ÔÉėChina‚Äôs central bank raises reserve requirement ratio to
sceptical about Greek savings plan
remains on course
No real alternatives to the dollar
At the end of last week, after the release of weaker- than-expected
US jobs data for December, EUR-USD had strengthened from 1.43 to about 1.45.
After hovering around this level for most of the week, it finally dropped to 1.44. The yen, which
had suffered a setback last week after comments made by the new finance
minister, firmed to around 91 against the dollar.
The dollar still remains the favoured currency. This
is not so much because of US economic
data, which painted a mixed picture, but rather because
the rest of the world is not looking particularly attractive at the moment. The
Chinese central bank, which had started to raise central bank bill rates the previous week, increased the reserve
requirement ratio for commercial banks from 15.5 to 16%, thus underlining its intention to
curb credit expansion. Many observers are now expecting the PBoC to raise lending rates too.
China‚Äôs shift towards a less expansive monetary policy is
having an impact on equity and currency markets, particularly those in the
Asian emerging markets, and on commodity markets. Asian equity markets, for
instance, were much weaker than US markets.
is still grappling with the debt crisis in Greece. This week, the Greek government unveiled a plan to
cut the budget deficit to 8.7% of GDP this year and reduce it to 2.8% of GDP by
the end of 2012. But markets are skeptical whether the government will be able
to implement the measures in the face of mounting opposition from
interest groups such as trade unions. Despite the ambitious plan, spreads between 10- year
Greek government bonds and Bunds widened to 282 basis points.
ECB President Jean-Claude Trichet‚Äôs remark that the
European central bank would not change its collateral rules for the sake of Greece probably had a negative impact too. If the ECB
reverts to pre-crisis rules in 2011 as planned, Greek government bonds may no
longer be accepted as collateral by the ECB after that date.
German GDP growth data for 2009 is unlikely to have
made the euro more attractive either. According to the preliminary results of
the German Federal Statistical Office, German GDP fell by 5% in 2009. Those who
had forgotten the true extent of the damage when growth rates turned positive
again in the second quarter of 2009, will have been brought back to earth with
a bump by that figure.
Moreover, the Statistical Office reported that economic
growth in Germany probably stagnated
in the fourth quarter, which was another
disappointment. If this assessment proves correct, the
statistical overhang for 2010 could turn out to be lower
than forecast. Thus some downward revisions are likely, especially as growth in
the first quarter of 2010 could be lower than expected due to the weather.
Money market deceptively calm
On Thursday, the ECB held its first meeting of the
year. As expected, last month‚Äôs assessment
was confirmed: interest rates remained appropriate; the
euro area economy was expected to grow at a moderate pace; inflationary
pressure was low. The previous month, the governing council had outlined its
plans to exit from unconventional measures. There was no additional information on this topic this time. In reply to journalists‚Äô questions,
Mr Trichet merely said that there would still be an abundant supply of liquidity in the
money market for some months to come. While that was the case, the EUONIA rate would also be
close to the deposit facility rate. Furthermore, Mr Trichet said that decisions
on further steps in money market management would be taken in March.
The ECB appears to be in no hurry to bring money
market management back to normal ‚Äď
particularly as regards draining excess liquidity from
the money market and reverting to refinancing operations with variable interest
rates. We, however, think it risky to bank on money market rates remaining at
their present level until the second half of 2010 at least.
On the one hand, in December, the ECB predicted a
gradual recovery in financial markets,
and pointed out that the continuation of the
unconventional measures harboured a risk of market distortion. On the other
hand, the excess liquidity is not likely to be drained from the market ‚Äúnaturally‚ÄĚ
before July at the earliest, as that is when the one-year tender of ‚ā¨442bn
issued in June matures. And it could be even later than that, if, for example,
market participants take advantage of the 6-month tender at the end of March to
stock up substantially.
We consider it unlikely that the ECB will wait six
months or more before embarking on implementing its decision to bring money
market functions back to normal. Furthermore, its commitment to allocate the
one-week tender in full is only valid until the middle of April. Changing to a
variable-rate tender could prove difficult, however, if the money market
remains flooded. We would therefore not be at all surprised if the central bank
was already in the throes of considering ways of mopping up liquidity.
Stephan Rieke +49 69 718-4114
Grabbe / Klaus N√§fken
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