FX Briefing - ECB security purchases: the genie is out of the bottle
FX Briefing 27
Â·China is striving to influence the global financial system
vice-president Papademos describes additional measures ECB could take
Â·ECB is set to
cut the refi rate by 50 basis points to 1%
ECB security purchases: the genie is
out of the bottle
week, forex markets were driven primarily by the sustained recovery in equity
markets and the subsequent increase in risk appetite. The US
private-public purchasing programme for toxic assets and loans could also have
played a part. This development boosted emerging market currencies as well as â€ścommodityâ€ť
currencies such as the Canadian and the Australian dollar. But currencies
such as the Korean won and the Swedish krona, which had previously been
considered particularly at risk, also benefited. After last weekâ€™s rebound,
EUR-USD remained relatively flat.
Mid-week, rates had tumbled from around 1.36/37 at the beginning of the week to
below 1.35, but recovered again to about 1.3550 towards the end of the week.
The yen, which had also firmed against the dollar the previous week, relinquished
its gains. USD-JPY rose from about 95 to 98. The yen has now depreciated
significantly again versus the euro. In January, EURJPY was about 115, but it
is now back to around
China wants global monetary system reform
Chinese central bankâ€™s call for a new international monetary system caused
quite a stir this week. Zhou Xiaochuan, governor of the Peopleâ€™s Bank of China,
suggested increasing the use of International Monetary Fund Special Drawing Rights
(a unit of account created by the IMF based on a basket of key international
currencies) as a new global reserve currency.
main argument is that a reserve currency country (not specifically named, but
obviously the US)
is constantly confronted with the dilemma of trying to achieve its domestic
monetary policy goals while at the same time ensuring the stability of the
reserve currency. Chinaâ€™s
suggestion is more food for thought rather than the complete draft of a new
system. It is by no means certain whether a currency based on a basket of
currencies like the Special Drawing Rights could in fact take over the role of
an international reserve currency. And it would be even harder to create an
autonomous supranational currency.
is probably aiming at achieving two immediate objectives: first, in the run-up
to the G20 summit at the beginning of April, it probably wants to assert its
right to have a say in international monetary questions. The International
Monetary Fund is to be given additional responsibilities, and requires fresh
is willing to pay additional capital into the Fund in return for having a say.
An increase and reform of IMF quota on the basis of economic performance would
lead to a massive shift in the distribution of power in the Fund to the benefit
of the big emerging market nations like China,
and to the detriment of the major industrialized countries, particularly the US.
proposal is a warning to the US
not to jeopardize the value of other countriesâ€™ currency reserves. A few weeks
ago, Chinese Premier Wen Jiabao had already asked the US
government to guarantee the safety of Chinese investments in the US.
is in a dilemma, however: its monetary authoritiesâ€™ dollar holdings are now so
vast, that it could not move out of dollar assets without suffering a loss.
ECBâ€™s monetary policy options
notable event was a speech given by ECB vice-president Lucas
Papademos on Thursday in Brussels.
It is striking that the assessment of macroeconomic risks has worsened again compared,
for example, to that in the governing councilâ€™s statement at the beginning of
March. As far as we know, Mr Papademos is the first ECB representative to admit
to downward risks to price stability, credit supply constraints, and the danger
of an adverse feedback loop between the real economy and the financial sector.
Most importantly, however, Mr Papademos hints that the ECB is intending to
implement further measures in addition to interest rate cuts. According to his
remarks, the ECB could, firstly, extend the maturity of refinancing operations.
Up to now, this was a maximum of 6 months. Secondly, Mr Papademos sees a
possibility of purchasing private debt securities in the secondary market to improve
liquidity in this market segment and reduce the cost of funding of the real
ECB governing council is not likely to present a hard and fast plan to purchase
private securities next Thursday. However, the fact that the vice-president of
the ECB, who tends to be rather tight-lipped as regards monetary policy, starts
talking about possible quantitative measures shortly before a council meeting,
must be more than a coincidence. Now that this genie is out of the bottle, it will
be difficult to get it back in again. We therefore consider it feasible that
the governing council will next Thursday at least admit that it is considering
such measures. Furthermore, we expect the ECB to lower the refinancing rate by a further 50 basis points to 1.0%.
measure would be most effective if the deposit rate, which is currently serving
as a basis for the overnight rate, were to be cut from 0.50% to zero at the
same time. In our view, this is possible and would make sense. However, marketparticipantsâ€™ expectations diverge on this
Rieke +49 69 718-4114
Grabbe / Klaus NĂ¤fken
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