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…
Then being the ‘taper tantrum’ in 2013.
Now being the recent China devaluation episode that caught so much of EM FX in its backdraft.
From Goldman’s chief FX strategist Robin Brooks, and with our emphasis: Read more
Not so bad this month, particularly when you take into account expectations and the headline $94bn fall we saw in August.
Currency wars are either everywhere or nowhere. We know that much.
What we also probably know is that currency devaluations in today’s environment are indeed approaching beggar thy neighbour policy without commitments to be irresponsible and/ or supportive fiscal action. Read more
And here’s that paragraph, from JPM’s Niko Panigirtzoglou and team, with our emphasis:
- First, we disagree with the description that FX reserve depletion is QE in reverse. This is because the FX reserve depletion that is happening currently is not an exogenous policy action but represents a policy reaction to capital flows out of EM. But the capital that leaves EM does not disappear from the financial system. In fact, the capital that flows out of EM could find its way back into DM bonds. For example three major manifestations of capital flowing out of EM are 1) the reduction of dollar denominated debt previously issued by EM corporates, 2) the accumulation of dollar deposits by domestic EM corporates or other entities who try to protect themselves against further dollar appreciation, and 3) the withdrawal of EM currency (e.g. Renminbi deposits) by foreign investors who in turn convert them back into dollar deposits.
From Barc on what’s happened since the PBoC got messy at band camp, devalued, and followed up with a “dirty peg”:
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.
But, as the foreign press corp does its best to hurry some much needed euro into the Greek economy, we should also look at what Greece is doing to the euro.
Here’s Nomura’s head of FX, Jens Nordvig, on what to watch where the single, now more parlous, currency is concerned: Read more
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
Dan Davies’ cynical guide to fintech was so good and made so many worthy points we’ve decided to launch a new FT Alphaville series to pay homage to it.
For those who didn’t read the original, Davies basically broke down the supposedly “disruptive” fintech models in the market into seven core categories (*only one of which is arguably innovative). Read more
An expensive business, banking. There’s offices, staff, technology, terminals, compliance…
Actually, maybe it would be wise to spend a bit more on the last one. The FT’s running total of legal fines and settlements paid by banks to US regulators since 2007 now comes to $155bn.
In case you were wondering, over eight years that works out to $53m per day (including weekends, because client service is a 24 hour kind of business, right.) Read more
Might have to pop this at the top, it’s a chart with lots of negative yield stuff on it after all:
Now, as we have said before… friends don’t let friends extrapolate too wildly from the IMF’s COFER data. Read more
At first glance, America’s latest growth figures don’t look so good. We generally refrain from commenting on quarterly GDP data because, among other reasons, the numbers are naturally noisy and they’re often revised by large amounts. (Or as the Fed says, “transitory factors,” although probably not the weather.) Those caveats out of the way, there are a few interesting points in this report that are worth noting.
Let’s start with a theoretical exercise. Imagine it were one year ago today, and someone told you that, between then and the end of this past March, the price of oil would fall by about half and that the real, trade-weighted dollar would appreciate by more than 10 per cent. A reasonable person would expect two things: big cutbacks in domestic oil investment that wouldn’t initially have been offset by higher investment elsewhere, and a hit to net exports.
None of this would have told you anything about would happen to total spending, but it would have provided guidance on how the composition of spending would change. Read more
It’s apparently sorely needed, if this from Nomura’s Jens Nordvig on EM FX pessimism is anything to go by:
During my presentation [at Nomura's annual central bank conference], I asked a number of simple questions about currencies. One of them was on the 2015 outlook for EM currencies – 67% of the audience was bearish, with the rest evenly split between bullish and neutral, a pretty extreme result, as these polls usually have a lot of neutral answers.
Is this nuts?
…the speed of the Euro depreciation is starting to look very fast. We are in the 99th percentile (at least) of 3M, 6M, 9M, and 12M moves since initiation in 1999.
- Nordvig, Nomura
Over the last eight months the USD has appreciated faster on a trade-weighted basis than at any time in the last 40 years and probably over a longer, much longer duration.
- Englander, Citi
Which, again, looks like this: Read more
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
Plus500 is an unusual member of the retail foreign exchange trading world. The London-listed group offers contracts for difference on currencies, as well as stocks, indices, exchange traded funds, and commodities, but it is unusual in the way it is structured, the way it operates and, above all, the way it is spectacularly profitable.
More on all that below, but to begin let’s focus on the recent move in the Swiss Franc versus the Euro. The decision by the Swiss central bank to remove the cap on the value of the franc prompted very large moves for the currency, blowing up some currency trading platforms and prompting unexpected losses throughout the financial system.
Plus500, however, suffered “no material impact on the Company’s financial and trading position”, an incredible result. Read more
The first numbers by way of CLS, the continuous link settlement system used by the vast majority of the FX market to settle transactions, are in.
As Nick Murray-Leslie tells FT Alphaville on Wednesday:
CLS settled a record number of transactions following the decision by the Swiss National Bank to remove a currency ceiling against the euro.
CLS settled 2.26 million transactions on 20 January, totalling USD 9.2 trillion with 99.5% of these transactions were settled within 45 minutes.”
The price of life in retail FX land….
The loan has an initial interest rate of 10% per annum, increasing by 1.5% per annum each quarter for so long as it is outstanding, but in no event exceeding 17% per annum (before giving effect to any applicable default rate). It is also subject to various conditions and terms such as requiring mandatory prepayments, including from proceeds of dispositions, condemnation and insurance proceeds, debt issuances, and equity issuances. The credit agreement includes a variety of restrictive covenants, including, but not limited to, limitations on the ability to merge, dissolve, liquidate, consolidate or sell, lease or otherwise transfer all or substantially all assets; limitations on the incurrence of liens; limitations on the incurrence of debt by subsidiaries of the company; and limitations on transactions with affiliates, without the prior consent of the lender.
As Goldman flagged this morning, December has brought with it $19bn of FX outflows from China. That’s the biggest move since 2007 (with our emphasis):
The position of FX purchases for the entire banking system (the PBOC plus commercial banks) decreased by about $19bn in December (vs. essentially flat in November)…
The FX outflow in December underlined the weakness in demand for the CNY, despite a strong trade balance of close to $50bn. The FX outflow size is the largest since December 2007 (and this earlier data point was skewed by the MOF’s FX injection in China’s sovereign wealth fund). The PBOC has been setting the daily USDCNY fix on the strong side of the spot rate since late November to counteract depreciation expectations. Today’s data suggest that besides displaying such a bias in fix setting, the central bank might have gone further in supporting the currency by buying CNY in the market. But we await PBOC balance sheet data, due out in the coming weeks, to confirm if it is indeed the case. The FX outflow also partly explains the slow M2 growth in December.
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: