Dollar Little Changed on Day that Saw Many Central Bank Meetings and Thick Menu of Released Data

January 20, 2022

The weighted dollar edged up by a marginal 0.1% overnight. It gained 0.1% against the euro and Swiss franc but is unchanged against the yen and sterling and down 0.1% versus the Canadian dollar.

Stock market action in the Pacific Rim was widely varied, with Japan Nikkei and Hong Kong’s Hang Seng indices closing 1.1% and 3.4% higher, but share prices dropping 1.1% in India and 0.9% in New Zealand. European equities are narrowly mixed. A rise in U.S. futures may be misleading. Futures have tried to bottom fish in recent days, only to be sent lower during actual North American trading hours.

Ten-year sovereign debt yields are down 4 basis points in Italy, 3 basis points in France, Spain and the U.S., and 2 basis points in the U.K. and Germany.

Among commodity prices, WTI oil has fallen back 0.8%, and gold is 0.2% softer.

Central bank meetings in Turkey, Norway, Malaysia, and Indonesia concluded with benchmark interest rates being left unchanged.

  • Turkish monetary policy had a tumultuous ride in 2021. After a 200-basis point hike of the one-week Turkish repo rate in March to 19% that resulted in the firing of key policymakers at the central bank and outspoken calls for rate reduction by Prime Minister Erdogan, a sequence of four straight cuts from September through December slashed the rate by 500 basis points to 14%. TCMB officials are now watching the effects of those reductions particularly with regard to the lira. They are counting on base effects and other factors to promote a downtrend in CPI inflation, which as of December had soared to 36.1%. This spike was fueled in part by a 44% plunge of the lira against the dollar over the past year.
  • The Bank of Norway‘s policy rate had been cut 150 basis points to zero percent between March and May of 2020 but then raised by 25 bps each last September and December to 0.50%. Today’s decision is only a pause in rate normalization, which will proceed in a gradual manner and likely include another 25-basis point hike at the next meeting in March. Caution is warranted in the process because of continuing uncertainty related to the pandemic and heightened global inflation.
  • Bank Negara Malaysia‘s overnight policy rate has been at 1.75% since a 25-basis point cut in July 2020 that capped 125 basis points of reduction that year. Monetary officials consider 1.75% an accommodative level but still appropriate. While Malaysian CPI inflation last year averaged less than 2.5%, core inflation is projected to rise a bit this year. Policy changes going forward will be data-driven.
  • There were six 25-basis point reductions of Bank Indonesia‘s 7-day reverse repo rate between February 2020 and February 2021. The rate level has been at a record low of 3.5% for the last 11 months and was kept at that level at this year’s first policy review. Indonesian CPI inflation ended 2021 at an 18-month high of 1.9%.

Officials at the National Bank of Ukraine, who had lifted their policy rate by three full percentage points to 9.0% last year, could not afford to pause rate tightening at this juncture. Instead at today’s first scheduled policy meeting of 2022, the rate was lifted by a fourth full percentage point to 10%, surpassing analyst expectations of a smaller move. Even at 10%, the key interest rate remains 250 basis points below the pre-pandemic level of 12.5%. A statement released by officials laments that total inflation is receding more slowly than hope and revises projected CPI inflation this year sharply higher to 7.7%. That’s also above the medium-term target of 5.0%, which now is unlikely to be reached before 2023. Ukraine faces not only global inflationary risks shared by other countries but also the possibility of a Russian military invasion that could weigh on the hyrvnia.

The Central Bank of Sri Lanka‘s policy interest rate was also lifted today. An initial increase had been engineered last August of 50 basis points to 5.0%, and today’s move was also a half percentage point to 5.5%. There had been five cuts in 2020 totaling 250 basis points, so the rate remains 150 bps below its pre-pandemic 7.0% level. While rising inflation in 2021 was driven mostly by supply side factors, officials want to avoid a rise in price expectations and observe demand-side pressures starting to emerge.

Moving in the opposite direction, officials at the People’s Bank of China, who on Monday of this week had cut their 1-year and 1-week interest rates by five and 10 basis points respectively, doubled down today with a reduction of another ten basis points in the 1-year loan prime rate to 3.70% as well as a 5-basis point cut of the five-year LPR to 4.60%. This month’s batch of Chinese data were generally weaker than forecast. Most alarming, real GDP growth on a year-on-year basis slowed to a six-quarter low of 4.0% in the final quarter of 2021. There is concern that growth, which averaged 9.2% per annum in 1989-2021, could decelerate to socially risky levels. A fresh threat is the emergence of the highly infectious, but less lethal, Omicron variant. China’s full-court press against any sign of Covid-19 is subjecting activities that require social gathering to containment measures that other governments around the world have been unwilling to tolerate in Omicron’s case.

Japan’s customs clearance trade balance recorded a fifth consecutive deficit in December, which at JPY 582 billion contrasted with a surplus of JPY 708 billion a year earlier. Full-2021 saw a deficit of 1.47 trillion yen following a surplus of JPY 388 billion in 2020 and a deficit of JPY 1.67 trillion in 2019.

Unemployment in Australia sank 0.4 percentage points to a 160-month low of 4.2% last month, having been as high as 5.2% in October. Employment growth was robust for a second straight month, but labor participation didn’t recover further.

The preliminary estimate of record high CPI inflation in Euroland of 5.0% has been confirmed. That up from minus 0.3% in December 2020. Core inflation accelerated from 0.2% at end-2020 to an above-target 2.6% last month.

German producer price inflation jumped much more rapidly than forecast in December to a record high of 24.2%. The month-on-month increase of 5.0% hadn’t been exceeded since 1951. PPI inflation averaged 10.5% in 2021 versus -1.0% in 2020 and +1.1% in 2019.

Consumer prices in Hong Kong climbed 1.0% on month in December and 2.4% on year, the most in four months.

South Korean producer price inflation settled back to a 3-month low of 9.0% in December, having begun 2021 at just 0.9% in January.

Austrian CPI inflation remained at a 24-year high of 4.3% in December.

In France, business confidence among manufacturers improved to a 47-month high in January, but service sector confidence and overall business confidence in all sectors was weaker than in December.

Mexican unemployment fell to a 21-month low of 3.5% last month.

Dutch consumer confidence weakened to a 15-month low in January, and unemployment of 3.8% in December was at a 2-month high.

U.S. news headlines:

  • Omicron factored heavily in a 55k leap of new jobless insurance claims last week to a 13-week high of 286 thousand. The 4-week average of 231k per week compares to 199-3/4k during the week ending on Xmas.
  • Existing home sales last month of 6.18 million annualized were 4.6% fewer than in November.
  • The Democratic Party-sponsored voting rights bill failed in the Senate and is likely to provide new impetus by state legislatures to suppress voting.
  • At yesterday’s press conference, President Biden conceded the need for deconstructing the Build Back Better bill and other future legislative efforts into small pieces, choosing ones that enjoy some bi-partisan support. The success of such a tactic would hinge on the dubious assumption that Republican opposition is more interested in approving initiatives that it genuinely favors than in discrediting President Biden and branding him as a politician without accomplishments. So far, that approach has progressively hurt voter approval for the president and his party.
  • There were 1.178 million new Covid-19 cases discovered yesterday. The 7-day average of 754k is 28% above the level two weeks ago. Comparable increases of deaths and hospitalizations were 48% and 42%.

Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.


Tags: , , , , , , , , ,


Comments are closed.