months in November.

The U.S. currency also headed for a third week of gains versus the yen on speculation faster growth in the world’s largest economy will prompt the Federal Reserve to raise interest rates faster central banks than in Japan and Europe.

“There are no signs that the economy is slowing down,” said Niels Christensen, a currency strategist at Societe Generale SA in Paris. “Rate expectations in Europe and Japan are no match for the Fed, and so the dollar will keep rising.”

Rational Markets?

The general impact of the French riots is, I feel, being ably covered by others here, what I am curious about is how financial markets reach their opinions. According to headlines in many newspapers, the euro is falling aginst the dollar as a result of what is happening in France (or see here). This may or may not be a good reading of why the euro is dropping, but if it was the explanation, I would say it was a far from rational response.
Continue reading

ECB Interest Rate Policy

Brad Setser has a post today on Kate Moss, not provoked by her evidently economically intriguing modelling properties, but due to the Kate-Moss-thin credit-spreads which Bloomberg’s William Pesek refers to in this article. What really turns Pesek on it turns out isn’t Kate Moss at all but the possible existence of links between China’s economic boom and the recent surge in popularity for credit derivatives.

And it is in the context of this evolutionary chain that Brad Setser’s work on China and Systematic Risk offers itself as some kind of missing link.
Continue reading

China Comes Off The Renminbi Dollar Peg

This is a big news day. China has just announced that it is going to come off the dollar peg currency arrangement. Well it’s not that simple, they have announced a 2% appreciation of the currency against the dollar, and that the renminbi will now float against a basket of currencies. In fact this is a very ‘dirty’ float, since the trading price of the US dollar against the renminbi will now float within a trading band of plus or minus 0.3 per cent, while the band of other currencies against the renminbi will be set by the central bank, at least this is what the official statement says. How this will work will doubtless become clear in the coming days. Still a start is a start, and in many ways this is a historic day.

Update: Around the blogs: Brad Setser is well onto this. As is Daniel Dresner who points us to this Wall Street Journal report by Michael Phillips.

The Euro Also Rises

The euro is trading this morning at around $1.2150. The big issue seems to be the US trade deficit, which is currently outweighing all other considerations. Still what goes down can come up, and what goes up……

The dollar fell to the lowest in two weeks against the euro, the biggest move of any currency, on expectations a government report tomorrow will show the U.S. trade deficit was near a record.

The U.S. currency has retreated 2.3 percent against its European counterpart since reaching a 14-month high on July 5. A rising deficit means more dollars are leaving the country to pay for imports. The dollar also weakened against the yen after Japan’s Nikkei 225 Stock Average rose to a three-month high.

“The dollar all of a sudden looks shaky; the deficit will be significant,” said Callum Henderson, head of global currency strategy in Singapore at Standard Chartered Plc. At the same time, “stock inflows are undoubtedly helping the yen. It makes sense for the dollar to weaken.”

You’d Better Move On

The papers this morning seem to be all full of ‘gloomy’ articles whose principal theme is that Europe has finally been plunged into a grave crisis by this weeks summit.

“People will tell you next that Europe is not in a crisis,” Luxembourg Prime Minister Jean-Claude Juncker, who holds the EU presidency, said after a two-day summit ended in acrimony. “It is in a deep crisis.”

As someone who is ‘crisis prone’ I would have imagined I would share that feeling. Somehow I don’t.

Some reasons why.
Continue reading

When You’re Done You’re Done

You know I’m sure most of you think my constant references to Argentina in the context of Italy’s economic problems is troubling, possibly even irritating. You may well be right. I have to say that I followed Argentina steadily from 1998, waiting to see the inevitable happen. The principal problem was, lets be clear, the 1:1 dollar peg. This was the epoch of the internet/ICT boom, and a rapidly rising dollar. It’s not clear to me at all that had Argentina pegged to the dollar in 2002 it would have had the same problems so quickly. One of the problems with being attached to a rapidly rising currency is that your imports get cheaper, and your exports dearer.

Now for an apochryphal story. Late in the crisis, before the geyser finally blew, back in early December 2001, a friend of mine visited Argentina. Seeing some nice shoes in a shop window he entered the shop (you will remember Argentina was famous for its leather products: all those cows). On asking where the leather came from, he was informed ‘it’s from Brazil, Argentinian leather is too expensive’. One month later it was all over bar the shouting. Well…..
Continue reading