Historically low level for Norges Bank

Even as the euro has surged against the dollar since August 12, it has been unable to break past the symbolic 1.2000 mark. There are several factors that may explain why. First of all, while the minutes of the last Federal Open Market Committee’s meeting certainly showed signs of concern, it does not seem like the institution is partial to further monetary easing in the immediate future. The Fed believes there is still much uncertainty as to how things will turn out, and has warned against expectations of economic recoveries in the second half of the year which could prove to be too optimistic. Nevertheless, the situation does not warrant an immediate change in monetary policy, which means the possibility of any such change has been postponed until later in the fall. In Europe, confidence indices fell for the eurozone last Friday. In addition, worsening contagion figures for the coronavirus pandemic in the continent – particularly in Italy and France – have dampened the market’s spirits. Uncertainty is also the key word in the minutes of the ECB’s latest monetary policy meeting, which were released on Thursday. The sentiment comes up over and over again in the document.  Therefore, the EUR/USD parity has found an equilibrium point around 1.1800. Attention now turns to Jackson Hole in the United States, where the central bankers’ symposium is held as in every year. Health measures mean that some sessions will be virtual and in-person attendance will be reduced. Jerome Powell is expected for his speech tomorrow and he has the opportunity to use the framework of the summit to signal possible future monetary policy changes such as the introduction of a limit on Treasury yields or the abandonment of a fixed inflation target in favour of an average value. Such announcements would weigh on the dollar and reactivate the euro’s bullish trend.

As for the Swiss franc, it remains stable against the single currency. Even so, the Swiss National Bank remains vigilant and demand deposits with the institution are increasing for the tenth consecutive week. After jumping by CHF 1.4 billion on August 21, they now stand at CHF 700 billion. For comparison, that figure was CHF 218 billion in March 2012 and still CHF 586 billion at the beginning of this year. In addition, Standard & Poor’s confirmed last week its AAA rating for Switzerland.

The Bank of Norway has left its key rate unchanged at 0%, a historically low level at which it should remain ‘for quite a while because the country’s economy is in the midst of a recession’, it says. ‘Activity has resumed its last months but is still weaker than before the pandemic’, it added. The country has suffered a double whammy of the health crisis and falling oil prices. Norway is the biggest exporter of the commodity in Western Europe. The central bank had reduced its key rate from 1.5% in mid-March to 0% in early May and suggested that it would be necessary to wait until the end of 2022 before considering a gradual rise.

The Central Bank of Turkey kept its base rate at 8.25% for the third consecutive month, after President Erdoğan called for a cut to revive the economy and encourage foreign investment. The pressure on the lira and inflation forecasts nevertheless point to an upcoming rate hike.  The central bank is trying to keep the currency, which has lost more than 6% of its value since early August, at around ₺7.35 per dollar. The lira, which was still below ₺7 at the start of the month, traded at ₺7.40 this morning.

In the bond market, and despite negative yields, German long-term debt is doing well. The 30-year sovereign bond issue saw its highest demand since 1997 last week. It was 2.9 times greater than the offer.

It took 100 trading sessions for the S&P 500 to return to an all-time high on August 18, after hitting a low of 2,191.86 points on March 22. This dramatically fast recovery where the index has grown by more than 50% is only comparable to the violent fall it suffered under the effect of the pandemic. The index of major US stocks then set a new record yesterday at 3,444.21 points. Since the start of the year, the S&P 500 has posted a gain of 6.59%, admittedly less significant than that of the Nasdaq which has soared 27.79%, but higher than the Dow Jones which has lost 1.02%.