Currently, global financial markets are experiencing unprecedented turmoil. Just when central banks around the world were releasing water, the European Central Bank suddenly announced an interest rate hike, like a thunderclap on the ground.
At the same time, concerns about a currency swap agreement between South Korea and Japan have surfaced, and a weaker yen seems a foregone conclusion.
In this financial war without gunpowder, China and the United States are undoubtedly the protagonists. As the game enters a critical moment, it remains to be seen who will have the last laugh.
1. The European Central Bank's sudden interest rate hike triggered shocks in global financial markets
Against the backdrop of major central banks in the world, the European Central Bank's sudden announcement of interest rate hikes has undoubtedly caused a lot of turmoil in the global financial market.
You know, under the impact of the new crown epidemic, the global economy has been hit hard. In order to stimulate economic recovery, central banks around the world have offered loose monetary policies.
The Federal Reserve has cut interest rates to near zero and has massively purchased Treasuries and mortgage-backed securities. The ECB has also previously said that it will maintain ultra-low interest rates and increase bond purchases to support the eurozone economy.
Just when the market was widely expecting the ECB to continue its easing policy, ECB President Christine Lagarde suddenly sent a hawkish signal in a speech.
She said that although the current inflation rate is still below the target level, as the economy gradually recovers, the upward pressure on prices will increase. In order to prevent the "de-anchoring" of inflation expectations, the ECB may begin to discuss the timetable for exiting easing policy during the year.
Lagarde's speech was like a bombshell, causing a huge shock in the global financial markets. The euro rose against the dollar, briefly breaking through the 1.22 mark, hitting a new high in more than two years.
At the same time, European equities and bond markets have also seen significant volatility. The yield on German 10-year government bonds rose above zero for a time, hitting the highest value in nearly two years.
The ECB's abrupt pivot clearly upset the market's expectations.
You must know that while the Fed maintains its ultra-loose policy, other major central banks rashly tighten monetary policy, which will undoubtedly cause market turmoil and may even trigger a new round of financial crisis.
More worryingly, this move by the ECB seems to have formed some kind of deviation from the Fed's policy.
With the global economy not yet fully out of the haze of the epidemic, the divergence of major central bank policies will undoubtedly exacerbate the turbulence and uncertainty in the global financial market.
Of course, the real intention of the ECB to raise interest rates may have deeper considerations. On the one hand, the uneven economic recovery in the eurozone is becoming increasingly prominent.
The economy of core countries such as Germany has recovered rapidly, but southern European countries such as Italy are still in difficulty. In such a situation, an overly loose monetary policy could exacerbate economic imbalances and trigger a new debt crisis.
On the other hand, with the strong recovery of the US economy and the rise of the dollar index, the eurozone is facing pressure from capital outflows and exchange rate depreciation. The ECB's timely interest rate hike may also be a consideration for hedging exchange rate risks and stabilizing capital flows.
In any case, the ECB's sudden "change of face" has undoubtedly added a touch of tension and unease to the global financial market.
As the divergence of monetary policies intensifies, the volatility of exchange rates and capital flows is likely to increase further. The final outcome of this global central bank game remains to be seen.
Second, the hidden worries of the South Korea-Japan currency swap agreement, the depreciation of the yen may be a foregone conclusion
While the European Central Bank is stirring up global financial markets, the rifts in Asia's monetary system are also quietly deepening.
Recently, South Korea and Japan announced that the currency swap agreement will be extended for another three years, and the swap size will remain unchanged at $75 billion. The news, which should have been reassuring to the market, unexpectedly sparked new concerns.
You must know that as early as 1998, during the Asian financial crisis, South Korea and Japan signed the first bilateral currency swap agreement. Since then, the two countries have repeatedly expanded the scale of swaps in an attempt to maintain regional financial stability through monetary cooperation.
In recent years, as the contradictions between the two countries on historical, territorial and other issues have become increasingly acute, the continuation of the currency swap agreement is also facing increasing uncertainty.
Whenever the agreement is about to expire, it always raises market fears of a deterioration in relations between the two countries and the interruption of the swap agreement.
Even more troubling is the fact that even if the swap agreement were to be extended, its practical effect would be greatly diminished.
Because in the terms of the agreement, there is a key "proviso", that is, once Japan's foreign exchange reserves fall to a certain "trigger level", the Bank of Japan has the right to unilaterally suspend the supply of South Korean won.
As Japan's economy falls into recession and the yen exchange rate continues to fall, Japan's foreign exchange reserves are approaching this "trigger level".
Once this red line is breached, the Bank of Japan is likely to stop supplying the won, and South Korea may face a foreign exchange liquidity crisis.
In fact, the deep-seated contradictions in the South Korea-Japan currency swap agreement reflect the fragility of the East Asian monetary cooperation system.
Unlike Europe, East Asian countries have signed many currency swap agreements, but most of these agreements are bilateral agreements, and due to the relationship between the two countries and the consideration of their respective interests, it is difficult to form a solid multilateral cooperation mechanism.
With the accumulation of internal contradictions in the region and the impact of the external environment, this loose monetary cooperation system may not be able to provide strong support for regional financial stability.
On the contrary, in the event of a crisis, countries are afraid that they will prioritize their own interests, and bilateral currency swaps are likely to be the first "victims".
More worryingly, the continued weakness of the Japanese economy could force the Bank of Japan to extend its ultra-loose monetary policy. This will not only exacerbate the depreciation pressure on the yen, but may also induce a new round of "exchange rate war".
You know, in the context of sluggish global economic growth, many countries are facing the temptation to stimulate exports through currency depreciation. If the yen depreciates first, other countries may follow, triggering a new wave of global monetary easing.
epilogue
At present, the game between China and the United States in the financial field is entering the most dangerous moment.
China and the United States are the world's two largest economies, and the direction of their financial policies and changes in the exchange rates of the renminbi and the U.S. dollar will have a profound impact on global financial stability.
Against the backdrop of intensified global monetary easing and increased exchange rate volatility, China needs to maintain strategic focus, adhere to the direction of market-oriented reform of the RMB exchange rate, and not dance with the United States and other developed economies.
At the same time, China should actively participate in global economic governance and promote the building of a fairer and more equitable new international monetary and financial order.
Only in this way can China seize the initiative in this global financial game and contribute its wisdom and solutions to maintain world financial stability.