FX volatility Feb 2015

Currency Wars Monetary Easing

A Merrill Lynch analyst has constructed a “GDP-weighted range-based currency volatility index” to show that the current level of volatility in currencies is “the highest for non-crisis periods in twenty years.”  He also argues that “a weak currency might provide a short-term boost to the countries engaging in currency devaluation.  However, if everyone is playing the same game, all we will end up with is more and higher FX volatility.  This in turn will likely exact a toll on global trade and capital flows.”  Also, “since interest rates (short-term as well as long-term rates) are currently so close to zero, the exchange rate has become the main transmission channel of monetary easing…but the benefits that exist independent to the exchange rate are shrinking alongside rates.”  Quite.  Cue the PBoC: “China’s central bank cut the required reserve ratio for its banks (alt) as it stepped up efforts to counter the impact of capital outflows and encourage banks to boost lending amid fresh data showing a weakening economy…The required reserve ratio, known as the RRR, specifies the portion of a commercial bank’s deposits that must be held on reserve at China’s central bank, where it is unavailable for loans and other investments.”  Most analysts, however, seem to think that the RRR cut reflects new concerns about yuan liquidity, and not necessarily an attempt at currency devaluation: “Once upon a time China’s trade surpluses were so large and the capital inflows so strong that [these] inflows provided more than enough base money to fuel any amount of credit expansion that China authorities desired.  In fact, there were excess inflows that China had to sterilize.  Now the trade surpluses have diminished and the speculative inflows have cooled…If RRR were not cut, there would be an effective tightening of liquidity conditions.”  


Jobless Claims Steady Despite Energy Layoffs

Fewer Americans than forecast filed jobless claims last week, hovering around levels that are typically associated with an improving job market.”  This is great news considering all the energy sector layoffs last month: “U.S.-based employers shed 53,041 jobs last month…with 40% of those directly related to oil prices.  It was the highest monthly job cut tally since February 2013 and an 18% increase from the same month a year ago.”  “All eyes are on Friday, when a Labor Department report is projected to show the [US] added more than 200,000 jobs in January for a 12th consecutive month, and unemployment held at 5.6 percent, a more than six-year low.”


How Do Ya Like Dem Wages?

The Labor Department says “unit labor costs, a key gauge of inflation and profit pressures that measures the price of labor for any given unit of output, increased at a 2.7 percent rate in the fourth quarter after falling at a 2.3 percent rate in the third quarter.  For all of 2014, unit labor costs rose 1.5 percent compared to a gain of 0.2 percent in 2013.”


The Problem With “Make My Day” Is That It Can Go Both Ways

Greeks have got themselves in a bit of a dilemma.  On the one hand, they don’t really wanna leave the European Union.  But also, they don’t really wanna leave their money in a Greek bank.  Also, “game theory has a couple of weaknesses.  First, it tends to work best in situations like mobile phone spectrum auctions where you can be reasonably sure that all the other players are playing game theory too.  And second, it will only give you the correct steer if you have made the right assumptions about the other guy’s objective function.”  Here’s the problem: everyone’s objective function is probably something like “don’t destroy the European Union,” but Syriza is holding a grenade (debt default), and the ECB is holding a bazooka (Greek banking collapse)….decisions…


EU: European Commission Raises Forecasts For Eurozone Growth: From 1.1 To 1.3% In 2015


USA: Prudential’s Stock Price Is About To Get Real Efficient

Oil Fund Is Gonna Take The High Road On Fossil Fuels (Alt)


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