As we have already pointed out about Thursday’s unprecedented Swiss franc move following the SNB’s announcement about removing its 1.20 euro level floor and introducing a -0.75 per cent interest rate regime, the real story to pay attention to is what exactly motivated a price surge to that level.
Was it a), that the SNB simply under appreciated the scale of the undervaluation it had been engineering in the franc? Or was it b) that the SNB under appreciated just how thin FX market liquidity is in the market these days?
So as to not sit on the fence, we’re going to take a view and speculate that it’s actually all down to option two. Read more
There’s plenty of discussion about why the oil price collapsed (read Izzy’s take on the changed structure of the market, for one), but consider a broader question: if markets can be so wrong about the price of one of the most widely used and heavily traded commodities, what else are they missing?
We ask because a halving in the price of other markets may not be cheered in the same way as cheap oil. We also wonder what it says about how orderly (or otherwise) big market declines will be, when they eventually roll around. After all, major currency pairs don’t move by a fifth in one morning…
To that end, here’s a reminder of what a 50 per cent decline looks like for a selection of markets, and the last time that level was hit. Read more
Who’d have thought?
This £203,948 bar bill…
… would eventually led to this… Read more
This installment in our occasional and disjointed series into the risk of balance-sheet driven currency crises in EMs — based on the hidden debt that lurks beneath — features a new if well flagged villain: oil.
The broad question as ever is: have the majority of emerging markets still got manageable foreign currency external debt levels? And do they rule themselves out as candidates for a self-fulfilling currency crisis? Even when dark debt is taken into account?
Tl;dr: Yes, with a few exceptions. Read more
A sharp column from the FT’s Jonathan Ford on a subject dear to our hearts — retail FX trading shops and their clueless clients — suggests that punter cash extraction as a business model is starting to get more attention. He calls for a hard cap on leverage to throw a little grit into the extraction machine.
Such grit might be bad for business. We’ve focused on the London listed Plus500 before, but it is just one highly valued and absurdly profitable example. Jonathan also highlights the US listed pair Gain Capital and FXCM.
The thing to understand here is the friction, the trading cost which erodes away capital, and the effect of leverage. Read more
It’s a variant on the ubiquitous “long dollar” that has passed through consensus into some region of near zen-like certainty, we grant you, but at least this is approaching the more outrageous corner of 2015 FX guesses. It’s entitled “How extreme USD strength can destroy the world” after all.
In two charts from HSBC:
It takes a bold and courageous man to go against the consensus, especially when the consensus view equals “evil manipulative trader types got what they deserved with that $4.3bn fine for fx rigging!”
In this case that bold man is Matt Levine, columnist at Bloomberg and long-time communicator of logic and sense, who made the brave assertion on Wednesday that commentary surrounding this entire rigging episode may be losing sight of the core fundamentals of the case. Namely, that in terms of money made, there’s no escaping the fact that this was possibly the least successful manipulation attempt of recent times. Read more
Jens Nordvig of Nomura reports a frequent question from clients: can the recent dollar rally turn into a big change in the currency’s value, similar to those that occurred in the 1980s and 1990s?
Answer: maybe, but it is worth remembering just how big those dollar moves were. See if you can spot them in the long term dollar index chart:
We’re talking retail forex trading here — through legitimate, authorised forex trading houses, not fraudsters.
Do places like the UK need hard leverage caps — like those imposed in the US — to cut the abuse of naive speculators?
The stat in the headline is from the Autorité des Marchés Financiers, the French regulator, which has made rather more effort than others in Europe in trying to combat online financial spivvery. Read more
FX vol is edging back and we have the notes to prove it.
The question is whether they are reflecting an overreaction to a small jump, after a period of slumped volumes and returns, or a real shift with further to go? Read more
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
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.
… 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
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
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
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
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.
At least for the majors. Just some annotated charts courtesy of HSBC, click to enlarge:
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
Consider this from Morgan Stanley’s FX team:
A telling chart from Citi’s Steven Englander:
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)
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:
That’s the Turkish two-year yield rising above the 10-year earlier on Wednesday — chart via Reuters:
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.
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
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.
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
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