Central Bank Outlook Is The Path To Success

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Contents

FX Monthly Outlook: Central banks pause amid global standoffs

After 10 years of economic expansion, institutions ranging from the IMF, the World Bank, the US Fed to global corporations have expressed concerns of an economic slowdown in the US and abroad. No clear exit has opened for Theresa May and the UK as the March 29 Brexit’s deadline quickly approaches. Trade tensions between US and China have strengthened headwinds to global growth, leading central bankers to take notice and pivot their forward guidance.

What’s in play?

Brexit countdown: Time is running out for the March 29 deadline with no clear indication of a deal in sight. PM Theresa May has held steady with her intent to reach a deal and extend the deadline if possible. Opposition party leader Jeremy Corbyn has not ruled out a second referendum altogether. The GBP has rallied with speculation the UK will ultimately “Bremain”, however a messy no-deal and potential collapse looms over the pound.

US/China trade negotiations: US Tariffs on $200 billion worth of Chinese goods will jump from 10 percent to 25 percent on March 1 unless Trump and Xi reach a trade deal which includes larger purchases of US goods and reformed practices on intellectual property from the Chinese. Trump and Xi were scheduled to meet toward the end of February, but the meeting this month in Vietnam is now “unlikely” according to Trump. This puts the 15% tariff increase on crash course to US importers on March 1. The Chinese renminbi furthered its retreat from 7 yuan per USD, reaching 6.7 as the saber rattling tempered down during the stock market sell-off at the end of 2020.

Venezuela on the brink: Amidst the state’s complete collapse, Juan Guaidó, leader of the National Assembly, proclaimed control of the government while President Nicolas Maduro clings to power through military support. The newly issued currency, the Sovereign Bolivar, linked to the oil backed cryptocurrency “the petro”, has seen inflation skyrocket over 1 million percent in months. US sanctions on state owned oil company, PDVSA, and fears of further supply disruptions could drive crude and currencies of resources producing nations higher.

What’s next?

Global growth slowdown: Fears of a slowdown in global growth have spread with central banks setting accommodative tones for their paths ahead.

Federal Reserve: The Federal Open Market Committee (FOMC) signaled patience on raising rates in the minutes from January’s meeting. The committee also caution in trimming its balance sheet, reversing expectations of tighter monetary policy in 2020. This may stifle the dollar strength and cap the greenback’s performance in 2020.

ECB: ECB President Mario Draghi’s acknowledgement of the Eurozone’s growth risks having “moved to the downside” now reduces the likelihood of a previously anticipated summer rate hike. With disappointing German economic numbers, uncertainty of Brexit’s outcome, look for the ECB to remain dovish and accommodative.

Kim Jong Un and Trump round 2: North Korea’s supreme leader and President Trump are planning to kick off a second round of talks near the end of February in Vietnam. Denuclearization of the North Korean regime will be front and center. A hostile result may lead to a short-term rally in safe haven currencies, JPY, EUR, CHF.

What happened?

Red light, green light: The ugly end of 2020 for global stocks has almost recovered form losses as nearly every major global equity index is now positive for 2020 to date. Emerging market currencies have rallied on the back of investors’ regained appetites for risk assets.

US Government shutdown: After a record 35 days of impasse, Trump passed a bill to temporarily open the government until February 15. The dollar index fell as much as 1.4 percent, while government workers were furloughed and lines grew at TSA checkpoints across the US.

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Protecting and growing your business

A focus on foreign exchange usually requires proactive efforts to safeguard cross-border business. We can help you add to your success by helping you reduce your currency risks.

SVB’s FX team has been ranked by Bloomberg as one of the most accurate FX forecaster in the world.* We leverage unique expertise to provide you with the ideas to help protect your business in turbulent times.

If you’d like to discuss your specific situation or to explore the merits of active FX management, contact your SVB FX Advisor directly, or email us at [email protected].

Learn More

  • Track the euro’s performance over its first 20 years; learn which Eurozone countries benefited the most/least in our latest FX Market Insight article.
  • Learn How Currency Movements Can Affect Your Global Business.
  • Explore all the tailored services SVB offers for your foreign exchange needs.
  • Subscribe to our Daily FX Updates to have currency news delivered to your inbox each weekday morning ET.

Sources: All data Bloomberg 2020

*Bloomberg Q3’ 2020 FX forecasters are ranked based on three criteria: margin of error, timing (for identical forecasts, earlier ones received more credit) and directional accuracy (movements with the currency’s overall direction). The rankings which were based on Bloomberg’s foreign exchange forecasts (FXFC), were for forecasters who provided forecasts for Q3’ 2020 in at least three of the four preceding quarters but no later than one month prior to September 30, 2020.

Scores were calculated each quarter for the three criteria, which were weighted 60 percent, 30 percent and 10 percent, respectively. The final score for each currency pair was the time-weighted average of the four quarterly scores.

The best overall forecasters were identified by averaging the individual scores for each firm on all 13 currency pairs and all four quarters. Forecasters had to be ranked in at least eight of the 13 pairs to qualify for the overall ranking (54 firms qualified). All ranking tables display the top 20 percent of the forecasters who were eligible, to a maximum of 10 names.

©2020 SVB Financial Group. All rights reserved. Silicon Valley Bank is a member of the Federal Reserve System. Silicon Valley Bank is the California bank subsidiary of SVB Financial Group (Nasdaq: SIVB). SVB, SVB FINANCIAL GROUP, SILICON VALLEY BANK, MAKE NEXT HAPPEN NOW and the chevron device are trademarks of SVB Financial Group, used under license.

This article is intended for US audiences only.

The views expressed in this article are solely those of the author and do not reflect the views of SVB Financial Group, or Silicon Valley Bank, or any of its affiliates. This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decisions. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.

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Finance English practice: Unit 23 — Central Banking

  • Complete the sentences below. Use the key words if necessary.
    • The functions of central banks

    A journalist is interviewing Professor John Webb, an expert in central banking.

    ‘What are the main functions of central banks?’

    ‘Well, most countries have a central bank that provides financial services to the government and to the banking system. If a group of countries have a common currency, for example the euro, they also share a central bank, such as the European Central Bank in Frankfurt.

    Some central banks are responsible for — trying to control the rate of inflation to maintain . This involves changing interest rates. The aim is to protect the value of the currency — what it will purchase at home and in other currencies.

    In many countries, the central bank and the banking system and the whole financial sector. It also collects financial data and publishes statistics, and provides financial information for consumers. In most countries, the central bank prints and — putting banknotes into circulation. It also participates in clearing cheques and settling debts among commercial banks.’

    The central bank and the commercial banks

    ‘How exactly does the central bank supervise the commercial banks?’

    ‘Well, commercial banks have to keep — a certain amount of their deposits — for customers who want to withdraw their money. These are held by the central bank, which can also change the — the minimum percentage of its deposits a bank has to keep in its reserves.

    If one bank goes bankrupt, it can quickly affect the stability of the whole . And if depositors think a bank is unsafe they might all try to withdraw their money. If this happens it’s called a or a , and the bank will quickly use up its reserves. Central banks can act as , which means lending money to financial institutions in difficulty, to allow them to make payments. But central banks don’t always or rescue banks in difficulty, because this could lead banks to take risks that are too big.’

    Central banks and exchange rates

    ‘What about exchange rates with foreign currencies?’

    ‘Central banks manage a country’s reserves of and foreign currencies. They can try to have an influence on the — the price at which their currency can be converted into other currencies. They do this by on the , and moving the rate up or down by buying or selling their currency. This changes the balance of — how much is being sold — and — how much is being bought.’

Match the two parts of the sentences.

    The central bank will sometimes lend money . . .
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