Friday, March 31, 2006
Iceland raises key interest rate as vulnerable currencies are hit
Iceland's central bank was forced to raise its key interest rate sharply yesterday to avert a currency crisis sparked by shifts in foreign exchange movements and rising global interest rates.
It raised the rate by 75 basis points to 11.5 per cent to head off a crisis of confidence in the krona that has affected markets far beyond the remote north Atlantic island that has a population of 300,000.
About 10,000 miles away, New Zealand, which also has experienced a sharp run on its currency, said another slide in its dollar could jeopardise an expected cut in its high interest rate.
Iceland and New Zealand have been big beneficiaries of the global carry trade in which investors from US hedge funds to Japanese retail investors borrowed in cheap dollars, euros and yen to chase better returns in countries with higher interest rates.
But these trades have started to unwind as rate tightening in the US and the eurozone, and the risk that Japan may follow suit later in the year, threaten to mop up global liquidity and to narrow currency rate differentials.
The Icelandic krona has fallen 12 per cent against the US dollar this year, and the New Zealand dollar is down 10.7 per cent as both currencies have hit lows.
As carry trades unwind, investors are focusing on economic fundamentals in Iceland and New Zealand. Both these small countries have big current account deficits, as does Hungary, where the forint has fallen 5.1 per cent this year. Turkey, Australia and South Africa are also seen as potentially vulnerable.
Many commentators want New Zealand's Reserve Bank to trim the interest rate of 7.25 per cent to stimulate economic growth. This is expected to fall to 1 per cent against the backdrop of a record current account deficit of NZ$13.7bn (£4.8bn).
It raised the rate by 75 basis points to 11.5 per cent to head off a crisis of confidence in the krona that has affected markets far beyond the remote north Atlantic island that has a population of 300,000.
About 10,000 miles away, New Zealand, which also has experienced a sharp run on its currency, said another slide in its dollar could jeopardise an expected cut in its high interest rate.
Iceland and New Zealand have been big beneficiaries of the global carry trade in which investors from US hedge funds to Japanese retail investors borrowed in cheap dollars, euros and yen to chase better returns in countries with higher interest rates.
But these trades have started to unwind as rate tightening in the US and the eurozone, and the risk that Japan may follow suit later in the year, threaten to mop up global liquidity and to narrow currency rate differentials.
The Icelandic krona has fallen 12 per cent against the US dollar this year, and the New Zealand dollar is down 10.7 per cent as both currencies have hit lows.
As carry trades unwind, investors are focusing on economic fundamentals in Iceland and New Zealand. Both these small countries have big current account deficits, as does Hungary, where the forint has fallen 5.1 per cent this year. Turkey, Australia and South Africa are also seen as potentially vulnerable.
Many commentators want New Zealand's Reserve Bank to trim the interest rate of 7.25 per cent to stimulate economic growth. This is expected to fall to 1 per cent against the backdrop of a record current account deficit of NZ$13.7bn (£4.8bn).
# posted by Dr Search- Principal Consultant at the Search Clinic @ 7:37 AM 0 comments
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Thursday, March 30, 2006
Bond yields touch multi year highs
Government bond yields around the globe touched multi year highs on Wednesday, amid fears of further rate rises in both the US and eurozone in the wake of Tuesday’s latest rise by the US Federal Reserve.
Two-year US Treasury yields hit a fresh five-year peak of almost 4.83 per cent while 10-year yields reached 4.82 per cent, their highest since before the Fed began increasing short-term borrowing rates in June 2004.
The US central bank’s hint of further rises beyond the current 4.75 per cent wrongfooted some traders and sent bonds tumbling on Tuesday.
Bond prices continued to fall on Wednesday, weighed down by a lacklustre auction of $14bn in five-year notes.
Fed funds futures also extended Tuesday’s declines as expectations of further rate rises hardened.
A move to 5 per cent at the May Fed meeting is now priced in, as is a 25 per cent chance of a rise to 5.25 per cent at the June meeting.
By late afternoon in New York bonds had moved off their lows, leaving two-year yields 0.9 basis points higher at 4.816 per cent and 10-year yields up 1.8bp at 4.812 per cent.
Eurozone government bond yields also steadied late in the day, but not before the yield on the two-year Schatz hit 3.289 per cent, the highest since October 2002. In late trading the two-year yield was up 0.6bp to 3.278 per cent and the 10-year Bund yield added 1.4bp to 3.758 per cent.
Hawkish comments from European Central Bank policymakers added to the bearish sentiment, reawakened by Tuesday’s robust German business sentiment survey.
Gilt prices found support from weaker UK mortgage lending and retail sales data, but prices still fell. The two-year gilt yield rose 1.5bp to 4.465 per cent and the 10-year gilt yield was 0.6bp higher at 4.376 per cent.
Yields on Japanese government bonds surged. The 10-year bond jumped 7.5bp to 1.775 per cent, the highest since August 2004, while the yield on the five-year rose 9bp to 1.295 per cent.
Two-year US Treasury yields hit a fresh five-year peak of almost 4.83 per cent while 10-year yields reached 4.82 per cent, their highest since before the Fed began increasing short-term borrowing rates in June 2004.
The US central bank’s hint of further rises beyond the current 4.75 per cent wrongfooted some traders and sent bonds tumbling on Tuesday.
Bond prices continued to fall on Wednesday, weighed down by a lacklustre auction of $14bn in five-year notes.
Fed funds futures also extended Tuesday’s declines as expectations of further rate rises hardened.
A move to 5 per cent at the May Fed meeting is now priced in, as is a 25 per cent chance of a rise to 5.25 per cent at the June meeting.
By late afternoon in New York bonds had moved off their lows, leaving two-year yields 0.9 basis points higher at 4.816 per cent and 10-year yields up 1.8bp at 4.812 per cent.
Eurozone government bond yields also steadied late in the day, but not before the yield on the two-year Schatz hit 3.289 per cent, the highest since October 2002. In late trading the two-year yield was up 0.6bp to 3.278 per cent and the 10-year Bund yield added 1.4bp to 3.758 per cent.
Hawkish comments from European Central Bank policymakers added to the bearish sentiment, reawakened by Tuesday’s robust German business sentiment survey.
Gilt prices found support from weaker UK mortgage lending and retail sales data, but prices still fell. The two-year gilt yield rose 1.5bp to 4.465 per cent and the 10-year gilt yield was 0.6bp higher at 4.376 per cent.
Yields on Japanese government bonds surged. The 10-year bond jumped 7.5bp to 1.775 per cent, the highest since August 2004, while the yield on the five-year rose 9bp to 1.295 per cent.
# posted by Dr Search- Principal Consultant at the Search Clinic @ 8:47 AM 0 comments
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Wednesday, March 29, 2006
Fed signals further moves as loans rates rises to 4.75%
The big news yesterday, and what we had been waiting for, the US Federal Reserve raised rates by 25bp as expected but more significantly signalled that further hikes were on the cards.
More importantly, the accompanying statement hinted at more to come, with the FOMC stating that the US economy had “rebounded strongly” in the current quarter, that possible increases in resource utilisation, in combination with elevated energy and other commodity prices, “have the potential to add to inflation pressures” and that some further policy tightening “may be needed”.
More importantly, the accompanying statement hinted at more to come, with the FOMC stating that the US economy had “rebounded strongly” in the current quarter, that possible increases in resource utilisation, in combination with elevated energy and other commodity prices, “have the potential to add to inflation pressures” and that some further policy tightening “may be needed”.
The market responded by regarding a May rate hike, always a strong prospect, as a done deal. Yet the statement did little to cement prospects for further rises beyond that.
The Fed’s statement was fairly upbeat as it notably avoided commenting on recent economic weakness – namely new home sales which recorded their biggest drop in 9 years – while issuing a positive view on the economy – “economic growth has rebounded strongly in the current quarter” and “the slowing of the growth of real GDP in the fourth quarter of 2005 seems largely to have reflected temporary or special factors”.
The USD benefited from the comments but the net effect was not as strong as it could have been following strong German economic data earlier in the day. The Ifo index came in at its strongest in 15 years pushing the EUR/USD towards 1.2100 and the GBP/USD above 1.7500.
Following the Fed’s comments the GBP/USD fell back to the low 1.7400’s and is currently in danger of dropping below this level – and while writing actually has had a brief did below. The EUR looks more vulnerable and is just managing to hold the 1.2000 level.
The USD benefited from the comments but the net effect was not as strong as it could have been following strong German economic data earlier in the day. The Ifo index came in at its strongest in 15 years pushing the EUR/USD towards 1.2100 and the GBP/USD above 1.7500.
Following the Fed’s comments the GBP/USD fell back to the low 1.7400’s and is currently in danger of dropping below this level – and while writing actually has had a brief did below. The EUR looks more vulnerable and is just managing to hold the 1.2000 level.
# posted by Dr Search- Principal Consultant at the Search Clinic @ 12:18 PM 0 comments
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