Alternative title: First mover dis-advantage in banking
In early 2013 the Financial Stability Board asked a group chaired by Paul Fisher of the Bank of England and RBA assistant governor Guy Debelle to formulate a set of proposals to improve the FX benchmark process and reduce the scope for manipulation.
Debelle gave an update on progress in a speech this week in Sydney.
As he noted, the group’s work was conducted separately from the investigations into allegations of FX manipulation and group members did not have access to any of the evidence gathered. Furthermore, while the concluding reported outlined 15 recommendations, none of these were explicitly embodied in regulation. The expectation instead was for the recommendations to be voluntarily implemented by market participants, on the basis were they not acted on, authorities could conclude that a regulatory response was necessary to generate the desired improvement in market structure and conduct. Read more
From Joy Rajiv, who formerly worked in the Foreign Exchange trading divisions at both Morgan Stanley and Deutsche Bank. He left the industry in early 2013 for personal reasons unrelated to the current regulatory probe into the FX industry, and writes in a private capacity here drawing on his experience in the industry.
As someone who has worked in FX trading for three years at Morgan Stanley and Deutsche Bank from 2010 to 2013, I have been dismayed and discouraged by the recent coverage of alleged manipulation by FX traders at major banks. Traders have been fired, lawsuits have been filed and comparisons to Libor have been thrown around without much concern for detail. Media reports have focused their attention on abuse of a daily benchmark, called the WM/R (World Markets/Reuters) fix. Read more
The BIS quarterly review came out this weekend, providing some good analysis of the FX and OTC derivative data which was gathered by the Triennial Central Bank survey.
Two notable observations on that front.
One: No mention of virtual currencies.
Two: The BIS’s overview of the ongoing decentralisation of the FX market: Read more
BNP Paribas has an interesting note out on the increased use of FX swaps by central banks.
If you’re a central bank in emerging markets, struggling to keep your economy stimulated/protected from hot money flows, using swaps or FX sales is a tempting and viable alternative to interest rate hikes, they note.
And generally speaking, the BNP EM strategists argue, swaps provide for a richer toolset for most central banks. Read more
Bloomberg on Wednesday brought us the exclusive story that currency traders may have been manipulating benchmark foreign-exchange rates, which are used to set the value of trillions of dollars of investments, for more than a decade.
From Bloomberg: Read more
Dark matter may more commonly be associated with physics, space exploration and Professor Brian Cox, but, according to Deutsche Bank’s FX strategist George Saravelos, there’s a good chance that it’s becoming a recognisable force in the world of foreign exchange too.
Of course, whilst you need complex structural analysis of the universe to detect the real dark stuff, in FX its presence is arguably more easily sniffed out. Mostly, says Saravelos, via the closer inspection of short-term derivative flows and the murky parts of balance of payment statistics. Read more
China announced last week that its State Administration of Foreign Exchange would remove the $1bn limit for foreign sovereign wealth funds, central banks and monetary authorities buying Chinese assets through the Qualified Institutional Investor Programme (QFII).
David referenced that this might turn out to be pretty significant as reserve managers are currently desperate to diversify their holdings out of euro and dollar.
But there’s another important factor to consider too. China is not a benevolent agent which just does things for the sake of pleasing other people. If it chooses to act you can bet your bottom yuan that it’s because it suits its own interests to do so. Read more
As a special treat, the below podcast.
FT Alphaville reporter David Keohane met Simon Derrick, chief currency strategist at BNY Mellon. They geeked out on various FX topics. Read more
Is the Reserve Bank of Australia intervening in the market to hold down the remarkably resilient Aussie dollar? That’s the question commentators and economists are asking themselves following the publication of data at the end of last week that showed a significant increase in the pace of foreign exchange accumulation (admittedly from a low very low base) in August and September. Read more
Swiss franc traders have been pretty bored of late, with the euro/Swiss franc flatlining for months. But it seems they’ve had some rare excitement this week: someone out there is buying as many euros against the franc as traders care to offload.
Naturally, everyone is assuming this buyer is the SNB — in disguise. Read more
So here they are! The results of 2012’s Euromoney survey — based on non-gamed voting by, er, clients!
And… drum roll please… it’s… Deutsche at the global top! Read more
FT Alphaville spent a lot of last week hanging out at Lift12, a Geneva-based technology conference exploring the social implications of new technologies.
We were particularly drawn to the Beyond Finance session last Thursday, which tried to take a peek at how technology might change the world of banking and money in the years to come. Read more
The Japanese government has confirmed that it intervened unannounced into foreign-exchange markets to weaken the yen last year, for the first time since 2004, the FT reports. Ministry of Finance data released on Tuesday showed Japan carried out Y1.02tn ($13.3bn) worth of unannounced intervention during the first four days of November, after selling a record Y8.07tn on October 31st, when the yen climbed to a post-war high of 75.35 against the dollar. This so-called “stealth intervention” had been widely anticipated, given discrepancies between the rise in yen balances implied by Bank of Japan reserve balance data, and the Y9.09tn of yen-selling MoF had earlier disclosed for the period between October 28th and November 28th. Even so, the more detailed breakdown may increase pressure on Japan from the US. A December report from the US Treasury Department sharply criticised the G7 nation for its recent unilateral interventions to curb yen appreciation. The BoJ has sold the currency four times since late 2010, under orders from MoF.
China’s first quarterly decline in its forex reserves since 1998 has been described as a result of “hot money” leaving China. But there are a few other reasons — probably bigger ones.
Firstly, though, the scale of this reversal versus the usual trend was smaller than it appeared, according to Jens Nordvig at Nomura. And some of it was a response to exchange rates: Read more
The Cabinet of Japanese Prime Minister Yoshihiko Noda signed off on steps to deal with the soaring yen on Friday, the WSJ reports. Fleshing out proposals made last month, Tokyo’s plan aims to curb further surges in the yen while exploiting its strength. Bloomberg says a government document shows the plan would add 2,000bn yen ($26bn) to the 8,000bn yen in foreign-exchange reserves being shifted to the state-run Japan Bank for International Cooperation to aid exporters and spur acquisitions overseas. A further 2,000 yen will be allocated to encourage investment in domestic plants and to hire workers, according to another document that has not been made public, says the news agency. The yen hit a record high against the dollar in August and has remained near those levels since.
The city and state of New York and US Department of Justice have filed separate lawsuits against Bank of New York Mellon, alleging the world’s largest custody bank defrauded pension funds, US banks and millions of investors nationwide on currency transactions for 10 years, the FT reports. Tuesday’s New York action, which seeks to recover more than $2bn in alleged ill-gotten gains, marks the third lawsuit this year filed by a state legal officer against the bank. In August, Florida and Virginia sued the company for allegedly wrongfully overcharging their local pension funds on foreign-exchange trades. According to the Wall Street Journal, the suits allege that BNY Mellon defrauded or misled state and public pension funds, private companies, universities and banks in a decade-long scheme of overcharging for foreign exchange. The move by the U.S. attorney in Manhattan is the first time federal prosecutors have filed a legal action in the mushrooming currency case. In a statement, a BNY Mellon spokesman said: “The U.S. Attorney does not appear to have made any serious independent effort to assess the validity of the claims in this lawsuit. We will fight these claims vigorously and are confident we will prevail.”
The city and state of New York and US Department of Justice have filed separate civil lawsuits against Bank of New York Mellon, alleging the world’s largest custody bank defrauded pension funds, US banks and millions of investors nationwide on currency transactions for 10 years, the FT reports. Tuesday’s New York action, which seeks to recover more than $2bn in alleged ill-gotten gains, marks the third lawsuit this year filed by a state legal officer against the bank. In August, Florida and Virginia sued the company for allegedly wrongfully overcharging their local pension funds on foreign-exchange trades. The federal lawsuit also represents one of the few actions brought against a Wall Street bank by the Obama administration, which has had to defend itself against accusations that it has taken a soft line against financial fraud. The bank said it would fight the claims vigorously.
SNB: “Leave our dear Swissie alone. Seriously, leave it alone.”
Investors: “But we don’t know where else to hide.” Read more
The ‘psychological shock’ of Wednesday’s moves by the Swiss National Bank to stem the rapid rise of the franc is already wearing off — at least in the FX market. Read more
Over the last few years we’ve all got used to the familiar risk-on and risk-off patterns.
But as you’ve probably heard, the US’s AAA credit rating is facing a possible downgrade, which could decouple the correlation between the US dollar and risk assets, according to Nomura. Read more
As has been well documented, the Swiss franc’s relentless rise has been causing no end of headaches.
Swiss exporters, Swiss banks and even Polish and Hungarian mortgage holders have all been affected. The Swiss National Bank, meanwhile, is stuck between a rock and a hard place. Read more
The World Bank expects the US dollar to lose its solitary dominance in the global economy by 2025, as the euro and the renminbi establish themselves on an equal footing in a new “multi-currency” monetary system, the FT reports. The shift will be driven by the increasing power and strength of emerging market economies, with six countries – Brazil, China, India, Indonesia, Russia and South Korea – accounting for more than half of global growth in 14 years. According to the World Bank report – released on Tuesday – emerging economies will grow at a rate of 4.7 per cent between now and 2025, a much faster pace than advanced economies which are expected to grow by 2.3 per cent over the same time-frame. “The balance of global growth and investment will shift to developing or emerging economies,” said Mansoor Dailami, the lead author of the report.
Oh deary me.
Someone at a major European investment bank (known for its foreign exchange services) is possibly a touch red-faced right about now. Read more
How weak is the dollar?
A timely question asked by Goldman Sachs on Tuesday morning, what with the euro reaching a 15-month high of $1.45 earlier today. Indeed, on the face of it, there is weakness everywhere. Read more
David Bloom’s currency strategy team at HSBC looks at the issue of oil and foreign exchange rates on Monday, arriving at a clear-cut conclusion.
Determining which currency in which to park one’s money when oil prices are on the rise is dependent on one thing and one thing only — whether said price rises are the result of demand forces or of a supply shock. Read more
FT Alphaville wrote last year about how the Federal Reserve’s experimentation with quantitative easing — while managing to alleviate stress in money markets — may have unwittingly transferred volatility into the foreign exchange market.
Now, a new paper posted on VoxEu by three business academics, Pasquale Della Corte, Lucio Sarno and Ilias Tsiakas, looks deeper at the issue — even speculating whether the volatility of foreign exchange has since become a new global carry trade. Read more
China’s foreign exchange reserves jumped by a record $199bn in the last quarter of 2010, taking the total to $2,850bn and underlining the continuing imbalances in the global economy, reports the FT. Already the largest in the world, China’s reserves increased by 18.7 per cent over the course of 2010, including an increase of $194bn in the third quarter. Although China’s monthly trade surplus dropped in December, the continued strong increases in its foreign exchange reserves will bolster the case of critics who are calling for a more rapid appreciation of the renminbi. Currency and trade issues are likely to feature strongly when Hu Jintao makes a state visit to the US next week, amid renewed talk internationally about a “currency war’.
FXCM, the US-based FX and securities broker, filed a prospectus to the Securities and Exchange Commission on Monday for an intended initial public offering later this month.
The terms show the company hoping to raise $211m by offering 15.1m Class A shares at a price range of $13-$15 — a mid-point of which would give the company a market value of $1.1 bn. Read more
We wrote last week how ‘Bernanke’s put’ was potentially transforming into ‘Bernanke’s genie released‘ over in the FX markets.
On Tuesday, it seems, that offloading of volatility was still very much going on. Read more
Finance ministers at the G20 summit in Seoul have agreed on a framework designed to tackle large current account imbalances, but will wait until next month to agree specific guidelines, the FT reports. Quick translation — the dollar has been given a green light to weaken even further. The yen reached another 15-year high against the dollar in Asian and European trading on Monday, with the euro also testing recent strengths, Reuters says; while Bloomberg has a copy of the official G20 communique and reports that the summit’s main takeaway may have been to prod China once again on the renminbi’s weakness against the dollar.