Egyptian Pound Floated; Investors Await ECB Announcement
October 27, 2022
The weighted dollar index recovered 0.9% from its overnight low but remains 4.1% below its recent 52-week peek. Overnight net advances in the U.S. dollar range from 0.2% against the Japanese yen to 0.8% versus the Australian dollar and Chinese yuan, with gains of 0.5% relative to the Canadian dollar, kiwi, and Swiss franc, 0.4% versus sterling and 0.3% against the euro in between.
The Central Bank of Egypt’s policy interest rate was raised by two full percentage points to 13.25%. This action was coordinated with an unpegging of the Egyptian pound’s 19.7 per U.S. dollar parity rate. In this adoption of a floating exchange rate, which had been an agreed IMF condition for Egypt to secure a loan, Egypt’s currency fell 14.4% so far today to 23.0 per USD. The central bank interest rate hike follows increases of 200 basis points in May and 100 bps in March and more than reverses 400 basis points of easing imposed in 2020 when the Covid pandemic struck. Egyptian CPI inflation has risen to a 21-year high of 15.0%, well above its 5-9% target range and also still above the news central bank rate level.
Share prices earlier today in the Pacific Rim fell 0.6% in China and 0.3% in Japan but rose 1.7% in South Korea, 1.6% in Taiwan, 0.7% in Hong Kong and 0.5% in Australia and New Zealand. Just prior to the ECB announcement of an as-expected 75-basis point increase in its interest rates, share prices in Europe were down 1.0% in France, 0.9% in Germany, and 0.6% in Italy. Overnight changes of key U.S. stock market indices range from +0.8% in the DOW to -0.6% in the Nasdaq with the S&P 500 unchanged. There wasn’t much initial reaction to news that U.S. GDP growth had swung to +2.6% last quarter after contractions in the prior two periods. The news was close to expectations.
Ten-year sovereign debt yields moved lower in the past half hour to show a net rise of only 2 basis points in the United States and drops of 3 bps in Italy and Germany and 2 bps in the U.K. and France.
The prices of oil and gold are respectively 0.5% above and 0.4% below Wednesday closing levels. Bitcoin is down 1%.
There’s been a spectacular 20+% extension in overnight trading of Meta’s sharp share price drop yesterday. The parent company of Facebook has plunged 71% below its 52-week high.
Corporate profits in China were 2.3% lower in January-September than a year earlier. That represents quite an adverse turnaround from on-year increases of 1.0% in the first half of the year and 34.3% in full-2021. Corporate sentiment toward China has been hit hard by the government’s handling of Covid and lessening reliance on capitalist economic structures.
Icelandic consumer price inflation in October ticked 0.1 percentage point higher to 9.4%, still a half percentage point south of the 13-year high in July. PPI inflation in Iceland continued to recede in September, reaching a 1-year low of 13.6%, down from April’s peak of 29.6%.
Greek PPI inflation dropped 10 percentage points in September to a 9-month low of 29.4%.
South African PPI inflation eased to a 3-month low of 16.3% in September after cresting in July at 16.0%.
In Australia, import prices were 19.3% higher in the third quarter than a year earlier.
Austria’s manufacturing purchasing managers index dropped 2.2 points further below the 50 neutral level to a 28-month low of 46.6 in October.
German consumer confidence this month ticked 0.9 points above the prior month’s record low of -42.9 but conveyed extreme pessimism compared to the reading of +0.9 a year ago.
Consumer sentiment in Italy fell 3.7 index points to a 125-month low of 90.1 in October versus 117.7 at the end of 2021. Manufacturing sector sentiment in Italy also deteriorated, reaching its worst level in 21 months.
Finland and Sweden each reported record lows in their respective consumer confidence indices for October. Swedish business confidence fell to a 26-month low.
Under a constant threat from China, consumer confidence in Taiwan sank to a new 13-year low this month.
But economic sentiment in Turkey rebounded to an 8-month high in spite of a trade deficit that widened from $32.4 billion in the first three quarters of 2021 to $83.1 billion one year later.
South Korean GDP grew only 0.3% on quarter in 3Q. That was the weakest advance in a year and resulted in a 3.1% on-year growth rate.
The Central Bank of Brazil’s Selic interest rate was left unchanged at 13.75% after this month’s scheduled policy review. The rate had been lowered early in the pandemic from 4.5% to just 2.0%. The cycle of rate increases began in March 2021 and, most recently, included 50-basis point hikes in June and August. CPI inflation has dropped from 12.1% in April to 7.1% in September, which remains above the medium term target. Officials are projecting inflation at 4.6% next year followed by 2.8% in 2024.
The European Central Bank engineered its third interest rate hike since midyear, a hike of 75 basis points that matches its previous action. The first hike in July amounted to 50 basis points. The new rate structure is a 2.0% refinancing rate flanked by a 1.50% deposit rate and a 2.25% on the marginal lending facility. Rightly or wrongly, investors perceived a less hawkish posture than at the July press conference. Today’s announcement statement includes this:
With this third major policy rate increase in a row, the Governing Council has made substantial progress in withdrawing monetary policy accommodation.
and deletes this:
This major step frontloads the transition from the prevailing highly accommodative level of policy rates towards levels that will ensure the timely return of inflation to our two per cent medium-term target. Based on our current assessment, over the next several meetings we expect to raise interest rates further to dampen demand and guard against the risk of a persistent upward shift in inflation expectations.
But officials again proclaimed that “inflation remains far too high” and casts the latest action in the context of a policy normalization that has further to go. Indeed, the rates are still way, way below on-year inflation of 9.9%. Although Euroland faces a gloomier near-term economic outlook than the United States, failure by the ECB to keep pace with the Fed, whose interest rate is a percentage point above the ECB marginal lending facility rate would risk a depreciation of the euro that would boost import prices in the euro area and exacerbate the problem of restoring price stability.
Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
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