RIGIBOR vs EURIBOR - loan arb?

[Directional]

Latvia's LVL 12 month interest rate is running around 11.6%, the LVL currency is pegged against the euro at a rate of 0.7 LVL to 1 EURO which is currently 5% interest.

whats the scope for borrowing Euro's and selling Lats on the money markets, and pocketing the difference? since there is only nominal risk in the currency rates?

 

[grantx]

Arbitrageur,

“only nominal risk”. Isn’t this the major/principal risk here? How much higher can the Euro go (vs USD) before the ECB (Bundesbank) takes drastic action on rates? Is a low inflation/contracting economy worse than high inflation/ expanding (or static) economy preferable?

Assuming Latvia aims for EU membership, it will only take an off-the-cuff remark from a government minister or central bank official for the tide to turn. But how will the changeover to membership play out?

Presumably the Latvian interest rate will revert to the EU rate of 5%, so the 0.7 currency rate will need to be adjusted drastically (down?) to maintain or establish a new parity. Therefore, fill your boots, mate.

GammaJammer or Dashing Blade may provide an antidote to my wild speculations.

Happy New Year.

Grant.

 

[DC STOXX]

How much higher can the Euro go (vs USD) before the ECB (Bundesbank) takes drastic action on rates?

Grant.

Pretty high the markets are saying,

BULLET: EONIA: EONIA (European Over-Night Index Average) now.>
2008-01-02 05:00 (New York)


EONIA: EONIA (European Over-Night Index Average) Swap rates now implying
around 40% chance of a 25bps rate hike in H1 2008 by the ECB Governing
Council. Moreover, probability of a hike is then seen easing into Q3
2008, albeit moderately.
Month Rate Prob (25bps rate hike)
---- ----- ---------------------


January 4.005% -5.0%
February 4.039% +7.0%
March 4.125% +39.0%
April 4.130% +39.0%
May 4.135% +40.0%
June 4.134% +34.0%
July 4.121% +28.0%

 

[lurkerlurker]

Latvia's LVL 12 month interest rate is running around 11.6%, the LVL currency is pegged against the euro at a rate of 0.7 LVL to 1 EURO which is currently 5% interest.

whats the scope for borrowing Euro's and selling Lats on the money markets, and pocketing the difference? since there is only nominal risk in the currency rates?

I'm surprised this hasn't had more interest. As a rank retail boy I have no access to lats.

Also, don't assume exchange rate pegs are always effective. The Bank of England tried to cap GBP/USD more than once. They might well adjust the rate in the future, or if the exchange rate it traded the market may ignore the "peg".

Not too sure how it would work in practice, but if you can pocket a risk free 6.6% before comms fair play.

 

[grantx]

I think the Saudi Riyal is pegged to the dollar but they are looking divesrify by pegging to a basket of currencies.I think their concern is inflation, ie buying ever-increasing dollar-weaknening priced goodsOr have I got that the wrong way round?).

Swith to Euros? Trichet will be foaming at the mouth and still persue the inflation on taget line at all costs (except for the present, and any time it isn't like in France, Germany, Italy,Spain).