Are big interest rate hikes coming up?
Monday, February 21, 2011 @ 3:10 PM
I don't know how many Eyeonspain readers watch the Foreign Exchange markets, but I'm a firm believer that more people should in general. In fact, if I were ever Education Secretary this would be a 3 hour per week subject in the syllabus. It tells us a lot about life.
On the 18th of Feb something interesting happened in FX options markets: a huge sum of contracts on the EUR / USD pair was bought, to the value of 100,000,000,000 (100 billion) USDollars. Huge sums change hands in FX markets, but this is the options market and this is one big sum for one trade. In other words, someone has made a 100 billion dollar bet that Euro will fall against the dollar within one month. I.e. someone is expecting some big bank to fail in the Eurozone or interest rates to be raised by a big amount in the US.
Bear with me before I draw my conclusions, there is another relevant data point: the GBP has massively risen against the JPY (japanese yen) during February. This indicates again that an interest rate hike is imminent in the UK. This is also Euro-bearish, i.e. we would expect the value/popularity/strength of the Euro to drop dramatically from the high levels it's enjoying right now.
What does this mean for us mortgage payers? I believe that the ECB will have no choice but to follow suit. The bank(st)ers of the world will have to raise in unison because otherwise the imbalances will not be beneficial to anyone (carry trades will ensue), and combine that with yesterday's G20 statement "we will address the imbalances" and presto! you have simultaneous interest rate hikes accross the world.
Oh sure, I've been wrong more times than I've been right - but please consider your refinancing/remortgaging moves with this in mind. Watch March events carefully.