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DIVISION OF INTERNATIONAL FINANCE BOARD OF GOVERNORS FEDERAL RESERVE SYSTEM H. 13 No. 206 July 28, 1965 DEVELOPMENTS ABROAD I. II. III. I. United Kingdom: United Kingdom™^*"' Nine Charts on Financial Markets Abroad Latest Figures Plotted in H. 13 Chart Series Money and Capital Market Developments, June-July 1965 The foreign exchange markets for sterling responded favorably to the stabilization measures announced on July 27, Spot sterling rose from 279.09 (U.S. cects)on July 26 to 279.26 on July 28; however the forward discount widened slightly from 1.96 to 2.02 per cent. Prior to the announcement of new measures, the foreign exchange market for sterling weakened sharply during the period under review, largely because of disappointing trade returns for May and June. Selling pressure was particularly heavy in mid-June and again in mid-July. Between June 11 and July 23 the spot rate fell from 279.36 to 279.01(U.S. cents) and the forward discount widened from 1.68 to 1.98 per cent per annum. By contrast there was little activity in domestic financial markets: government bond yields moved fractionally and stock prices eased as buyer interest remained dormant. (See Table 1.) Table 1. United Kingdom: Selected Financial Market Indicators June-July 1965 Interest rates Treasury bill _a/ Government bonds b/ 5% 1967 5% 1971 3-1/2% 1979-81 5-1/2% 2008-12 3-1/2% War Loan Stocks b/ c/ Price index Share yield Exchange rates Spot (U.S. cents) Forward (per cent per annum) a/ b/ c/ Changes from previous a a t. ? July 16 9 IS 5.62 -0. 02 +0. 02 +0.03 0. 00 5. 65 6.40 6.66 c SO 6. 75 6. 73 +0. 10 4-0. 08 +0. 05 4-0. 02 4-0. 06 4-0. 02 4-0. 01 0. 00 0.00 4-0. 06 +0.08 +0. 06 +0. 02 +0.02 +0. 03 -0.08 -0. 03 -0.05 -0. 03 -0. 05 6.52 6.87 6. 62 6. 77 6.83 105.56 5. 61 -2.04 +0. 12 -4.06 4-0. 19 +1. 00 -0.06 -0. 17 +0. 02 100.27 5.94 279.36 -1. 68 -0.22 -0.28 -0.10 fO. 14 -0.03 -0. 03 0.00 -0. 13 279.01 -1.98 Maximum tender. Previous Thursday. Financial Times 500 industrials. Actual Julv 23 Actual June 11 OFFICIAL USE ONLY (Decontrolled after six months) 23 OFFICIAL USE ONLY - 2 Partly in response to the weakening tone of the pound sterling in foreign exchange markets and the halting pace of improvement in the external accounts, Chancellor of Exchequer Callaghan on July 27 announced further measures designed to bolster Britain's external position, These measures fall into three broad categories: (1) curbs on private and public sector spending; (2) steps to restrain imports and spur exports; and (3) measures to cut back the rate of capital outflow, In order to promote exports the government: (1) reduced from £50,000 to £25,000 the minimum, value of a foreign buyer's promissory note qualifying for discount at the fixed rate of 5-1/2 per cent; and (2) reduced the cost of shortterm export finance given by banks from Bank Rate plus one per cent to Bank Rate. To restrain imports, government agencies were instructed to postpone as much as possible the overseas purchase of equipment and stores. In addition, the Bank of England requested the commercial banks to exercise careful surveillance over import finance demands--especially for overseas purchase of manufactures for immediate consumption or inventory build-up. Further, prepayment for imports will not be allowed prior to shipment of the goods. To restrain the capital outflow, the government directed that: (1) official foreign exchange would no longer be made available for direct investment outside the sterling area; (2) special permission would have to be obtained for the granting of bank loans to nonresident controlled U.K. corporations(such corporations will in the future have to satisfy their financing needs by importing capital); and (3) proceeds of life insurance policies and assets of immigrants redesignated as U.K. residents must be surrendered to the government at the official exchange rate. In an attempt to curb domestic demand the new measures provide for a reduction in capital spending by all levels of government. In addition, local authority mortgage lending is to be reduced from the £180 million annual rate for fiscal 1965 to £130 million for 1965-66, and the remaining £481 million of the £360 million allotted to them in the April budget is to be phased more gradually over the next nine months. To further restrain consumer demand, the maximum maturity of hire-purchase contracts was reduced from 36 to 30 months. Money market conditions remain tight. Tight conditions continued to prevail in British money markets during June and July; however rate movements were diverse owing to special factors. (See Table 2 and Charts 1 and 5.) Call money was generally on the short side for most of the period under review and the rates tended to rise. (See Table 2,) The Bank of England bought Treasury bills on a number of occasions, in order to ease the situation. However, in early July the discount houses were forced to borrow at Bank rate--at times quite large amounts-- in order to balance their books, OFFICIAL USE ONLY - OFFICIAL USE ONLY Table 2. United Kingdom: Selected Money Market Rates June-July 1965 (per cent per annum) 4 June _U 25 2 9 16 23 Call money 5.38 3.38 5.50 5.38 5.38 5.44 5.44 Deposit rates: Less than 3 days Local authority Euro-? 6.06 4.38 5.94 4.38 6.25 4.38 6.13 4.38 6.00 4.38 5.94 4. 25 6.37 5.12 6.44 5.00 6.56 4 88 6.38 4.88 6.38 4.8^ 6.38 4 6,44 4.56 5.56 5.49 5.46 5.42 5.49 5.54 5.54 90-day Local authority: Euro-$ Treasury bill July CO . 00 The occasion for borrowing by the discount houses was, as it has been repeatedly in the past, a downward slide in the Treasury bill race. Between June 4 and July 2 the market rate on Treasury bills fell from 5.56 to 5.42 per cent, and the continuing short supply of Treasury bills led the discount houses to raise their bid at the weekly tenders. After particularly large loans on July 5 and 6, the houses raised their bid on July 9 and again on July 16. As a result, the market rate on Treasury bills climbed to 5.54 per cent on July 16, and has since been maintained at that level. In the local authority deposit market rates continued the easing tendency that began last April (See Table 2 and Chart 3.) This development suggests that the local authorities might well be meeting their cash needs from s ources other than short-term borrowing. First, cash receipts from local taxes are seasonally high during the second calendar quarter. Secondly, the authorities continued to draw heavily upon the Public Works Loan Board and the long-term market for funds during June, For the April-June period borrowing from the government reached £179 million-£26 million in June--while market borrowing in long-forms totalled £64.5 million-£25.5 million in June. The amount borrowed from the government by the end of June accounted for 50 per cent of the total allocated in the April budget for the entire 1965-66 fiscal year. Finally, the continued easing of Euro-dollar rates (See Table 2 and Chart 5) enabled the authorities to offer lower deposit rates without doing serious damage to their competitive position, Capital Markets still exhibit an uneasy tone. The uneasy tone of British capital markets which has been evident for some time was not materially affected by the new stabilization measures. According to market reports, trading volume remained at a low level on July 27 while stock prices and government bond yields moved only fractionally. OFFICIAL USE ONLY OFFICIAL USE ONLY From early June to mid-July bond yields generally eased and stock prices fell.off, especially after the mid-month announcements of adverse trade returns for May and June. (See Table 1 and Chart 6.) Reportedly, market activity was at a low ebb. with buyer interest particularly dormant. Growth of private sector borrowing shows easing tendency. There wa:> a modest decline in the rate of growth of private sector borrowing during the second quarter of 1965 compared to the first three months of the year. In particular, the level of bank advances fell sharply and the growth of building society loans and new issues by U.K. corporations eased. However, installment credit continued its strong advance through April and May. (See Table 3.) Table 3, United Kingdom: New Borrowing by the Private Sector 1964-65 (£ m) I II 1964 III IV 231 50 76 105 135 210 105 210 26 55 42 31 24 c / 3 9 Net issues by U.K. corporations 175 138 126 71 87 62 -- Advances by building societies. 227 272 285 273 234 220 -- Bank advances a/ . Actual Seasonally adj. Installment credit b/ a/ b/ c/ d/ 1965 I 174 -35 Ountstanding II June 30, 1965 -12 15 4626 4575 d/ 1178 London clearing banks. Finance houses and department stores, April-May, May 31, 1965. This easier tendency in the rate of borrowing appears to be more than seasonal, suggesting that the general credit squeeze is having some effect. Seasonally adjusted bank advances have shown a slight downward tendency since the first of the year. In addition, corporate issues and advances by the building societies were much lower in the first six months of 1965 than they were during the same period one year ago. Data on installment credit since the increase in early June in downpayment requirements are not yet available. OFFICIAL USE ONLY OFFICIAL USE ONLY The prospects for continued easing are at best uncertain. Bank advances should remain in check because of the 5 per cent growth ceiling, and the growth of consumer credit may be halted by the measures imposed by the Board of Trade in June and July. However, U.K. corporations are reportedly turning increasingly to the issues market because of the squeeze oh bank loans. In addition, building society loans are expected to rise over the coming months because net deposit inflows have jumped substantially since deposit rates were raised early in June. No improvement in the foreign trade position. Britain's foreign trade position continued to slip in June: although imports, as expected, fell back from their May peak, exports continued to ease. (See Table 4.) Table 4. United Kingdom: Foreign Trade 1964-65 (£tn, seasonally adjusted, monthly or monthly average) 1965 May June II 477 400 -77 501 392 -109 471 389 -82 483 393 -90 -30 - 56 -33 -40 1964 I April Imports (c.i.f.) Exports (f.o.b.) a/ Difference 475 381 -84 458 396 -62 Trade balance b/ -46 -13 a/ t)/ Includes re-exports. Balance of payments basis. For the second quarter, imports rose 5.5 per cent above January-March levels while exports remained stagnant at the average levels for the first three months of the year. However, the first quarter improvement in the foreign trade position was so substantial that by mid-year exports were 4 per cent above and imports 1 per cent below the average monthly values for 1964. (See Table 4.) Foreign exchange reserves slip in June. Britain's official holdings of gold and foreign exchange fell by $67.2 million in June to a level of $2.8 billion. (See Table 5.) However, British Treasury officials let it be known that during the month the government had made use of central bank credits. Table 5. United Kingdom: Official Holdings of Gold and Foreign Exchange January-June 1965 ($ m) June Total holdings June 30 1965 -67.2 2791.6 Changes in: Gold and foreign exchange Jan. Feb. Mar. April -16.8 +6*^,4 -33.6 +22.4 OFFICIAL USE ONLY May +506.8 - 6 OFFICIAL USE ONLY Table 6. United Kingdom Exchange Rates and Arbitrage Calculations June-July, 1965 June 18 4 Exchange Rates Spot (U.S. cents) Fwd. (p.c. p. a.) Three month yields and yield spreads Treasury bills U.K. (covered) U.S. Difference Deposit rates Local authority (covered) Euro-$ Difference Euro-$ a/ New York C.D. 1s a/ b/ Difference ja/ b/ 279.42 -1.82 279.14 -1.96 July 25 279.15 -1.60 1 16 23 279.09 -1.93 279.04 -1.82 279.01 -1.85 279.01 -1.98 2 ' I 3.67 3.82 -0.15 3.46 3.77 -0. 31 3.79 3.74 40.05 3.43 3.80 -0.37 3.56 3.84 -0.28 3.61 3.82 -0.21 3.48 3.79 -0.31 4.55 5.12 -0.57 4.48 5.00 -0.52 4.96 4.88 +0.08 4.44 4.88 -0.44 4.56 4.88 . -0.32 4.53 4. 75 -0.22 n. a. 4.56 n.a. 5.25 4.34 +0.91 5.06 4.29 40. 77 4.88 4.29 40.59 4.81 4.29 40.52 4.81 4.33 40.48 . 4.75 4.31 40.44 4. 75 4.28 40.47 Previous Wednesday. Secondary offering rates for N.Y. negotiable certificates of deposit. Sterling weakens sharply in June and July. The sterling foreign exchange markets responded favorably to the latest stabilization measures. Between July 26 and 28 the spot pound^ rose from 279.09 (U.S. cents) to 279.26; however, the forward discount widened slightly irom 1.96 to 2.02 per cent per annum. Prior to the July 27 announcement of new measures to bolster the pound, the tone of the sterling foreign exchange markets weakened sharply. Between June 4 and July 23 the spot pound fell from 279.42 (U.S.cents) to 279.01 and the forward discount widened from 1.82 to 1.98 per cent per annum. (See Table 6 and Charts 8 and 9.) Selling pressure was particularly acute in mid-June and again in mid-July. During the period under review the discount on three month sterling fluctuated a good deal making for marked movements in the covered differentials between comparable U.S,U.K, paper For the most part however, arbitrage incentives remained against London. (See Table 6 and Charts 8 and 9.) The covered spread on Treasury bills favored New York by amounts varying from 15 to 37 basis points. In the market for deposit pounds, Euro-dollars earned anywhere from 22 to 57 basis points more than covered local authority deposits. Finally, the yield spread between Euro-$ and New York C.D.'s remained large during the period under review, but it did show a narrowing tendency. OFFICIAL USE ONLY - 7 - OFFICIAL USE ONLY Price of gold rises in the London market. There was a substantial increase in the demand for gold during the period under review and the London fixing price rose sharply. Between June 11 and July 23. ttl'e^ price per firre ounce rose steadily from $35.0949 to 35.1477. (See Table 7.) Table 7. United Kingdom: 4 Price per fine ounce 35.1013 London Fixing Price for Gold June-July 1965 (U.S. dollars) June 11 35.0949 25 2 9 16 23 35.1056 35.1067 35.1063 35.1096 35.1477 OFFICIAL USE ONLY Chart 1 MONEY MARKET YIELDS 3 -MONTH EURO-DOLLAR Wednesday figures INTERNATIONAL DEPOSIT VS. FOR U.S. CERTIFICATE DOLLAR OF U.S. CERTIFICATE OF DEPOSIT | SELECTED I N T E R N A T I O N A L Friday figures MONEY EURO-DO LIAR OVER INVESTORS DEPOSIT JL | RATES EURO DOLLAR DEPOSIT RATES ( L O N D O N ) INTEREST A R B I T R A G E , UNITED STATES / C A N ADA Friday 3 figures* - MONTH TREASURY BILL RATES UNITED STATES RATE DIFFERENTIAL AND FORWARD CANADIAN DOLLAR SPREAD IN FAVO* OF CANADA JLL 3 . MONTH COVERED RATE _LL _L_L _LL DIFFERENTIALS (NET I N C E N T I V E S ) ^ — C A N A D A PBIME FINANCE PAPEB F A V 0 8 0 . S^ F A V O : CANADA TBEASUBY BILLS ' I.I I '.111,1' 'J ' 'J 1 Thursday ligurei 1962, Friday iherealler. 1 V1 1 'J 1 V 1 1 1 1 'r FAVOB U S. INTEREST A R B I T R A G E , NEW Y O R K / L O N D O N Friday figure* 3 - M O N T H TREASURY BILL R A T E S U . I . LOCAL AUTHORITY DEPOSITS RATE DIFFERENTIAL A N D FORWARD RATE 3-MONTH STERLING DIFFERENTIAL WITH FORWARD EXCHANGE COVER 1144 (NET INCENTIVE) IftS 1 INTEREST ARBITRAGE Friday figures 3 - M O N T H FOR TREASURY EURO-DOLLAR GERMAN BILLS, DEPOSIT COMMERCIAL INTERBANK RATES LENDING i BANKS RATE : AND i , EURO-DOLLAR LONDON / V' XA/V RATE | DIFFERENTIAL AND FORWARD DEUTSCHE MARK TRiASURY BILLS RATE i ; . DIFFERENTIAL WITH i , FORWARD 1 : EXCHANGE i COVER I (NET : l INCENTIVE) f M I I I I I I I J S I N F A V O R OF L O N D O N E U R O - D O L L A R S D M J I I I I I I I S D M 1 1 J I I S I I D 1 I Cliort 5 SHORT-TERM INTEREST R A T E S * •vi | CANADA 3. month Ireoivry bill rolei lor oil couninet • » c • pi Jopon end Swilxerlond (3-monih deposil role) 3 month role for U S dollar depoiili in London (Averoge role on bonk loom ond diicounn) Chart 6 L O N G - T E R M BOND YIELDS j — V 11*5 I N D U S T R I A L STOCK I N D I C E S t e l l e icele SWITZIIUND 2S0 S~ X ISO A' 350 CANADA — Z> VX ./ SPOT E X C H A N G E RATES - M A J O R CURRENCIES A G A I N S T U.S. DOLLAR <•" - A - 11 ITALIA N LIRA j l [r~T^ f — - L CANADIA N DOLLAR \ A - 1 1 M i I V - ^J\ JAPAN! SI YIN 1 i \ 1 I S 11*3 I D 1 1 M 1 1 i 1 J 1»S< i S i B i i i i M i 1 i 1 1 S 1»*$ . 1 D B.U- 3 - M O N T H FORWARD Friday figures EXCHANGE RATES AGAINST U.S. DOLLARS AGAINST POUND STERLING - LONDON AGAINST POUND STERLING - LONDON fV \ kNC I A/ i V H. 13 No. 206 July 28, 1965 Latest Figures Plotted In H.13 Chart Series 1965 Per cent per annum Chart 1 Upper panel Per cent per annum Chart 5 (Friday, July 23 except as noted) (Wednesday ulv 21 _) Euro-$ deposit . 75 U.S. certif. of deposit . 23 Treasury Lower panels (Friday, July 23 bills: U.S. hll U. K. 5.46 3.12 Germany ) 3.92 Euro-dollar 4.000 12;: 4.375 6.562 Swiss 3-month deposits (Date : June 23 ) 3. 69 5.000 Euro-$ deposit (London) 4.56 U.S. 4.25 4.94 Japan: composite rate (Date: April 30 ) 7. 921 Canada depcsi:s : Call 7- day 30-day 90-day 180-day Finance Co. paper: Hire-purchase paper, U.K. Bonds: Chart 2 (Friday uly 23 Treasury bills: U.S. govt. (Wed. , ::ly 21 _) Canada 3.92 U.S. 3.79 Spread favor Canada 40.13 Forward Canadian dollar +0- l4 Net incentive (Canada +) +0.27 Chart 3 (Friday, July 23 Treasury bills: Chart 6 4.83 ) U.K. U.S. Spread favor U.K. r . 46 U.K. war loan (Thurs. July 15 German Fed. Railway (Fri. , July 23 7.00 Swiss Confederation (Fri. , JL.lv 16 Canadian govt. (Wed., July 14 5.27 Netherlands government perpetual (Fri. , July 9) 5.28 3. 79 +1.67 Forward pound -1.98 Net incentive (U.K. +) -0,31 For description and September 23, 1964. ) sources of data see special annex to H. 13 Number 164,
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