Go big or go home! The Swiss franc explodes and the rupee roars as central banks make dramatic moves to fight off deflationary pressures. Switzerland's central bank and India central banks shocked markets by cutting interest rates in response to falling prices and slower economic growth. Even more shocking was the fact that the Swiss central bank removed its peg and price cap that limited how much the euro could fall against the Swiss franc, known as the minimum exchange rate policy. The old policy was to intervene in the market to make sure that the Euro currency did not fall below 1.20 Swiss francs, to keep investors from parking money there for safe haven, lowering the country’s export prospects by having a strong currency. The fear was that if they did not watch, prices might go through the roof!
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Dow Jones reported that the Swiss National Bank also raised the fees it charges banks to deposit money. It said it would lower its three-month Libor target range to between minus 1.25% and minus 0.25%, from between minus 0.75% and 0.25%, effective immediately. The central bank said it has now "concluded that enforcing and maintaining the minimum exchange rate for the Swiss franc against the euro is no longer justified." The move by the Swiss National bank is going to raise the pressure on the ECB to do something dramatic -- as far as quantitative easing to keep up with the Swiss.
India, normally an inflation hot spot, also shocked markets, first with an unscheduled interest .25 basis point interest rate cut -- bringing their interest rate down to 7.75 percent. According to Dow Jones, Reserve Bank of India Governor Raghuram Rajan said he decided to lower rates, thanks to signs that India is winning its long battle with inflation in recent months, as oil and food prices have slid. Of course they may have to fight a new battle of slowing economic growth, as reflected by falling prices. Dow Jones says that “India’s economic slowdown, as well as falling oil prices have helped bring India’s consumer-price index inflation rate down below 6% in recent months.” Some countries would love that inflation rate right now.
Who saw this coming? Perhaps it was the oil market. Oil has acted like a leading economic indicator, even beating Dr. Copper to the punch, signaling more weakness in the global economy. Even as oil rebounded dramatically in options expiration, spectacular rally moves in the price of oil may be the leading economic indicator we need to watch as a barometer of just where the economy is headed. While the dramatic rebound of my key target point of $44 a barrel may signal we have at least found a point in the market where we should start to consolidate, there are still signs that the oil was right in signaling a turndown in the global economy and the growing risk of global deflation. Maybe these central bank moves will inspire some oil demand expectations, but the European Central Bank will have to act.
Oil also saw support from an uptick in gasoline demand, even as the oil inventories came in much higher than the markets estimates. The Energy Information Administration reported U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 5.4 million barrels from the previous week. At 387.8 million barrels, U.S. crude oil inventories are at the highest level for this time of year in at least the last 80 years. Total motor gasoline inventories increased by 3.2 million barrels last week, and are well above the upper limit of the average range. Finished gasoline inventories decreased, while blending components inventories increased last week. Distillate fuel inventories increased by 2.9 million barrels last week, but are in the lower half of the average range for this time of year. Propane/propylene inventories fell 0.8 million barrels last week, but are well above the upper limit of the average range. Total commercial petroleum inventories increased by 10.2 million barrels last week. Total products supplied over the last four-week period averaged 19.9 million barrels per day, up by 3.9% from the same period last year. Over the last four weeks, motor gasoline product supplied averaged 9.2 million barrels per day, up by 7.1% from the same period last year. Distillate fuel product supplied averaged over 3.8 million barrels per day over the last four weeks, up by 7.8% from the same period last year.
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