It was a week with massive volatility with unexpected fundamental developments. The US dollar index broke its own previous week’s record making a high of 89.86 surging all the USD pairs higher and higher with the signals given by the FED chair Janet Yellen that possible rate hike could be expected in April 2015.
The week started with Japan on Sunday. Japan’s ruling Liberal Democratic Party (LDP) had a major victory, winning 290 seats in the Lower House. Although lower than the previous 294 seats, this victory win gave the prime minister Abe an extra strength to continue his economic reforms. From the results of the referendum, one major signal was sent from Japan; "Abenomics" reforms will be continuous which translates into further weaker Japanese yen.
On Monday, the day started with the panic in emerging markets. First the Turkish lira lost ground against all its counterparts with the news that the Erdogan administration announced “anti-terror” operations against country’s leading media reporters. Then it was Russia’s turn to take the stage. Some of the Russian economists called it the black Monday for Ruble, without knowing what was next for the following day, for the fact that Russian ruble depreciated from 58 to 62 levels per US Dollar.
On Tuesday, China’s preliminary December HSBC manufacturing PMI was announced, where the index fell further into contractionary territory to 49.5 level compared to the previously expected 49.9 levels. The fall in the Chinese PMI, did not help the already struggling Russian Ruble, as China consumes some 10% of the Global oil and is a recent energy partner for the Putin administration.
1:00 am Moscow time, Russian Central Bank announced its record breaking interest rate hike, a jump from 10.5% to 17.0%, the largest hike since 1998’s Russian Economic crisis. Following the news on the rate hike, the Russian ruble fell by over 20% against the US Dollar. Some analysts commented that, Russia’s rate hike did not really help the falling Ruble, while some analysts claimed that Ruble would have fallen even further if the rate hike would not have been enforced as the hike had indicated that the central bank will support the national currency and do everything within their control to control the economy.
The fall in Russian Ruble became so strong that, most of the liquidy providers shut their Ruble transactions down limiting the Ruble entries in most of the exchanges and banks globally.
Later on during the day, in an article by the New York Times, it was claimed that the Ruble’s decline was due to the Russian Energy giant Rosneft. The article continued that Rosneft needed money to refinance its debt payments, which could not have been rolled over due to the western sanctions preventing the company to work with the Western banks. In return the Russian Central bank and the Rosneft worked out a strategy where the central bank accepted Rosneft bonds as collateral for loans, enabling Rosneft selling 625 Billion Ruble (aproximately $10.9 Billion as per the exchange rate on Friday the 12th) to the Russian banks. These bonds were in return used by the Russian banks as a collateral to borrow money from the central bank.
The big claim came as a part of the article that, Rosneft had exchanged this borrowed 625 Billion Ruble creating panic in the market. Of course, these claims were denied by Rosneft management.
A confirmative statement was also given by an opposition politician, Boris Y. Nemtsov that "The central bank started the printing press to help the Sechin-Putin business, and gave Rosneft 625 billion newly printed rubles. The money immediately appeared on the currency market, and the rate collapsed."
On Wednesday the big news was within the FOMC meeting minutes, where the FED dropped the “considerable period” phrase and stated that “Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy.”
The most important element of the “patient” phrase of the FOMC minutes was revealed during the press conference where the FED Chair Janet Yellen commented that the FED would not be raising rates for the next couple of meetings, signalling possible rate hikes for April 2015.
Meanwhile in Europe, the troublesom member of the European union, Greece was voting for the presidential candidate. The vote did not pass the parliament’s first hearing. 180 votes were required; however only 160 votes were collected leading the vote to its second round on the 23rd of December. If the second round fails as well final round of the voting will be held on the 29th of December.
On Thursday the Swiss National Bank was on stage, where the bank imposed negative interest rates on deposits in response to the falling EUR/CHF rates. With the recent rate cut the SNB once again highlighted that the bank will do everything within its power to protect the 1.20 floor for EUR/CHF.
Meanwhile, the German business confidence rose for a second month, signaling that the German economy is recovering from recession.
On Friday, the market was relatively quiet with not many market influencing announcements made.
As we are moving towards the end of the year the number of market-moving events decreases dramatically and liquidity slows down as well. However, this week we will have the following announcements, which could create extra volatility in the market:
1. Final Q3 US GDP figures to be announced on Tuesday the 23rd of December
With monetary policy divergence increasing between the US FED and the other central banks globally. It could be expected that the US Dollar will get stronger, from the most recent market developments positive sentiment towards the US stocks and government bonds can also be expected.
2. The second attempt to select the president in Greece on Tuesday the 23rd of December
With 160 votes in favor of the coalition government candidate Stavros Dimas, the coalition is seeking at least another 20 additional MPs votes in order to avoid snap general elections for the country. However if the coalition fails this time as expected we will have the third final attempt on the 29th of December.
By Yury Safronau at Orbex.com.