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OctaFX.Com - Are the Glory Days of Currency Trading Over?
Once upon a time, the foreign exchange (FX) markets enjoyed a clear framework for trading and were seen as a reflection of the health of global economies. But as central bank programs of quantitative easing have been introduced, currency market trades are not so clear cut, according to analysts at HSBC.
The latest report from HSBC's global research department heralds "a new era for FX" as currency carry trading, a popular strategy of currency trading that exploits global interest rate differentials, struggles in an era of central bank intervention and low interest rates.
"In the glory days of carry, the FX market had the luxury of a clear framework for understanding and trading currencies," the report, led by David Bloom Global Head of FX Strategy at HSBC (London Stock Exchange: HSBA-LN), begins.
"Life for FX market was simple. Get your interest rate calls correct, and you could both understand and trade the FX markets....In the low inflation environment, higher short rates meant a stronger currency and vice-versa...FX was beautiful."
"It was clear, liquid and transparent," the report surmises.
Fast forward through five years of global economic crisis and central banks ranging from the Federal Reserve to the Bank of Japan have introduced near-zero interest rates and quantitative easing (explain this) in an attempt to stimulate economic growth creating "a problem for markets," the report says.
Indeed, central bank intervention has made the currency trading world a risk on - risk-off place, according to HSBC's report. Investors are now flocking to emerging market currencies and safe havens alike, which makes currency trading much more volatile and harder for investors to interpret.
"Today carry's hold on FX has waned as global rates gravitate towards zero, forcing the FX market to react instead to the far more ambiguous implication of quantitative easing," the report states.
"We now live in a world dominated by risk-on/risk-off, and prospects for unconventional monetary easing have become the key element of [that] dynamic."
HSBC notes that not all easing has had negative effects for currencies. Indeed, in the euro zone it has been positive as "non-conventional easing" European Central Bank easing has lowered "the possibility of euro (EUR=X) default and disintegration" and has attracted investors.
In sum though, central bank policies have created an uncertain environment for currency traders as it becomes harder to identify economic trends. As global economic data points to an uncertain future in the euro zone and events such as the U.S. fiscal cliff approach, the world of FX becomes opaque, HSBC states.
"This lack of clarity is creating a puzzling outlook for many currencies...The world of FX has become one of perception rather than concrete links," HSBC says.
Read More:What is the "Fiscal Cliff"?
In the U.S., for instance, easing has been dollar (.DXY) negative as "the resultant 'risk on' mood takes us to higher yielding more risky currencies." This was indeed exemplified by the dollar falling to a four-month low after the Fed announced "QE3" in September that led to emerging market governments such as Brazil fearing a new era of "currency wars".
HSBC's view on currency market volatility is reflected by other FX strategists too.
Sebastien Galy, Senior Currency Strategist at Societe Generale told CNBC on Wednesday that the robust Australian dollar was an example of how investors flocking to a safe-haven asset had inflated a currency that should "be massively lower".
"It should be massively lower...in a normal environment. But everyone is looking for yields which leads to over-shoot," Galy said, "that overshoot has been happening for years."
Indeed, HSBC concludes, as the carry trade dies a bit of the currency market could go with it.
"The demise of carry has brought "onion skin" layers of uncertainty into the FX market, tears and all."
Oct 3, 2012 10:55 AM
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OctaFX.Com -Euro Mixed After ECB Holds Rates; All Eyes on Draghi Press Conference
THE TAKEAWAY: EUR European Central Bank Rate Decision > Key Rate on Hold at 0.75% as expected > EURUSD NEUTRAL
The European Central Bank has announced its key interest rate for the coming weeks, where it is on hold at 0.75%, as expected according to a Bloomberg News survey. The ECB also announced that it would be leaving its marginal lending rate unchanged at 1.50% and its deposit facility rate unchanged at 0.00%.
ECB President Mario Draghi is now scheduled to speak at 08:30 EDT / 12:30 GMT.
EURUSD 1-minute Chart: October 4, 2012
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Charts Created using Marketscope – Prepared by Christopher Vecchio
Following the rate decision, the EURUSD perked up more from its pre-release gains, trading as high as 1.2967, before falling back to 1.2951 at the time this report was written. The pair remains near session highs set post-release with the session low coming in at 1.2900.
Oct 4, 2012 12:18 PM
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OctaFX.Com - Dollar, Yen Aim Higher as All Eyes Turn to Eurozone FinMin Summit
The safe-haven US Dollar and Japanese Yen rose overnight amid risk aversion before a Eurozone finance ministers’ summit. More of the same appears likely ahead.
Talking Points
- US Dollar, Japanese Yen Rise as Risk Aversion Grips Asian Stock Markets
- Canadian Dollar Well-Supported in the Wake of US Employment Report
- Eurozone FinMin Summit in Focus for Greece Funding, Spain Bailout Cues
- IMF Likely to Downgrade Global Economic Outlook in Updated Data Set
- Germany’s Trade Surplus Set to Narrow, Industrial Production to Decline
The US Dollar and Japanese Yen advanced against most of their major counterparts as Asian stocks declined, boosting demand for the go-to haven currencies. Regional bourses (excluding Japan, where markets are closed for a holiday) slumped 0.9 percent on average. The Canadian Dollar was likewise well-supported in the wake of Friday’s better-than-expected US jobs report as traders wagered that a firming recovery in the world’s top economy will boost cross-border demand for its northern neighbor.
From here, all eyes turn to the Luxembourg, where Eurozone finance ministers are due to begin a two-day meeting to discuss debt management efforts. Traders will be interested in any moves to mend disagreements between the Greek government and troika monitors that open the door for disbursement of the latest batch of bailout funding. Any clues about the timing of a Spanish request for a full-on rescue package are also sought, particularly after borrowing costs rose at a bond auction last week.
Against this backdrop, the IMF is due to release an updated set of global economic performance expectations, with downgrades widely expected. This suggests that absent concrete positive cues from Luxembourg, the risk-off mood is likely to carry forward. On the data front, Germany’s Trade Balance surplus is expected to narrow to €15.2 billion – the lowest in four months – while Industrial Production is forecast to have fallen 0.6% percent in August.
Oct 8, 2012 05:40 AM
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OctaFX.Com - Spain doesn't need help, euro zone ministers say
LUXEMBOURG (Reuters) - Euro zone finance ministers delivered a united defense of Spain on Monday, saying the country was taking steps to overhaul its economy, funding itself successfully in the financial markets and did not need a bailout, at least for now.
Arriving at a meeting in Luxembourg to discuss Greece and Spain and to inaugurate the euro zone's permanent bailout mechanism, the ESM, German Finance Minister Wolfgang Schaeuble said Madrid had made clear it wanted no help.
"Spain needs no aid program. Spain is doing everything necessary, in fiscal policy, in structural reforms," he told reporters as he arrived for a gathering that will also discuss plans to establish a single supervisor for euro zone banks.
"Spain has a problem with its banks as a consequence of the real estate bubble of the past years," he said. "That's why Spain is getting (EU) help with banking recapitalization."
Luxembourg Finance Minister Luc Frieden took the same line but added that if Spain were to make a request for aid beyond the 100 billion euros already earmarked to recapitalize its banks, it would be examined.
"I think we should deal with such a request when it comes, but so far the Spanish government is undertaking reforms which go in the right direction," he said.
Finance ministers agreed in June to provide up to 100 billion euros for Spain's banks, many of which are weighed down with bad property loans and need to be recapitalized.
An independent audit has shown the banks need around 40 billion euros, less than originally expected, a result Austria's finance minister, Maria Fekter, said was positive.
"We have the banking application from Spain," Fekter said. "We are likely to hear today that this 100 billion euros is not all needed, that Spain needs significantly less."
Many in the financial markets are convinced Spain will not be able to meet its sovereign funding needs at an affordable cost without euro zone and European Central Bank support, especially with several of its regions requiring a bailout from Madrid.
A euro zone source said ministers may also discuss Spain's 2013 budget, outlined last month, which the International Monetary Fund and the European Commission both believe is based on an over-optimistic forecast of a 0.5 percent economic contraction next year. The IMF forecast of a 1.2 percent recession may be revised further downwards on Tuesday.
NO MOVES ON GREECE
As well as Spain, ministers will discuss the situation in Greece, where intense negotiations continue between the government and the 'troika' of inspectors from the Commission, the ECB and the IMF over budget cuts for 2013-2014.
But Jean-Claude Juncker, the chairman of the Eurogroup, said no developments on Greece, which has fallen behind on its second bailout program, were likely at least until the troika finishes a report on the country's debt situation. That report is now expected in early November.
"I don't think that we will have any major decisions on Greece," Juncker said. Asked whether a decision on Greece could be expected soon, he replied: "Hope never dies."
Monday's meeting will also discuss plans for the ECB to be given responsibility for supervising all eurozone banks and the idea of creating a single budget for eurozone countries, issues that will be discussed further by eurozone and EU leaders at a summit in Brussels on October 18-19.
But little formal progress is expected, with questions unresolved about how many of the eurozone's 6,000 banks the ECB will be charged with overseeing and whether it will be able to start its new role from January next year.
Instead, the only firm action taken on Monday was the unveiling of the European Stability Mechanism (ESM), a 500 billion euro, rescue mechanism for the 17 euro zone countries.
The ESM, which replaces the temporary EFSF, will be used to lend to distressed euro zone sovereigns in return for strict fiscal and structural reforms that aim to put economies that have lost investor trust back on track.
"The start of the ESM marks a historic milestone in shaping the future of the European monetary union," the fund's chief executive, Klaus Regling, told reporters
"The euro area now is equipped with a permanent and effective firewall, which of course is a crucial component in our strategy to ensure financial stability in the euro zone."
The fund's lending capacity will be based on 80 billion euros of paid-in capital and 620 billion of callable capital, against which the ESM will borrow money on the market to lend it on to governments cut off from sustainable market funding.
From Monday it has a capacity of 200 billion euros and it will reach its full capacity gradually by 2014.
Oct 8, 2012 01:30 PM
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OctaFX.Com - German regulator: "no euro zone bank watchdog until 2014"
FRANKFURT (Reuters) - Plans to establish a euro zone bank regulator by January 1, 2013, may be delayed by a year, Germany's markets regulator said on Tuesday, a potential setback to efforts to help distressed euro zone countries and their banks.
European leaders agreed at the end of June to set up a single supervisor to oversee 6,000 banks in Europe, but Elke Koenig, head of Germany's markets regulator BaFin, said the original deadline to start such supervision was unrealistic.
"I could imagine that we get there in January 2014. That's a guess," she told German television station ARD on Tuesday, adding this was her personal view.
Koenig argued that efforts to centralize supervision should proceed with caution, a view at odds with several euro zone policymakers, but in line with German Finance Minister Wolfgang Schaeuble, who last month objected to giving the ECB sweeping powers.
The speedy establishment of common banking supervision is necessary to pave the way for the direct recapitalization of lenders via the European Stability Mechanism (ESM), a euro zone bailout fund which came into force on Monday.
Propping up weak banks is seen as a way to break the vicious circle linking indebted governments and their troubled lenders. Doubts over the solidity of Spain's finances, for example, are inextricably linked to its weak banking sector.
The Dutch Central Bank said on Tuesday that policymakers should quickly give the European Central Bank the tools to supervise major lenders and to enable the ESM to directly recapitalize troubled banks if shareholders or national governments proved unable.
Germany, the euro zone's economic heavyweight, has criticized efforts to allow the ECB to supervise all euro zone lenders, claiming the ECB will be overstretched.
In reality, the ECB will not be in day-to-day charge of supervision, which will still lie with national and local regulators. But the ECB is expected to leave national supervisors with less wiggle room to adopt special rules designed to protect their home market.
Germany's landesbanken, for example, are currently allowed to keep using a special form of non-voting capital as a way to meet tougher rules on capital safeguards.
The ECB's president Mario Draghi commented on the timetable for creating a new supervisor on Tuesday.
"The ECB is not supposed to take over supervision in three months' time and do it. There is a phase-in time. We foresee that one year will be needed to adapt all the structures," Draghi told the European parliament.
As a first step, the ECB is set to take responsibility for supervising banks which have received state aid beginning 2013. From mid-2013 the ECB will add systemically relevant institutions, before finally overseeing all euro zone banks by 2014.
Upon being asked whether a January deadline for Euro zone bank supervision was realistic, The Bank of France, the Bank of Spain and the Bank of Italy declined to comment.
Gerard Rameix, head of the French markets watchdog AMF, said he had heard nothing to suggest there would be a change to the timeframe. "I think they are playing on words a bit. If they are talking about the utmost end of the process, then they are maybe not wrong," Rameix said.
Late on Monday Koenig said that although she supported the idea of common supervision in principle, she hasn't understood how the transition from national to pan-European supervision will work in practice.
"I support the idea of a strong European regulator. But I have not seen a roadmap of how we get there," she said.
"The last thing we can afford is to have an interregnum between those who are no longer responsible (for supervision) and those who are not yet in a position to act," Koenig said.
Earlier this month ECB policymaker Joerg Asmussen warned that tapping the ESM for direct bank recapitalization will only be possible once supervision has been set up.
And last month, Germany, the Netherlands and Finland insisted that the ESM should not be used to solve "legacy issues", essentially saying that highly indebted banks in Spain, Ireland and Greece will remain the responsibility of those countries' governments.
The Basel Committee on Banking Supervision said last week the EU was failing to apply the Basel III capital requirement rules for banks because it softened up a definition of what qualifies as core capital.
Basel III says it must be common equity capital while Germany has pushed hard to include what some regulators see as less proven financial instruments which are widely used in the German public sector banking arm of Landesbanks.
Oct 9, 2012 12:54 PM
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OctaFX.Com -Eleven euro states back financial transaction tax
LUXEMBOURG/ATHENS (Reuters) - Eleven euro zone countries agreed on Tuesday to press ahead with a disputed tax on financial transactions designed to help pay for the cost of fixing a crisis that has rocked the single currency area.
The initiative, pushed hard by Germany and France but strongly opposed by Britain, Sweden and other free-marketers, gained critical mass at a European Union finance ministers' meeting in Luxembourg, when more than the required nine states agreed to use a treaty provision to launch the tax.
The so-called "Tobin tax", first proposed by Nobel-prize winning U.S. economist James Tobin in the 1972 as a way of reducing financial market volatility, has become a political symbol of a widespread desire to make banks, hedge funds and high-frequency traders pay a price for the crisis.
"This is a small step for 11 countries but a giant leap for Europe,"
Austria Deputy Finance Minister Andreas Schieder said.
"The way is now clear for a just contribution from the banking and financial sector for financing the burdens of the crisis."
The agreement raised the prospect of a pioneer group of European states for the first time launching a joint tax without the unanimous backing of the 27-nation bloc, a move that may fragment the single market for financial services.
EU Tax Commissioner Algirdas Semeta told the meeting the number of states backing the initiative had passed the quorum for so-called "enhanced cooperation", provided some countries turn their oral backing into written commitment.
"I proposed this tax as a source of new revenue from an under-taxed sector, and a means of encouraging more responsible trading,"
Semeta said.
"It would also prevent a patchwork of national bank taxes from creating difficulties for businesses in the Single Market."
However, critics say it could distort that market by giving banks and other traders incentives to shift their trading activities to European financial centers where the tax is not levied, or away from Europe altogether.
"People will arbitrage it. People will find a way around it," said David Stewart, CEO of London-based hedge fund firm Odey Asset Management, which runs around $6.5 billion.
"If someone really wants to buy a company that's good, I'm sure they'll keep on buying it. But if it's a synthetic derivative then they may go somewhere else ... More volume will go through London."
Britain, home to the region's biggest trading centre, will not join the scheme.
Austrian Finance Minister Maria Fekter said the 11 countries would present a model for how the tax would work by the end of the year, and it was realistic to expect the tax to be implemented by 2014.
Semeta said the countries aiming to launch the tax did not yet agree on where the proceeds should go or on what they should be spent.
"Some of them would like to spend it individually. Some of them prefer to use part of the proceeds to finance the EU budget. It is premature to say what will be the final outcome," he said.
The breakthrough was a surprise to many EU diplomats who had thought Germany might fail to convince sufficient countries to join the plan, which has been in the works for two years.
After heavy diplomatic pressure from Berlin overnight, Spain and Italy agreed to support the measure. Slovakia and Estonia said they would throw their weight behind it too.
The European Commission has said a tax on stocks, bonds and derivatives trades from 2014 could raise up to 57 billion euros a year if applied across all countries.
SCANT PROGRESS ELSEWHERE
The agreement was a victory for German Chancellor Angela Merkel on the day she travelled to Athens, epicenter of Europe's debt crisis, to express her support for near-bankrupt Greece staying in the euro zone.
Greek police fired teargas and stun grenades to hold back protesters who accuse Merkel of imposing devastating austerity on their country in exchange for two EU/IMF bailouts that have so far failed to turn the shattered economy around.
"A lot has been accomplished," Merkel said after talks with Prime Minister Antonis Samaras, adding that the tough path Greece is on will pay off if Greeks stay the course.
The financial tax deal masked a distinct lack of progress among finance ministers on other pressing issues facing the euro zone, including whether and when to provide a rescue package for Spain, and what to do about Greece's off-course program.
The 17 euro zone ministers finally inaugurated their 500 billion euro permanent rescue fund on Monday, but danced around the question of how soon it might have to be used.
Ministers insisted Spain was taking the right actions to restore its public finances and did not need a bailout for now, even though many in the financial markets are convinced Madrid will need help within weeks rather than months.
The International Monetary Fund doused several euro zone countries' budget plans, including those of Spain and France, by revising down its 2013 growth forecasts for their economies.
Euro zone peers told Spanish Economy Minister Luis de Guindos that his country's budget cuts should take into account the weakness in the economy as regional policymakers debated whether to let Madrid slacken the pace of its austerity drive.
"The only thing I can say (about the IMF's forecasts for Spain) is to try to avoid that they happen," de Guindos said.
"Logically, we are working on the basis that such negative forecasts are not met," he said.
The ministers also had a "robust" discussion with the IMF about the long-term sustainability of Greece's debt mountain -- a key factor in whether international lenders release an urgently needed next tranche of aid to Athens.
An IMF director told a Dutch newspaper that European countries should consider restructuring the Greek debt they hold if the country's financial burden proves unsustainable.
Diplomats say euro zone governments would prefer to find ways to give Athens more time to meet its fiscal targets and postpone any consideration of official debt restructuring until after next September's German general election.
European Central Bank chief Mario Draghi told the European Parliament the euro zone economy faced a long, uphill road to recovery and the bloc was still suffering a crisis of confidence.
But he said there was no alternative to continued budget cuts.
Oct 9, 2012 02:22 PM
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OctaFX.Com -EU summit to back idea of separate euro zone budget-draft conclusions
BRUSSELS (Reuters) - The euro zone should have its own budget, which would be separate from the long-term budget of the wider European Union, draft conclusions of an EU summit to take place next week said.
"For the euro area, the objective is to move towards an integrated budgetary framework," said the draft conclusions, obtained by Reuters.
"In that context, mechanisms to prevent unsustainable budgetary developments, as well as mechanisms for fiscal solidarity, e.g. via an appropriate fiscal capacity, should be explored," the draft said.
"Such mechanisms would be specific to the euro area and therefore not be covered by the Multiannual Financial Framework," the draft said.
The Multiannual Financial Framework is the European Union's long-term budget which amounts to around 1 percent of the gross domestic product of the 27-nation bloc.
It is used to support the EU's agriculture policy as well as investment in the EU's poorer countries and regions, among others.
The idea of a separate euro zone budget is supported by Germany, but many non-euro zone countries, which now benefit from the funds of the EU-wide budget, are concerned that its creation would diminish the amount of money available to them.
The conclusions also showed that EU leaders would support the idea of euro zone countries entering into contractual agreements with EU institutions to implement reforms.
"The smooth functioning of EMU (the euro zone) for stronger and sustainable economic growth, employment and social cohesion requires stronger coordination, convergence and enforcement of economic policy," the draft conclusions said.
"In this respect, the idea for the euro area Member States to enter into individual arrangements of a contractual nature at the European level on the reforms they commit to undertake and on their implementation should be explored," they said.
Oct 9, 2012 04:24 PM
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OctaFX.Com -Euro Rises Following ECB Bulletin Remarks on OMT Bond Purchases
THE TAKEAWAY: Euro-zone growth is expected to remain weak according to ECB bulletin -> OMT comments reflect Draghi -> Euro trading slightly higher
The European Central Bank said growth in the Euro-area is expected to remain weak, as tensions in certain markets keeps confidence and sentiment down, according to the monthly bulletin from their October meeting. The ECB continued to say that economic indicators confirm the continuation of a weak economy in the third quarter.
The ECB quoted rising energy prices,increases in indirect taxes, and the resulting higher inflation as the reason that the central bank kept rates unchanged in their October meeting. The ECB predicted that inflation will remain above 2% for the rest of 2012, but will drop below 2% in 2013.
The ECB said the decision regarding the OMT has helped relieve certain tensions, but the governments must continue to implement necessary steps. The bulletin stressed the importance of the conditionality of OMT purchases, thereby reflecting Draghi’s statements at the European parliament.
Finally, the ECB supported efforts to implement a single supervisory mechanism for Euro-area banks. The ECB has already begun preparatory work so as to be ready to implement the joint banking supervision.
The Euro rose slightly following the release of the bulleting, possibly on optimism over the implementation of the OMT program. Euro investors may be hoping to see Spain agree to the ECB’s conditions for bond purchases, which could be a step in the direction of a recovery from the debt crisis.
EURUSD is currently trading closer to the key 1.2900 line, where resistance could be found by the 23.6% retracement of the rally that began at the end of July. Support could be provided by the month-long low at 1.2803.
EURUSD 15-minute: October 11, 2012
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Oct 11, 2012 08:48 AM
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OctaFX.Com - Japanese Yen and US Dollar Weaker as Chinese Data Bucks Worries
News was light over the weekend, although data out of Asia proved to be materially important for global investor sentiment. Headed into the weekend, there were two concerns for the week ahead: what will the swath of Chinese data bring; and what will happen in Europe this week with respect to the Spanish bailout?
The first answers regarding China began to trickle in the past few days, with Chinese September trade data showing that Exports increased by more than expected while Imports held steady, allowing for a wider surplus despite forecasts for a narrower one. Alongside headline inflation pressures that continue to trend lower, in both the Consumer and Producer Price Indexes for September, the view that China is headed for a ‘hard landing’ is indeed softening. With the third quarter GDP on tap for this Thursday, we expect Chinese-linked currencies (the Australian and New Zealand Dollars and the Japanese Yen) to see a bit more action in the coming days.
In Europe, it appears that there’s a growing consensus for “more time” for Greece, with reports indicating that Greek Prime Minister Antonis Samaras will agree to new austerity measures with international lenders by this week’s Euro-zone Summit, slated for October 18 to 19. Greek bond yields sank today, so perhaps there is some credibility to these reports.
Also out of Europe has been the ceremonial pre-Summit jawboning from various leaders and institutions, but the outlook is surprisingly dull. In fact, taking a look at bank research this morning, expectations for the Summit this week are “quite low to begin with,” says Deutsche Bank, while JPMorgan’s European political analyst Alex White wrote over the weekend that no significant progress should be expected on Greece or Spain.
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Oct 15, 2012 11:08 AM
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OctaFX.Com - Norway's Housing Boom Could Turn to Bust
Norway, which chose to remain outside the EU and the euro currency, enjoys an enviably stable economy and a booming housing market - but it could be going down the perilous route taken by Spain and Ireland, according to economists and recent analysis.
According to a report by Bank of New York (BNY) Mellon, Norway's housing sector, which has seen prices jump by almost 30 percent since 2006 - could end up replicating a pattern of housing booms and busts seen across the globe, from the U.S. to Japan to Spain and Ireland.
Indeed, Norway's house price rise has been so dramatic that the San Francisco Federal Reserve wrote a paper on the subject in June that made parallels between the lead up to the U.S. housing crisis and the "irrationally exuberant bubble" of Norway's present boom.
Written by an advisor to Norway's central bank (Norges Bank) Marius Jurgilas and San Francisco Fed's senior economist Kevin Lansing, the paper stated that Norwegian property prices are currently 125 percent of the historic price-to-income ratio and around 170 percent of the historic price-to-rent ratio - a full 50 percent above their last major peak 20 years ago.
Home prices continue to rise sharply with the Association of Norwegian Real Estate Brokers (NEF) reporting an 8.1 percent annual increase in August.
Has Anyone in Norway Noticed?
Though the Norwegian Central Bank has warned about long-term risks to the economy from rising housing prices, it has kept interest rates steady at 1.5 percent and suggested that it will keep them at these levels until Spring 2013. It declined to comment on the housing market.
Neil Mellor from BNY Mellon said that Norway's central bank, has neglected its housing market's indomitable price rise by focusing on a monetary policy of low and stable inflation.
"In focussing solely on indices for goods and services, Norges Bank is failing to address some unnerving trends in a sector whose stability is vital to that of the economy as a whole."
"Low interest rates, stable consumer price inflation and booming asset prices combine to form conditions whereby debt is accumulated at a growing rate to levels that contravene conventional rules of thumb pertaining to stability."
Mellor added that as house prices rise, household debt in Norway is also rising.
"In the case of Norway, the ratio of household debt-to-income has risen dramatically over the past decade and currently stands at around 210 percent - well above that seen in the U.S. before its own bust in 2007 (with debt/income at 130 percent)."
The Central Bank of Norway declined to comment, but Mellor insisted that the unrelenting accretion of debt must not be played down or dismissed as an accounting matter.
"The asset price bubbles formed over the past decade were, in essence, down to policy makers suffering from the same illusion of price stability, albeit an illusion formalized by inflation targeting."
Norway's Dangerous Success Story
Robert Shiller, Professor of Economics at Yale University and co-creator of the S&P/Case-Shiller home-price index said that the Norwegian government "should start worrying now".
"This is a reason to expect an unpleasant end to this bubble in Norway. That is what I told them then," Shiller told CNBC on Tuesday, alluding to a presentation he made in the Scandinavian capitals of Oslo, Copenhagen and Stockholm in January in which he warned of the impending housing bust.
Rather than learning from its European neighbor Spain - where a real estate bubble saw home prices rise 44 percent from 2004 to 2008 before the bubble burst, leaving not only eerily empty properties and Spanish ghost towns but domestic banks with billions of bad loans - Norway is letting its economic success go to its head, Shiller said.
"My suspicions are Norwegians are infected with a success story for their own country that makes high home price increases seem plausible to them," a success only aggrandized when compared to its economically ailing euro zone neighbors.
"They feel smug in their superiority with regard to the European crisis. They didn't even join the EU, let alone the euro. They don't have to bail out any irresponsible southern countries. They have North Sea oil. They have low unemployment. [In short] they are doing everything right, and lots of people want to come to Norway."
However, Shiller notes that there is a paradox in the Norwegian success story.
"Norway is just about the last country to expect a housing bubble to appear, at least not a rational bubble, since it has so much empty land."
"If home prices get elevated, there should be a prompt supply response, new houses will be built, bringing prices down, unless there is some kind of political or zoning problem. Even such political problems tend not to last forever. "
Indeed, there have been some calls to raise lending rates and tighten policy.
In August, as household credit grew at an annual rate of some 7.2 percent - the highest rate since February - Norway's Finance Minister Signjoern Johnsen called for lending standards to be tightened, and the NEF called for higher interest rates.
Mellor states that "[Past crises] have taught us that formulating policy on the basis of a narrow range of prices is a recipe for potential instability, and history tells us that it is never "different this time"."
Mellor concludes with a quote from the San Francisco Fed paper on Norway: "History tells us that episodes of sustained rapid credit expansion combined with booming asset prices are almost always followed by periods of financial stress ... Time will tell whether things turn out differently for the Norwegian housing market."
Oct 17, 2012 09:36 AM
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