December 17, 2014
The rate hike by the Russian central bank had the predictable effect. It worked for a few hours, until investors realised that a 17% interest rate is not sustainable. Some central bankers never forget, and never learn. The rouble was trading this morning 70 to the dollar (60 yesterday morning after the rate hike), and about 90 against the euro. A screenshot of Dollar/Rouble from Reuters this morning.
The oil price continued to fall yesterday, with Brent now below $60, at $59.34 this morning, and the lighter WTI at $54.79.
We took a look at the euro's daily nominal exchange rate on the ECB's website and found that it has only fallen by 3.6% over the year. We also noted that the Norwegian crown is down by 7% against the euro over the last month. Federico Fubini doug up some other numbers in La Repubblica. The rouble has devalued by 63%, the Turkish lira by 10%, the Indonesian rupiah by 7.3%, and the Indian rupee by 5.4% over the last month.
The number that really drives home the impact of all of this recent volatility is the German 10-year yield, which is now down below 0.6%. This is what happens when you allow inflation expectations to slip and when you are then subject to a big shock. The fall in the oil price and the exchange rate of the rouble and the currencies of other oil exporting nations like Norway constitutes such a shock.
This graph (we presume from Bloomberg) has been put together by Holger Zschaepitz, who compares the Japanese and German yields, relative to each other for the periods of before and after the respective financial crises:
The extreme volatility in the rouble forex rates and the oil price have raised concern about financial stability. We would not be surprised to see losses by major European banks with a strong engagement in Russia. The FT has a report on the impact of the oil price on the US credit markets - with oil and gas constituting some 4.5% of the S&P LCD loan index. German 10 year yields were below 0.6% this morning.
The impact of the falling oil price is showing through in the latest economic releases. The latest ZEW showed a very big rise for Germany, up from 11.5 in November to 34.9 in December. The index is notorious volatile, and seems to amplify trends. The trend here is the positive impact of the oil price fall on economic output, and the relative weakness of the euro.
Eurostat, meanwhile, reports that the eurozone's trade surplus had shot up in October, due mainly to fall in energy costs, a factor that will presumably have an even bigger effect in November and December. The unadjusted figure for October was €24bn, which compares with €16.5bn in November 2013, and €18.1bn in October this year. For the period of January-September, the deficit in energy trade fell from a previous €239.5bn to €214.8bn.
We had two interesting comments from the two authors of the Econbrowser blog. James Hamilton tried to disentangle the supply side and demand side effects of the slide in the oil, and concludes that weak global demand constitutes some two fifth of the total effect, leaving three fifths to the supply shock, mostly related to higher US production. Menzie Chin made an astute observation about Russia foreign exchange reserves. While their nominal value, at some $400bn, seems high, only about $200bn of those are available for the defending the rouble.
We also have stories on Germany stepping up its campaign QE; on the Greek presidential vote tonight; on how to deal with the debt of Spanish regions; on the ECB’s refusal to appear in front of the Irish banking inquiry; on Charles Grant’s take on the Franco-German relationship; and on Emmanuel Todd’s views of the euro.