Russia’s knee-jerk reaction to the E.coli outbreak in Europe was to draw a curtain between itself and the EU. In doing so it brought to a halt the usual flow of fresh produce from west to east. That trade is – or was – estimated to be worth up to €4bn a year. Call it €75m or Rb3bn a day. That is nearly a tenth of the rouble’s total daily turnover in the FX market. Other things being equal, a reduction in euro purchases against the rouble on a similar scale would have sent the rouble higher and the euro lower.
But other things are not equal. The rouble does not float freely like the euro, the dollar or the pound. Its value is carefully managed by Russia’s central bank to track an imaginary currency ‘basket’ made up of €0.45 and US$0.55. It is allowed to move within a Rb5.00 band, currently Rb32.45-Rb37.45, against the basket. If daily sales or purchases of the rouble exceed an undisclosed daily target, the central bank intervenes to take up the slack. Similarly, if the rouble is close to either edge of its band, the central bank buys or sells a daily amount (also undisclosed) to lead it back towards the middleground. The system works: since the import ban took effect in late May, the rouble has weakened very slightly.
Nor has the E.coli crisis had any noticeable effect on the euro. Investors have two much greater issues to occupy them: Greece and interest rates. While the expectation remains that euro interest rates will go up this year, with the next move coming in July, the European Central Bank (ECB) has moved the goalposts. After a policymaking council meeting in June it issued a lower forecast for eurozone inflation. It now believes inflation will be down to its 2 per cent target next year, maybe even lower. With that in mind, investors have had to rein in their ambitions for where the ECB’s benchmark refinancing rate, currently 1.25 per cent, might go.
Bailing out Greece
The Greek problem is a very different issue and even harder to quantify. On one hand, the authorities are stressing there will be no restructuring, no bondholder losses and no default. On the other hand, last year’s rescue is already accepted to be insufficient and Bailout 2.0 is on the drawing board. But would anyone sign up for Bailout 3.0? One way or another Greece is eventually going to have to go through a rescheduling of its debt, even if they call it something else in order to save face.
The problems in the UK and the US are weather-related. In the UK there is a shortage of rain. In the US heavy rain in California has caused significant damage to cherry crops halfway through harvesting. The concern is that warm weather could now cause fruit to split. In Arkansas almost 250,000ha are still underwater a month after the Mississippi began to flood.
If that all pushes up the price of US exports to Europe, the situation will be exacerbated by the dollar’s added strength. The pound and the euro are both down by around US$0.04 from their high points at the beginning of May. It is not that the US economy is doing particularly well; post-recession job creation there is going far more slowly than it should, barely keeping up with natural demographic growth. But, with the exception of Germany, Europe is not looking too clever either. For two months the UK has been delivering evidence that it is struggling to recover. Growth is only just still positive.
The story is not much different around the world. The relative pace of countries’ economic slowdowns will help determine currency directions in coming months.
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