Currency Markets

img_research

The Treasury Department’s Maiden Manipulation Artifice

2017 April 22 by

The Trump Treasury Department released its first review of major economy foreign exchange policies after a bilateral summit with China and before the IMF spring meeting, with no Asian partner called a manipulator while Latin America was dropped from coverage altogether. It followed new criteria from 2015 legislation concentrating analysis on countries with at least a $20 billion trade surplus, a current account one at minimum 3 percent of GDP, and annual currency unilateral intervention of 2 percent of output. No country met all three criteria and the report noted reduced interference the past two years, but questioned whether the shift was just a temporary response to capital outflow trends. It reiterated the claim during the campaign that the US has been “unfairly disadvantaged” by artificial distortions and placed China, Japan, Korea and Taiwan and Germany and Switzerland on respective regional monitoring lists. The US current account gap was shaved to 2.5 percent of GDP in the second half of 2016, but the net international investment position slumped to an $8 trillion deficit.  The world economy expanded 3 percent, the slowest rate in a decade, and global demand distribution remains “highly imbalanced.” Fiscal and monetary policy can correct the tilt but structural reforms, particularly greater competitive access for private versus state-owned firms should be a priority. Chinese capital flight last year was due to local rather than foreign investor exit, including outward direct allocation by big government companies, but new limits have diminished the pace. Outside China net emerging market inflows continued into the last quarter, but currency performance was mixed, with a 15 percent Mexican peso depreciation, while the Taiwan dollar and India rupee were up almost 5 percent against the dollar. The first quarter of this year solidified appreciation tendencies, but global reserves fell marginally to $11 trillion at end-2016 as China and big oil exporters sold off holdings. The figures cannot distinguish between valuation adjustments and interventions, and future reporting and statistical efforts should redress the discrepancy, Treasury urges.

China’s large scale one-way anti-appreciation moves lasted a decade and harmed American workers and business, but from mid-2015 to February 2017 Beijing sold an estimated $800 billion to resist opposite depreciation direction. The authorities still must improve communications and transparency and open further to US goods and services while boosting domestic consumption, the analysis warns. During his recent Florida visit President Xi pledged further banking and securities industry liberalization, but observers pointed out the same commitment from Obama administration economic dialogues yet to permit rule-based majority foreign ownership. Korea too continues to run an outsize current account surplus, and the IMF believes the won is undervalued. Intervention in the spot and forward markets was $6.5 billion or 0.5 percent of GDP, reserves are triple short-term external debt and operations should only occur in “exceptional circumstances.” Taiwan has a pegged exchange rate and its dollar jumped 7 percent versus the greenback in the first quarter. Foreign currency purchases in 2016 were $1 billion/month, and outside experts put undervaluation at 25 percent. It is not an IMF member so does not publish the same reserve data as all other big Asian emerging economies to potentially flag irregularities.

The Trump Triumph’s Truculent Trades

2016 November 10 by

Emerging market currencies, particularly Asian and Latin American ones in the cross-hairs of promised trade pact renegotiation and retaliation, were roiled by US President-elect Trump’s victory, which may also coincide with a Federal Reserve December rate hike with good continuing job and GDP growth numbers.  Protectionism would exacerbate the underlying trend of flat global export expansion as countries try to shift to boosting domestic demand, aided by cross-border capital inflow return as of mid-year according to industry and official figures. They may also ease fiscal and monetary policies, but deficits and possible exchange rate implications narrow maneuvering room. Units in Mexico, Korea, and China have been most directly exposed, but the impact reaches to South Africa’s rand as a universe proxy, the zloty as an EU estrangement bet and Russia’s ruble as a reconciliation one, and to Middle East plays that may reflect future commodity and geopolitical direction. The Mexican peso dipped below 20 per dollar after the win, as authorities prepared to intervene after meeting the budget deficit target and raising benchmark rates 150 basis points the past six months. State oil company PEMEX bonds also fell as the December block auction may receive few bids pending the Washington administration shift, which could jeopardize $15 billion in proposed facility spending. The central bank and finance ministry announced contingency plans ahead of the election to sell dollars from reserves, and the Trump campaign’s immigration, border wall and NAFTA revision platform sours the outlook but they have refrained from action barring major depreciation translation into consumer inflation, projected at 4 percent next year. The candidate blamed the tripartite trade deal for the loss of manufacturing jobs north of the border and threatened to scrap it, while Democratic Party standard bearer Clinton also pushed for further labor and environment standard changes. Despite the pressure on Mexico’s auto and assembly operations services have been a main pillar of 2 percent GDP growth and would not be as upset by treaty overhaul. Remittance flows have been slowing even with US real estate recovery, but mass illegal migrant deportation would further pare them while swelling joblessness at home as another minimum wage increase is under consideration.

Korea’s won as an export heavy Asian proxy has also been battered, after it was named along with China on the US Treasury’s currency manipulation watch list, with the central bank warned to interfere only with “disorderly” movements. The bellwether Samsung conglomerate is literally under fire for exploding batteries in its smart phone, and lead shipping group Hanjin is barely afloat after state bank rescues. Overseas sales dipped 3 percent in October and growth will be only 0.1 percent this quarter according to estimates. North Korea saber-rattling has been frequent in recent months with ballistic missile tests focusing attention on continental nuclear capability. President Park may have entered lame duck status early amid resignation calls after she admitted to a long personal and professional relationship with a fortunetelling adviser, who may have used influence to secure contracts and tip policy decisions.  She reshuffled the cabinet and offered a public apology accepting an independent inquiry with her popularity at a record low 5 percent. The stimulus budget is on hold, and pledged structural reforms may await her successor in another featured anti-establishment contest.

 

 

The BIS’ Overturned Currency Turnover

2016 September 14 by

The Bank for International Settlements’ triennial foreign exchange and interest rate derivative surveys underscored increased emerging market trading shares largely at the expense of the euro and yen with continued dollar dominance. For twenty years the Basel-based organization has compiles these statistics and the latest effort drew on 50 central banks assembling data from over 1000 commercial banks and institutional dealers. Daily currency turnover was $5.1 trillion, down from $5.4 trillion in 2013, but when adjusted for dollar strengthening it rose 5 percent. The greenback was again on one side of the trade almost 90 percent of the time, while the euro dropped to 30 percent from ten points higher in 2010 due to the Eurozone debt crisis. The yen also slipped to 22 percent and the Aussie dollar and Swiss franc also slipped 1 percent for 5 percent range chunks. Emerging economies’ rise was “significant,” as the Chinese renimbi replaced the Mexican peso as the leader with $200 billion in daily activity and doubled its global slice to 4 percent. The Russian ruble also dropped on the list to almost 20th place at 1 percent, while Asian currencies including the Korean won, Indian rupee and Thai baht improved, ranking between 15-25. Brazil’s real, Turkey’s lira, and South Africa’s rand were in the top twenty rung. The spot market declined 20 percent over the three-year period to $1.7 trillion/day for one-third of volume, while swaps jumped 5 percent to $2.5 trillion for almost half of trading, although the growth rate slowed from the 2010-13 25 percent clip. Outright forwards were the largest segment at $700 billion, while options shrank by one-quarter to $250 billion, and they tended toward longer one week to one year maturities. By counterparty non-bank dealers raised their portion to 40 percent, while non-reporting smaller and regional banks contributed 20 percent of turnover and institutional investors were involved in 15 percent of trades, particularly swaps. Hedge fund and bank proprietary arm participation was off 30 percent to $200 billion daily, reflecting business and regulatory retrenchment. By hub location the UK took almost 40 percent as of April 2016 before the Brexit vote, and the US was constant with 20 percent. Asia specifically Tokyo, Hong Kong and Singapore boosted intermediation from 15 percent to 20 percent of the aggregate, aided by Chinese Yuan focus.

The companion over-the-counter interest rate derivatives reading traced a daily uptick to $2.7 trillion from the previous $2.3 trillion, with the dollar supplanting the euro as the most popular currency. Countries with negative interest rate such as the Nordics had sharp falls, while sterling and the Australian and Canadian dollars jumped. Emerging market units gained, but the greenback’s surge over the timeframe “understated” the shift, with contracts spiking for the Mexican, Chilean and Colombian pesos and Hungary’s forint. Hong Kong and Singapore dollar transactions were also up, while Chinese renimbi, Indian rupee and Brazilian real engagement slipped double-digits. Swaps were the chief driver at 70 percent of business, and the US edged out the UK as the leading processor, each with around 40 percent shares. In Hong Kong and Singapore daily dealing exceeded Tokyo’s $55 billion, which slid 20 percent from 2013 on Abenomics’ long-term zero interest rate policy trying to topple deflation assumptions.

 

The G-7’s Wrung War Cry (Asia Times)

2016 June 2 by

The G-7 summit in Japan, despite currency war talk, was a tame event hardly moving Asian financial markets. It was mostly notable as US President Obama’s valedictory after stops in Vietnam and Myanmar, where bilateral trade and investment clashes were also avoided. Several years into the Abenomics experiment the hosts scrambled for fresh fiscal and monetary approaches to defeat deflation and revive the domestic economy, and irked Washington with the threat of yen intervention beyond previous agreement only in “disorderly conditions.” The issue disappeared on its own during the meeting as the Federal Reserve signaled a June interest rate hike again lifting the dollar. Chinese currency devaluation fallout also faded as a concern, as the yuan seemed to stabilize on minor foreign exchange reserve growth with reduced capital outflows. Foreign investors have yet to return in size to the mainland, but an MSCI nod to boost its equity index weighting along with recent opening of the local bond market could shift direction. Vietnam and Myanmar highlighted the Obama administration’s respective foreign policy breakthroughs with the Trans-Pacific Partnership and military-civilian rule transition, but questionable human rights and economic policies were likewise prominent to underscore near-term business and financial community skepticism.

Prime Minister Abe attempted to promote joint stimulus as he presented a faltering global recovery scenario hinting at a 2008 crisis repeat. US and European representatives dismissed the scaremongering as they focused on their own regional issues, including elections, the EU refugee influx, and Greece’s interminable bailout. Asian security problems featured such as Beijing’s claims in the South China Sea and North Korea’s nuclear missile launch, but the economic agenda largely revolved around more specific structural reform pledges. In Japan’s case corporate governance and labor market flexibility moves will go further, according to officials, but the immediate linchpins of its growth package are consumption tax delay and public works rebuilding in earthquake areas. This strategy kept local financial asset sentiment negative as fund managers considered boosting neighboring emerging market bond and equity allocation. Despite negative bond yields at home, banks and insurers have preferred other industrial country instrument abroad with low returns, and in stocks individual investor fund positions continue to show outflows as so-called Mrs. Watanabes have been burned continuously on currency swings.

Both Vietnam and Myanmar have cozied up to the US, Japan and Europe to distance themselves from the Chinese economic and geopolitical orbit, but the entire Mekong region also blames Beijing for aggravating its original El Nino-induced drought. The water level in the main river artery is at a century low, and Vietnam’s rice output was down 10 % in the last quarter as GDP growth slipped under the 6 % preliminary forecast. Farmers accuse China of blocking irrigation with its gate control over hydroelectric dams, and many also use pesticide that damages crops and the environment, according to experts.  At the same time, the state-owned rice trading and export apparatus has deep job and patronage tentacles defying change, and it would be among the last candidates under the country’s phased TPP commitment to privatization. Free labor practices are also to be adopted within 5 years of treaty ratification to replace the current worker union monopoly. With rising wages strikes are more frequent and the government has been quick to crack down on activist members. During President Obama’s visit such advocates were reportedly in detention, angering congressional members who accompanied him as they prepare to vote on the free-trade pact, which will enlarge Vietnam’s economy 10% in the coming decades, the World Bank estimates.

Vietnamese three hundred listed stocks have been flat for the year with the mixed messages, but investor enthusiasm still far exceeds Myanmar’s new exchange with its one company available. Aung San Suu Kyi wields ultimate power and is said to have a 100-day plan with scant economic details. Coincident with President Obama’s G-7 swing the US left individually-targeted commercial and banking sanctions in place. The IMF slashed the growth projection to 7 percent and decried persistent high budget deficits and inflation, with the battle there barely begun.

The Treasury’s New Currency Interference Signal

2016 May 24 by

The US Treasury Department issued the first version of its periodic currency manipulation report under 2015 trade enforcement legislation overriding the 30 year-old Omnibus Competitiveness Act, which details specific criteria and remedial action triggers in response to the long China debate and congressional consideration of binding guidelines in the proposed Trans-Pacific Partnership. Five countries were named to the “monitoring list,” including Germany outside Asia in view if its second highest global 8 percent of GDP current account surplus, 5 percent above the qualifying threshold under the process. The other two perquisites are a minimum $20 billion bilateral trade surplus and annual net reserve buying of more than 2 percent of GDP. Analysis then turns to potential undervaluation and investment limits, and if they exist the Treasury Secretary must first engage in consultations and after a year take measures that could include federal government contracting suspension, increased IMF surveillance, or trade pact retaliation. These responses are not automatic and can be waived on cost or national security grounds. The monitored countries are not yet at this stage and other emerging economies including Brazil, Mexico and India are regularly under review. China is a perennial feature with a $350 billion 3 percent of GDP current account surplus last year, the first one at that level since 2010. It sold foreign exchange reserves to miss that criterion and the currency was “more market-determined” in contrast to previous declarations of aggressive devaluation. Japan made the surplus cut but has not intervened for four years, although the Treasury warned that even with recent wide swings the dollar yen market was “orderly” and thus should be left alone under current G-20 commitments. Korea was admonished for several years of anti-appreciation operations beyond allowable “disorderly conditions” and put on notice that it among the group could soon enter the next anti-manipulation phase.

Taiwan had the largest surplus at almost 15 percent of GDP and accumulated more than 2 percent in reserves but the bilateral imbalance fell short of $20 billion. Germany had not before been a currency policy target and its Eurozone surplus too was 3 percent, which was labeled “excess saving that could support domestic demand and global rebalancing.” The IMF separately was at odds with German officials over Greece’s fiscal retrenchment needed to stay in the single currency and unlock the delayed portion of last year’s EUR 85 billion package. It also reiterated the concept of debt relief as the burden hovers at 200 percent of GDP five years after consecutive EU rescues and private bond restructurings. The main state banks must be recapitalized once again as deposit leakage continues, and Prime Minister’s threatened resort to another public referendum on actions came up empty. The new exchange rate enforcement provisions got 75 percent bipartisan backing before the presidential election campaign went into full swing with the issue particularly in play from respective Democratic and Republican contenders Sanders and Trump. Both oppose Pacific free trade and have been harsh on Chinese currency practice despite the latest findings, with Beijing again memorialized as a master manipulator.

The Treasury Department’s Manipulated Currency Crescendo

2014 May 1 by

The Treasury Department’s International Affairs office again found no outright manipulation in its semi-annual update on main trading partner exchange rate practice under 25-year old legislation, although it cited “inadequate” global demand rebalancing and increased intervention and reserve accumulation toward the end of 2013. The lack of adjustment undermines the recent G-20 commitment to boost GDP growth 2 percent over the next five years, and Germany and China in particular must change their models, the report urged. Germany’s current account surplus is over 7 percent of GDP as the rest of the Euro-zone also exhibits positive external accounts often due to weak internal purchasing power. Last year the Chinese renimbi appreciated 3 percent but in the first quarter swung the same amount in the opposite direction as the daily fluctuation band doubled to 2 percent. Market determination remains “incomplete” in light of last year’s $450 billion in balance of payments inflows bringing reserves to $4 trillion and productivity gains suggesting undervaluation. While the intent may be to inject two-way volatility “serious concerns” include the absence of intervention and reserve data under the IMF’s SDDS standard as a big emerging economy outlier. Officials have hinted that depreciation against the dollar may continue as they gradually deflate credit and property bubbles while preserving 7.5 percent output expansion. A new mini-stimulus program was ruled out as Q1 social financing figures show a sharp dip in trusts and corporate bonds. The central bank has imposed tougher rules on the former and the latter was shaken by a handful of defaults. Real estate developers are already highly-leveraged and face currency strains from borrowing abroad as sales slow noticeably outside major cities. They have been battered on the Shanghai and Hong Kong exchanges as the two launched individual investor cross-trading in an attempt to lift sentiment. The Treasury survey also profiled Taiwan which had its biggest current account surplus since the 1980s the past year and maintains capital account restrictions. The managed float regime has been uneven and its $415 billion in reserves are “excessive by any metric.”   Unlike other major developing markets the main portfolio outflow source with curbs since the Federal Reserve’s tapering signal last May was not foreign investors but local life insurers allocating overseas.

Korea was criticized despite its pledge to forgo competitive devaluation as the current account surplus was the highest since the Asian financial crisis with authorities intervening “aggressively” against won strength. Personal consumption has been hampered by household debt, but President Park has unveiled reforms to double per-capita income to $40,000 and shift away from exports dominated by the chaebol groups that again incited public outcry with recent disclosures of top executive compensation packages. Brazil’s $85 billion short dollar position under its swap and spot operations also was highlighted in the brief survey and its hedging and liquidity rationale was given a pass through mid-year in a bow to opinion manipulation.

Foreign Exchange’s Dizzying Turnover Twist

2013 October 2 by

The BIS’ initial findings from its 2010-13 triennial currency trading survey showed the Mexican peso, Chinese renimbi and Russian ruble in the most active tier of daily activity up one-third to $5.3 trillion. Over 1000 banks and dealers from 55 countries participated, as the share of money center institutions fell to around 50 percent and non-financial corporate customers to under 10 percent. Non-bank insurance, pension and hedge funds have jumped into the swap and spot segments each at $2 trillion, as dollar dominance continues with 85 percent use on at least one side, followed by the euro and yen. Singapore is on the list of biggest centers behind the UK and US, and the Australian and New Zealand dollars also climbed the popularity ranks. The peso leapt into the top ten with a 2.5 percent portion of global turnover, with offshore access putting the yuan just behind. Prime brokers accounted for 15 percent of transactions, and retail investors represented 3 percent of the total through electronic platforms. FX forwards and options were growth categories, with the former ahead 40 percent to $675 billion over the period. Half of derivatives were longer maturity, between one week to a year, and only $150 billion in all daily instruments was exchange-traded, implying that open interest may be an “inaccurate reading” for general positions. With amounts from $50-70 billion the Turkish lira, Korean won, South African rand, Brazilian real and Indian rupee are in the leading 20 by volume. Hong Kong and Russia are important dealing locations, and Japan and Singapore hold equal weight at 5.5 percent of worldwide sourcing. A separate tabulation of interest rate derivatives charted a 10 percent advance over three years to $2.3 trillion, two-thirds in swaps and the rest in forwards. Half the structures were in euro, with the real, rand and ruble also featuring regularly. Exchange activity dropped 40 percent to $5 trillion and in the OTC market the cross-border versus local pairing was 10 percent down to 55 percent.

The three biggest emerging market contracts were $15 billion each this year from negligible sums in 2010. On geographical distribution New York and London again took 75 percent, but the euro concentration increased sales in France, Germany and Denmark. In the Asia-Pacific, Japan edged out Australia, followed by Singapore and Hong Kong. Other sizable developing economy units included the Polish zloty, Thai baht, Hungarian forint, and Chilean peso. China and South Africa had $10 billion in agreements through early 2013, and into next year higher global rates could further boost participation. An exception to the negative exchange-listed trend has already been seen in Brazil, as companies that borrowed heavily abroad belatedly seek hedges. Many were unprotected or in bad derivatives bets in 2008 and had to be aided by government and outside liquidity lines but such contracts may not be renewed for the post-taper crisis.

Currency Fighters’ Battle Fatigue Fits

2013 April 22 by

Major emerging market currencies ended Q1 mixed despite the bond flow redirection into local markets, with strength mostly against the euro and yen but leaders up just 5 percent against the dollar. The Thai baht topped the roster as the number two Asian equity performer as well, on the heels of a third ratings agency upgrade to BBB+ as Fitch reversed a previous demotion in the wake of political bloodshed. A $2 billion construction firm ipo captured enthusiasm about post-flood recovery, party reconciliation as the prime minister slowed moves to grant her exiled brother and predecessor judicial amnesty, and a wave of infrastructure “mega-projects” alongside other fiscal stimulus including car sales incentives and minimum wage hikes. Core inflation is below 1 percent and the central bank has been on hold as the current account balance swings between monthly deficit and surplus. With the auto push Japanese manufacturers are looking to rebuild their presence with the timetable accelerated by the weakening yen under the unprecedented monetary easing there. The Mexican peso has been the other outstanding gainer with a surge to 12 to the greenback despite an unexpected 50 basis point benchmark rate cut. Bullish futures bets were up 50 percent in March on the Chicago Mercantile Exchange as President Pena Nieto visited the White House and unveiled anti-monopoly media and telecoms industry steps. A Pemex reform proposal could follow by the end of the current congressional session to sustain early tenure confidence as export and factory indicators continue to decline. After a prolonged period criticizing neighbors’ currency intervention stance, the authorities may be considering daily fluctuation limits, and with the stock market again in the positive column a capital gains tax is on the table as a way to boost short-term collection. S&P raised the sovereign outlook to positive but stipulated the need to far-reaching fiscal overhaul and anti-drug security improvement.

Elsewhere in Latin America, Brazil remained a favorite despite well-established capital inflow taxes and central bank real meddling to keep the rate around 1.9. With above-target 6 percent inflation the benchmark Selic is due to be raised in a rare regional and global tightening which could further stifle flat GDP growth.  The primary budget surplus may fall to half the 3 percent of GDP norm with consumer tax exemptions as the current account gap continues to worsen with Chinese cancellation of a major soybean shipment. Agricultural commodity prices are down and iron ore giant Vale faces back tax claims from multinational subsidiaries. State-owned Bank of Brazil will float its insurance unit in an attempt to revive the flailing stock exchange and also boost its US-listed ADRs. Japanese institutional and retail money meanwhile is expected to resume record allocation with Governor Kuroda’s historic quantitative expansion at home dragging the yen to 100 to the dollar. In Asia in turn another decent spike has come from Malaysia’s ringgit just prior to May elections where the opposition is in formidable combat position.

The World Economic Forum’s Reserve Currency Cull

2012 August 10 by

The Geneva-based World Economic Forum disseminated the results from an 18-month project on alternative future international monetary system paths which offered no clear winner among the dollar, euro, renimbi and other competing units as they position for the coming decades. The fragmentation highlighted a continued divide between global capital and trade integration and governance structures, and a mooted G-20 attempt at reform in 2011 when France was in charge of the group as the Eurozone crisis took precedence. A western view since the collapse of the Bretton Woods arrangement 40 years ago touts the adjustment benefits of floating exchange rates but many Asian markets in particular continue to prefer close management. These tensions hurt the real economy, according to banking and business executives participating in the study, resulting in disconnect between supply chains and a difficult hedging challenge for small and mid-size firms with limited sophistication. Since introduction in 2001 the euro’s share in reserves and trade settlement at almost 30 percent and 15 percent respectively advanced on the greenback with the yuan also making headway since 2009 with an incremental “internationalization” push. The three rivals now confront fundamental internal debt and growth model revamps that impinge on external financial cooperation and standing, with imbalances often reinforced in cross-regional public and private commercial and portfolio flows. A long-range scenario to 2030 incorporates a range of “multipolar” options including a split into different zones, a G-2 condominium as the Eurozone crumbles, and a heterogeneous world where advanced and developing economies jointly hold sway. The last outcome posits the RMB as the “de facto BRICs currency” with China’s own development bank and monetary fund eclipsing historical predecessors. Its trajectory checks the euro’s rise even as a full-fledged fiscal union is in place then to preserve the area. The report, which draws on meetings in New York, London and Beijing as well as the annual Davos summit, concludes that the road ahead is “rocky” in view of the inability of global institutions to handle “growing connectivity.” Within the Eurozone the countervailing forces have yet to foster effective dialogue and solutions between key stakeholders, it adds.

In Asia, the yen likewise would be outdistanced as an international unit and Korea and India are also projected as minor players even as won and rupee trading volume continues to climb in BIS surveys. The WEF interviews were completed before Prime Minister Singh assumed the finance post in an effort to combat record bottoms on a combination of confidence and balance of payments factors. The central bank reversed course on an original capital-account opening blueprint by ordering exporters to surrender half their hard currency proceeds as the raj again wielded its license.