20 years ago … the Euro!

We’re off to a gentle start with this first week of the new year. First, it is an opportunity to celebrate a birthday. Twenty years ago, on 1 January 2002, the euro was born. True, it had existed since 1999, but that was only in cashless form through credit cards, cheques or bank transfers. It took another three years to be able to hold coins and notes in one’s hand. This was a major change. Between January and March 2002, 308 million people in twelve countries exchanged their national currency for the new single currency. 16 billion banknotes and 32 billion coins were produced to replace the old currencies. The other significant event at the beginning of the year was the disappearance of the Libor rate. Already, it was quoted only for the US dollar, the euro, the British pound, the yen and the Swiss franc. With the exception of the dollar, for which it be extended for a few periods only, until June 2023, the Libor rate will be replaced by the SARON for the franc, the EURIBOR or ESTR for the euro, the SONIA for the pound sterling and the TONAR for the yen. But the particularity of some of these rates is that the calculation is made retroactively at  the end of the period. It is therefore not possible to know financing costs in advance. This is why, in some currencies so-called Forward Looking rates have been developed, which allow to know the cost of one’s credit as opposed to Backward Looking rates such as the SARON or the ESTR (Euro Short Term Rate).

In these first days of the year, the dollar is starting with some growth. US interest rates are rising and the 10-year Treasury bond has recovered 13.5 points to 1.646%. Rising yields are thus weighing on the euro and the yen, for example. Analysts are now waiting for the minutes of the last FOMC meeting today and US employment figures on Friday for confirmation that the Fed is indeed preparing to tighten credit policy. The minutes refer to the last FOMC meeting on 15 December, when the Committee decided to accelerate the tapering.

Other currencies are in the spotlight these days. The Swiss franc continues to be in demand. Thus, the euro reached a new low against the franc at 1.0326 on 31 December. It hasn’t been that low since the euro/Swiss franc floor rate was abandoned in  2015. The market believes, following Thomas Jordan’s statement, that the SNB is now more willing to tolerate a temporary and gradual strengthening of our currency. According to the President of the National Bank, a strong franc tempers the rise in inflation by reducing the impact of imported inflation.

The Czech koruna is shining bright as 2022 starts – it reached a 10-year high against the euro at 24.8536 korunas per euro. It is being driven by an improvement in the PMI (purchasing managers’ index) and an increase in expectations of monetary tightening.

The yuan remains strong even against the greenback, reaching levels not seen since 2018.  And it is the strongest it has been against the euro since 2017. China’s central bank said between Christmas and New Year that it intends to let its currency fluctuate more freely in 2022 because it believes it will remain generally stable and at a reasonable and balanced level. At the end of November, the PBOC held nearly $3.2 trillion in foreign currencies, and it does not wish to increase its reserves.

We should also note the Turkish lira, which remains very volatile. The plummeting Turkish currency caused the consumer price index to rise by 36.08% year-on-year in December. The prices of basic foodstuffs are becoming difficult to bear for the population. Since the beginning of the crisis, the pound has experienced fluctuations of up to 10% during a single day.

After a year 2021 that saw a surge in the main financial markets, with gains of around 20% – and sometimes much more, such as the 27% of Standard & Poors or the 30% of the CAC. They are almost all in the green in these first days of the year, ignoring the new covid wave hitting the world. The Dow Jones even set a record closing price for the second day in a row yesterday, driven by financial and industrial stocks.

The main central banks will not hold their first monetary policy meeting until the second half of the month or even in early February for the ECB or the Bank of England. In the meantime, it is the minutes of the FOMC, published today, or the statements of the members of the various management boards that the markets will be scrutinising, since 2022 is shaping up to be a turning point in the monetary policy of institutions such as the Fed or the Bank of England.