On May 5, 2000, the late Dr. Willem Duisenberg, then President of the ECB, said: "The current development of the euro's exchange rate has given rise to questions from European citizens who are concerned about the value of their currency...European citizens can be assured that the future of the euro is that of a strong currency, based on price stability and the strength of the European economy."

On May 11, 2000 Duisenberg added: "Notwithstanding the strong growth performance and favourable outlook for euro area economic activity, the exchange rate of the euro has continued to decline over the past few weeks...Interventions are always a possibility and the only time you will hear me speak about interventions, and the deliberations concerning them, will be at the time we intervene." EURUSD rallied 2% the next day.

On June 8, 2000 he said: "the exchange rate, in my opinion, has - in the past, in recent months - clearly overshot a level which could be regarded as being more in line with the fundamentals. And the reversal which started about two weeks ago still leaves, I believe, some potential for further appreciation...I did not talk about intervention today. So you may conclude that we did not intervene. And I said that I would only talk about interventions ex post, i.e. after we have intervened and, then, immediately thereafter."

On Aug 31, 2000 Duisenberg said: "The protracted depreciation of the exchange rate of the euro and the renewed rise in oil prices have increasingly put upward pressure on import prices and consumer prices in the euro area."

Finally, on Sep 22, 2000, the ECB announced joint intervention in the exchange markets: On the initiative of the European Central Bank, the monetary authorities of the United States and Japan joined with the European Central Bank in concerted intervention in exchange markets because of their shared concern about the potential implications of recent movements in the euro exchange rate for the world economy. EURUSD gained 4% over two days.

Five central banks (the ECB, Fed, BoJ, BoC and BoE) participated in that intervention in 2000, and could be expected to be active again if intervention returns. This time, major G7 economies would want to secure some assurances from Asia of their cooperation, and events on October 8 last year, when the PBoC cut rates simultaneously with the Fed, ECB, BoE, SNB and BoC mean that there is coordination. If EURUSD continues to gain in a volatile manner ahead of the November G20, action at that meeting can be expected.


NZD: RBNZ Bollard says high NZD no impediment to rate rises

In a radio interview, RBNZ Governor Bollard said that a strong NZD is not necessarily an obstacle to raising the cash rate. NZD jumped on the news, but later gave back most of the gains. We do not attach too much significance to this unscripted remark, although it may have moderately increased the chance of the RBNZ dropping its easing bias on Oct 28.

GBP: MPC in 9-0 vote


The MPC voted 9-0 against expanding the asset purchase facility during their October policy meeting. Our economists note that one key difference between this month's minutes and the previous month is the commentary around asset prices. Where last month the committee explicitly emphasised the possibility of an asset price/confidence-led 'upward spiral for the economy' this month the committee appears to take comfort from the same higher prices arguing that the strengthening is at least in part because of the QE programme and therefore welcome.

UBS economists note that today's unanimous vote for QE does not preclude the possibility of a further expansion in November. On balance we still expect a £25 bn increase as part of a phased easing in the QE programme. In our view the committee is divided with some such as the Governor likely looking for at least £25 billion of QE and others holding the view that the £175 billion is adequate for the moment at least. The committee in our view believes the risks to policy making are very much asymmetric and will therefore remain in a 'give growth a chance' mode..

Overnight, BOE Governor King said that the UK economy is likely to return to growth in H2 2009, but that it still faces two major long-term challenges: re-balancing the economy and reforming the banking sector. He predicted that CPI would be volatile into next year, but that it would rise in the coming months.

King cautioned however that choosing the correct course for monetary policy is difficult due to supply and demand uncertainties, a weakened banking sector, and the fiscal tightening measures likely to be introduced next year. His comment on interest rate normalization has supported the pound overnight, while rising corporate activity may also be contributing to better demand.

Ref: UBS, Bloomberg

Tags: ECB, EUR