The single currency remains on the defensive against the Dollar

The single currency remains on the defensive against the Dollar. Last week Klaas Knot, who sits on the European Central Bank’s Governing Council, said that the ECB had room to push its rate further into negative territory, in order to improve financing conditions and meet inflation targets. He also revisited the value of the single currency, stating that the ECB had the tools necessary to counter Euro appreciation. The value of the currency fell immediately, from 1.2150 to 1.2059 USD. There are however dissenting voices within the institution, as in the view of others the ECB should not lower its base rate, with any effect thereof on the economy being minimal, they believe. The fact is that the level of the single currency is the subject of intense debate in Frankfurt. The currency is suffering not only as a result of the delivery problems besetting the vaccination programme but on account of poor economic data. Under the effects of the restrictions in place in Germany, which could last until June, that country has seen a very sharp fall in retail sales. These fell by 9.6 % in December, compared to an increase in 1.9 % in the previous month. German Gross Domestic Product increased by only 0.1 % in the fourth quarter, after rallying by 8.5 % in the third quarter. For 2020 as a whole, GDP will remain negative. Spain had a nightmarish 2020.  The growth in its GDP by 0.4 % in the fourth quarter was far from enough to offset the impact of the pandemic-related measures implemented there. Growth contracted by 11 % in 2020. Production contracted to the tune of 130 billion, with Spain suffering its worst collapse in that sector since 1936 (during the Civil War). In Italy, the economy contracted by 2 % in the last quarter and by 8.9 % over the year as a whole. For the Eurozone, the first estimate for the fourth quarter suggests a contraction of 0.7 %, compared to growth of 12.4 % in the third quarter.

In the United States, at its first monetary policy meeting the FOMC elected to leave reference rates unchanged. T-bill purchase programs will also remain in place. Economic conditions worsened at year’s end, undermining recovery. The measures in place will be maintained until unemployment falls and inflation reaches the target of 2%, according to the press release. The tone of Jerome Powell was rather accommodating at his press conference. Unlike Federal Reserve Vice-Chairman Richard Clarida and Federal Reserve Governor Lael Brainard, he thinks it premature to consider any reduction of the measures supporting the economy. He does not believe that the Fed will curtail asset purchases this year and considers that the reopening of the economy and the demand which should be triggered thereby will not have any significant effect on inflation.

In Switzerland, the Swiss National Bank, which had been subject to a certain pressure, decided to be more generous in the redistribution of its profits. The Cantons and the Confederation will receive more money. A new agreement is to regulate the distribution of the SNB’s profits between 2020 and 2025. A maximum amount of six billion Francs will be disbursed per year. The mechanism provides for a basic amount of two billion Francs, which amount will be distributed if a profit of at least the same amount is booked. Four further distributions of one billion Francs each are possible. These will be made if the profits booked reach 10, 20, 30 and 40 billion Francs. As the conditions for the maximum distribution are satisfied for the 2020 financial year, six billion Francs will be paid to the Confederation and the Cantons this year. At the economic level, Thomas Jordan expects growth to have remained weak and perhaps even to have contracted in the last quarter of 2020 and the first quarter of 2021. He also reiterated that the US administration’s decision to place Switzerland on the list of currency-manipulating jurisdictions had not impacted the SNB’s policy.

The Reserve Bank of Australia decided to leave its reference rate at 0.1 % but indicated its readiness to continue to support the economy with an accommodating monetary policy. It therefore announced that it was extending its QE programme (which had been scheduled to expire in April) by a further six months. In its press release it also modified its interest rates forecast. From remaining with the status quo for “at least three years”, it moved to no increases before “2024 at the earliest”. This announcement depressed the Australian Dollar, especially as Governor Philip Lowe had stated that without this decision there was a risk that the Australian Dollar would appreciate.

The price of silver has been very volatile in recent days. As a result of the taking of massive speculative positions, the value of an ounce of silver briefly topped 30 Dollars. The grey stuff had started the year at 26.66 Dollars and then fallen to 24.05, before rising again to heights (30.1003 on Monday) last seen in the first quarter of 2013. But its price per ounce fell sharply on Monday evening, when COMEX announced that the margin on futures would increase by 18 % with effect from 2 February. This resulted in a wave of liquidations which pulled the trading price down to below 27 Dollars per ounce. Gold however did not experience such peripatetics and its price has remained stable in recent days.