Tag Archive | "Prime Minister"

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Osborne Calls For Bolder BoE


Finance minister George Osborne stated his case for more aggressive and innovative Bank of England initiatives to help the country climb out of the economic rut that has led to a credit downgrade and has the economy on the verge of another recession. His address to Parliament was marred by jeers from Labor and their leader, Ed Millibrand.

While the politics is sticky, the current economic trends point to disaster unless a commitment to growth is in place. Osborne looks to the BoE to carry the ball by giving the economy some breathing room with an already stifling inflation rate.

Osborne made it clear that this was not the time to cut back on austerity. Prime Minister David Cameron and Osborne remain committed to the austerity strategy that is designed to narrow the deficit through curtailing public debt. Many Brits believe their success will determine the outcome of the elections in two years. The deficit reduction package is a five year plan.

Another EU Nation Long On Austerity, Short on Growth

However, as other EU nations have found, austerity without growth is a dangerous formula. Recession looms and the UK manufacturing output is discouraging.

Latest growth projections are dismal. Osborne announced the economy will grow about 0.6 percent this year. The finance minister projects 1.8 percent GDP expansion in 2014. He was quick to point out that the 1.8 percent would exceed the output of Germany and France.

Cameron and Osborne had paid a price politically for the struggling recovery. British sterling took another hit on Wednesday but the prospect of a more aggressive BoE seemed to stabilize equity markets.

Osborne called for the central bank to maintain its 2 percent inflation rate, if possible, but not at the expense of growth. He asked for the bank to devise a strategy to reduce the inflation rate over time if it became necessary to increase the rate by more than 2 percent to supply enough easing to stimulate growth.

Housing and Construction Must Lead Way

Of particular interest is the stagnant construction and housing industry. Osborne’s charge to the BoE would transform the mission to resemble the mandate of the US Federal Reserve, whose controversial three rounds of QE have sparked a slow, tenuous but steady recovery.  US equity markets have flourished in the meantime.

Most troubling in Osborne’s presentation is his paring of the 2013 GDP growth. The 0.6 percent is half the original 2013 projection of 1.2 percent.

Osborne said, “As we’ve seen over the last five years, low and stable inflation is a necessary but not sufficient condition for prosperity. The new remit explicitly tasks the MPB with setting out clearly the tradeoffs it has made in deciding how long it will be before inflation return to target.”

It looks like uneasy times are ahead for the Sterling and the UK economy.

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Japan Finally Intervenes in Forex Markets


After months of speculation, the Bank of Japan (BOJ) has finally intervened in the currency markets. As the plummeted towards a fresh low against the Dollar, the BOJ swiftly entered the market, driving the Yen up 2% instantly. On the day, it finished 3% higher against the Dollar.

Over the last few weeks, Japan had been inching slowly towards intervention. [In fact, I was prepared to write a post yesterday about intervention being imminent, but that is neither here nor there…] The Finance Minister, Governors of the Central Bank, Members of Parliament, and even the Prime Minister himself had started to become increasingly vocal about the Yen’s un-halting rise, and the need to control it. It had already touched a 15-year high, and was only 4% away from it’s all-time low. With rhetorical intervention and its easy monetary policy failing to sway investors, the Bank of Japan sold an estimated $20 Billion worth of Yen on the open market.

BOJ Japanese Yen Intervention September 2010 

By no coincidence, the intervention was carried out only one day after a Parliamentary vote to see whether Naoto Kan would be replaced as Prime Minister. Having defeated Ichiro Ozawa and survived the challenge, Kan evidently was determined to make good on his promise to rescue the economy from the brink of another downturn. (Only a few days earlier, he admitted, “We’re conducting various talks, so other countries won’t say negative things when Japan acts. We’re studying now various scenarios, examining possible responses from markets when we take a decisive measure.”)

Reaction to the intervention has been mixed. On the one hand, the fact that the BOJ waited so long before stepping in is evidence that this measure was taken out of desperation. According to Billionaire investor George Soros, “Japan was right to act to bring down the value of the yen. ‘Certainly, they are hurting because the currency is too strong so I think they are right to intervene.’ ” Politicians and policymakers, on the other hand, were not so kind. One US Senator called the move “disturbing” and Jeane-Claude Trichet, President of the ECB, said it was “not…appropriate.”

From these snippets, then, it’s clear that the intervention is being conducted unilaterally and lacks any support from other Central Banks. Thus, if the BOJ is to continue selling the Yen, it will do so alone and perhaps even under the open contempt of other Central Banks. At the same time, it appears to have some credibility with investors, who may back off the Yen for the time being. That’s because the BOJ is trying to make owning the Yen as unattractive as possible, by driving down interest rates and attempting to spur inflation. Whether investors will take the hint and stop and return to using the Yen as a funding currency for the carry trade is still unclear. (Despite unraveling significantly over the last two years, the Yen carry trade may still exceed $500 Billion). Japan also has to contend with China, which has been putting upward pressure on the Yen by buying Japanese bonds.

For that matter, it’s not even clear whether the BOJ will continue to intervene. Perhaps it just wanted to send a message to investors by showing that it can weaken the Yen any time it wants. Besides, a protracted campaign to hold down the Yen would be expensive and doomed to failure over the long-term, as the BOJ learned the hard way in 2003-2004 and has probably been reminded of by the Swiss National Bank’s recent failure to weaken the Franc. On the other hand, the BOJ needs to show investors that it is serious, and a “shock and awe” intervention campaign is probably the only real way to achieve this.

Either way, I think it’s fair to say that those who bet on the Yen do so at their own peril. While I don’t think the Yen is suddenly going to return to 100 JPY/USD, the fact that my personal reserves are not nearly as vast as those of the Bank of Japan means I’m not inclined to bet on it…

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