Bank Indonesia Raises Borrowing Costs

The Bank Indonesia increased the interest rates today for its third meeting in a row to efficiently fight the accelerating inflation caused by the growing food and oil prices.

The central bank voted for the interest rate to be raised from 8.5 percent to 8.75 percent. The only reason the government wants to hold the rates that high, despite the unpopularity of such measures, is the fastest price growth in Indonesia in the last 21months.

Although the rate of the Indonesian rupiah remains quite steady against the U.S. dollar since April this year, the USD/IDR rate may experience some decline, as this interest rate hike may cause more investors to secure their assets in the Indonesian currencies and get a higher yield.

The rate increase wasn’t a surprise for the market analysts — the growing fuels costs cause protests by the transportation workers world-wide and Indonesia isn’t the exception. Despite the fact that the high borrowing costs may hurt the position of the current President Susilo Bambang Yudhoyono on the general elections next year, the inflation remains the central bank’s main priority.

Banks Slash Rates; Pound, Euro, Franc Drop

The Europe’s currencies posted a daily drop against the U.S. dollar after showing a moderate volatility during the early trading session after the regional central banks cut the interest rates at an unexpectedly large scale.

An increased volatility on the Forex market was the direct reaction to the series of the interest cuts performed by the central banks of the United Kingdom, Eurozone and Switzerland today. Just after the surprisingly big cut by the Bank of England, pound began to recover against the dollar and the Japanese yen but after the Swiss National Bank and the European Central Banks also cut the rates, the pound and other European currencies went down.

Bank of England lowered the interest rate by 150 basis points today — down to 3 percent. The largest expected cut was 100 basis points and it wasn’t quite a popular forecast. Swiss National Bank cut the Libor target range by 50 basis points to 2 percent average. European Central Bank also slashed 50 basis points from the 3.75 percent rate, showing its conservative character even during the harsh crisis times.

Aussie, Kiwi Rise on China’s Stimulus Plan

The Australian and New Zealand dollars rose against the U.S. dollar and the Japanese Yen compared to the last Friday’s close levels as the China said that the government will provide $586 billion of liquidity help to the national economy.

The Aussie and Kiwi opened with a huge weekly gap against the dollar and the yen after the news that the Chinese economy, which is expanding at a fastest pace among the world’s largest economies, will get this additional stimulus. $586 billion will be injected gradually and will completely enter the market by the end of 2010.

Although the proposed plan is quite «slow», the traders and investors hope that it will help to revive the demand for the commodities, thus allowing Australia and New Zealand (which are the large commodity exporters) to maintain the better trade and current-account balances.

The news from China makes traders to believe that the global recession may not last for too long, spurring the confidence in such high-yielding currencies as the Australian and New Zealand dollars. Some Forex traders still believe that the carry trade may return to the market soon.

Chinese Yuan Depreciates to July’s Levels

The Chinese yuan fell to the weakest level since August today as the country’s government continued to manipulate its currency before the scheduled meeting with the U. S. Treasury Secretary.

The reference rate, set by the People’s Bank of China, allows 0.5 percent deviation in the either side during the daily yuan trading session. Today the rate was set to the lowest level since August 2008 and the daily trading led the currency below that level as the traders expected further depreciation.

China’s economic growth is declining; it reached the lowest rate since 2003 as the government tried to decrease the inflation with the strong yuan in the first half of this year. Financial crisis brought another stress factor for the Chinese export-orientated economy — developed countries decreased their demand for the China-produced goods, pressing on the production growth in the country.

According to many analysts the yuan will continue its decline, directed by the People’s Bank of China, as the currency rate manipulation is seen as one of the most effective method to stimulate growth.

U.S. Treasury Secretary Henry Paulson will try to convince the Chinese officials to tolerate more freedom for the yuan’s rate during the meeting on December 4th and 5th. U. S. President-elect Barack Obama also called for a stronger and more loose yuan control. Despite the pressure from the United States, it’s unlikely that China will refrain from using its currency as an economy’s growth locomotive.

USD/CNY reference rate was set to 6.8505 today and currency pair rose from 6.8330 to 6.8802 as of 9:06 GMT today, reaching the daily high at 6.8830.

GBP at Lowest Level Against JPY in 17 Months

The Great Britain pound today reached its lowest value against the Japanese yen since 11th of July, 2006, continuing the strong bearish trend that has started during early November 2007.

Since the pound has been a carry trade favorite long currency for a long time, it’s gained a lot of “overweight” against its Japanese counterpart - yen, and it now has a great potential in falling down as the carry trade positions are being closed by the majority of the Forex investors.

GBP/JPY touched a 209.99 level today and then retraced back from the psychologically strong 210.00 support level. But it is still trading with a daily loss of more than 0.2% making it a 4th straight bearish trading day for this pair.

There are other reasons for pound to depreciate against yen, even without the problems with carry trade. The Great Britain pound is experiencing rather bad times with the economy growth slowdown and the real estate sector slumping. Bank of England has to reduce the interest rates in order to stimulate the investments. But the lower interest rate makes the pound less attractive as a currency.

Another reason for GBP/JPY to head down so fast can be seen in a fast Chinese yuan appreciation, which is driving all other Asian currencies up. The yuan rose by more than 11% in 2007 against the U.S. dollar and is believed to gain near the same in 2008. Judging from the data received since the start of the year, China is acting to strengthen its currency. And strong yuan will certainly influence the yen, helping it to go up against the pound.

Canadian Dollar Slid This Week as Oil Declined

The Canadian dollar declined against the U.S. dollar for the second week in a row as the oil and commodities prices continued to drop on the worsening global economy outlook.

The Bank of Canada Commodity Price Index dropped to 181.63 this week — its lowest level since 2005, while oil prices dropped below $50. Commodity exports are very important for the Canadian economy as they constitute a large part of the country’s GDP and attract the foreign capital to the financial system.

From the fundamental analysis point of view the Canadian dollar has only one way — down, as it gets no support neither from the commodities nor from the positive interest rates difference.

But from the technical point of view, the USD/CAD currency pair iscurrently heading to form a double top pattern after declining on Friday this week. If the price corrects to about C$1.1500 per dollar the further decline may follow.

USD/CAD gained 2.3 percent this week — from 1.2381 to 1.2666. It declined down from 1.2971 to 1.2666 or 2.4 percent on Friday alone.

Rupee Declines More as Stocks Tumble

The Indian rupee continued to fall against the U.S. dollar and the Japanese yen today as the Asian stock markets fell again, spurring the outflow of the capital from the emerging markets.

The India’s central bank allowed the domestic companies to attract more foreign loans yesterday, lifting the limit imposed last year to cool down the financial markets. That effort failed to dwell the confidence into the investors’ hearts and the rupee fell today for a seventh day.

The problem with the availability of the funds for the Indian companies isn’t unique and it can’t be solved by the one-sided decision to lift the limits. The global demand for liquidity greatly exceeds the quite limited supply.

The Reserve Bank of India raised the limit for the foreign borrowing to $500 million in one financial year, allowing repatriation of the funds if they weren’t invested into the capital markets or real estate sector.

USD/INR rose from 49.290 to 49.745 as of 8:24 GMT today. INR/JPY fell significantly today — from 1.9882 to 1.9694.