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A lot of digital ink has been spilled in recent days over the perplexing reversal of the Yen, which for years was seen by the market as a “flight to safety” trade (as unexpected crisis events would prompt capital repatriation into Japan or so the traditional explanation went), only to suffer a major selloff in the past week as it suddenly started trading not as a funding currency for risk-on FX pairs, but as a risk asset itself.

To us, the reversal is far less perplexing than some smart people make it out to be: with Japan now effectively in a recession following the catastrophic Q4 GDP print which crashed 6.3% annualized, validated by today’s just as terrible PMI report…

.. and with Japan now set to suffer a major hit due to the coronavirus epidemic spreading like wildfire across the region, it is only a matter of time before the BOJ follows the ECB and Fed in reversing what has been years of QE tapering, and either cuts rates further into negative territory or expands its QQE (with yield control), and starts buying equities (although with the central bank already owning more than 80% of all ETFs, one wonders just what risk assets are left for the central bank to buy). Needless to say, both of these would have an adverse impact on the yen, and potentially lead to destabilization in the Japanese bond market which for years has defied doom-sayers, but it will only take one crack in the BOJ’s confidence for Japan’s entire house of cards to fall apart. That said, we are not there quite yet.

Furthermore, after the bizarre move in the prior two days, overnight the JPY appears to regain some normalcy, when it traded as it should (i.e., it was once again a risk-off proxy), with the USDJPY sliding during the two major “risk-off” events overnight.

…click on the above link to read the rest of the article…

Dethroning the King: Five ways Trump could weaken the dollar

September 2, 2018

Dethroning the King: Five ways Trump could weaken the dollar

Can President Trump instruct the US Treasury to intervene in FX markets and weaken the dollar? Twelve months ago, we wouldn’t have even considered this question. But under this new mercantilist US regime, who knows? We identify five ways in which Washington could try to engineer a weaker dollar

In this article

Key messages: Time to consider how Trump could weaken the dollar

President Trump’s ramped up verbal jawboning in recent weeks suggests that current USD strength may be the upper bound of the White House’s tolerance level
We identify five policies that the White House could employ to weaken the dollar: (1) US FX intervention and building out US FX reserves; (2) Changing the rules of the game for the Fed; (3) Ongoing jawboning and talking down the dollar; (4) Pressuring major trading partners to strengthen their currencies; (5) Creating a US sovereign wealth fund.
We don’t think any small-scale unilateral intervention by US authorities will have a sustained impact on weakening the dollar. The best historical precedent – the Bush FX interventions in 1989-1990 – shows that this approach had a limited impact in driving the USD materially lower.

…click on the above link to read the rest of the article…

Rand Tumbles As Government Warns Of “Catastrophe” Unless ‘Land Reform’ Allowed

August 30, 2018

Rand Tumbles As Government Warns Of “Catastrophe” Unless ‘Land Reform’ Allowed

In a barrage of headlines that sparked chaos in FX algo markets, The South African government proclaimed proudly that it is opposed to illegal land grabs (sparking a rally in the rand) before humans realized that this is mere statement of fact and that the entire reason for this process is to ‘legalize’ land grabs through reform.

As Deputy President David Mabuza said, the nation will “slide into catastrophe” if land reform doesn’t take place.

“The majority of our people are poor and homeless,” he told lawmakers in Cape Town Thursday.

“Our resources to carry out reform are limited.”

And the reaction is now getting real as the Rand nears two-week lows once again…

Notably, the rand is behaving more erratically this month than it did during the height of the power struggle between Jacob Zuma and Cyril Ramaphosa in December. The rand’s one-month historical volatility is now at its highest level since December 2016 and the currency is headed for its worst August performance against the dollar on record, on track for a 9 percent drop.

As Bloomberg notes, President Cyril Ramaphosa has embraced land expropriation without compensation as a means to achieve equality and racial justice, and in a bid to steal a march on populist opponents before elections in 2019. A planned amendment to the constitution is still a work in progress, with public hearings on the matter concluding next month.

Yesterday saw UK PM Theresa May confirm her support of Ramaphosa’s “land reforms” as long as they’re legal…

“The UK has for some time now supported land reform that is legal and transparent and generated through a democratic process. I discussed it with President Ramaphosa during his visit to Britain earlier this year and will discuss it with him again later today,” she said.

…click on the above link to read the rest of the article…

“EM FX Never Lies” – BofA Warns As Brazilian Real Is Routed

June 7, 2018

“EM FX Never Lies” – BofA Warns As Brazilian Real Is Routed

Mohamed El-Erian warned overnight that Brazilian policy makers are “in quite a tricky position — and there’s little room for error,” and judging buy this morning’s rout in the real, he is dead right.

Crippling nationwide trucker strikes, which prompted the resignation of Petrobras CEO, and forced Brazil and Argentina to roll back their planned fuel-price increases have, according to Bloomberg’s Davison Santana, undermined their already fragile currencies and deter investors eager for signs authorities are serious about putting fiscal accounts in order.

Brazil’s projected budget deficit as a percentage of gross domestic product stands at 7.4 percent, the highest among major emerging-market peers.

The gap, as El-Erian explained succinctly, leave government with a stark choice: keep borrowing or cut spending.

As Santana notes, borrowing more isn’t a healthy option. Higher deficits make currencies less attractive, leading to rising interest rates that reduce growth and erode government revenue in a cycle that ends up, you guessed it, swelling the deficit. Reining in spending typically makes more sense. That’s why it’s all the more remarkable that Brazil recently capitulated in their efforts to remove artificial price controls that kept fuel costs low. After all, it’s much harder to reduce spending while maintaining subsidies.

So where does this leave the real? It means authorities will have to keep intervening in currency markets, a costly use of foreign-exchange reserves that can only stop for good once the nations tackle their underlying fiscal problems. And indeed, after Brazil’s real tumbled to a two-year low on Tuesday, the government effectively tripled its support – which has already failed dismally.

A month ago we explained how critical the Brazilian Real is to identifying just when the Emerging Market turmoil will go viral.

…click on the above link to read the rest of the article…

EM FX Plunges: Argentine Peso Re-Crashes, Turkish Lira Tumbles To Record Low

May 8, 2018

EM FX Plunges: Argentine Peso Re-Crashes, Turkish Lira Tumbles To Record Low

Just hours after Fed Chair Jay Powell implied that ’emerging markets are on their own’, EM FX is re-collapsing…

with Argentina (despite a 1275bp rate hike) and Turkey both crashing to new record lows…

“There is good reason to think that the normalization of monetary policy in advanced economies should continue to prove manageable for EMEs,” Powell said, adding that “markets should not be surprised by our actions if the economy evolves in line with expectations.”

So much for the unprecedented Argentina rate-hike and Treasury Minister’s reassuring comments last week…

How much more can BCRA do? They have a scheduled meeting today.

“If the ARS remains under pressure and continues to drift upward we do not rule out further rate hikes at the scheduled May 8 meeting, or even ahead of it,” Goldman Sachs said

Goldman expects central bank to reiterate it is “ready to do more to anchor the currency and inflation expectations (preserve a hiking bias) and to signal that monetary policy will remain very tight for as along as needed”

Bloomberg reports that Argentina’s central bank sold Lebacs due in June in the secondary market at 40%, according to two people with direct knowledge (it used these notes last week to signal commitment to tighter monetary policy).

And the Turkish Lira broke above 4.3 per USD – weakest on record – and is now down 7 days in a row…

And as we detailed earlier, as for the indicator that markets should keep an eye on to decide when it’s time to panic, we reported yesterday that Bank of America is keeping an eye on one specific catalyst for imminent contagion: “EM FX never lies and a plunge in Brazilian real toward 4 versus US dollar is likely to cause deleveraging and contagion across credit portfolios.”

If Currency Wars Have Indeed Started, This Is What Comes Next

January 26, 2018

If Currency Wars Have Indeed Started, This Is What Comes Next

Even as overall volatility remains tame, things are rapidly changing in the world of currency trading where FX vol has spiked to the highest level since early October after this week’s dramatic FX rollercoaster which saw the US Treasury Secretary get this close to launching currency war, and required the verbal intervention of both (a rather angry) Mario Draghi and Donald Trump himself to normalize things, if only for the time being.

While some were quick to point out that what Mnuchin did with his “weak dollar” commentary was a dramatic reversal of decades of US “strong dollar” policy (which is nothing more than lip service as Hank Paulson showed so very well when he launched QE1 in 2008), others such as FX strategist Alan Ruskin saw a more innocuous explanation: as we noted earlier, he suggested that what you have here “is two officials who like a weak(er) USD in the short-term that will help the US trade accounts and support growth, albeit to the point where strong growth will eventually support a strong USD longer-term.”

In Alan’s view this is a way of saying that in the short-term a weak USD is good for US trade, and in the long-term a strong USD is good because it is indicative of strong growth a healthy economy. Still, Ruskin concedes that that this is clearly a very confusing message to convey and it’s unlikely to either be reported or understood correctly, which doesn’t really help the message.

And then there is the less subtle explanation: that trade wars have indeed broken out. That’s the assumption used by DB’s Masao Muraki, who today writes that it his view that the Trump Administration, having completed the tax reforms, will shift focus to trade policy.

…click on the above link to read the rest of the article…

Another shoe drops in the FX fraud manipulation conspiracy

May 26, 2017

Another shoe drops in the FX fraud manipulation conspiracy

FX is quite literally, a rigged game. Not like the stock market, well not exactly. FX has been, a game of ‘how many numbers am I holding behind my back?’ and the guess is always wrong! As we explain in Splitting Pennies Understanding Forex – FX is rigged. But that doesn’t mean there isn’t opportunity! One just needs to understand it.

From Law 360:

French bank BNP Paribas was fined $350 million by the New York State Department of
Financial Services for lax oversight in its foreign-exchange business that
allowed “nearly unfettered misconduct” by more than a dozen employees involved
in exchange rate manipulation, officials announced Wednesday.

From 2007 through 2013, a trader on the bank’s New York desk, identified in the
consent order as Jason Katz, ran a number of schemes with more than a dozen
BNPP traders and salespeople on key foreign exchange trading desks to
manipulate prices and spreads in several currencies, including the South
African rand, Hungarian forint and Turkish lira, officials said.

He called his group of traders a “cartel” and they communicated in a
chat room called “ZAR Domination,” a reference to the rand’s trading
symbol, according to the consent order. The group would push up the price of
the illiquid rand during New York business hours when the South African market
was closed, moving the currency in whichever way they chose, and thus
depressing competition, officials said.

Katz also enlisted colleagues at other banks to widen spreads for orders in
rands, increasing bank profits and limiting competition at the customer’
expense, the order says. Some of the traders engaged in illegal coordination
and shared confidential customer information, officials said. As part of a
cooperation agreement with prosecutors, Katz pled guilty in Manhattan federal court in
January to one count of conspiracy to restrain trade in violation of the
Sherman Act.

…click on the above link to read the rest of the article…

The FX Mexican Standoff

February 27, 2016

The FX Mexican Standoff

Theodor Horydczak Lincoln Memorial 1925

There has been quite a bit of talk lately over the need for a new Plaza Accord, something several parties saw happening during this weekend’s G20 summit in Shanghai -hence the term ‘Shanghai Accord’-. (On September 22, 1985 at the Plaza Hotel in New York City, France, West Germany, Japan, the US, and the UK signed an accord to depreciate the US dollar vs the Japanese yen and German Deutschmark by intervening in currency markets).

Unless all the G20 finance ministers and central bankers gathered in China are in close and secretive cahoots, though, it doesn’t look like it is going to happen. And that seems to both make sense and not. What those advocating such an accord are calling for is a -large- devaluation of the Chinese yuan (RMB) vs the USD and yen -perhaps even the euro-, but the climate simply doesn’t look ripe for it.

Still, the problem is, if they don’t do it, they open the doors to a whole lot more volatility, unpredictability and losses in the markets. All things that those markets do not want. Because, like it or not, the yuan is overvalued, China’s fabricated trade numbers are increasingly under scrutiny, and a large devaluation could settle things at least for a while.

However, Beijing looks too full of hubris and pride -and inclusion in the IMF basket of currencies is an issue too- to do what seems natural. Lest we forget, no matter how much China seeks to obfuscate the numbers, everybody already knows that numbers like producer prices and exports, and most importantly imports, have seen steep falls, and for a long time too.

China’s oil tanks look as close to overflowing as the American ones, and without those oil imports, who knows who bad import numbers would have looked?

…click on the above link to read the rest of the article…

When Currency Pegs Break, Global Dominoes Fall

February 24, 2016

When Currency Pegs Break, Global Dominoes Fall

When a currency peg breaks, it unleashes shock waves of uncertainty and repricing that hit the global financial system like a tsunami.

The U.S. dollar has risen by more than 35% against other major trading currencies since mid-2014:

If all currencies floated freely on the global foreign exchange (FX) market, this dramatic rise would have easily predictable consequences: everything other nations import that is priced in dollars (USD) costs 35% more, and everything the U.S. imports from other major trading nations costs 35% less.

But some currencies don’t float freely on the global FX markets: they’re pegged to the U.S. dollar by their central governments. When a currency is pegged, its value is arbitrarily set by the issuing government/central bank.

For example, in the mid-1990s, the government/central bank of Thailand pegged the Thai currency (the baht) to the USD at the rate of 25 baht to the dollar.

Pegs can be adjusted up or down, depending on a variety of forces. But the main point is the market is only an indirect influence on the peg, not the direct price-discovery mechanism as it is with free-floating currencies.

If central states/banks feel their currency is becoming too strong via a vis the USD, they can adjust the peg accordingly.

Why do states peg their currency to the U.S. dollar? There are several potential reasons, but the primary one is to piggyback on the stability of the dollar without having to convince the market independently of one’s stability.

Another reason to peg one’s currency to the USD is to keep your currency weaker than the market might allow. This weakness helps make your exports to the U.S. cheap/ competitive with other nations that have weak currencies.

…click on the above link to read the rest of the article…

Financial Time Bombs Hiding In Plain Sight

February 23, 2016

Financial Time Bombs Hiding In Plain Sight

The bear will soon be arriving in earnest, marauding through the canyons of Wall Street while red in tooth and claw. Our monetary central planners, of course, will once again—for the third time this century——be utterly shocked and unprepared. That’s because they have spent the better part of two decades deforming, distorting, denuding and destroying what were once serviceably free financial markets. Yet they remain as clueless as ever about the financial time bombs this inexorably fosters.

The sum and substance of Keynesian central banking is the falsification of financial prices. In essence, this means pegging interest rates below market clearing levels on the theory that more borrowing and spending will thereby ensue.

To this traditional credit channel of monetary policy transmission has been added in recent years the notion of an FX channel, which works through currency depreciation and export stimulus; and the wealth effects channel, which seeks to levitate the paper wealth of the top 10% of households so that they will feel emboldened to spend more at luxury retail emporiums, BMW showrooms and upscale vacation spots.

Needless to say, currency trashing might work for a tiny export economy like New Zealand. But on a global scale among the big national economies, it’s just a recipe for a race to the bottom. Ultimately it leads to nothing more than the inflation of imported commodities and goods and the reallocation of income and wealth from domestic industries and households to exporters and their shareholders. Japan proves that in spades.

With respect to the false FX channel, even Black Rock’s chief big thinker, Peter Fisher, hit the nail on the head last week on Bloomberg:

…click on the above link to read the rest of the article…

Bank Of Russia Calls “Emergency” Meeting To Address Ruble Rout

January 21, 2016

Bank Of Russia Calls “Emergency” Meeting To Address Ruble Rout

Earlier today, we highlighted a dramatic plunge in the Russian ruble which has crashed to record lows against the dollar after staging its steepest two-day decline in nine months.

The sharp (and seemingly inexorable) decline in crude prices combined with Western economic sanctions and geopolitical turmoil have weighed on the currency of late and in the midst of a new leg down in oil, investors appear to be panic selling.

“Some investors are selling at any price,” Bernd Berg, an emerging-markets strategist in London at Societe Generale told Bloomberg by e-mail.

And even as Russian central bank Deputy Chairman Vasily Pozdyshev swears “there’s no systemic risk,” the Bank of Russia has now called an emergency meeting with state-run and private lenders to discuss the FX bloodbath.

BANK OF RUSSIA TO MEET STATE-RUN, PRIVATE LENDERS: IZVESTIA

Dmitry Zaks

✔@dmitryzaksAFP

#BREAKING #Russia‘s Central Bank call emergency meeting as #ruble plunges for second day running, breaking 1998 lows https://twitter.com/rianru/status/690214963403685888 …

11:52 AM – 21 Jan 2016

Not to worry, Moscow wants you to know this is not an “emergency” gathering.

BANK OF RUSSIA SAYS TALKS WITH BANKS NOT AN EMERGENCY MEETING

Is This How the Next Global Financial Meltdown Will Unfold?

November 20, 2015

Is This How the Next Global Financial Meltdown Will Unfold?

In effect, a currency crisis is simply the abrupt revaluation of the currency to reflect new realities.

I have long maintained that the structural imbalances of debt and risk that triggered the Global Financial Meltdown of 2008-2009 have effectively been transferred to the foreign exchange (FX) markets.

This creates a problem for the central banks that have orchestrated the “recovery” by goosing asset bubbles in stocks, real estate and bonds: unlike these markets, the currency-FX market is too big for even the Federal Reserve to manipulate for long.

The FX market trades roughly the entire Fed balance sheet of $4.5 trillion every day or two.

Currencies are in the midst of multi-year revaluations that will destabilize the tottering towers of debt, leverage and risk that have propped up global growth since 2009.

Though the relative value of currencies is discovered in the global FX market, there are four fundamental factors that influence the value of any currency:

1. Capital flows into and out of the currency (and the nation that issues the currency).

2. Perceived risk, specifically, will this currency preserve my global purchasing power (i.e. capital) or erode it?

3. The yield or interest rate paid on bonds denominated in this currency.

4. The scarcity or over-abundance of the currency.

If we dig even deeper, we find that currencies reflect the income streams and assets of the issuing nation. Consider the currency of an oil exporting nation that has seen both its income from selling oil and the underlying value of its oil in the ground fall by more than 50%.

Why shouldn’t that nation’s currency decline in parallel with the erosion of income and asset valuation? As a nation’s income and asset base decline, there is less national income to pay interest on sovereign bonds, less private income to tax, and a reduced asset base for additional borrowing.

…click on the above link to read the rest of the article…

Don’t Forget China’s “Other” Spinning Plate: Trillions In Hidden Bad Debt

September 5, 2015

Don’t Forget China’s “Other” Spinning Plate: Trillions In Hidden Bad Debt

To be sure, there’s every reason to devote nearly incessant media coverage to China’s bursting stock market bubble and currency devaluation.

The collapse of the margin fueled equity mania is truly a sight to behold and it’s made all the more entertaining (and tragic) by the fact that it represents the inevitable consequence of allowing millions of poorly educated Chinese to deploy massive amounts of leverage on the way to driving a world-beating rally that, at its height, saw day traders doing things like bidding a recently-public umbrella manufacturer up 2,700%.

The entertainment value has been heightened by what at this point has to be some kind of inside baseball competition among media outlets to capture the most hilarious picture of befuddled Chinese traders with their hands on their faces and/or heads with a board full of crashing stock prices visible in the background. Meanwhile, the world has recoiled in horror at China’s crackdown on the media and anyone accused of “maliciously” attempting to exacerbate the sell-off by engaging in what Beijing claims are all manner of “subversive” activities such as using the “wrong” words to describe the debacle and, well, selling stocks. Finally, China’s plunge protection has been widely criticized for, as we put it, “straying outside the bounds of manipulated market decorum.”

And then there’s the yuan devaluation that, as recent commentary out of the G20 makes abundantly clear, is another example of a situation where China will inexplicably be held to a higher standard than everyone else.That is, when China moves to support its export-driven economy it’s “competitive devaluation”, but when the ECB prints €1.1 trillion, it’s “stimulus.”

…click on the above link to read the rest of the article…

Fallout From Petrodollar Demise Continues As Qatar Borrows $4 Billion Amid Crude Slump

September 4, 2015

Fallout From Petrodollar Demise Continues As Qatar Borrows $4 Billion Amid Crude Slump

Early last month in “Cash-Strapped Saudi Arabia Hopes To Continue War Against Shale With Fed’s Blessing,” we noted the irony inherent in the fact that Saudi Arabia, whose effort to bankrupt the US shale space has blown a giant hole in the country’s fiscal account, was set to tap the debt market in an effort to offset a painful petrodollar reserve burn.

“Saudi Arabia is returning to the bond market with a plan to raise $27bn by the end of the year, in the starkest sign yet of the strain lower oil prices are putting on the finances of the world’s largest oil exporter,” FT reportedat the time.

The reason this is so ironic is that at various times, we’ve characterized persistently low crude prices as essentially a battle between the Fed and the Saudis. Many struggling US producers would likely have been out of business months ago were it not for the fact that ZIRP has kept capital markets wide open, allowing otherwise insolvent drillers to stay afloat. Obviously, that works at cross purposes with Riyadh’s efforts to “preserve market share”, and so ultimately, the Saudis are betting their FX reserves can outlast ZIRP.

There are other factors at play here that weigh on Saudi Arabia’s financial situation including two proxy wars and the defense of the riyal peg which is why turning to the bond market is an attractive option especially considering that capital markets are so favorable thanks to – and here’s the irony – the very same Fed policies that are keeping US shale producers in business.

But Saudi Arabia’s “war” with the US shale space isn’t unfolding in a vacuum and now Qatar is looking to borrow to alleviate the financial strain. Here’s more from Bloomberg:

…click on the above link to read the rest of the article…

Why QE4 Is Inevitable

August 28, 2015

Why QE4 Is Inevitable

One narrative we’ve pushed quite hard this week is the idea that China’s persistent FX interventions in support of the yuan are costing the PBoC dearly in terms of reserves. Of course this week’s posts hardly represent the first time we’ve touched on the issue of FX reserve liquidation and its implications for global finance. Here, for those curious, are links to previous discussions:

And so on and so forth.

In short, stabilizing the currency in the wake of the August 11 devaluation has precipitated the liquidation of more than $100 billion in USTs in the space of just two weeks, doubling the total sold during the first half of the year.

In the end, the estimated size of the RMB carry trade could mean that before it’s all over, China will liquidate as much as $1 trillion in US paper, which, as we noted on Thursday evening, would effectively negate 60% of QE3 and put somewhere in the neighborhood of 200bps worth of upward pressure on 10Y yields.

…click on the above link to read the rest of the article…

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