The euro’s unbroken fall

After returning to parity with the Swiss franc, the euro has now hit parity with the dollar. And the single currency is still trending down as financial markets fear a recession. With closure of the Nord Stream pipeline, Russia has suspended gas deliveries to Germany. It is officially closed until 21 July for maintenance, but some fear a definitive closure, which could seriously disrupt the German economy. BASF, the German chemical giant, is an emblematic example. In Ludwigshafen, BASF’s turbines are still running at full capacity. But the company, whose business model runs on cheap gas imported from Siberia, has entered troubled waters after a record year in 2021. In the first quarter, net profit fell by 30%. The group is totally dependent on Russian gas deliveries to Germany, which have fallen by 60% since mid-June and have currently been interrupted for at least ten days. In the worst case scenario, in which the plant has to shut down, certain types of chemicals would no longer enter the production chain – chemicals that are indispensable for the pharmaceutical, food and automotive industries and whose scarcity would threaten 40,000 jobs. Should gas deliveries stop altogether, entire sectors of the German economy would grind to a halt, GDP would fall by 12.7% and 5.6 million people would lose their jobs according to forecasts. The market is looking forward to the next meeting of the European Central Bank. The ECB is expected to raise rates by 0.50% at its policy meeting on 21 July but this is considered a virtual certainty, so the risk of “disappointment” is high. If the central bank does not send a strong message in favour of the single currency, the downward spiral is not about to be reversed.

On the other side of the Atlantic, at the June FOMC meeting, the Fed noted in its minutes published last week that inflationary pressures had not yet shown signs of abating and may last longer than previously expected. The FED, which will announce its decision on 27 July, is expected to raise its key interest rate by a further 0.75%. On the economic front, according to figures released last Friday, 372,000 non-agricultural jobs were created last month, surpassing economists’ expectations of 265,000. The unemployment rate remained unchanged at 3.6%, but the increase in hourly wages, although slightly down from 5.3% to 5.1% on an annual basis, remains particularly high. The strong labour market and rapid wage growth present a additional argument for significant central bank action. All eyes are now on this afternoon’s publication of the consumer price index, which is expected to rise to 8.8%, up from 8.6% previously, also on an annual basis. For Raphael Bostic, President of the Atlanta Fed, the economy can withstand another major hike and rates should rise to around 3% while avoiding a recession.

Back in Europe, the euro seems to be settling for a while below parity against the franc. Economists expect the SNB to raise its interest rate by a further 25 basis points to 0% at the next policy meeting on 22 September, regardless of the ECB’s next decisions. And it is not only the SNB that’s coping with a stronger franc – Banque Cantonale Vaudoise (BCV) has reduced its foreign currency reserves. At the June meeting, the SNB had mentioned the possibility of intervening in both directions in the markets. According to the BCV, it has sold about forty billion of its foreign currency reserves, thus contributing to the rise of the Swiss currency. Conversely, it is said to have bought around fifty billion in April-May to mitigate the surge in the value of the franc after the March decision to raise its key rate by half a percent.

The Central Bank of New Zealand raised its main interest rate this morning by half a percent to 2.50%. This is the third meeting in a row that has resulted in a rate hike and the bank announced that others will follow until inflation is contained and can be brought back to its target.

After the European Parliament adopted earlier this month the report stating that Croatia fully meets the criteria to adopt the single currency from 1 January 2023, Zagreb announced yesterday that the conversion rate will be 7.5345 kuna for one euro. This morning, it traded at HRK 7.5155 per euro. Croatia will thus become the 20th country to adopt the European currency.

The price of WTI crude, which was $104 a barrel on Monday, fell below $100 yesterday on the prospect of falling demand following OPEC’s monthly report forecasting a slowdown in oil consumption in 2023.