The European Central Bank (ECB) raised its interest rates further to combat inflation.
It was the first time in eleven years when ECB raised the rates from -0.5% to 0% in July. Now it broke another record by raising 0.75%, the largest increase since the euro currency was launched in 1999.
EUR/USD inched higher from below 1 to 1.005.
Is it too late?
The Eurozone’s inflation rate was at 8.9% in July when their interest rate was 0% then.
US inflation was at 8.5% while their interest rate was already at 2.5% in July.
If US was late, Eurozone is even later.
Both the Fed and ECB have turned hawkish, vowing to raise rates in the coming months.
There are two other major economies where their interest rates have not risen – China and Japan.
Interest rate in Japan is still around 0% while inflation is relatively lower than the West at 2.4%. Although it is higher than Bank of Japan’s target inflation rate of 2%, it is still at a manageable level which means rate hikes are unlikely to happen in Japan.
Expect JPY to weaken further as the US raises its interest rates.
If you long JPY and short USD, you would have lost 20% year-to-date. Such movement is significant for developed countries.
The People’s Bank of China (PBOC) went the opposite direction to slash interest rate to 3.65% from 3.7% in August.
China’s economy has been struggling from Covid lockdowns and heatwaves. Moreover China’s inflation rate isn’t high at 2.7%, so it could accommodate looser monetary policy.
But that comes at a price. Yuan has weakened against the USD. It is now hovering near 7 per dollar when it was just 6.3 per dollar at the start of the year.
PBOC’s latest action was to cut the forex reserve ratio from 8% to 6%. It slowed down the pace of depreciation but analysts believe it is unlikely to reverse direction.
What are the implications?
If you do forex trades or your business is strongly affected by forex rates, note that the general trend is that USD and EUR are likely to strengthen while CNY and JPY are likely to weaken.
Stock investors will see more forex impact. Not necessary just stocks denominated in those currencies, but companies that have forex exposure would get hit too. Translating to gains or losses when the currencies get converted.
From a leisure perspective, it is time to go Europe! EUR is likely to strengthen provided ECB keeps its promise in raising rates. Go to those countries that are mired in debt first – Portugal, Italy, Greece and Spain (the PIGS).
This is because rising interest rate means their debt repayment will increase too and better to visit before any political unrest fester in the countries.
US visit will get more expensive so if you want to go, go soon.
Visit to Japan isn’t urgent as JPY may weaken further and you benefit more if you travel later.
China? Wait till they sort out their Covid issues.
