April 2015


Technical Analysis
This month EUR/USD maintained its upward trend initiated in March. The movement was interrupted in the time of April 7 to April 14. It was reinforced when the Japanese Candlestick intercepted the 50 SMA and the 100 SMA, reaching 1.126 on April 30.
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Currently this rate has a resistance at 1.120/1.130, which was previously a support that took approximately a month (from January 26 to February 26) to overcome. If EUR/USD overcomes this strong resistance we may see a more ample correction to 1.14/1.15. In case it breaks the support given by the 50 SMA and the 100 SMA, we can expect EUR/USD to return to its long-term downward trend.




Fundamental Analysis

In April, the EUR/USD reached 1.12217, the highest level in two months. After the US PPI and Retail Sales data reported worse than predicted, and the CPI Inflation of the Euro Zone reached 0%, better than the -0,1% expected, the EUR/USD inverted the downtrend.
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Meanwhile the ECB decided to keep interest rates unchanged. Investors are still waiting for the rise of US interest rate but the FED policy meeting still held it off. The rise of the Euro started on the 27th April after Greek Finance Minister Yanis Varoufakis was demoted from the negotiation team by the Prime Minister Tsipras. The Foreign Minister Tsakalotas, preferred by international creditors, took his place on the Greek bailout negotiations team. 




SPOTLIGHT: Worldwide low interest rates & currency wars

The ECB cut its deposit rate to -0.2 in September 2014. Negative rates had never been applied on a economy as big as the Eurozone before. Other european countries followed this year. In January, deposit rates in Switzerland went below zero for the first time since the 1970s.
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In February, Denmark cut its deposit rate to -0.75% from -0.2% (the deposit rates had been negative since 2012). In March, Sweden cut its repo rate to -0.25%. Consequently it is not surpising, that “by the end of March, more than a quarter of the debt issued by euro zone governments had negative yields (Bloomberg)“. This developement can be also observed in Asian countries. In Feburary the National Australian Bank cut their interest rates. In March, Thailand, India and the Bank of Korea cut their rates. For South Korea it was a response to the decrease in demand for its exports in the US and Europe. For India it was the second time, after cutting the benchmark interest rate in January already, it decreased it repo rate at the beginning of March to 7.75%. China also cut their overnight interest rate (from 5% to 4.5%) and their seven-day rate (from 7% to 5.5%) after they surprised the markets with a decrease in the cash reserve requirement. The PBOC observes slow growth rates in their economy and a depreciation might help on that. However, if the CNY is depreciating, Japan might be forced into additional quantitative easing programs. Looking at North America, the Bank of Canada cut the target overnight lending rate of 1% to 0.75% in January and is expected to be cut further this year (Financial Post, April 15th 2015). In April the U.S. economy was underperforming is expectations due to the strong dollar and remaining low oil prices. This has made a tighting of the FED’s monetary policy unlikely.These latest developements come with an appreciation of the EUR/USD after. Close to zero or negative interest rates are on one hand argued to motivate commercial banks to increase their extent of lending and to broaden their lending to weaker borrowers. Some commercial banks have now passed on the negative rates to large deposit holders. This shell give the incentive to consume or invest instead of increasing the savings further. When investements and consumption increase, the economy of a country is growing. In this case, a worldwide low interest rate situation should be engaged. The current decrease in interest rates however is not necessarily also meaning a decrease in the real interest rates. The threat of deflation in many economies puts the economic boosting characteristic of low and/or negative interest rates aside. As inflation decreases and deflation arises/increases, the real interest rate will rise, not motivating consumption and investment. On the other hand, some (including Janet Yellen) have argued, that when negative yields are passed on to customers, they might not withdraw the money to spend it, but to put it under the mattress. In such a situation the bank is left with a decreasing margin between the lending and the borrowing rate and becomes less willing to lend. This can result in the opposite situation of the one desired: a contracting economy. The Economist points out that in a similar way, the financial instituions can be hurt when they do not impose negative interest rates on deposit themselves. Some banks do rely on their deposits and fear costumers run away and/or loosing profit from assets linked to the interest rate. A possible erosion of capital would threaten financial stability. The second effect a cut in the interest rate has, is the depreciation of the home currency. As a result the GDP might rise in the short term due to a better trade balance, but no additional demand is created. Instead demand is shifted from one country to another. This trend was named as „currency wars“ by Guido Mantega first in 2010. The Brazilian finance minister used it when he was complaining about the effects of the U.S. QE program and the depreciating USD at that time. The effects of the affect of low interest rates on the foreign exchange rate are debatable: no new demand is created but shifted away from expensive currencies. David Woo (BoAML) sees the incentive for the QE of the ECB and Japan in the depreciation of the currency, as interest rate levels have been low before and the change in the borrowing costs doesn’t seem significant. However, the depreciation of currencies is either only short-term lived or not sufficient for a change in the trade balance. The CPB Netherlands Bureau for Economic Policy Analysist reported the export growth rate of developing countries to have fallen from 8% (2000-2010) to 4% (2011-2015), despite a depreciation of the currencies against the USD (on average by 25% since 2011). Further, low interest rates increase the volatility of currencies. High currency volatilities can damage the world economy as they are followed by higher costs for trading and capital flows across borders, ultimately leading to higher hedging costs for companies. Discouraging global trade it also discourages foreign direct investments. So is there a currency war? Nouriel Roubini (NYU Stern Professor) says yes, In his article published in December 2014 he underlined, that “you can lead a horse to liquidity, but you can’t make it drink“ – showing his critical opinion on monetary easing measures. His more recent article published on the 1st of May 2015 highlights the imbalance created in the EU between the current account of Germany and other members. Meanwhile in China and Japan, a rising trade balance surplus can be observed, indicating a first success of the QE program in Japan and the weakening of the CNY by the PBOC. However, with the U.S. abandoning any expectations on monetary tightening in short time, Roubini says, the U.S. has joined the currency war, restressing the advantages of fiscal policies. Not after all, the idea of currency wars are directly opposed to the currently discussed Trans-Pacific Partnership. For futher reading on the history of currency wars can be found in the Bloomberg Brief on Currency Wars from 2013.