Covered interest parity is close to a physical law in international finance, yet it has been consistently violated since the Global Crisis. Violations since 2014, once banks had strengthened their balance sheets and regained easy access to funding, are especially puzzling. This column argues that the violation reflects a combination of foreign exchange hedging demand and tighter limits to arbitrage. Hedging demand has been boosted, in particular, by divergent monetary policies in an ultra-low interest rate environment, while tighter limits to arbitrage result from a stricter management of banks’ balance sheets.
Despite the broad global trend toward more flexibility in exchange-rate
policy and freer movement of capital across national borders, many countries are
lacking dollars. Indeed, in many developing countries, the only thriving market
for the past two years or so has been the black market for foreign exchange.
For months now, China’s exchange-rate policy has roiled global financial
markets, because officials have done a poor job communicating their intentions.
But criticizing Chinese policymakers is easier than offering constructive
advice: In fact the authorities no longer have any good options.
China is afraid of a British exit from the European Union.Yu Jie (Cherry) claims that the historic Sino-British strategic partnership in the making is as much about money as it is about power, and hence its importance rests on the UK’s role in a united Europe. Beijing sees its cooperation with London as the foundation of a new world order where China plays a much greater role in international affairs.
The decision to include the Chinese renminbi in the currency basket that determines the value of the IMF's reserve asset seems to be a done deal. Far from having been made on solid economic grounds, the decision can only be understood as political, which means that the long-term consequences are likely to be regrettable.