The situation in Ukraine is once more coming to a head, as it did so in 2008 and 2009. To avoid a hard default, a critical outflow of foreign funds, and a complete depletion in the central bank’s reserve assets, Ukraine should drop the peg (or widen the trading band) to the USD and devalue its currency.
Core European government bond yields continue to fall and are now outright negative in many countries. Traditionally, this would suggest a stern message from the fixed income market that deflation is around the corner.
But there could be other explanations.
Variant Perception’s Editor Simon White was on Bloomberg Television Friday to talk about the funding needs of Spanish banks.
The SNB lately reiterated its stance to maintain a EURCHF floor of 1.20. In the process, the SNB has amassed billions of foreign currency-denominated assets, about half of which is EUR, and certainly some of dubious quality (some of the recent moves tighter in French yields have been due to Swiss central bank buying, who have been deterred from channelling any further flows into short-term German bonds paying negative yields).
The Final Winner of the Wolfson Economics Prize was announced today. Congratulations to all for their efforts! Download our full report
Chinese reserve accumulation has slowed down rapidly. As a result the growth of foreign ownership in US treasuries (USTs) has fallen. The global liquidity pump of Bretton Woods II, in which pegging emerging markets are recycling their increase in foreign exchange reserves into US treasuries in order to keep their currencies stable against the USD, has slowed, but not stopped altogether.
So far the recovery in output, income and employment following the 2008/09 recession has been the weakest on record with only industrial activity appearing to buck the trend. Most remarkably, however, is the steady decline in post-recession expansions of employment and personal income growth. In the US, these have fallen since 1982, but have currently hit a new low point.
One country very sensitive to economic events in Switzerland, specifically the strength of the CHF, is Hungary. Hungary has a high ratio of loans denominated in a foreign currency – over 60% of GDP – most of which is in Swiss francs. As the HUF weakens, especially if against the CHF, Hungary’s external debt position rapidly worsens. Indeed, the correlation between Hungarian CDS and CHFHUF is as high as it’s been in 2 years.
The US CPI is currently just above target at 2.3%, and long-term market expectations of inflation measured by the US inflation swap curve remains mid-range. This is in stark contrast to all-time lows in nominal treasury yields which appear to be pricing in almost the end of the world.
Variant Perception’s Head of Research Claus Vistesen was guest host on CNBC yesterday (Tuesday) to discuss the ongoing euro debt crisis and the outlook for the global economy given weakening data.