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Currencies’ 5 per cent band

Crisis era central bankers bow out

Ex-Bank of Italy governor Mario Draghi took over at the helm of the European Central Bank in 2011 from Jean Claude Trichet who claimed that the great financial crisis (which he too hadn’t spotted) was sorted, raising the key interest rate on his way out. Immediately the PIGS (Portugal, Ireland, Greece and Spain) began to nosedive, threatening the single currency itself, forcing Super Mario to utter the famous words "whatever it takes".

The Bank of Canada said on Friday that Stephen Poloz informed its board of directors that he wouldn’t seek a second term as head of the bank when his seven-year contract expires on 2 June 2020. Mr Poloz continued with "forward guidance", a policy dreamt up by his predecessor Mark Carney. Their key policy rate has been 1.75 per cent this year, up from a record low of 25 basis points in 2009.

Current Bank of England governor Mark Carney, whose term was extended because the country faced Brexit, should leave at last in January; he’s already lined himself up a nice role as special envoy for climate action and finance at the UN. His role is to "galvanise action among financial institutions ahead of next year’s global climate talks in November".

Raghuram Rajan, previously chief economist at the IMF, resigned from the Reserve Bank of India in 2016 where he’d worked since September 2013 and his handpicked successor, Urjit Patel, followed in his footsteps in December 2018. Both worried that the so-called independence of the central bank might become a casualty of prime minister Narendra Modi’s plans.

As guardians of their nations’ banks and retail savings, how have they fared? Against a backdrop of a generally subdued FX market and a stable US dollar, currency moves have generally held within a 5 per cent band this year (Latin America, Turkey, Israel and Thailand outliers). The euro is a rather sorry specimen, trading one standard deviation below the mean regression over the last five years, in the bottom third of its range since inception. Meeting its inflation target has failed as its spent most of the time below 2 per cent since 2011.

The Canadian dollar has been exceptionally steady against its US counterpart for five years, currently holding at the mean regression of CAD$ 1.3250, no mean feat considering the trade threats unleashed by President Trump. In terms of inflation they’ve made a good job of it, keeping it between 1 and 3 per cent since 2010.

Sterling, as we are all too aware, is cheap after collapsing when the result of the Brexit referendum was announced – something the Old Lady at Threadneedle Street could do little about, even though chancellor Osborne chose Mr Carney for the top job there. At USD$ 1.2000 this September it was perilously close to its lowest ever since exchange rates were floated, worth just two-thirds of 2014’s interim peak. Trying to put in a floor this month, a rally to $1.4300, maybe more late next year, should be pencilled in.

The Indian rupee, caused by inflation persistently higher than that in developed countries, has been getting weaker for decades, moving from 16.80 rupees to the US dollar in 1990, to an interim peak at 49.00 in 2002, and a record 74.48 last year. This year it’s been steadier than usual, hugging 71.00.