Imagine someone told you about a country where real output per person is at an all-time high and growing at an increasingly rapid pace, its employment rate is at the highest level in decades, the country’s housing sector is on fire, and its current account surplus is about 6 per cent of GDP. In the absence of other information, would you say this country should be: If you answered yes to the above questions, congratulations! You’ve just described the behaviour of the Sveriges Riksbank. From their policy announcement on Thursday (our emphasis):
Chinese FX reserves are down to a three-year low according to figures released this weekend. But, if like us, you trace the current drawdowns to dynamics which first emerged at the end of December 2011… then you might find the following chart from Macquarie Bank’s global equities team of interest:
When things get too expensive, imperfect substitutes become increasingly appealing. It happened to oil with natgas and shale. It happened to gold with copper and silver. Now it seems to be happening with Bitcoin as well. So while Bitcoin traded through $1,000 on Wednesday (depending on which exchange or service you use to acquire Bitcoin: it was $1,035 on MTGox, $922 on BTC-e at pixel time), more interesting is the recent surge that’s taking place in the value of alternative crypto currency Litecoin:
Crises tend to be born out of the unexpected and the thing most people just don’t see coming. Nassim Taleb taught us that. With all eyes on western central banks, QE, accusations of Western repression — and a repetitive dialogue that it’s QE that’s causing bubbles everywhere — we’d argue the markets may be missing a trick in neglecting the importance of China’s recent turn towards liberalisation. But not necessarily for the reason most people think.
We were going to be slightly snarky in the face of Zhou Xiaochuan, head of the People’s Bank of China, promising to “basically” end normal intervention in the currency markets and other such liberalising things — the lack of a timetable and the ambiguity of phrasing making this seem rather similar to what we’ve heard in the past — but then we saw this from Neil Mellor at BoNYM and felt bad: However, although a timetable was absent from Mr Zhou’s brief – something we discuss below – the fact is that this announcement constituted the beginnings of a new era for financial markets and no superlative would overstate its significance. Oops.
He’s dead, of course, professionally. Former chief FX dealer for JP Morgan in London, Richard Usher. Bloomberg has the glee: …wrote instant messages while he was at Royal Bank of Scotland Group Plc (RBS) that U.K. regulators are scrutinizing as part of their investigation of alleged currency manipulation, two people with knowledge of the matter said.
Markets: Asian shares slipped and the dollar inched higher in early Asian trade on Wednesday, as concerns about a possible U.S. government shutdown and uncertainty about the U.S. Federal Reserve’s policy outlook made investors hesitant to take aggressive positions. (Reuters) (Bloomberg)
The Swiss National Bank on Thursday reiterated its commitment to maintaining a minimum exchange rate for the Swiss franc, noting that in its opinion the currency was still strong. Inflation numbers were slightly better, though not enough to encourage a shift in the SNB’s long term inflation forecast, which remained unchanged for 2015 at 0.7 per cent.
By Yukon Huang That China’s growth is unbalanced is a fact. Consumption as a share of GDP has declined steadily over the past decade to 35 percent — the lowest of any major economy — while its investment share rose to above 45 percent, correspondingly the highest (Figure 1). But are these imbalances a vulnerability — as most observers believe — or a consequence of China’s economic rise and therefore not inherently problematic?
In last week’s post about when does a growth deceleration become a crisis, we looked at the likely inevitability of change in China’s economic systems and growth rates. While timing is difficult to predict, it does seem very hard to argue that the economic model can continue along with the social, political and legal status quo, all while maintaining recent high rates of growth.
Thanks to Monument Securities’ Marc Ostwald for directing our attention to an interesting report from MNI on Tuesday regarding changing attitudes to the renminbi: The PBOC made a “big mistake” in letting the yuan rise so quickly earlier this year because it has only swelled the level of foreign exchange onshore, creating potential problems when depreciation expectations rise and capital starts flowing out of the country, regulators contend.
In the last few years China has become the single largest producer of gold. It is also, by some measures, the second largest global consumer of the precious metal outright. Given this, some goldbugs are befuddled as to why, despite all this Chinese buying and scenes like this… ….gold prices are still falling like this:
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:
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:
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.
Vodafone in early talks to buy Kabel Deutschland in €7bn deal || Traders accused of manipulating currency rates || Glencore picks former Morgan Stanley boss John Mack for board || Sir Roger Carr confirmed as BAE chair || IEA predicts steeper-than-normal summer spike in crude demand || Dimon pledges to fight ‘whale’ suits ||
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.
Bank of Korea has done its bit to stoke the currency wars… Although they insist that it’s not. From BAML’s Jaewoo Lee: In the press interview, the Governor cited a few main changes since April which led the BoK to cut in May rather than in April: the supplementary budget was finalized; many central banks, including the ECB, turned to easing mode; and the easing can help further with improving sentiments. The Governor, on the other hand, stated that today’s decision was not a response to the yen weakness, contrary to the often-voiced speculation.
A surging stock market, increased corporate earnings (check out Toyota) and frothy domestic consumer spending are lending some real optimism to Japan’s Abenomics but the main avenue through which hope flows might be narrower than originally thought. Consider this chart from Citi’s Steven Englander:
Back in July, 2012 the Danish central bank, Nationalbanken, lowered the deposit rate to -0.2 per cent. Back then we wrote that it was going to be costly for the banks, and that money market rates were going deeper into negative territory. With Draghi’s comments last week, how did that whole negative deposit rate action turn out for Denmark? Nordea had a note out last week on that very subject. Now, before we move, let’s remember that Danish monetary policy is tailored around the FX peg. The deposit rate was there to assure outflow because of mounting pressure on the EUR/DKK pair.
(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:
We thought the following from TD Securities’ Richard Gilhooly on Tuesday was a rather insightful way of looking at the whole BoJ effect (our emphasis): While it remains a contentious point and as yet unproven, Japan’s devaluation and soaring Nikkei vs slumping DAX or Bovespa has all the hallmarks of a competitive devaluation. While competing factions debate the Monetary expansion/QQE, versus beggar-thy-neighbour interpretation, one positive aspect of the Japanese Yen collapse and fear of exported deflation has been collapsing commodity prices with weak growth in export countries (China, Germany, S Korea) and a stronger USD helping a supply story (crude inventories at 22yr highs) and weak demand send commodities into a bear market.
Some post-Cyprus thoughts from Citi’s Buiter et al… first on rolling capital controls and the chances of a new Cypriot pound being forced into existence (our emphasis): The lack of internal convertibility of euro notes (through the limitations on cash withdrawals and on electronic payments) will, if they persist for more than a few weeks, likely lead to a search for alternative media of exchange for internal transactions. IOUs of large, respected enterprises could for example be countersigned and start to circulate more widely as media of exchange and means of payment. This was the case, for instance, during the 1970 bank strike in Ireland, uncleared cheques were made negotiable (like bills of exchange) and pubs and shops served as credit verifiers. These could later develop into more full-fledged parallel currencies, if internal euro liquidity in Cyprus remains very scarce.