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Thursday, July 3, 2014
China’s currency: the RMB, CNY, CNH…
China’s currency is officially called the renminbi. The yuan is the unit of account. The renminbi, denoted RMB, is thus the name for the currency traded onshore and offshore. There exists a separation between these two markets, as China institutes capital controls that prevent the currency from flowing abroad and vice versa.
If the RMB is traded onshore (in mainland China), it is referred to as CNY, whereas if the RMB is traded offshore (mainly in Hong Kong) it trades at the rate of USD/CNH, deliverable RMB located in Hong Kong. Thus, while the RMB is just one currency, it trades at two different exchange rates, depending on where it is traded.
As China is seeking to increase the role of its currency on the world stage (referred to as currency internationalization), foreign exchange reforms have led to the formation of the CNH currency. The CNH market is still relatively small and illiquid, especially to the USD and EUR market, but it is growing rapidly as restrictions on this market are gradually lifted. During 2010, reforms made it possible for RMB to leave the China mainland and move to Hong Kong for trade purposes. For example, a Chinese exporter receiving USD could convert USD to CNH in Hong Kong. Once moved to Hong Kong, the RMB is reclassified as CNH and (at the time of writing, as reforms proceed rapidly) it cannot easily flow back to China mainland, only under strict rules and for trade purposes.
Drivers of CNY vs. CNH dynamics
Currently, the onshore CNY and the offshore CNH are two separate markets. Apart from the technical differences, the main feature of CNY is that its exchange rate with the dollar is fixed by the Chinese central bank. Players on the CNY-market are among others onshore exporters, who demand CNY and sell US dollars. Onshore importers pay for US dollars with CNY. The PBoC also typically buys US dollars in line with its monetary policy the USD/CNY exchange rate fixing (see alsoChina’s exchange rate policy).
The CNH exchange rate is driven by private demand and supply for CNH, although the supply of CNH is suppressed by government regulation. The result is that demand for CNH (for example by speculators anticipating on an increase in the value of the Chinese currency) generally exceeds supply. Therefore, the CNH is usually trading above the value of CNY.
Premium vs. discount CNH vs. CNY
However, at two moments in time, CHN was trading below the value of CNY (equivalently, USD/CHN was trading above USD/CNY). The first time was prior to the collapse of Lehman Brothers in August 2008. Tensions in the CNH market (a sudden decline in demand) led to a higher USD/CNH, which has been perceived as an indication that USD/CNY would be fixed higher by the PBoC in a response to financial market unrest.
The second moment has been during the escalating European debt crisis, as fears for a large adverse impact on Chinese exporters due to a sudden drop in demand from Europe led to comments by Chinese officials that the USD/CNY-rate would be kept relatively stable. In anticipation of a higher fixing for USD/CNY, and as a result lower demand for CNH, USD/CNH traded higher.
The future of the CNH market
There are two developments indicating that the CNH market will grow over time and become more important for exporters, importers and investors alike.
- China is aiming to expand the international role of the CNH market by allowing foreign companies to issue bonds denominated in CNH. For example, during the course of 2010, the first ‘Dim Sum’ bonds were issued by McDonalds, Caterpillar, China Development Bank, the Asian Development Bank, some Hong Kong corporates, etc.
- Also, the CNH market will proceed its expansion as current capital controls that impede CNH to flow back onto the mainland are lifted gradually. Thereby, the returns from offshore CNH investments are allowed to be directly invested in fixed capital projects in mainland China. Without possibilities to invest CNH, the CNH accounts in Hong Kong stand basically idle, while the return on such deposits is generally very low. This would prevent significant growth in the CNH market.
Non-Deliverable Forward Market
Before the CNH-market was established, the Non-deliverable forward (NDF) market already existed. This market was generally used to hedge against exchange rate fluctuations of the renminbi against the US dollar. Although the Chinese currency could not be delivered, exchange rate differences against which a player was hedged were paid out in US dollars. Therefore, the NDF CNY markets was actually based on future changes in the USD/CNY exchange rate. Players from mainland China could not participate in this market, although participation of onshore players in the CNH market is allowed.
For as long as the CNH market is relatively small and illiquid, the NDF market will in the short term be the main market in which investors can participate and take positions on China’s exchange rate. As the CNH market develops and restrictions on the offshore renminbi use of the are relaxed, most likely the CNH market will step by step overtake the NDF market.
EES: Ruble on the up vs. the US Dollar
If the US based anti-Russian policy is working so well - why is the USD down against the Ruble since the crisis peaked in March? Look at the above USD/RUB daily chart.
Reports indicate the BRICs are forming an anti-USD alliance which wouldn't be really too difficult for them.
Since EUR/USD seems to be locked into a perpetual 1.30-1.40 range at least for the time being, traders may want to keep an eye on exotics, and particularly emerging exotics such as the RUB, MXN, TRY, CNH, HUF, etc.
The BRICs Are Morphing Into An Anti-Dollar Alliance
While numerous massively indebted administrations around the world hope to divert the attention of what's left of their struggling middle class away from its daily impoverished existence and distract it with flashing lights and glitzy animations showing another all time market high on a daily basis, a significantly more important shift taking place behind the scenes is appreciated by very few: the ongoing de-dollarization of the world. For the latest example of how increasingly more countries are setting the stage for the final currency war, we go again to Russia where VOR's Valentin Mândr??escu explains that slowly but surely the BRICS - that proud Goldman acronym which was conceived to perpetuate the great American way of life by releasing trillions in US-denominated debt in heretofore untapped markets - are morphing into an anti-dollar alliance.
BRICS is morphing into an anti-dollar alliance, From VOR
Before the crucial visit to Beijing next week, the governor of the Russian Central Bank, Elvira Nabiullina met Vladimir Putin to report on the progress of the upcoming ruble-yuan swap deal with the People's Bank of China and Kremlin used the meeting to let the world know about the technical details of its international anti-dollar alliance.
On June 10th, Sergey Glaziev, Putin's economy advisor published an article outlining the need to establish an international alliance of countries willing to get rid of the dollar in international trade and refrain from using dollars in their currency reserves. The ultimate goal would be to break the Washington's money printing machine that is feeding its military-industrial complex and giving the US ample possibilities to spread chaos across the globe, fueling the civil wars in Libya, Iraq, Syria and Ukraine. Glaziev's critics believe that such an alliance would be difficult to establish and that creating a non-dollar-based global financial system would be extremely challenging from a technical point of view. However, in her discussion with Vladimir Putin, the head of the Russian central bank unveiled an elegant technical solution for this problem and left a clear hint regarding the members of the anti-dollar alliance that is being created by the efforts of Moscow and Beijing:
“We've done a lot of work on the ruble-yuan swap deal in order to facilitate trade financing. I have a meeting next week in Beijing”, she said casually and then dropped the bomb: “We are discussing with China and our BRICS parters the establishment of a system of multilateral swaps that will allow to transfer resources to one or another country, if needed. A part of the currency reserves can be directed to [the new system].” (Prime news agency)
It seems that Kremlin chose the all-in-one approach for establishing its anti-dollar alliance. Currency swaps between the BRICS central banks will facilitate trade financing while completely bypassing the dollar. At the same time, the new system will also act as a de facto replacement of the IMF, because it will allow the members of the alliance to direct resources to finance the weaker countries. As an important bonus, derived from this “quasi-IMF” system, the BRICS will use a part (most likely the “dollar part”) of their currency reserves to support it, thus drastically reducing the amount of dollar-based instruments bought by some of the biggest foreign creditors of the US.
Skeptics will surely claim that a BRICS-based anti-dollar alliance will not manage to deprive the dollar of its global reserve currency status. Instead of arguing against this line of thought, it is easier to point out that Washington is doing its best to enlarge the ranks of the enemies of the dollar. Asked by the Russia 24 channel to comment on Nabiullina statements, Sergey Kostin, the president of the state-owned VTB bank and one of the staunchest supporters of anti-dollar policies, offered an interesting perspective on the situation in Europe:
“I think the work on ruble-yuan swap line will finalized in the nearest future and the way for ruble-yuan settlement will be open. Moreover, we are not the only ones with such initiatives. We know about the statements made by Mr. Noyer, chairman of the Bank of France. As a retaliation for what Americans have done to BNP Paribas, he opined that the trade with China must be done in yuan or euro.”
If the current trend continues, soon the dollar will be abandoned by most of the significant global economies and it will be kicked out of the global trade finance. Washington's bullying will make even former American allies choose the anti-dollar alliance instead of the existing dollar-based monetary system. The point of no return for the dollar may be much closer than it is generally thought. In fact, the greenback may have already past its point of no return on its way to irrelevance.
Monday, June 30, 2014
The USD Is Tumbling; Near 2 Month Lows
Equities have flip-flopped this morning, giving up the new normal opening-squeeze higher gains as USDJPY fades. Bonds are rallying. But it is the USD Index that is the most notable this morning as it tumbles back towards 2-month lows in a hurry... This is the biggest 2-day plunge in 3 months.
Pushing the USD to 2-month lows...
A great time to Open a Forex Account and Buy the USD
Sunday, June 29, 2014
BIS: Central banks warned of 'false sense of security'
The Bank for International Settlements (BIS) has warned that ultra-low interest rates have lulled governments and markets "into a false sense of security".
The Basel-based organisation - usually dubbed the "central banks' central bank" - urged policy makers to begin to normalise rates.
"The risk of normalising too late and too gradually should not be underestimated," the BIS said.
Markets have rallied since January.
The FTSE all-world share index is up 5% so far this year, while the Vix, a measure of implied US market volatility known as the "fear index" , is at a seven-year low.
"Overall, it is hard to avoid the sense of a puzzling disconnect between the markets' buoyancy and underlying economic developments globally," the BIS said in its annual report.
It said that low interest rates had helped increase demand for higher risk investments on stock markets as well as in property and corporate bonds markets.
Disappointing growth
The BIS doesn't set policy but serves as a forum for central bankers to exchange views on relevant topics from the global economy to financial markets.
While global growth has improved, the BIS said it was still below its pre-crisis levels.
"Growth has disappointed even as financial markets have roared: The transmission chain seems to be badly impaired," the BIS said.
It said policy makers should take advantage of the current upturn in the global economy to reduce the emphasis on monetary stimulus.
'Behind the curve'
And it warned that taking too long to do this could have potentially damaging consequences, by encouraging investors to take too much risk.
"Over time, policies lose their effectiveness and may end up fostering the very conditions they seek to prevent," it said.
"The predominant risk is that central banks will find themselves behind the curve, exiting too late or too slowly," it added.
The BIS was founded in 1930 and is the world's oldest international financial institution.
Its 60-strong membership includes the Bank of England, the European Central Bank, the US Federal Reserve, the People's Bank of China and the Bank of Japan.
Thursday, June 26, 2014
Gazprom Ready To Drop Dollar, Settle China Contracts In Yuan Or Rubles
A little over a month ago, when Russia announced the much anticipated "Holy Grail" energy
deal with China, some were disappointed that despite this symbolic agreement meant to break the petrodollar's stranglehold on the rest of the world, neither Russia nor China announced payment terms to be in anything but dollars. In doing so they admitted that while both nations are eager to move away from a US Dollar reserve currency, neither is yet able to provide an alternative. This changed rather dramatically overnight when in a little noticed statement, Gazprom's CFO Andrey Kruglov uttered the magic words (via Bloomberg):
deal with China, some were disappointed that despite this symbolic agreement meant to break the petrodollar's stranglehold on the rest of the world, neither Russia nor China announced payment terms to be in anything but dollars. In doing so they admitted that while both nations are eager to move away from a US Dollar reserve currency, neither is yet able to provide an alternative. This changed rather dramatically overnight when in a little noticed statement, Gazprom's CFO Andrey Kruglov uttered the magic words (via Bloomberg):- GAZPROM READY TO SETTLE CHINA CONTRACTS IN YUAN OR RUBLES: CFO
In other words just as the US may or may not be preparing to export crude - a step which would weaken the dollar's reserve status as traditional US oil trading partners will need to find other import customers who pay in non-USD currencies - the world's two other superpowers are preparing to respond. And once the bilateral trade in Rubles or Renminbi is established, the rest of the energy world will piggyback.
But wait, there's more. Because only now does Gazprom appear to be unveiling all those "tangents" that were expected to hit the tape in May. Among Kruglov's other revelations were that Gazprom is in talks on a Hong Kong listing and is weighing the issuance of Yuan bonds. Gazprom is also considering selling bonds in Singapore dollars, the CFO said at briefing in Moscow. Wait, you mean that by alienating and embargoing Russia from western (USD, EUR-denominated) funding markets, it has pushed the country to turn to its pivoting partner, China and thus further cementing the framework for the next Eurasian strategic alliance?
, China and thus further cementing the framework for the next Eurasian strategic alliance?
Unpossible
But wait, there's still more, because it is not just Gazprom. As the PBOC announced overnight, PBOC Assistant Governor Jin Qi and Russian central bank Deputy Chairman Dmitry Skobelkin led a meeting held yesterday and today in Shanghai. The meeting discussed cooperating on project and trade financing using local currencies. The meeting discussed cooperation in bank card, insurance and financial supervision sectors.
and financial supervision sectors.
In other words, central bankers of China and Russia discussed how to replace the dollar with Rubles and Yuan. From the PBOC:
In retrospect it will be very fitting that the crowning legacy of Obama's disastrous reign, both domestically and certainly internationally, will be to force the world's key ascendent superpowers (we certainly don't envision broke, insolvent Europe among them) to drop the Petrodollar and end the reserve status of the US currency.
Wednesday, June 25, 2014
"We Are In Uncharted Waters" Singapore Central Bank Warns Of "Uneasy Calm"
Submitted by Simon Black of Sovereign Man blog,
Well, at least someone gets it.
While just about every other central bank on the planet is giving everyone two thumbs up on the economy, the deputy chair of the Monetary Authority of Singapore (Lim Hng Kiang) said last night at a dinner that “an uneasy calm seems to have settled in markets” and that “we remain in uncharted waters.”
It was pretty amazing, really, to see such pointed language from a central banking official.
Mr. Lim jabbed at the “obvious” risks and said there would be “bumps on the road” ahead. That’s putting it mildly.
Warren Buffet once said that ‘only when the tide goes out do you discover who’s been swimming naked.’ (In my mind he says it like ‘nekked’ but I seriously doubt he pronounces it that way…)
That’s exactly what happens in severe financial crises. You find out which banks have been playing it safe… and which have so mind-numbingly stupid it’s a miracle they’re still around.
There are a number of ways to judge how safe a bank is. One way is by looking at its liquidity; my preferred metric is to calculate how much cash a bank has on hand as a percentage of customer deposits.
Note- this doesn’t mean physical currency, as in bricks of paper cash stacked up in a vault. Those days went away long ago. I’m talking about electronic currency– typically deposits with central banks.
The more cash a bank has on hand, the safer it is. Because in a financial crisis, people tend to panic (hence the crisis) and want to withdraw their money.
Banks bleed cash. And if they don’t have enough of it on hand, the bleeding turns into a sucking chest wound.
It’s at this point that they’ve been caught red handed swimming naked, and they need to go raise cash from somewhere, anywhere else.
So they start selling assets– loans, securities, and even shares of the bank itself.
But this is not an orderly liquidation in a well-functioning market. It’s a distress sale brought on by a full blown crisis. Asset prices are collapsing, fear has taken hold, and it’s difficult to find a buyer.
You never get full price in a crisis (unless you’re Goldman Sachs and can call up your BFF the Treasury Secretary). So in the process of raising cash, banks end up taking heavy losses on their balance sheets.
Now, banks that have healthy balance sheets will be able to withstand these losses.
But banks with razor thin capital ratios (i.e. a bank’s net equity as a percentage of total assets) will fold. Or go to the taxpayer with their hats in their hand claiming to be too big to fail.
This is precisely what happened to the US financial system back in 2009. Lehman Brothers. Wachovia. Washington Mutual. Etc. They were all swimming naked, with very little liquidity and miniscule capital levels.
Singapore’s monetary authority is obviously concerned about financial markets. They understand that you can’t expect to conjure trillions of dollars out of thin air without creating epic bubbles and even more epic consequences.
Sure, you can shuffle those consequences out a few months… even a few years. But at some point those bubbles must be reckoned with.
Perhaps the greatest concern is how few people seem to care.
Central banks and institutional investors turn a deaf ear to obvious risks and fundamentals that are screaming out in desperation hoping some conservative steward will notice that we are tap dancing on a knife’s edge, where nearly every single financial market is simultaneous at/near an all-time high, and central bankers keep pumping money into economies that they claim to be ‘recovered’.
This is the ‘uneasy calm’ that Mr. Lim discussed– a prevailing attitude that there’s nothing to see here; keep calm and buy the all-time high.
And he’s telling banks to get ready for something to happen.
Curiously, Singapore’s banks are already better capitalized and more liquid than most western banking systems. Back in 2008, Singapore demonstrated a lot of resilience as a financial center, sidestepping most of the problems with zero bank failures.
But for a country that went from third world to first world in just a few decades, complacency is not a cultural norm.
According to Mr. Lim, Singapore’s experience with the 2008 crisis “shows how the buildup of risks can severely destabilise even the most developed and sophisticated financial markets.”
So he wants them to increase their capital and liquidity even more.
If a senior official presiding over one of the world’s safer banking jurisdictions wants his banks to become even safer, a rational person would certainly wonder– “What do these guys know about the financial system that I don’t?”
They must be expecting the mother of all busts.
The Simple Reason Why Everyone's Wrong On The 'Short Euro' Trade (Including Draghi)
We live in stirring times. The president of the European Central Bank (ECB), Mario Draghi, crossed the monetary policy Rubicon and cut one of the Euro area’s key interest rates into negative territory. This is dramatic stuff, as even the most economically oblivious are likely to recognize that negative interest rates are a radical policy. At the same time the United States Federal Reserve is gracefully gliding out of its quantitative policy position — and by October that money printing process is likely to be effectively at an end.
The question from most investors is therefore “what next for US monetary policy?” The answer is likely to be an increase in US interest rates, and those increases may start earlier and take place faster than many investors currently assume. The Bank of England has been even more explicit in signaling a desire to tighten interest rates sooner than financial investors had expected.
Euro area monetary policy and Anglo-Saxon monetary policy are taking different directions — radically so. It has been a decade since the Fed last embarked on a tightening cycle, and Euro area rates have never gone negative before. The bias in discussions is whether the Fed and the ECB both do more than is currently expected; the difference is that “more” for the Fed means “more tightening”, while “more” for the ECB means “more policy accommodation”. With the expectations and the reality of the direction of interest rates diverging in this manner the instinct of most in financial markets is to assume that the Euro will weaken against the US dollar.
A weaker Euro has been forecast by financial markets for some time — and financial markets have been spectacularly wrong in their forecasts. The Euro weakened a little in the wake of the nudges and hints on policy from ECB President Draghi, but it still remains at a high level. How can this be explained? How is it that the Euro is not behaving the way everyone says it should?
A key part of the explanation for the Euro’s defiance of divergent monetary policy lies in a revolution that has taken place in the world economy. Put simply, globalization has collapsed dramatically since 2007, and that collapse in globalization has profound implications for financial markets.
The collapse in globalization is nothing to do with global trade. Global exports (as a share of the world economy) are at a higher level than they were in 2007 — here there has been a complete recovery. Instead the collapse has taken place in the realm of global capital flows.Global capital flows (again as a share of the world economy) are running at roughly a third of their pre-crisis peak, and around half the levels seen in the decade before the global financial crisis.
The collapse of global capital flows has been brought about by several factors coming together. Investors, in particular banks, are more regulated than before the crisis. With that regulation has come about a bias to investment in domestic markets — in some cases as an unintended consequence of regulation, in some cases as a direct policy objective. In addition the more political nature of several developed financial markets has acted as a deterrent to international investors, who are likely to have less understanding of politics in remote markets.
When capital flows were abundant, an economy with a current account deficit did not have too many problems finding the capital inflows necessary to finance the current account position. Only a tiny proportion of the huge amount of capital sloshing around the world had to be diverted to provide the funding. Now, with capital flows reduced to a thin trickle, a current account deficit country has to work a lot harder to attract the capital that they need. Crudely put, it is three times more difficult to finance a current-account deficit, now that capital flows are one third their pre-crisis levels.
This helps to explain the Euro. The Euro area is a current account surplus area. The United States is a current-account deficit area. The interest rate differential argues for a weaker Euro. The current account position argues for a stronger Euro. These two forces battle it out in the foreign exchange markets, and the result is less Euro weakness than many had expected.
This new model for foreign exchange has implications that reach far beyond the errors of Euro/dollar forecasting. Reduced capital flows means reduced capital inflows into Asian markets — something that has already slowed the pace of foreign exchange reserve accumulation. Reduced capital flow may mean a less efficient global allocation of capital resources. Global capital flows have been hidden from the headlines, but the collapse of globalization may turn out to be one of the most important economic changes of the past decade.
Tuesday, June 24, 2014
Currency Spikes at 4 P.M. in London Provide Rigging Clues
In the space of 20 minutes on the last Friday in June, the value of the U.S. dollar jumped 0.57 percent against its Canadian counterpart, the biggest move in a month. Within an hour, two-thirds of that gain had melted away.
The same pattern -- a sudden surge minutes before 4 p.m. in Londonon the last trading day of the month, followed by a quick reversal -- occurred 31 percent of the time across 14 currency pairs over two years, according to data compiled by Bloomberg. For the most frequently traded pairs, such as euro-dollar, it happened about half the time, the data show.
The recurring spikes take place at the same time financial benchmarks known as the WM/Reuters (TRI) rates are set based on those trades. Now fund managers and scholars say the patterns look like an attempt by currency dealers to manipulate the rates, distorting the value of trillions of dollars of investments in funds that track global indexes. Bloomberg News reported in June that dealers shared information and used client orders to move the rates to boost trading profit. The U.K. Financial Conduct Authority is reviewing the allegations, a spokesman said.
“We see enormous spikes,” said Michael DuCharme, head of foreign exchange at Seattle-based Russell Investments, which traded $420 billion of foreign currency last year for its own funds and institutional investors. “Then, shortly after 4 p.m., it just reverts back to what seems to have been the market rate. It adds to the suspicion that things aren’t right.”
Global Probes
Authorities around the world are investigating the abuse of financial benchmarks by large banks that play a central role in setting them.
Barclays Plc (BARC), Royal Bank of Scotland Group Plc andUBS AG (UBSN) were fined a combined $2.5 billion for rigging the London interbank offered rate, or Libor, used to price $300 trillion of securities from student loans to mortgages. More than a dozen banks have been subpoenaed by the U.S. Commodity Futures Trading Commission over allegations traders worked with brokers atICAP Plc (IAP) to manipulate ISDAfix, a benchmark used in interest-rate derivatives. ICAP Chief Executive Officer Michael Spencersaid in May that an internal probe found no evidence of wrongdoing.
Investors and consultants interviewed by Bloomberg News say dealers at banks, which dominate the $4.7 trillion-a-day currency market, may be executing a large number of trades over a short period to move the rate to their advantage, a practice known as banging the close. Because the 4 p.m. benchmark determines how much profit dealers make on the positions they’ve taken in the preceding hour, there’s an incentive to influence the rate, DuCharme said. Dealers say they have to trade during the window to meet client demand and minimize their own risk.
Currency Patterns
“There are some patterns in currencies that are very similar to what I have seen in other markets, such as the way the price-fixings’ effects disappear so often by the following day,” said Rosa Abrantes-Metz, a professor at New York University’s Stern School of Business, whose August 2008 paper, “Libor Manipulation?,” helped trigger the probe into the rigging of benchmark interest rates. “You also see large price moves at a time of day when volume of trading is high and hence the market is very liquid. If I were a regulator, it’s certainly something I would consider taking a look at.”
WM/Reuters rates, which determine what many pension funds and money managers pay for their foreign exchange, are published hourly for 160 currencies and half-hourly for the 21 most-traded. The benchmarks are the median of all trades in a minute-long period starting 30 seconds before the beginning of each half-hour. Rates for less-widely traded currencies are based on quotes during a two-minute window.
London Close
Benchmark providers such as FTSE Group and MSCI Inc. base daily valuations of indexes spanning different currencies on the 4 p.m. WM/Reuters rates, known as the London close. Index funds, which track global indexes such as the MSCI World Index, also trade at the rates to reduce tracking error, or the drag on funds’ performance relative to the securities they follow caused by currency fluctuations.
The data are collected and distributed by World Markets Co., a unit of Boston-based State Street Corp. (STT), and Thomson Reuters Corp. Bloomberg LP, the parent company of Bloomberg News, competes with Thomson Reuters and ICAP in providing news and information as well as currency-trading systems.
Reuters and World Markets referred requests for comment to State Street. Noreen Shah, a spokeswoman for the custody bank in London, said in an e-mail that the rates are derived from actual trades and the benchmark is calculated anonymously, with multiple review processes to monitor the quality of the data.
“WM supports efforts by the industry to determine and address any alleged disruptive behavior by market participants and we welcome further discussions on these issues and what preventative measures can be adopted,” Shah said.
Opaque Market
The foreign-exchange market is one of the least regulated and most opaque in the financial system. It’s also concentrated, with four banks accounting for more than half of all trading, according to a May survey by Euromoney Institutional Investor Plc. Deutsche Bank AG (DBK) is No. 1 with a 15 percent share, followed byCitigroup Inc. (C) with almost 15 percent and London-based Barclays and Switzerland’s UBS, which both have 10 percent. All four banks declined to comment.
Because they receive clients’ orders in advance of the close, and some traders discuss orders with counterparts at other firms, banks have an insight into the future direction of rates, five dealers interviewed in June said. That allows them to maximize profits on their clients’ orders and sometimes make their own additional bets, according to the dealers, who asked not to be identified because the practice is controversial.
‘Incredibly Large’
Even small distortions in foreign-exchange rates can cost investors hundreds of millions of dollars a year, eating into returns for savers and retirees, said James Cochrane, director of analytics at New York-based Investment Technology Group Inc., which advises companies and investors on executing trades.
“What started out as a simple benchmarking tool has become something incredibly large, and there’s no regulatory body looking after it,” said Cochrane, a former foreign-exchange salesman at Deutsche Bank who has worked at Thomson Reuters. “Every basis point is worth a tremendous amount of money.”
An investor seeking to change 1 billion Canadian dollars ($950 million) into U.S. currency on June 28 would have received $5.4 million less had the trade been made at the WM/Reuters rate instead of the spot rate 20 minutes before the 4 p.m. window.
“Funds that consistently trade using the WM/Reuters fix are basically trading against themselves, and their portfolio is taking a hit,” Cochrane said.
FCA Complaint
One of Europe’s largest money managers, who invests on behalf of pension holders and savers, has complained to the FCA, alleging the rate is being manipulated, said a person with knowledge of the matter who asked that neither he nor the firm be identified because he wasn’t authorized to speak publicly.
The regulator sent requests for information to four banks, including Frankfurt-based Deutsche Bank and New York-based Citigroup, according to a person with knowledge of the matter. Chris Hamilton, a spokesman for the FCA, declined to comment, as did spokesmen for Deutsche Bank and Citigroup.
Bloomberg News counted how many times spikes of at least 0.2 percent occurred in the 30 minutes before 4 p.m. for 14 currency pairs on the last working day of each month from July 2011 through June 2013. To qualify, the move had to be one of the three biggest of the day and have reversed by at least half within four hours, to exclude any longer-lasting movements.
The sample was made up of currency pairs ranging from the most liquid, such as euro-dollar, to less-widely traded ones such as the euro to the Polish zloty.
Pounds, Kronor
End-of-month spikes of at least 0.2 percent were more prevalent for some pairs, the data show. They occurred about half the time in the exchange rates for U.S. dollars and British pounds and for euros and Swedish kronor. In other pairs, including dollar-Brazilian real and euro-Swiss franc, the moves occurred about twice a year on average.
Such spikes should be expected at the end of the month because of a correlation between equities and foreign exchange, said two foreign-exchange traders who asked not to be identified because they weren’t authorized to speak publicly on behalf of their firms. A large proportion of trading at that time is generated by index funds, which buy and sell stocks or bonds to match an underlying basket of securities, the traders said.
Banks that have agreed to make transactions for funds at the 4 p.m. WM/Reuters close need to push through the bulk of their trades during the window where possible to minimize losses from market movements, the traders said. That leads to a surge in trading volume, which can intensify any moves.
Index Funds
For 10 major currency pairs, the minutes surrounding the 4 p.m. London close are the busiest for trading at the end of the month, quarter and year, according to Michael Melvin and John Prins at BlackRock Inc. who examined trading data from the Reuters and Electronic Broking Services trading platforms from May 2, 2005, to March 12, 2010.
Reuters and ICAP, which owns EBS, declined to provide data on intraday trading volumes for this article.
Index funds, which manage $3.6 trillion according to Morningstar Inc., typically place the bulk of their orders with banks on the last day of the month as they adjust rolling currency hedges to reflect relative movements between equity indexes in different countries and invest inflows from customers over the previous 30 days. Most requests are placed in the hour preceding the 4 p.m. London window, and banks agree to trade at the benchmark rate, regardless of later price moves.
Opposite Effect
“Since the major fix-market-making banks know their fixing orders in advance of 4 p.m., they can ‘pre-position’ or take positions for themselves prior to the attempt to move prices in their favor,” Melvin and Prins wrote in “Equity Hedging and Exchange Rates at the London 4 P.M. Fix,” an update of a report for a 2011 Munich conference. “The large market-makers are adept at trading in advance of the fix to push prices in their favor so that the fixing trades are profitable on average.”
Recurring price spikes, particularly during busy times such as the end of the month, can indicate market manipulation and possibly collusion, according to Abrantes-Metz.
“If the volume of trading is high, each trade has less importance in the overall market and is less likely to impact the final price,” said Abrantes-Metz, who’s also a principal at Chicago-based Global Economics Group Inc. and a World Bank consultant. “That’s exactly the opposite of what we’re seeing here. That could be a signal of a problem in this market.”
‘Massive Trades’
U.S. regulators have sanctioned firms for banging the close in other markets. The CFTC fined hedge-fund firm Moore Capital Management LP $25 million in April 2010 for attempting to manipulate the settlement price of platinum and palladium futures. The regulator ordered Dutch trading firm Optiver BV to pay $14 million in April 2012 for trying to move oil prices by executing a large number of trades at the end of the day.
Melvin, head of currency and fixed-income research at BlackRock’s global markets strategies group in San Francisco, and Prins, a vice president in the group, said that because banks could lose money if the market moves against them, their profit may be viewed as compensation for the risk they assume. Both declined to comment beyond their report.
“Part of the problem is it’s all concentrated over a 60-second window, which gives such an opportunity to bang through massive trades,” said Mark Taylor, dean of the Warwick Business School in Coventry, England, and a former managing director at New York-based BlackRock.
World Markets, the administrator of the benchmark, could extend the periods during which the rates are set to 10 minutes or use randomly selected 60-second windows each day, said Taylor, who began his career as a currency trader in London.
‘Fiduciary Duty’
Trading at the highly volatile 4 p.m. close instead of at a daily weighted average could erase 5 percentage points of performance annually for a fund tracking the MSCI World Index, according to a May 2010 report by Paul Aston, then an analyst at Morgan Stanley. (MS) For an asset manager trading $10 billion of currencies, that equates to $500 million that would otherwise be in the hands of investors. Aston, now at TD Securities Inc. in New York, declined to comment.
Fund managers rarely complain about getting a bad deal because they’re assessed on their ability to track an index rather than minimize trading costs, according to consultants hired by companies and investors to help execute trades efficiently.
“Where possible, I would always advise clients not to trade at the fix -- but minimizing tracking error is so important to them,” said Russell’s DuCharme. “That doesn’t seem to be the right attitude to take when you have a fiduciary duty to seek the best execution for pension holders.”
NFA's Board approves prohibition of credit cards to fund retail forex accounts
June 23, Chicago — National Futures Association (NFA) announced that its Board approved a ban on the use of credit cards to fund retail forex and futures accounts. This prohibition is subject to approval by the Commodity Futures Trading Commission. Although NFA's proposed rule prohibits the use of credit cards to fund both futures and retail forex accounts, NFA determined through its study that futures commission merchants currently don't permit this practice.
"Since our inception, NFA has been committed to protecting investors," says NFA President and CEO Dan Roth. "Forex and futures markets are both high-risk and volatile, and individuals who wish to participate should use only risk capital to fund their accounts. Allowing customers to fund accounts with credit cards encourages them to trade with borrowed money."
This prohibition is a direct result of an extensive study by NFA of forex dealer members' business practices. NFA looked at more than 15,000 retail forex accounts and noted that an overwhelming amount of these accounts were funded by small retail customers using a credit card or borrowed funds, and a majority of these accounts were unprofitable.
"Over the last decade, NFA has made significant strides in its regulation of the retail forex markets," Roth says. "From the increase in capital requirements to mandating content requirements so that all customers could receive comprehensive and accurate account information, this proposal is just another very important step to fulfill our mission to protect customers."
Sunday, June 22, 2014
"End The Fed" Rallies Are Exploding Throughout Germany
This is a fascinating development and one that I had no idea was happening until today. It seems that rallies are spreading throughout Germany protesting the corrupt and dying global status quo. One of the key targets of these groups is the U.S. Federal Reserve system, which as I and many others have maintained, is the core cancer infecting the entire planet.
According to the organizer of these rallies, they have now spread to up to 100 cities and have a combined attendee base of around 20,000.What is also interesting, is that the mainstream media in Germany is calling them Nazis. In Germany, if you don’t support Central Banking, this apparently means you are a Nazi. What a joke. Just more proof mainstream media everywhere is complete and total propaganda. It is also a good sign, since it shows the desperate lengths to which the power structure will go to keep their criminal ponzi alive.
http://www.zerohedge.com/news/2014-06-21/end-fed-rallies-are-exploding-throughout-germanyhttp://www.infowars.com/video-of-the-day-end-the-fed-rallies-are-exploding-throughout-germany/
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