The Bank of England believes that cryptocurrencies like Bitcoin could be big news and even UK chancellor George Osborne is tweeting about it. But it is important to note the detail in the central bank’s comments. It is talking about forming its own digital currencies in a trend which could yet see Bitcoin take a back seat in the future it helped to create.
Numerous companies have reported that developments in the currency markets, especially the dollar’s appreciation, has been an important headwind on their earnings. The logic is compelling. US S&P 500 companies earn almost 50% of their revenue from foreign markets. Given the greenback’s appreciation, those foreign earnings translate into less dollar earnings.
As the next five-year review of the IMF’s international reserve asset approaches, reviewers should strongly consider the case for including the Chinese yuan in the basket.
The Special Drawing Rights (SDR) is an international reserve asset used to supplement IMF member countries’ official reserves. Its value is based on a basket currently consisting of four key international currencies. This includes the US dollar, euro, British pound and the Japanese yen currently.
The two main knocks against the US from global investors have been largely addressed. The US budget deficit has been reduced from 10% of GDP to less than 3%. The current account deficit has been halved. Nevertheless, many observers, including some Americans themselves still think that the US is in an irreversible decline that affects all great powers.
The dramatic slide in the value of the rouble has claimed its first banking casualty. The Russian Central Bank, to the tune of US$530m, is bailing out Trust Bank. The emergency liquidity line’s intent is as life support for one of modern Russia’s more established banks.
What can’t go up forever apparently will not and today has seen a couple violent moves. The dollar, which has risen by more than 10% against the yen since the BOJ surprised with a 5-4 vote to accelerate its already aggressive monetary easing on October 31, rose to new multi-year highs yesterday just shy of JPY122 only to sell off to almost JPY119.50 today.
The US dollar remains king. It continues to receive support through the divergence in growth and interest rate differentials. Even though the ECB did not take fresh action this past week, there is little doubt that it will in early 2015. The aggressive monetary policy in Japan, where the BOJ is expanding its balance sheet by 1.4% (of GDP) per month for as long as the eye can see, also stands in sharp contrast to the US, where the market has largely priced in a hike in Q3 15.
Throughout 2014, financial traders around the world have been enthusiastically taking to bitcoin as a new area for speculation. Analysts, commentators and investors have all ensured that 2014, for investments at least, may well be remembered as the year of the bitcoin.
Official comments have injected volatility into the foreign exchange market. As we anticipated, Japanese officials pushed back against the seemingly free-fall in the yen sparked by the aggressive BOJ action and the diversification of the government pension funds. Finance Minister Aso expressed concern about the pace of the yen’s decline. However, comments by Abe-adviser Hamada underscored that the direction was no objectionable and that JPY120 would be good for the Japanese economy. The dollar was pushed off a full yen to roughly JPY117.35 before finding a good bid.
The run on the yen continues. The US dollar and euro are at new multi-year highs against the yen. The BOJ confirmed its JPY80 trillion monetary base target unexpectedly adopted at the end of last month. Last month’s seemingly last minute decision was based on a very un-Japanese 5-4 vote. Today, three of the dissents accepted the fait accompli; one did not (Kiuch).
