New Overnight Developments Abroad: Central Bank Rate Cuts in Korea, Taiwan and Switzerland

December 11, 2008

Dollar downward momentum picked up. The U.S. currency lost 1.8% against the kiwi, 1.5% against the euro, 1.4% against the Australian dollar, 1.1% against the yen, 0.9% against the Canadian dollar, 0.8% against sterling, and 0.6% against the Swiss franc.

Stock market movements have generally small by recent standards. U.S. futures indicate likely rise at open. Nikkei up 0.7%. German Dax and Paris Cac are flat. British Ftse up 0.8%. Australia -1.2%. South Korean Kospi up 0.7%. Chinese CSI -2.4%.

Commodities extended their recent rally. Oil up 4.9%. Gold up 2.3%. 10-year JGB yield firmed 1.5 bp to 1.425%.

The Bank of Korea repo rate was reduced 100 bps to 3.0%. Four reductions since October 9 add up to 225 basis points. Largest cut since present policy framework began in 1999.

Taiwan’s discount rate cut by 75 basis points to 2.0%, lowest since September 2005 and biggest reduction in 26 years. Intent is to boos personal consumption. Five reductions since September 26th total 162.5 basis points. The target for M2 growth was also raised.

The Swiss National Bank cut its 3-month Libor rate target by 50 basis points to a range of 0.0-1.0% with a mid-point aim of 0.5%. Four cuts since October 8th total 225 basis points. The central bank expects GDP to drop next year by 0.5-1.0% and inflation, which may dip below zero at some points, to be 0.9%, revised from 1.9%, and to fall further in 2010 to 0.5%. Street analysts had looked for reductions of 50 basis points in Korea, Taiwan, and Switzerland.

Chinese consumer price inflation fell sharply to 2.4% in November, a 22-month low, from 4.0% in October and 8.7% last February. Food rose 5.9% year/year, down from 23.3% in the year to Feb 2008, while other consumer prices went up 0.6%, down from a peak of 1.9% year/year.

Japanese stock and bond transactions generated a Y 580 billion outflow last week, similar to the outflow in the week to November 29th.

Australian jobs fell 15.6K last month, less than feared, after net gains of 30.4K in September-October. The jobless rate rose to 4.4% from 4.3% in October and a 2008 low-point of 3.9%.

South Africa’s confidence indicator climbed to a 19-month high of 260.65 in November. Markets expect a 50-bp rate cut in South Africa to be announced later today.

Peru’s central bank kept its benchmark rate at 6.5% but loosened reserve requirements.

Brazil’s central bank retained a 13.75% Selic rate.

Chile’s central bank extended liquidity-supporting measures to the end of next year.

Britain’s quarterly survey of expected inflation posted the biggest drop since 1999, falling to 2.8% in November from 4.4% in August. Construction orders in the U.K. fell 21% from a year earlier in August-0ctober. The CBI industrial trends index for orders firmed three points to -35, still implying a very sharply declining trend.

Officials in Russia widened the trading range for the ruble, effectively broadening the scope for depreciation. Russian reserves are down more than 25% since August.

The ECB monthly Bulletin foresees economic recovery in the second half of 2009. Stark of the Governing Council spoke of limited scope for additional rate cutting.

In the U.S., the auto rescue plan is now in the Senate, where it faces tougher going than in the House of Representatives. U.S. and Canadian trade data arrive at 13:30 GMT. U.S. import prices and Canadian house prices will also be announced.


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