Last Meaningful Week of 2020 Drawing to Close
December 18, 2020
Ahead of the approaching year-end holidays, this week saw a rush of central bank policy reviews and data releases, many coming a couple of days earlier in December than is customary in other months. Foreign exchange trading tends to lose some breadth and depth in the final weeks of December, making currency relationships prone to erratic and occasionally unrepresentative movements.
Yesterday’s deluge of central bank board meetings was capped by the Bank of Mexico, which like the others left its overnight interbank benchmark rate unchanged. Such has been 4.25% since a 25-basis point cut in September. The rate was slashed by 300 basis points between February and the September cut, but officials have demurred from changing it at its latest two reviews. According to a released statement, two policymakers dissented in favor of a 25-basis point cut now, and the text categorized the current period as a pause in easing while incoming data are examined to see if more stimulus will be needed.
Central banks completed policy reviews today in Japan and Russia:
After a 5 hour six minute deliberation over two days, the Bank of Japan Board left its short-term interest rate at -0.1%, the 10-year Japanese JGB yield at around zero percent, and the quantitative easing with yield curve control policy framework intact. But the statement announced six-month extensions to September 2021 (mid-fiscal 2021) of commercial paper and corporate bond purchases and of the special lending facility aimed at firms hit especially hard by the pandemic. The statement also contained a surprise revelation that a 3-month examination of ways to more effective ways to attain 2% sustainable inflation, which Governor Kuroda underscored in now way signals an intent to abandon the overall framework and goals of its policy. As always, he said stimulus could and will be augmented if deemed necessary in the future.
The Bank of Russia‘s policy interest rate had been cut 200 basis points from February to July but was left unchanged at 4.25% at the last scheduled review of 2020. Officials left the door open to additional rate cutting or other stimulus. GDP fell 3.4% on year last quarter, but inflation has been lately somewhat above what officials had assumed. Such is expected to recede to 4% during the forecast period.
In financial market action overnight,
- The dollar recouped 0.4% against sterling and 0.2% versus the yuan and yen, but remained unchanged relative to the euro and Swissy. The Russian ruble responded adversely to the aforementioned Bank of Russia announcement.
- Most stock markets and especially those in New Zealand and Australia lost some ground.
- The ten-year British gilt yield fell four basis points, but its U.S., German, and Japanese counterparts stayed level. There was also scant change in the prices of oil and gold.
The third-quarter U.S. current account deficit widened to $178.5 billion (equal to 3.4% of GDP) from $161.4 billion in 2Q and $121.6 billion in the third quarter of 2019. Four years ago, the reduction of U.S. external deficits was identified as a top priority of the incoming Trump Administration, but the aggressive tariff policy was employed toward that end proved ineffective. The U.S. current account deficit in 2016 had equaled 2.4% of GDP. In nominal terms, last quarter’s deficit was its largest since mid-2008.
Japanese core CPI deflation intensified to -0.9% in November, its most deflationary on-year condition since August 2010. Energy prices, down 7.6%, and considerable slack in resource usage, have been driving the downtrend in Japanese prices.
The German business climate index, compiled by the IFO Economic Institute, showed overall resilience in December, firming 1.2 index points to a 2-month high of 92.1. Current conditions rose to a 9-month high, and expectations recovered to a 2-month high. Manufacturing touched its best level in over a year. Services improved 2.7 points to a 2-month high, but construction matched November’s 4-month low.
German producer prices fell 0.5% in the year to November, their smallest on-year drop in nine months.
Euroland posted a somewhat larger seasonally adjusted EUR 26.6 billion current account surplus in October, but the unadjusted surplus recorded in the past dozen months of EUR 233.5 billion was 12.9% smaller than a year earlier.
The Swiss current account surplus shrunk to a six-quarter low of CHF 8.778 billion in the third quarter from EUR 13.1 billion in 2Q and CHF 11.9 billion a year earlier.
British retail sales broke a string of six straight monthly advance, dropping 3.8% on month in November and trimming the on-year advance to 2.4%. On a brighter note, the British industrial trends survey’s orders index rose 7 points in December but remained soft at -26.
New Zealand’s business confidence index leaped from -6.9 in November to a 40-month high of +9.4 in December.
Copyright 2020, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Bank of Japan, Bank of Mexico, Bank of Russia, German IFO business climate, U.S. current account deficit