World’s central banks diverge

KUWAIT: Policy divergence by global Central Banks has become more apparent since the beginning of 2015. In accordance with the latest development in the US, the FOMC statement on Wednesday was generally consistent with expectations that the Federal Reserve will start raising rates later this year. Opposite to that, the list of Central banks looking to ease continues to grow this year with the ECB, the MAS in Singapore, Denmark, Canada, India, Turkey, Egypt, Romania and many others.

The fact that the Fed is heading closer toward normalizing their monetary policy should be a major puzzle to a lot of emerging market and commodity rich central banks. A stronger USD invariably results in major outflows from emerging market economies and put tremendous pressure on their currencies. As of late, we have seen major drop in commodity currencies such as the CAD, the AUD, the NZD, the NOK and emerging markets currencies such as the Russian Ruble and the Turkish Lira to name a few.

In this whole puzzle, the USD continued to hold as the only safe haven despite reports from the Senate that Yellen Told Senators that the ‘Economy Is Strong” but no tightening will be immediate.

In Europe, the Greek saga continues with the left wing political Party Syriza winning over the Greek Parliament and Euro officials attempting to contain the European nightmare that could potential come up from the negotiations. The new government is clearly determined to erase all austerity measures imposed on Greece during the latest bailout deal.

On the foreign exchange side, commodity currencies remain under pressure on the back of the shifts in the US Fed policy guidance. The FOMC did not change its own guidance much in the statement issued last Wednesday; however, it sent a message to global investors and other central banks that the days of reliance on the Fed to be the lender of last resort have ended.

After hitting a thirteen-year low of 1.1098 after the Greek elections results, the Euro regained some ground this week and closed at 1.1291. In a similar fashion, the Sterling Pound started the week at 1.4966 to end the week slightly higher at 1.5060.

In Asia, the Japanese Yen remain stuck in a range trading as low as 117.26 oil prices to be fully reflected in domestic consumer prices. If the current spot oil prices are maintained, the largest negative impact on CPI should show up in either March or April this year.

The data reveal the fundamental tension in Japan’s economy after the aggressive quantitative easing conducted by the BoJ. Although activity is picking up, it is still not resulting in upward pressure on prices. The numbers suggest the Bank of Japan will struggle to hit its inflation forecast of 1 percent for the year to March 2016.

China accepting lower growth

Chinese industrial profits continue to slow by a record 8 percent in December. The fall in profits in December highlights the challenges facing an industrial sector racked by overcapacity and falling prices, adding to pressure the People Bank of China to loosen monetary policy and boost infrastructure spending to cushion the slowdown. The 8 percent drop in profits compares with 4.2 percent in November

In sum, the latest data out of China demonstrates that the country needs a clear shift from a debt fuelled construction and foreign demand-led exports economy to one that is more services and consumption oriented. Even government officials seem to have accepted GDP forecasts in the neighborhood of 6 percent or possibly lower. On the back of a slowdown in growth, People Bank of China is likely to embark like other Emerging Central Banks on a monetary loosening policy in 2015.

Gold buying

According to reports released this week, Russia accounted for about onethird of central banks’ gold purchases last year. Central banks around the world bought a net 461 tons of gold in 2014, 13 percent higher than the previous year as they continued to diversify their currency reserves following the financial crisis. They have added 1,800 tons to their holdings in the past six years. According to the same report, Russia’s central bank purchased 152 tons of gold worth $6.1bn, an increase of 123 percent compared with the previous year.

Kuwait

Kuwaiti dinar at 0.29495 The USDKWD opened at 0.29495 yesterday morning.