Posts tagged 'FX'

Bretton Woods II, the India phase?

This retrospective on predictions made in the 2003 Essay on the Revived Bretton Woods System by Deutsche’s Dooley, Folkerts-Landau, and Garber is brought to you by Deutsche’s Dooley, Folkerts-Landau, and Garber.

Their premise was and is that we are part of an international system characterised by newly industrialised countries pegging their currencies to the dollar at an undervalued exchange rate in pursuit of export-led growth furnished by an excess supply of labour. Those developing countries then ship their gains back to the US et al as a form of collateral against new lending as the net foreign assets of poor countries support the risks taken by their richer brethren.

More so, they suggested that we were in the China phase of this system, that it would last for 10 years-ish… Read more

Another USD regime shift?

From BofAML’s David Woo, with our emphasis:

A major consensus this year was that this was going to be a rates-centric year. Eight months into the year, many investors continue to believe that with QE3 winding down, all markets will be taking their cues from the US rates market sooner than later. Currency investors are no exceptions. USD bulls have built their investment thesis on the assumption of higher US rates and have been waiting for rates to climb to establish or add to long USD positions.

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Ah, I see we are firmly in the “what if QE fails” stage of the debate…

… and back on the “buy foreign bonds” option. Never mind the former might never happen, let alone happen when the ECB meets next week and does its best not to disappoint.

From Morgan Stanley’s FX team: Read more

Toddlers, puppies, markets and the troublesome sound of silence

How quiet is too quiet?

A reaction we keep hearing to the fact that volatility has seeped out of a lot of markets is that comparative calm should be expected. The supportive actions of central banks fit with the encouragement to keep taking risk, at least for now, as the unconventional easing policies should persist for a while. Read more

China’s FX grip is not what it seems

The influence of the ‘China factor’ on currency markets is waning.

That at least is the view of HSBC’s FX strategy team, headed by David Bloom. Read more

Who really benefits from EM export feedback loops?

We all know the role played by the vendor financing feedback loop of hell in dotcom bubble mark 1.

Quickly summarised, tech equipment suppliers became overly dependent on sales to internet startups funded through vendor financing, a situation which saw them lending money to companies with dubious track-records for the purpose of buying equipment directly back from them. It didn’t end well.

Nevertheless, it’s still a model replicated on a consumer level in the west, whether it’s through car company lending money to customers so that they can buy their cars or sofa company loans for purchases of sofas. Read more

A little case of commodities/FX fragmentation

Magic mirror on the wall, where’s the fairest value for commodities overall?

Or, as BoAML notes on Thursday:

Commodities may be soft in USD terms, but for anyone living in South Africa or Turkey they are back to the record highs of the ominous summer of 2008 (Chart of the Day). In contrast, in PLN and RUB they are as low as they have not been since 2010. This divergence will have a significant impact on growth and inflation in 2014: weak pricing power means that higher commodity prices act as a tax on demand, slowing down growth and thus ultimately reigning in current account deficits and inflation. For now, markets focus primarily on the short-term inflation uplift, but we believe FX pass-through will prove self-deflating, and rebalancing will materialize.

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Your FX year that was

At least for the majors. Just some annotated charts courtesy of HSBC, click to enlarge:

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FX evolution

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

This is your euro on AQR

Consider this from Morgan Stanley’s FX team:

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Hold on, the periphery looks relatively calm?

A telling chart from Citi’s Steven Englander:

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London’s extraordinary lead in FX

The following is not for distribution in the United States

The triennial central bank survey of foreign exchange and derivatives market activity from the BIS is out.

FX details are here and OTC IR derivatives are here. Oh, and the Bank of England’s parochial summary is here.

But if you are interested in how financial centres stack up against each other you’ll need to consult this table: (Click to enlarge)

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The pictorial Indian FX swap

As announced amid Raghuram Rajan’s ‘big bang’ on Wednesday — BofAML reckon that this could bring in $10bn for the Indian central bank from non-resident deposits and stabilise the rupee:

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The Turkish inversion

That’s the Turkish two-year yield rising above the 10-year earlier on Wednesday — chart via Reuters:

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One very large divergence please (with a dollar chaser)

According to Nomura, since 1980, there are only two periods of economic divergence — between the US and Europe and the UK — comparable to what we are observing currently.

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EMageddon: the Socratic dialogue

The level of debate for a lot of money in emerging markets on Thursday must have been whether or not to hide under the desk with a bottle of bourbon. So, kudos to Olgay Buyukkayali and Tony Volpon, top EM strategists at Nomura, for standing back and raising the tone a little…

The bank’s published a debate between the two about the sell-off. Tony’s vaguely bearish and Olgay’s vaguely bullish. But that doesn’t do justice to what’s quite a nuanced debate on EM: Read more

Interest rate wars

That’s the new black according to Citi’s Steven Englander:

Since May 1 the median increase in 10-year local bond yields in 47 major EM and developed markets (DM) is 39bps (Figure 1). Among major EM economies (light blue) it is 83bps; among major DM (dark blue) economies it is 29bps. The US 10-year Treasury yield increase (red) is only at the median of developed economies and well below the overall median. In both EM and developed economies, the fat tail of rate increases is to the upside, so average increases are even higher. The paradox is that the run-up in US interest rates, which is arguably the primary driver of these global rate increases, is well below the average and median globally.

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Japan and the curious incident of the dog in the night-time

Header credit goes to UBS’s Paul Donovan, the source of the piece of Japanese skepticism that follows. He takes us first to Sherlock Holmes’ “Silver Blaze”:

Gregory: “Is there any other point to which you would wish to draw my attention?”

Holmes: “To the curious incident of the dog in the night-time.”

Gregory: “The dog did nothing in the night-time.”

Holmes: “That was the curious incident.”

A strong opening gambit, as yen tales go. Read more

USDJPY 100, eh?

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USD/JPwhy?

By Theo Casey, marketcolor

The loss of simple narratives in forex is something we are learning to deal with together. To continue navigating major and minor crosses we need to make complex narratives more digestible.

Consider dollar-yen. It’s behaving like the bought end of a carry trade. Read more

Nowotny on Draghi and negative rates: “purple monkey dishwasher”

From Reuters:

LONDON, May 3 (Reuters) 13.04 – The euro pared gains while German Bund futures edged up on Friday after European Central Bank policymaker Ewald Nowotny said the central bank was open-minded about taking deposit rates into negative territory.

Nowotny said he was “astonished” by the market’s reaction to his comments earlier in the day, when he said negative deposit rates were not relevant in the near term.

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The risk of yen reversal

The yen has gained back 2.4 per cent against the US dollar since it threatened but failed to break Y100 ahead of the most recent, and quiet, Bank of Japan meeting — the first since April 4, when QE on steroids was announced.

Now, we are not suggesting this is definitely the start of a yen correction — if we could predict FX moves for sure we’d be on a yacht, Japan isn’t lacking the political will to give it a further shot, this dip is small in context and we’ve seen its like before — but there is clearly a threat.

Simon Derrick, chief global markets strategist at Bank of New York Mellon, sent through a few thoughts which we think capture that threat quite nicely: Read more

The loss of simple narratives in FX

(Or ‘goldilocks syndrome’ if you’d prefer)

An existential cry has been sounded once again in the world of FX which has suddenly been reduced to trading short term signals in a fickle market. Shocking. Gone are the days of simple carry, Risk on-Risk off and easy reifying market stories. And it seems they are missed, almost as much as they were once bemoaned…

From HSBC’s ever excellent FX team: Read more

Stumbling JGBs

Something to keep an eye on (the respective reaction of the 6mth, 2-year, 5-year, 10-year and 30-year JGBs to the BoJ’s QE onslaught):

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Be excited, be, be excited: BoJ edition

Seemingly everybody is benefiting from the Bank of Japan’s decision to splash the cash. Peripheral bond yields in Europe have fallen and high-yielding carry targets such as Mexico and Brazil are being touted as destinations for Kuroda’s cash.

Where that cash ends up will in many ways define the success or failure of the Abe/ Kuroda push since what really matters is what happens after the cash has left the BoJ. Read more

The BoJ massive

Gloves off from Kuroda and everyone is very excited…

For those who need a rundown of what the BoJ actually did, here’s a summary from Nomura: Read more

Expectations reconsidered at the BoJ

Two charts for your morning consideration:

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Expectations management for the BoJ

We’ve used that kind of header before… but Abe is forcing us to crack it out again. From the FT on Tuesday:

Japanese Prime Minister Shinzo Abe has said that the 2 per cent inflation target he imposed on the Bank of Japan may not be reached within two years…

In an exchange with Seiji Maehara, an opposition politician and former economy minister, Mr Abe said the BoJ should not pursue the inflation target “at all costs”.

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Unlike the rest of the world’s central bankers, athletics aren’t Kuroda’s forte

He struggled as a young bureaucrat on a climb with officials and journalists up a 1,500-meter (4,900-foot) mountain in Nagano Prefecture, to the west of Tokyo, according to Utsumi, now president of Japan Credit Rating Agency Ltd. Kuroda “got exhausted and said he’d never do it again,” he said. “He’s not the sporty type.”

Metaphors aside we can ignore that but the rest of Bloomberg’s profile of the man set to take over at the Bank of Japan is worth a read. After all Kuroda has to convince the Japanese that Abenomics is for real now that much of the easy lifting has already been done. Read more

Breaking bad

Rising inflation expectations and a diving Great British Krona helped another leg downhill on Tuesday by dire production data.

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