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Central Bank Watch

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Germany's Economic Growth To Continue In Near-Term: Conference Board

Germany's leading index increased for the fourth successive month in January, suggesting that the current expansion in economic activity will continue in the near term, survey data published by the Conference Board revealed Friday.

 

The leading economic index advanced 0.2 percent sequentially to 128.3 in January, after growing 0.9 percent in December and 0.3 percent in November.

 

All the seven components the constitute the leading index increased in January, with the biggest contributions coming from the yield spread, investment goods and new orders.

 

Conference board further noted that the coincident economic index, which measures the current situation, moved up 0.2 percent month-on-month to 123.7 in January. This followed increases of 0.1 percent and 0.2 percent respectively in December and November.

 

During the six months ended January, the leading index logged a 2.3 percent expansion, and the coincident index recorded a 0.8 percent rise.

 

Germany's Economic Growth To Continue In Near-Term: Conference Board

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Fed says 29 out of 30 banks meet stress test capital requirements

The Federal Reserve's most recent stress test shows 29 out of 30 U.S. banks met their stress test capital requirements. Only one smaller bank, Zions Bancorporation, failed to pass the annual test. Shares of that Salt Lake City-based bank's stock fell more than 1 percent in extended trading.

 

The results showed continued improvement in banks' financial positions since the 2008 crisis, the Fed said. That built on positive results in last year's tests.

 

The Fed will announce next week whether it will approve plans by some of the banks to increase dividends or buy their own stock.

 

Following the announcement, Discover Financial, one of the 30 banks tested, said it will increase its quarterly dividend by 4 cents to 24 cents per share.

 

Other banks tested included Bank of America, Citigroup, JPMorgan Chase and Wells Fargo.

 

The annual testing has become an increasingly important tool for regulators to ensure that banks are not eating too much into their capital cushions, by examining how banks would weather a hypothetical major market shock.

 

Earlier, analysts predicted that the larger U.S. banks would most likely meet the Fed's requirements, having reduced their leverage, the amount of debt compared to shareholder equity, since the 2007-2009 financial crisis.

 

Bigger fireworks could come next week, when the Fed will either approve or reject each firm's plans to pay dividends to shareholders or buy back shares.

 

The Fed conducts stress tests each year to measure how banks' loan books and security portfolios would hold up under extreme economic scenarios not unlike those experienced during the last crisis.

 

Some 30 banks participated in this set of tests, up from 18 last year.

 

Fed says 29 out of 30 banks meet stress test capital requirements

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. German Unemployment - Bullish EUR - Employment rose for fifth straight month 3. UK PMI Manufacturing - Bullish GBP - Improvement in CBI Trends Index 4. ISM Manufacturing - Bullish USD - Rise in Empire State and Philly Fed should overshadow decline in Chicago PMI

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Tonight is a big night for the Australian and New Zealand dollars. Both currency pairs are trading near their recent highs with further gains contingent on positive surprises from many if not all of tonight’s economic reports. The evening kicks off with Australia’s manufacturing PMI index, which is probably the least interesting and market moving event risk of the night for AUD and NZD. Instead, forex traders are keenly waiting for China’s official manufacturing report and the Reserve Bank of Australia’s monetary policy announcement. Manufacturing activity in the world’s second largest economy is widely expected to slow further in March. However with the index hovering just a whisker above the 50 boom/bust mark, the danger is that the index could drop into contractionary territory. If China’s PMI index falls below 50, AUD and NZD could give up its gains quickly. However weaker data would also trigger additional speculation for accelerated stimulus from China, which could limit the downside in commodity currencies. If the PMI report surprises to the upside and improves or holds steady, AUD and NZD could climb to new highs. As for the RBA, no changes in monetary policy are expected. Central Bank Governor Stevens feels that economists are too pessimistic about the outlook for Australia, which can explain why he is not concerned about the current level of the Australian dollar.

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ECB considers Fed-style stimulus

 

Negative interest rates? Printing money? They're now both firmly on the agenda in Europe if prices don't start to pick up soon.

 

European Central Bank President Mario Draghi said the bank kept interest rates unchanged Thursday because a sharp fall in inflation in March could be reversed in April due to stronger demand for travel and other services around the Easter holiday.

 

But the ECB was ready to act swiftly if the outlook deteriorates, Draghi made clear.

 

At their meeting, policymakers discussed the merits of negative deposit rates -- effectively charging banks to hold excess cash with the ECB. They also debated quantitative easing, or Fed-style asset purchases.

 

"The governing council is unanimous in its commitment to using also unconventional instruments ... to cope effectively with the risks of a too prolonged period of low inflation," Draghi told reporters.

 

ECB ignores calls to tackle deflation risk - Apr. 3, 2014

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Press Release

 

Release Date: March 19, 2014

 

For immediate release

Information received since the Federal Open Market Committee met in January indicates that growth in economic activity slowed during the winter months, in part reflecting adverse weather conditions. Labor market indicators were mixed but on balance showed further improvement. The unemployment rate, however, remains elevated. Household spending and business fixed investment continued to advance, while the recovery in the housing sector remained slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.

 

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace and labor market conditions will continue to improve gradually, moving toward those the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for the economy and the labor market as nearly balanced. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.

 

The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in April, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $25 billion per month rather than $30 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $30 billion per month rather than $35 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee's sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate.

 

The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. If incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.

 

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.

 

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

 

With the unemployment rate nearing 6-1/2 percent, the Committee has updated its forward guidance. The change in the Committee's guidance does not indicate any change in the Committee's policy intentions as set forth in its recent statements.

 

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Richard W. Fisher; Sandra Pianalto; Charles I. Plosser; Jerome H. Powell; Jeremy C. Stein; and Daniel K. Tarullo.

 

Voting against the action was Narayana Kocherlakota, who supported the sixth paragraph, but believed the fifth paragraph weakens the credibility of the Committee's commitment to return inflation to the 2 percent target from below and fosters policy uncertainty that hinders economic activity.

 

Statement Regarding Purchases of Treasury Securities and Agency Mortgage-Backed Securities Leaving the Board

 

2014 Monetary Policy Releases

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Greece ends market exile with triumphant bond auction

 

Bailed-out Greece returned to bond markets with a bang on Thursday after a four-year exile, raising 3.0 billion euros and sending a major signal that the eurozone debt crisis is fading.

 

Greece's EU-IMF creditors hailed the move which the Greek prime minister said had "opened the way for cheaper borrowing" for the recession-hit country.

 

"We have opened the way for cheaper borrowing on the markets tomorrow," Prime Minister Antonis Samaras said in a televised address.

 

"If all goes well from now on, next time the country will be able to borrow higher sums at lower interest," he said.

 

The finance ministry said Greece had sold the five-year bond at 4.75 percent interest, with participation of long-term investors outside Greece expected to approach 90 percent.

 

In Washington, IMF chief Christine Lagarde said the bond issue showed Greece was headed in the "right direction."

 

"I see the issuance that took place today, which was massively oversubscribed, as an indication that Greece is heading in the right direction," Lagarde told reporters at the World Bank/International Monetary Fund annual spring meetings.

 

EU vice-president Siim Kallas added: "It is an important sign that the Greek economy is starting to regain the confidence of investors, and reflects the positive effects of the far-reaching reforms undertaken by Greece."

 

Greece ends market exile with triumphant bond auction ? EUbusiness

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In his speech today Mr. Draghi once again reaffirmed the key policy points that he has been making for the past few months – namely that the central bank stands ready to use all tools at its disposal including negative interest rates and QE via purchases of asset backed securities in order to combat deflationary threats. However, as many analysts have pointed out those policy choice face many serious problems.

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The AUD/NZD looks to be rolling over again as interest rate differentials between the two Tasmanian sea neighbors begin to widen. At its last meeting the RBNZ raised rates and although it complained about the high value of the kiwi, the central bank made no indication that it will stop the tightening process. This trend is sure to continue given the very strong results in NZ Building Consents as the RBNZ is most concerned with popping the housing bubble. Meanwhile the Aussie appears to have run out of steam at the 9300 level and tonight Chinese PMI data if it misses to the downside could provide further reason for the AUD to weaken. Therefore AUD/NZD which has failed above the 1.0800 level could begin to fall further as it retests the lows at 1.0500

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With Janet Yellen’s testimony behind us, the next big event risk this week will be Thursday’s European Central Bank monetary policy announcement and with EUR/JPY trading in an increasingly narrow range, it could be just what the currency pair needs to breakout. No changes are expected so any reaction in the euro will be to Mario Draghi’s press conference and not the monetary policy announcement. For the first time since September 2011, the euro is trading north of 1.39 versus the dollar ahead of the European Central Bank’s monetary policy meeting. We know that Draghi and his peers at the ECB are not happy with the current level of the euro but the big question is whether the value of the currency is a large enough problem for the central bank to prepare the market for additional easing. When the ECB last met in March, the euro sold off aggressively after Draghi spent most of his press conference talking about the possibility of additional easing and outlining the ways they could increase stimulus. In order to send a stronger message to the market, he would need to indicate that the central bank is not only willing to ease, but preparing to do so within the next few months. If he does, it could drive EUR/JPY sharply lower. However the ECB can afford to wait with inflation ticking up in April and activity increasing so if they choose to be patient and keep their outlook steady, EUR/JPY could break to the upside.

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Once again when ECB President Draghi talks, the market listens with respect. The pundits claim the phrase "comfortable taking action in June" is what got the market running to the downside. Probably there is more at work than just a phrase. But the threat of pending prospective negative market inputs, coming from a central banker who has done it all, took the starch out of the market.

 

What followed was a 'key reversal' day, in the parlance of technicians (making a new yearly high and then closing lower is called a 'key reversal', a notable event). The EURUSD exceeded the previous high for the year, trading at the highest level since October of 2011, no small feat. Then the market reversed, selling off about 150 pips from the high. Extremely high volume confirmed the importance of the reversal.

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The downtrend in USD/CAD shifted quickly and aggressively after Friday’s Canadian employment report. Although job growth was widely expected to slow in the month of April, only 1 out of the 21 economists surveyed by Bloomberg anticipated job losses. A total of 30k full time jobs were lost last month with only a gain of 2k in part time employment. While the unemployment rate held steady at 6.9%, the labor force participation rate fell to a 12 year low of 66.1% from 66.2%. This is not only terrible news for the labor market but the economy as a whole and it hardens the argument for additional easing. The last time we heard from the Bank of Canada, they cut their 2014 GDP forecast and said they can’t shut the door on further rate cuts. With today’s release, traders will be raising their bets on additional easing which should drive USD/CAD higher. The currency pair has already appreciated 0.6% on the back of the employment report and we believe that this number is significant enough to carve out a bottom in USD/CAD.

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Data released today - Wednesday, 14th May 2014 - reveal the success of PM Abe's economic stimulants.

 

The world's number-three economy grew 1.5 percent on-quarter in January-March, sharply higher than the previous three months thanks to a rush by shoppers to beat an April 1st sales tax hike.

 

That compares with revised growth of 0.1 percent in October-December and is much better than the 1.1 percent forecast by market-watchers. It also represents the sixth consecutive quarter of growth and is the fastest since July-September 2011 when the economy picked up from the effects of the quake-tsunami disaster.

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In the currency market, it doesn't matter where the interest rates are, only where they are heading. GBP/AUD offers a perfect example. Although Aussie rates are considerably higher than those in the UK, they have been compressing, whereas the market expects the BoE to become the first G-7 central bank since the Great Recession to actually begin hiking up rates. The latest threat by S&P to lower Australia's rating from AAA is also not helping as it may force many real money accounts such as insurance companies and pension funds to sell Australian bonds and push the currency lower. GBP/AUD therefore has exploded today as traders reposition their capital. Tomorrow's UK Retail Sales could be the key to further rally in the pair. If the number prints better than expected the prospect of further gains in likely with the pair racing towards the 1.8300 figure as it targets 1.8500 over the medium term horizon.

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The week of waiting for the numerous June economic reports is now over, and traders are longing for a pick-up in forex volatility.

 

The market movers are the usual: on Thursday, the ECB will announce how and to what extent they will use monetary methods to stimulate the moribund EU economy. The other major report, to be released on Friday, is the US Non-Farm Payroll report.

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Monetary easing by the ECB was the big market mover last week. How will a negative interest rate influence bank lending? Some are predicting the ECB stimulus plans will be a boon for the carry trade. Greater liquidity, combined with cheap interest and the possibility the euro will trade lower in the long term, makes this trade look attractive.

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Talk of an earlier rate hike by Bank of England Governor Carney drove GBP/CHF to its strongest level since November 2012. We believe that the renewed clarity in U.K. monetary policy will drive the currency pair even higher towards 1.55. Thursday afternoon Carney surprised the market by saying the central bank could raise rates sooner than the markets expect and the start of rate increases from the BoE is getting nearer. Previously the central bank refused to give into rate hike expectations, leading to a correction in the pound but now they feel that the strength of the housing market warrants vigilance because growth has been stronger and unemployment has fallen faster than they anticipated. The prospect of accelerated BoE easing should lead to further gains in GBP/CHF. There are no shortages of U.K. event risk next week and given Carney’s recent comments, traders will be looking for the BoE minutes to contain a more optimistic tone. The Swiss National Bank meets in the coming week and for the most part with EUR/CHF trading near the lower end of its recent range, the central bank will most likely remind investors that they are committed to avoiding excessive CHF strength.

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Fed Keeps Rates Unchanged, Sees Eventual Rise in 2015, 2016

Federal Reserve officials fine-tuned their interest-rate projections on Wednesday and announced further reductions in their monthly bond purchases, leaving the program on course to end later this year.

 

With the bond-buying program winding down, officials are increasingly turning their attention to the question of when to start raising short-term interest rates from near zero. Officials indicated they expected short-term rates to remain there through the year. New interest-rate projections released by the central bank suggest officials see rates rising slightly more than previously forecast in 2015 and 2016, though not as much in the longer run.

 

The Fed's benchmark federal funds rate has been slightly above zero since December 2008.

 

"Growth in economic activity has rebounded in recent months," the Fed said in a policy statement at the conclusion of a two-day policy meeting, citing an improving job market and resumed growth in business investment.

 

U.S. stocks bounced back into record territory and bonds rallied after the Fed signaled that its plans are largely steady. The S&P 500 index rose 14.99 points, or 0.8%, to 1956.98, surpassing its June 9 record close of 1951.27. The Dow Jones Industrial Average advanced 98.13 points, or 0.6%, to 16906.62 after earlier being down 26 points, and the 10-year U.S. Treasury note rose 18/32 in price to push the yield down to 2.59%.

 

The Fed's latest tint of optimism about the economy follows a dismal first quarter in which the economy contracted, forcing officials to reduce their projection for economic growth this year. The Fed now forecasts that the economy will expand 2.2% this year, substantially slower than a projected growth rate of near 3% offered last March.

 

Fed Chairwoman Janet Yellen, at a news conference after the Fed meeting, said there are "many good reasons" to expect faster growth in 2015 and 2016, including an improving labor market, the Fed's easy credit policies, reduced household debt burdens, rising stock and home prices and an improving global economy. She said she also expects consumer spending to pick up in part due to rising wages.

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The British pound sold off sharply against the Swiss Franc today on the back of disappointing comments from BoE Governor Carney. The head of the U.K. central bank failed to express a strong degree of hawkishness in today’s testimony before the U.K. Parliament. Rather than harden the BoE’s commitment to tighten monetary policy, Carney said there’s scope to absorb more slack before rates are increased and the MPC wanted to see market expectations adjust to data, which he suggested was the primary reason why the recent rate comments were made. With overextended long positions, the lack of unambiguously hawkish comments triggered profit taking in the British pound and unfortunately we think the sell-off could continue ahead of Carney’s speech on Thursday. In all likelihood, the BoE will fall short once again, leading to a deeper correction in GBP/CHF.

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