Highlights

  • Germany reluctant to pledge aid for Greece

  • SNB refrains from intervening, franc hits fresh all-time high against euro

  • Sterling recovers on improved labour market data

  • FOMC retains ultra-low interest rates, exit set to continue as scheduled

  • Speculation on further discount rate increase in US


Greece: Crucial EU summit

At the end of last week, EUR-USD had surged to over 1.37, thus breaking out above the trading range of the past weeks. In the run-up to the FOMC meeting, the single currency actually managed to increase its gains to over 1.38 temporarily. As from Thursday, however, the euro came under renewed pressure, mainly because the German government now seems to be reluctant to provide financial aid for Greece, and is now saying that the International Monetary Fund should rescue Greece.

EUR-CHF tumbled to a new low of 1.4360 – a level not seen since October 2008. Although the Swiss National Bank had the previous week issued a further warning that it would intervene to prevent an excessive appreciation of the franc, it has refrained from doing so in the last few days.
In our view, the franc is unlikely to remain at such lofty heights for long.

The pound sterling has recovered somewhat. After political uncertainty, rapidly rising public debt and economic setbacks had weighed on the British currency, the first good news from the labour market on Wednesday triggered a small rally. In February, jobless claims dropped by 32,000 – the sharpest fall in unemployment since the late 1990s. Furthermore, there was a slight glimmer of hope for public finances, as unexpectedly high tax receipts in February reduced the deficit (slightly).


EU aid for Greece: yes or no?

The finance ministers of the Eurogroup had met in Brussels on Monday to discuss, inter alia, a financial aid package. It was generally agreed, that the eurozone countries would support Greece in an emergency. The rescue plan, which was to conform to the EU Treaty, envisaged bilateral loans from eurozone member states, coordinated at EU level. The final decision was to be taken the following week at the EU summit meeting on 25-26 March.

However, what seemed cut and dried at the beginning of the week is now by no means certain.
The German government is backtracking: although, only a few days earlier, the German finance ministry had launched the idea of a European Monetary Fund and finance minister Wolfgang Schäuble had of course participated in the finance ministers’ discussions in Brussels, the idea has now been criticised by the German chancellor: Angela Merkel cautioned against overly hasty pledges of financial aid and actually said in a budget speech that she was in favour of calling in the International Monetary Fund.

The to-ing and fro-ing on the issue of aid for Greece is continuing to create uncertainty among investors. Now the question is not so much whether aid will be provided but rather where it will come from. If the IMF has to be brought in, this would reveal a structural weakness in the Monetary Union. If a solution is not found at the EU summit next week, the euro could be put under more pressure in the forex markets.


Fed still on course

At its meeting on Tuesday, the Federal Open Market Committee confirmed its monetary policy stance. It continues to see exceptionally low levels of the fed funds rate as warranted for an extended period. The remaining special liquidity facilities, in particular the extensive purchasing programmes for agency bonds and MBS, are to be closed as scheduled. The assessment of the economic situation states that housing starts have declined but investment in machinery and equipment has risen significantly. Otherwise, the Committee continues to see economic activity strengthening; the pace of economic recovery, however, is likely to remain constrained by high unemployment, modest income growth and lower housing wealth.

All in all, there is little change in the FOMC statement. It is striking, however, that the reason given by Kansas Fed president Thomas Hoenig for voting against policy action is not, as before, because he no longer considers maintaining monetary policy for a longer period justified, but “because it could lead to the buildup of financial imbalances and increase risks to longer-run macroeconomic and financial stability.” Comments from other Fed representatives also reveal that discussions among the central bankers are currently focused on the right time to exit.

There are market rumours that the discount rate might be raised again before the next FOMC meeting in April. On 18 February, the central bank had already lifted the discount rate unexpectedly from 0.50 to 0.75%. The Fed basically wants to install the discount window as a marginal refinancing facility with an appropriate spread over standard rates. Raising the discount rate again would pave the way for eventually increasing the fed funds rate and deposit rate.