ICYMI, RoRo — or risk on/ risk off — is apparently back.
It’s not quite at peak levels but that bane of interesting narrative, that supporter of the yen, that acronym of dubious origin is getting back up there:
From BofAML’s FX strategist Athanasios Vamvakidis, do click to enlarge:
Or, pictorially, what’s up with this?
And we mean apart from the whole “hey, we gave you negative rates why aren’t you giving us weaker yen?” thing as we’ve already spread plenty of pixels on a webpage about that.
It’s more about they strong negative correlation between the yen and equities on show in that chart. Read more
This post will be made up of two pieces. The first will try to explain why JPY continues to defy Japan’s negative rate-led demand for currency weakness. The second will add words to this picture from HSBC which proclaims a break in the (so-called, he adds hastily) currency wars, predicated mostly on said JPY strength:
At last sighting JPY was hovering at about Y108. That’s not good if you are the BoJ’s Kuroda or the overarching Abe, particularly because FX strength can beget more FX strength. The question is why did the yen start this slide: Read more
An important question for anyone who thinks the euro area needs to keep its currency weak to grab foreign demand. Or who thinks that’s what the ECB thinks, anyway.
By Giles Wilkes, normally found at Lex or writing leaders.
So on Wednesday 23rd March, three month implied volatility for the proud pound was 14.5 per cent, which is up a third from 11 per cent the day before.
For an options market maker, such a move in ‘vol’ is a pretty big deal: expected volatility in a market is the major factor driving prices, and being caught the wrong way on such a move would be enough to cause a fairly large loss. But that is not what happened.
The reason for the change in three month vol was rather more mundane. Read more
“I don’t think this is a meeting where there will be some big decision,” said one G20 official who asked not to be identified, presumably not because he fears reprisal from an IMF which advocated a plan “for co-ordinated demand support using available fiscal space to boost public investment and complement structural reforms.”
So that’s probably that for now.
What about the FX bit? Read more
By Nomura first, who are worried that Japan’s economy has taken a dangerous turn — what with GDP dropping at an annualised rate of 1.4 per cent in the fourth quarter and Abenomics being felt for a pulse:
Which is sad, but at least he’s talking and talking at length.
Before we get to that though, it’s worth having a read of George Magnus and Eric Burroughs on Chinese capital outflows, reserves and the country’s ongoing FX trilemma — China cannot “pursue more than two of an independent monetary policy, a fixed exchange rate, and free capital movements simultaneously”. They’re good catch ups on where China is now and the prospects of a float, devaluation or increasing capital controls.
It’s also broadly what PBoC governor Zhou discussed, among other things, in a lengthy interview to Caixin over the last few days — after a long period silence — and a transcript of that interview is now pixelated and ready for your eyeballs.
We thought we’d aid that eyeballing and pick out some sections of the interview and put a summary of sorts near the bottom. It’s best to skip down to there if you’ve already read the full thing. The extracts are chunky, as was the interview — which you could maybe read as some 10,000 words of PBoC versus the speculators. Read more
This seems like a decent list of possibilities, from Citi’s Steven Englander:
We think the following concerns are weighing on the market.
1. US economic fragility means there is no one to depreciate against
2. Too many simultaneous issues and policy coordination unlikely.
3. QE/negative rates have lost their financial market impact,
4. QE/negative rates have lost their economic impact
5. QE/negative rates are constrained by bank profits
But his colleague Matt King has a somewhat more involved, if not entirely separate, explanation for what he says is, at the surface, an orderly sell-off but which hides a number of indicators under “extreme stress”.
Basically, it’s all about bank balance sheets coming under pressure. Less basically, he suggests these dislocations “raise awkward questions about the entire narrative which led to the wave of post-crisis bank regulation.” Read more
Not sure how many more pixels you’ll tolerate us spilling on the BoJ’s move negative, but this from Simon Derrick at Bank of New York Mellon seems worth your time. With our emphasis, and pars broken up for online readability:
Whether or not the BOJ’s decision was a direct reaction to the ECB’s decision to potentially push even further into negative territory doesn’t really matter. Indeed, it doesn’t even really matter whether or not the BOJ was trying to weaken the JPY by their move (in our opinion plausible deniability remains a key tool for central bankers).
What does matter is that four of the eight members of G8 (France, Germany, Italy and Japan) now have an official negative deposit rate while Canada continues to suffer the impact of collapsing oil prices (Russia, which has had its membership suspended, suffers from the same issue of course).
Bank of Russia Governor Elvira Nabiullina is leaving it to the market to imagine when a ruble collapse will pose a threat to financial stability and force policy makers into action.
So far it hasn’t, and the currency is close to its “fundamental levels,” Nabiullina said in an interview on Wednesday. Other top officials also took the crisis in their stride, with President Vladimir Putin saying that changes in the exchange rate are actually opening up “additional opportunities” for some businesses.
- Bloomberg, Jan 21
- Markets, Jan 21 Read more
From Societe Generale’s analysts over the weekend, with our emphasis, on the fallout from the weakening yuan on the European Central Bank, and why that might circle back (and back again):
Global currency markets have taken their cue from China and commodities, and the resulting shifts are causing something of a headache for the major central banks. Since the low of last spring, the euro has bounced back by just over 9% trade-weighted. Similar moves have been observed for the JPY and USD, with the bulk of depreciation coming from EM commodity currencies. Their status as funding currencies has even seen the euro and yen gain against the dollar in recent weeks
Tips. The ultimate example of “unbundled” costs and discretionary performance-based income.
There are service staff who rely extensively on tips (waiting staff, bartenders, hairdressers, shoe-shiners, doormen, taxi drivers, hospitality staff, street entertainers) and then there are service staff which weirdly don’t (handymen, nurses, airline hostesses, Uber drivers, carers and a plethora of others).
So what to make of a fintech start-up, Xendpay, which would like to encourage discretionary tipping for foreign exchange services? Read more
We wrote — when talking about the ECB’s potential move to a tiered depo facility which would allow a deeper cut than expected into negative territory on Thursday – that Draghi was in the somewhat relaxed position of being able to follow where other central banks had gone before.
We were of course referring to the Swiss and Danish central banks, which are currently at -75bps versus the ECB’s -20bps and have in place versions of the tiered model being mooted for the ECB.
But… Nomura’s Jens Nordvig thinks we were being too casual in our comparison. The ECB needs to be analysed as its own central bank because: Read more
Which came first the commodity fall or the local currency collapse? And, more importantly, how far through the commodity supply/ demand adjustment are we?
The suggestion here from SocGen’s Kit Juckes and friends is that the causality runs from commods to currencies and that there is still a lot of pain to come:
My colleague Michael Haigh has done a lot of work on the overall state of supply and demand in commodity markets, and he makes one very striking observation: For all the fall in the prices of many industrial and agricultural commodity prices in USD terms, the prices in the currency of the biggest producers have not necessarily fallen much. Sugar prices have fallen by over 8% this year in USD terms, but the Brazilian real has fallen by 29%. Copper prices have collapsed, down over 20%, but the Chilean peso is down 15% and trying hard to keep up. Gold is down 9%, but the South African rand has fallen by twice as much and in rand terms, the gold price is near its highs. The fall in iron ore prices (over 30%) is twice the fall by the Australian dollar, but you get the picture (Charts 1 and 2).
We might have to start an “x is less terrifying” series.
Consider this on EM FX…
And here’s that paragraph, from JPM’s Niko Panigirtzoglou and team, with our emphasis:
From UBS’s Tao Wang on what, post China’s surprise revaluation, is now an oft used phrase, the impossible trinity — AKA the corner China finds itself in:
The impossible trinity says that a country cannot simultaneously have an open capital account, independent monetary policy, and stable tightly managed exchange rate. Some academics (such as Hélène Rey) argue that since capital controls are no longer as effective in the current day world, complete monetary policy independence is still not possible without some degree of exchange rate flexibility, even without a fully open capital account – or impossibly duality.
Regardless of whether it is an impossible trinity or duality, the fact is that in recent years, as a result of substantial capital controls relaxation, China has found it increasingly difficult to manage independent monetary policy while simultaneously maintaining a fixed exchange rate.
Jim Reid at Deutsche assesses the damage so far. As he says, this has something of a taper tantrum feel to it but seperating out China from Fed fear is a tough job even if given “that the odds of a September hike are fading again (32% this morning, down 16% over the last 48 hours)” it seems “China and the impact on EM is the overriding driver”.
With our emphasis:
One of the big problems with China’s FX move is that although they’ve ‘only’ seen a 3% currency fall (in the onshore Yuan) since their announcement last week, others have subsequently followed suit either deliberately or via market [and oil based] pressure. The following countries have seen their currency depreciate at least 4% since last Monday (and using last night’s closing prices): Kazakhstan (leading the way with a huge 26% devaluation following the removal of the trading band), Russia, Ghana, Guinea, Colombia, Belarus, Turkey, Malaysia and Algeria. In fact, if we extended the analysis to include those that have seen at least a 3% depreciation then the number of countries hits 17 and unsurprisingly all sit in the EM bracket.
This is a snapshot of the Peruvian economy’s growing dependency on central bank intervention by way of BNP Paribas on Tuesday,
As SocGen’s Kit Juckes says, the main topic in currency markets may be the resilience of the euro in the face of the ongoing Greek
tragedy (ed – no, sorry) comedy (ed- really now, no) thing.
I wouldn’t know. I’ve been on holidays.
But in case that’s true, here’s Nomura’s Jens Nordvig on why it might be holding up. Read more