There is no question that governments will have to continue offering and providing both monetary and fiscal support before the global easing cycle can be said to have ended. The good news, however, is that some key indicators have started to show fragile signs or turning around, at least in some regions.

But how can investors measure the process? In measuring the progress towards what will hopefully ultimately be the end of a global credit markets crisis, combined with attempts to reverse the underlying slowing in the global economy, the Bank Credit Analyst has selected three key indicators: interest rate spreads, the gold price, and currency volatility.

In the US, the key so-called Libor/Overnight indexed swap (Libor/OIS) rate has been easing in the past few weeks. This rate, an important measure of risk and liquidity, went into orbit after the bankruptcy on 15 September of Lehman Bros., the erstwhile Wall Street investment bank. In the US, where the OIS rate is quoted against posted effective Fed funds rates (Libor stands for “London interbank overnight rate”), the policy interest rate of the Federal Reserve, the US central bank, the spread moved from somewhat less than 100 basis points to nearly 400 basis points.

The spread has since moved down sharply to around 200 basis points, indicating that at least a certain degree of confidence has been restored by the enormous and widespread responses announced by the Federal Reserve and the US Treasury.

BCA Research comments that while there are encouraging signs that US Libor/OIS spreads have adjusted lower (even at longer maturities), this measure of banking sector risk has not yet narrowed much throughout Europe, “and both corporate bond yields and mortgage rates are still near their peaks across the globe”.

In the background, global policymakers continue to literally do everything imaginable to first, shore up both investor and banking sector confidence and, second, to limit downside in their various economies. The latest big headline example was China’s announcement, this past weekend, of a monster USD 586bn fiscal package that will create positive economic activity for years to come.

Beyond watching spreads, as a “conventional measure”, analysts at the Bank Credit Analyst remark that they are also watching gold prices and currency volatilities. In the opinion of BCA Research, and many other experts and observers, the dollar gold price is a “great barometer of excess liquidity”; an increase in dollar gold bullion prices would indicate that global attempts to reflate economies is meeting with success.

The price has fallen nearly USD 200 an ounce, from around USD 910 an ounce early in October. Dollar gold bullion peaked at just over USD 1,000 an ounce in March this year, at the height of the Bear Stearns debacle on Wall Street, as the first big name from that district bit the dirt.  Seen from then, the bullion price has moved steadily down as liquidity has dried up, or at least gone into hibernation mode. There has been a currency effect at play as well, given that the dollar started to rally from multi year lows on 15 July this year, the day when dollar crude oil prices traded at lifetime records.

Most, if not all, commodity prices maintain an inverse correlation with the value of the dollar, falling when the dollar rises, and vice versa. Since the collapse of Lehman Bros., there has been strong demand for the dollar, on the back of rising demand for US Treasury bills as (ironically) a safe haven asset, and also the yen, as so-called carry trades continue to be unwound. In these trades, speculators borrow money in low interest rate countries – and here Japan rules the world – and invest in jurisdictions where rates (and risk) are higher.

Since its lows earlier this year, the dollar has risen by a rather phenomenal 23%, leaving any number of currencies gasping for breath. So-called “commodity currencies” such as those in Australia, Chile, South Africa and Brazil, have been particularly badly battered, along with currencies connected to worrying current account deficits, such as those found in Hungary, South Africa, and Turkey.

Analysts at the Bank Credit Analyst argue that “a sustained rise across a broad range of currencies would suggest that reflation measures are starting to work. Similarly, a dramatic reduction in currency volatility may indicate that we are returning to a world of competitive currency devaluation as policymakers seek external support for weakness in their domestic economies. In this environment, no currency adjusts lower but significant monetary stimulus is provided”.

The “bottom line”, says BCA Research, is that further evidence in the weeks ahead that policymakers are finally getting ahead of the curve “would prove supportive of risky assets”.

 

SELECTED CURRENCIES

From

From

 

 

 

high*

low*

 

Dollar DXY index USD

87.13400

-0.9%

23.2%

 

 

 

 

 

 

 

USD/unit

 

 

Unit/USD

Venezuelan bolivar VEB**

0.00047

0.0%

0.0%

2147

Hong Kong dollar HKD

0.12901

0.0%

0.9%

7.75

Chinese yuan CNY

0.14643

-0.3%

9.0%

6.83

Kazakhstan tenge KZT

0.00833

-0.5%

0.9%

120.02

UAE dirham AED

0.27226

-0.7%

0.1%

3.67

Saudi Arabian riyal SAR

0.26656

-1.1%

0.6%

3.75

Nigerian naira NGN

0.00849

-1.1%

1.3%

117.77

Jordanian dinar JOD

1.41044

-1.2%

0.6%

0.71

Kuwaiti dinar KWD

3.69734

-2.3%

1.1%

0.27

Egyptian pound EGP

0.18104

-4.8%

1.8%

5.52

Japanese yen JPY

0.01024

-6.9%

17.4%

97.63

Taiwan dollar TWD

0.03031

-9.2%

2.0%

32.99

Argentine peso ARS

0.30319

-8.8%

3.8%

3.30

Singapore dollar SGD

0.66370

-10.7%

0.6%

1.51

Iran rial IRR

0.00010

-11.4%

0.0%

10125

Malaysian ringgit MYR

0.27836

-12.9%

0.2%

3.59

Peruvian sol PEN

0.32321

-13.4%

4.1%

3.09

Russian ruble RUB

0.03633

-16.2%

0.3%

27.53

Israeli shekel ILS

0.25763

-17.5%

3.7%

3.88

Thai baht THB

0.02858

-17.5%

0.5%

34.99

Philippine peso PHP

0.02043

-17.8%

2.0%

48.95

Swiss franc CHF

0.84313

-18.7%

0.3%

1.19

Moroccan dirham MAD

0.11362

-18.3%

1.1%

8.80

Indian rupee INR

0.02041

-20.0%

2.6%

49.00

Canadian dollar CAD

0.82897

-21.1%

7.9%

1.21

Danish krone DKK

0.16864

-21.6%

2.0%

5.93

Euro EUR

1.25541

-21.7%

1.8%

0.80

Slovenian tolar SIT

0.00524

-21.7%

1.8%

190.90

Indonesian rupiah IDR

0.00009

-21.7%

3.5%

11550

Ukrainian hryvnia UAH

0.17316

-21.9%

23.4%

5.78

Bulgarian lev BGN

0.64117

-22.3%

1.7%

1.56

Albanian lek ALL

0.01018

-22.3%

1.6%

98.23

Mexican peso MXN

0.07687

-24.2%

9.9%

13.01

Pakistani rupee PKR

0.01243

-24.6%

4.2%

80.48

Romanian leu RON

0.32691

-27.7%

1.0%

3.06

British pound GBP

1.53597

-26.3%

0.6%

0.65

Swedish krona SEK

0.12369

-28.0%

1.2%

8.08

Czech koruna CZK

0.04961

-28.6%

2.0%

20.16

Colombian peso COP

0.00043

-29.1%

4.7%

2311

Turkish lira TRY

0.61491

-29.3%

7.0%

1.63

Brazilian real BRL

0.45280

-29.6%

15.5%

2.21

Norwegian krone NOK

0.14210

-29.7%

3.9%

7.04

New Zealand dollar NZD

0.57515

-30.0%

7.5%

1.74

Polish zloty PLN

0.33299

-32.8%

5.1%

3.00

South Korean won KRW

0.00074

-32.9%

10.0%

1360

Hungarian forint HUF

0.00465

-33.3%

5.7%

214.89

Australian dollar AUD

0.65718

-33.3%

9.4%

1.52

Chilean peso CLP

0.00155

-33.7%

5.9%

644.36

South African rand ZAR

0.09643

-36.8%

14.5%

10.37

* 12-month

 

 

 

 

** Some currencies are tied, or fixed, to the USD.