Morning Commentary: First In – First Out

Foreign Exchange - Morning Commentary
First In – First Out
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
On July 2, 2009, Sweden’s central bank, the Riksbank, became the first major central bank in the world to implement negative interest rates and charge commercial banks to hold deposits. Today, the Riksbank, has ended that experiment returning interest rates back to zero by raising interest rates by 25 bps as expected. This change in interest rates was widely telegraphed to the market despite growth in Sweden remaining anemic at 0.3% in Q3 and 0.2% in Q2.

Why the change given weak growth and inflation remaining slightly below target? The majority of policymakers have concerns about the unfavorable impact of negative interest rates for an extended period of time on the Swedish economy. Policymakers are concerned that it could lead businesses and households to take on too much debt and force individual savers to remain in cash. It could also lead to speculative bubbles in the economy and in Swedish equities.

But, the Riksbank also took the extra step and signaled caution to businesses, investors, and savers by indicating that it has no plans to raise its key rate further in the coming year. While negative interest rates remain in Japan and many key countries in Europe, this change by the Riksbank could be a forerunner for changes by other central banks.

Despite the institutionalization and acceptance of negative interest rates in Europe and Japan, growth has remained anemic and inflation has remained below target; perhaps a different set of policy responses is required. The Swedish krona is unchanged on the session down by nearly 6% against the U.S. dollar and is one of the weakest major currencies this year.
  • Australia reported a better-than-expected jobs report for November with total job gains of nearly 40,000 against expectations of a gain of 15,000. The UR fell from 5.3% to 5.2%, but the labor force participation rate remained unchanged at 66%. The composition of the jobs gains was a small negative in that of the 40,000 jobs created, 36,000 were part-time jobs. Aussie interest rates are higher and the Aussie dollar is up on the session.
  • The Bank of England kept interest rates unchanged as expected at 0.75%. The vote was 7-2 in favor of keeping rates unchanged with two members voting for a cut in interest rates. The Bank of England signaled that it will focus on the next phase of the Brexit negotiations and will continue to monitor if the election results from last week will change business and household sentiment or keep uncertainty entrenched in the short term.
  • The Bank of Japan kept interest rates unchanged at -0.10% as expected.
  • Taiwan’s central bank kept interest rates unchanged at 1.375% as expected. However, it did raise growth forecasts for 2019 and 2020.
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