What has the Yen flash rally of 2019 taught us?

Yesterday we took a look at the low-level of bond yields for this stage in the cycle and the US Treasury Note yield has fallen further since to 2.63%. Also I note that the 0.17% ten-year German bond yield is being described as being in interest-rate cut territory for Mario Draghi and the ECB. That raises a wry smile after all the media analysis of a rise. But it is a sign of something not being quite right in the financial system and it was joined last night by something else. It started relatively simply as people used “Holla Dolla” to describe US Dollar strength ( the opposite of how we entered 2018 if you recall) and I replied that there also seemed to be a “yen for Yen” too. So much so that I got ahead of the game.

What I was reflecting on at this point was the way that the Yen had strengthened since mid December from just under 114 to the US Dollar to the levels referred to in the tweet. For newer readers that matters on two counts. Firstly Japanese economic policy called Abenomics is geared towards driving the value of the Yen lower and an enormous amount of effort has been put into this, so a rally is domestically awkward. In a wider sweep it is also a sign of people looking for a safe haven – or more realistically foreign exchange traders front-running any perceived need for Mrs.Watanabe to repatriate her enormous investments/savings abroad  –  and usually accompanies falling equity markets.

The Flash Rally

I was much more on the ball than I realised as late last night this happened. From Reuters.

The Japanese yen soared in early Asian trading on Thursday as the break of key technical levels triggered massive stop-loss sales of the U.S. and Australian dollars in very thin markets. The dollar collapsed to as low as 105.25 yen on Reuters dealing JPY=D3, a drop of 3.2 percent from the opening 108.76 and the lowest reading since March 2018. It was last trading around 107.50 yen………..With risk aversion high, the safe-haven yen was propelled through major technical levels and triggered massive stop-loss flows from investors who have been short of the yen for months.

As you can see there was quite a surge in the Yen, or if you prefer a flash rally. If a big trade was happening which I will discuss later it was a clear case of bad timing as markets are thin at that time of day especially when Japan is in the middle of several bank holidays. But as it is in so many respects a control freak where was the Bank of Japan? I have reported many times on what it and the Japanese Ministry of Finance call “bold action” in this area but they appeared to be asleep at the wheel in this instance. Such a move was a clear case for the use of foreign exchange reserves due to the size and speed of the move,

There were also large moves against other currencies.

The Australian dollar tumbled to as low as 72.26 yen AUDJPY=D3 on Reuters dealing, a level not seen since late 2011, having started around 75.21. It was last changing hands at 73.72 yen.

The Aussie in turn sank against the U.S. dollar to as far as $0.6715 AUD=D3, the lowest since March 2009, having started around $0.6984. It was last trading at $0.6888.

Other currencies smashed against the yen included the euro, sterling and the Turkish lira.

There had been pressure on the Aussie Dollar and it broke lower against various currencies and we can bring in two routes to the likely cause. Yesterday we noted the latest manufacturing survey from China signalling more slowing and hence less demand for Australian resources which was followed by this. From CNBC.

 Apple lowered its Q1 guidance in a letter to investors from CEO Tim Cook Wednesday.

Apple stock was halted in after-hours trading just prior to the announcement, and shares were down about 7 percent when trading resumed 20 minutes later.

This particular letter from America was not as welcome as the message Tim Cook sent only a day before.

Wishing you a New Year full of moments that enrich your life and lift up those around you. “What counts is not the mere fact that we have lived. It is what difference we have made to the lives of others that will determine the significance of the life we lead.” — Nelson Mandela

So the economic slow down took a bite out of the Apple and eyes turned to resources demand and if the following is true we have another problem for the Bank of Japan.

“One theory is that may be Japanese retail FX players are forcing out of AUDJPY which is creating a liquidity vacuum,” he added. “This is a market dislocation rather than a fundamental event.”

Sorry but it is a fundamental event as Japanese retail investors are in Australian investments because they can get at least some yield after years and indeed decades on no yield in Japan. This is a direct consequence of Bank of Japan policy as was the move in the Turkish Lira which is explained by Yoshiko Matsuzaki.

This China news hit the EM ccys including Turkish lira where Mrs Watanabe are heavily long against Yen. I bet their stops were triggered in the thin market. Imagine to have TRYyen stops in this market.

So there you have it a development we have seen before or a reversal of a carry trade leading the Japanese Yen to soar. Even worse one caused by the policy response to the last carry trade blow-up! Or fixing this particular hole was delegated to the Beatles.

And it really doesn’t matter if I’m wrong
I’m right

Bank of England

It too had a poor night as whilst it is not a carry trade currency with Bank Rate a mere 0.75% the UK Pound £ took quite a knock against the Yen to around 132. Having done this we might reasonably wonder under what grounds the Bank of England would use the currency reserves it has gone to so much trouble to boost? From December 11th.

Actually the Bank of England has been building up its foreign exchange reserves in the credit crunch era and as of the end of October they amounted to US $115.8 billion as opposed as opposed to dips towards US $35 billion in 2009. So as the UK Pound £ has fallen we see that our own central bank has been on the other side of the ledger with a particular acceleration in 2015. I will leave readers to their own thoughts as to whether that has been sensible management or has weighed on the UK Pound £ or of course both?!

To my mind last nights move was certainly an undue fluctuation.

The EEA was established in 1932 to provide a fund which could be used for “checking undue fluctuations in the exchange value of sterling”.

It is an off world where extraordinary purchases of government bonds ( £435 billion) are accompanied by an apparent terror of foreign exchange intervention.


I have gone through this in detail because these sort of short-term explosive moves have a habit of being described as something to brush off when often they signal something significant. So let is go through some lessons.

  1. A consequence of negative interest-rates is that the Japanese investors have undertaken their own carry trade.
  2. The financial system is creaking partly because of point 1 and the ongoing economic slow down is not helping.
  3. Contrary to some reports the Euro was relatively stable and something of a safe haven as it behaved to some extent like a German currency might have. There is a lesson for economic theory about negative interest-rates especially when driven by a strong currency. Poor old economics 101 never seems to catch a break.
  4. All the “improvements” to the financial system seem if anything to have made things worse rather than better.
  5. Fast moves seem to send central banks into a panic meaning that they do not apply their own rules.

We cannot rule out that this was deliberate and please note the Yen low versus the US Dollar was 104.9 as you read the tweet below.

Japanese exporters had bought a lot of usd/jpy puts at year end with 105 KOs so now they are really screwed … ( @fxmacro )

Me on The Investing Channel



Is a reversal of the carry trade behind the rise of the US Dollar?

This morning brings us back to what has been a regular topic in 2018 which has been the US Dollar. Let’s look at it from the perspective of the sub-continent.

The rupee weakened further and dipped by 54 paise to 73.04 against the US dollar Monday, owing to increased demand for the American currency from importers amid increasing global crude oil prices.

International benchmark Brent crude was trading higher by 2.04 per cent at USD 71.61 per barrel.

Forex traders said besides increased demand for the US currency from importers, the dollar’s strength against some currencies overseas weighed on the domestic unit.

From India’s point of view this is not as bad as it has been as twice the Rupee has fallen through 74 versus the US Dollar. However the overall trend has been down as we recall promises it would not go through 70 and the fact it is 11% or so lower than a year ago. The recent dip – until this weekend’s OPEC meeting – did not benefit the Rupee much in comparison.

For Pakistan things have been even worse as it own troubles have led it back into the arms of the International Monetary Fund ( IMF). The Pakistan Rupee is at 134.3 versus the US Dollar or 28% lower than a year ago.

The Euro

This morning the Euro has dipped to 1.125 and Bloomberg is on the case.

The euro fell to its weakest in more than 16 months on Monday as traders fret political risks from Italy to Brexit.

Actually Bloomberg mostly ignores the Euro and concentrates on Brexit which of course is an influence but far from the only one. The weaker phase for the Euro area economy where quarterly economic growth has fallen from 0.7% to 0.2% does not merit a mention. Nor does the expansionary monetary policy of the ECB with its negative interest-rate and ongoing QE which still has a couple of months to run in monthly flow terms. On the other side of the coin is the ongoing trade surplus which supports the Euro but not so much today.

President Macron of France made a suggestion on this front on CNN over the weekend.From Politico.

Macron also talked in the interview about the need to strength the euro’s position as a global reference currency — not as a challenge to the U.S. dollar but as an alternative for purposes of stability.

I guess it and the Chinese Yuan will have to compete but I am not sure how several reference currencies would work? The Euro is of course very widely traded but still a long way behind the US Dollar.

Returning to economic policy this will give both Euro area inflation and the economy a boost. With inflation already around its target the ECB will not welcome the former but will the latter as economic growth has faded. Should it be out of play for a while in terms of monetary policy then the Euro area would have to deal with any further slow down with fiscal policy. That would be awkward after spending so much time telling Italy that it does not work.

The Dollar Index

If we broaden our view and look at an index of which President Macron would approve ( because of the high Euro weighting) we see that the Dollar Index has hit a 2018 high of just above 97.5 this morning. Whilst that is not up an enormous amount on a year ago ( less than 3%) there has been quite a push since it fell below 89 at the opening of the year.

The move has technical analysts in a spin as some see this as the start of a big move higher and others see this as an inflexion point. This proves that it is not only economists who can tell you that a market may go up or down!

US Monetary Policy

Economics 101 will be pleased that at least some of it can be brought out into the sun as the so-called normalisation of US monetary policy leads to a higher dollar. We seem set for another interest-rate increase next month as well as 2/3 more in 2019 meaning US interest-rates look set for the 3 handle.

Also there is a quantity issue as US Dollars are being withdrawn via the advent of Quantitative Tightening or QT. That is happening at the rate of 50 billion dollars a month which is a large sum in spite of the fact that these times have made us somewhat numb about such matters.


The media seem keen to find reasons for this burst of US Dollar strength which have nothing to do with the US itself. Personally I think the US holiday may be a factor in today’s move but as well as the change in monetary policy stance something else has been at play in 2018. This is the apparent shortage of US Dollars which back on the 18th of May was affecting relative interest-rates.

The problem is a spike in the differential between LIBOR and the Overnight Index Swap, or the premium over the risk-free rate non-US banks pay to borrow dollars outside of the US.

The spread has risen to 42 basis points, the highest since February 2012, and up from 25 basis points at the start of last month and just 10 basis points in November.

While the rise does not pose a systemic risk, it has nevertheless raised the cost, and reduced the availability, of dollar-denominated loans for non-US banks by a considerable margin and in short space of time. ( Bank Pictet).

That improved but has returned to some extent ( 30 earlier this month) and of course in the meantime US interest-rates are higher. On September 25th we looked at the way a new carry trade had developed but apparently stopped.

 The overall amount of dollar credit to the non-bank sector outside the United States has climbed from 9.5% of global GDP at end-2007 to 14% in the first quarter of 2018. Since end-2016, however, the growth in dollar credit has been flat.

What if that reverses? We know from what happened with the Swiss Franc and Japanese Yen that reversals of international carry trades can have powerful effects. At this time of year there is also usually demand for US Dollars for the end of the year. Although frankly if you are thinking of it now you are likely to be too late. For now at least it is time for Aloe Blacc.

I need a dollar dollar, a dollar is what I need
Hey hey
Well I need a dollar dollar, a dollar is what I need
Hey hey

As the US observes Veterans Day let me give a plug to They Shall Not Grow Old which was on BBC 2 last night and was quite something.







QE and its role in the Dollar shortage, zombie banks and productivity woes

Overnight there have been some intriguing releases from the BIS or Bank for International Settlements, which if you were not aware is the central bankers central bank. The BIS has, although it would not put it like that been reviewing some of the problems and indeed side-effects of the QE ( Quantitative Easing) era, So what does it tell us? Well one major point links to yesterday’s post on India and indeed to the travails of Argentina and Turkey.

The second defining feature is the rise of foreign currency US dollar credit . US dollar-denominated debt securities issued by non-US residents have been the key driver of this trend, surpassing bank loans for the first time in the second half of 2017 . The overall amount of dollar credit to the non-bank sector outside the United States has climbed from 9.5% of global GDP at end-2007 to 14% in the first quarter of 2018. Since end-2016, however, the growth in dollar credit has been flat.

So the US Dollar has been used as a new form of carry trade as people and businesses choose to borrow in it on a grand scale. Also as global GDP has been growing the 14% is of a larger amount. But to me the big connection here is the way that this pretty much coincides with plenty of US Dollars being available because the US Federal Reserve was busy supplying them in return for its QE bond purchases. Correlation does not prove causation but the surge fits pretty well and then it ends not long after QE did. Or more precisely seems to have faded after the first interest-rate increase from the Fed.

The question to my mind going forwards is will we see a reversal in the QT or Quantitative Tightening era? The supply of US Dollars is now being reduced by it and we wait to see what the consequences are. But it is hard to avoid noting the places that seem to be as David Bowie and Queen would put it.

It’s the terror of knowing what this world is about
Watching some good friends screaming, ‘Let me out’
Pray tomorrow gets me higher
Pressure on people, people on streets

Things seem set to tighten a little further tomorrow should the Fed tighten again as looks likely.

Zombie Companies and Banks

This development has been brought to you be the financial world equivalent of Hammer House of Horror. All the monetary easing has allowed companies to survive that would otherwise have folded, or to put it another way the road to what is called “creative destruction” or one of the benefits of capitalism was blocked. A major form of this was the way that banks were bailed out and some of them continue to struggle a decade later but also took us down other roads. For example the debt model of the Glazers at Manchester United looked set to collapse but was then able to refinance more cheaply in the new upside down world. Ironically it was then able to thrive at least financially as in football terms things are not what they were.

The BIS has its worries in this area too.

In this special feature, we explore the rise of zombie companies and its causes and consequences. We take an international perspective that covers 14 countries and a much longer period than previous studies.

It is willing to consider that the era of lower interest-rates and bond yields which covers my whole career and some has had consequences.

A related but less explored factor is the drop in interest rates since the 1980s. The ratcheting-down in the level of interest rates after each cycle has potentially reduced the financial pressure on zombies to restructure or exit. Our results indeed suggest that lower rates tend to push up zombie shares, even after accounting for the impact of other factors.

So cutting interest-rates for an economic gain looks to have negative consequences as time passes. How might that work in practice? The emphasis below is mine

Mechanically, lower rates should reduce our measure of zombie firms as they improve ICRs by reducing interest expenses, all else equal. However, low rates can also reduce the pressure on creditors to clean up their balance sheets and encourage them to “evergreen” loans to zombies . They do so by reducing the opportunity cost of cleaning up (the return on alternative assets), cutting the funding cost of bad loans, and increasing the expected recovery rate on those loans. More generally, lower rates may create incentives for risk-taking through the risk- taking channel of monetary policy. Since zombie companies are risky debtors and investments, more risk appetite should reduce financial pressure on them.

The reason for the emphasis is that in essence that is the rationale for QE. That is something of a change on the past but as inflation as measured by consumer inflation mostly did not turn up the central banks got out their erasers and deleted that bit. It has been replaced by this sort of thing which links to the Zombie companies and banks theme.

In addition, QE can stimulate the economy by boosting a wide range of financial asset prices. ( Bank of England )

Note the use of the word can so that even the Take Two version can be erased! But the crucial point is that yet again the Zombies are on the march via central banking support. I guess most of you have already guessed the next bit.

Visual inspection suggests that the share of zombie firms is indeed negatively correlated with both bank health and interest rates.

Why are Zombies such a problem?

The have negative effects on economic life.

a higher share of zombie firms could depress productivity growth,

Could? Later we get more of a would as we see an old friend called “crowding out” return to the picture.

Zombies are less productive and may crowd out growth of more productive firms by locking resources (so-called “congestion effects”). Specifically, they depress the prices of those firms’ products, and raise their wages and their funding costs, by competing for resources.

But there is a deeper consequence.

We find that when the zombie share increases, productivity growth declines significantly, but only for the narrowly defined zombies………. The estimates indicate that when the zombie share in an economy increases by 1%, productivity growth declines by around 0.3 percentage points.


There is a fair bit to consider here. The first is the role of the BIS in this which in some ways is welcome but in others less so.  The former is an admittal of some of the side-effects of easy monetary policy but the latter is the way we are getting it a decade late. Or in the case of Japan a couple of decades or so late! To my mind intelligence also involves an element of timeliness. Although to be fair to do quantitative research you do need an evidence base. The catch as ever for the evidence in economics is the way that some many things are varying not only with each other but also with themselves over time. Or if you prefer heteroskedasticity and multicollinearity.

As to the issues they tend to be on the back burner because they are inconvenient for the establishment. The career path of economists at central banks is unlikely to be improved by research into the collateral damage of its policies especially ones which it may not be able to reverse. At the moment both ZIRP and QE are in that category even in the US. So should the period of QT lead to the issue below rising in volume get ready for the claims that it could not have been expected and is nobody’s fault.

I need a dollar dollar, a dollar is what I need
Hey hey
Well I need a dollar dollar, a dollar is what I need
Hey hey

On that subject I note that a bank borrowed 563 million Euros from the ECB overnight which is odd with so much Euro liquidity around. Next we come to the issue of the productivity puzzle which seems likely to have a few of its pieces with zombie companies on it. The same zombie companies and especially banks that have been so enthusiastically propped up. Time for some Cranberries.

Zombie, zombie, zombie, ei, ei
What’s in your head?
In your head
Zombie, zombie, zombie

How many more central banks will end up buying equities?

One of the features of modern economic life is the way that central banks have expanded their operations. In a way that development is a confession of failure ( as why are new policies requited if they existing ones are working? ) Although of course that would be met with as many official denials as you can shake a stick at. We moved from sharply lower interest-rates to QE (Quantitative Easing) bond purchases to credit easing and in some places to negative interest-rates. The latter brings me to the countries I classified as the “Currency Twins” Japan and Switzerland who both have negative interest-rates and some negative bond yields. In fact this morning the Bank of Japan gave Forward Guidance on this subject.

The Bank intends to maintain the current extremely low levels of short- and long-term interest rates for an extended period of time, taking into account uncertainties regarding
economic activity and prices including the effects of the consumption tax hike scheduled to take place in October 2019.

So the first feature seems to be negative interest-rates and perhaps ones which persist as both Japan and Switzerland are on that road. Thus you start by funding yourself with money at a negative cost something which ordinary investors can only dream of. But we also have countries with negative interest-rates which have not ( so far) bought equities such as Sweden and the Euro area although the latter does have a sort of hybrid in its ongoing corporate bond programme.

However we find more of a distinguishing factor if we note that both Japan and Switzerland ended up with soaring exchange-rates due to the impact of the large carry-trades that took place before the credit crunch. This was what led me to label them the “Currency Twins”  and the period since then has seen them respond to this which has seen them via different routes end up as equity investors on a larger and larger scale albeit by a different route. An irony comes if we look at an alternative universe where Germany had its own currency too as in that timeline it too would have seen a soaring currency and presumably it too would be an equity investor.

Bank of Japan

Here is this morning’s announcement.

The Bank will purchase exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) so that their amounts outstanding will increase at annual
paces of about 6 trillion yen and about 90 billion yen, respectively. With a view to lowering risk premia of asset prices in an appropriate manner, the Bank may increase
or decrease the amount of purchases depending on market conditions.

As you can see the Tokyo Whale will continue to gobble up the plankton from the Japanese equity world and at quite a pace. The latter sentence refers to the way it buys more when the market drops which of course looks rather like a type of put option for other equity investors. That is what it means by “lower risk premia” although more than a few would question if this is “appropriate”

Also there are ch-ch-changes ahead. From the Financial Times.

the BoJ also said it would alter the balance of its ¥6tn ($54bn) per year ETF buying programme so that a much greater proportion was focused on ETFs that track the broader, market cap-weighted Topix index. The scale of its Topix-linked ETF purchases would rise from ¥2.7tn to ¥4.2tn per year, the bank said in its statement.

The Japanese owned FT fails however to note the main two significant points of this. The first is that the Tokyo Whale was simply running out of Nikkei index based ETFs to buy as it was up to around 80% of them and of course rising. The next comes from a comparison of the two indices where the Nikkei is described as very underweight this sector and it is much larger in the Topix ( ~9%). Regular readers will no doubt have figured that this is the “precious” or banking sector.

As of this month it has made major purchases on 3 days buying 70.5 billion Yen on each occasion.

Let us move on by noting that Japan has bought equities but so far they have been Japanese ones boosting its own market and keeping the impact on the exchange-rate to an implied one.

Swiss National Bank

The SNB has been a buyer of equities as well but came to it via a different route which is that once it implemented its “unlimited” policy on foreign exchange intervention it then found it had “loadsamoney” and had to find something to do with all the foreign currency it had bought. The conventional route would be to buy short-dated foreign government bonds which it did but because of the scale of the operation it began to impact here and may have been a factor in some Euro area bond yields going negative. The Geneva Whale would have found itself competing with the ECB QE operation if it had carried on so switched to around 20% of its foreign exchange reserves going into equities.

That is a tidy sum when we note it had some 748.8 billion Swiss Francs of foreign exchange reserves at the end of June. How is that going?

. The profit on foreign currency positions amounted to CHF 5.2 billion.

So at that point rather well but of course it is rather strapped in for the ride with its holdings which will have led to some fun and games more recently as it notes its holding in Facebook as the tweet below illustrates.


If you ride the tiger on the way up you can end up getting bitten by it in the way down. Also a passive investment strategy means you raise your stake as prices rise whereas an active one means you are an explicit as opposed to an implicit hedge fund. Some like to express this in terms of humour.


We do not know if the recent weakness in the so-called FANG tech stocks is just ebb and flow or a sea change, but the latter would have the SNB entering choppy water.


We see that this particular development can be traced back to the carry trade and a rising currency. Both of the countries hit by this ended up with central banks buying equities although only the Swiss have bought foreign equities. Perhaps the Japanese think that as a nation they own plenty of foreign assets already or there is an inhibition against supporting a gaijin market. That would be both emotional and perhaps logical if we note how many lemons have been passed onto them.

Looking ahead newer entrants may not follow the same path as we note that once a central bank crosses a monetary policy Rubicon it has the effect of emboldening others. The temptation of what so far have been profits will be an incentive although of course any suggestion that such moves are for profit would be meant with the strictest official denial. Should there be losses however we know that they will be nobody’s fault unless they become large in which case it will be entirely the fault of financial terrorists.

Putting this into perspective is the price I am about to describe. Around 1000 until the middle of 2016 but rose to 8380 earlier this year and as of the last trade 6080. One of those volatile coins the central bankers dislike so much? Nope, it is the SNB share price in Swiss Francs.


Whatever happened to those with Swiss Franc mortgages around Europe?

Today brings together several of the themes of these times. The first is currency movements which is particularly apposite to UK readers as the Pound £ over the past 24 hours has dropped like a stone and then bounced hard singing along to those magnificent men in their flying machines.

Up, down, flying around,
looping the loop and defying the ground.

That is not the only mover as I notice the Renminbi in China has been fixed lower again ( 6.7258) as it continues a much more sedate devaluation. So there is as ever plenty of currency risk to go around. Before the credit crunch this was brought home on a large scale by banks who sold foreign currency and in particular Swiss Franc mortgages in central and eastern Europe. It may be hard to believe now at a time of ZIRP ( Zero Interest-Rate Policy) and NIRP ( N=Negative) but there were wide differences between official interest-rates which these mortgages took advantage of. Except nobody took any notice of the currency risk which was exacerbated by the fact it drove the Swiss Franc lower and was just waiting for a financial crisis to blow it up. So another example of bad behaviour from banks and indeed miss-selling.


What happened next was that if we look at its move against the Euro the Swiss Franc which was worth 1.68 Euros at its nadir rose and rose and is now 1.09. This meant that the Swiss National Bank which intervened against the move including for a while promising “unlimited intervention” ended up with foreign exchange reserves of over 600 billion Swiss Francs. But more importantly for today’s update those mortgagors looking for a lower interest-rate were hit with a double whammy. This was that the capital sum owed rose as did the monthly repayments as they were set on the amount of debt. Also quite a lot of uncertainty was thrown in.

Less well publicised were the business loans which took place but as you can see from the move would also have seen a very painful change.


According to the National Bank of Romania this is the position.

The volume of CHF-denominated loans to households stood in December 2015 over 21 percent lower than at end-2014, when these loans amounted to lei 9.8 billion. The number of borrowers with CHF-denominated loans fell further in 2015, standing at 60,429 in December 2015.

The reason for the fall was that some loans have been converted into Lei and amazingly in a way as of course there is a currency risk Euros. Today Reuters brings us more news on this front.

Romania’s lower house of parliament on Tuesday postponed to next week a final vote to approve a bill to help Swiss franc borrowers convert their mortgage loans into local leu currency at historical rates, due to the lack of a quorum…….Deputies have previously agreed to convert all loans of up to 250,000 Swiss francs at the exchange rate they were taken.

These issue have wider consequences as 91% of banking is foreign owned in Romania and according to New Europe the sums are large.

Banks stand to lose €540 million according to Romanian central bank’s estimates. However, if the same principle is applied to all mortgages denominated in a foreign currency, banks stand to lose €9.6 bn.

This may well lead to issues between Romania and Austria.

Mostly Austrian banks in Poland, Croatia, Hungary, Romania, and Serbia, have extended thousands of housing mortgages in Swiss Francs and citizens have seen their double-digit appreciation.

There are certainly effects on the Austrian finances according to Reuters.

Austria will borrow roughly 3 billion euros ($3.4 billion) more this year than originally planned, the Federal Financing Agency said on Tuesday, an increase that is aimed at lending the province of Carinthia the money to buy bonds of “bad bank” Heta Asset Resolution .

If we look at house prices they have risen by 6.8% in the last year in Romania according to Eurostat this morning.


Back in August Reuters told us this.

Poland’s Financial Stability Committee kickstarted work Wednesday on stepping up capital requirements for banks holding foreign-currency home loans, part of a plan to unwind the country’s $36 billion in non-zloty mortgages…..the country’s 565,000 foreign-currency mortgage holders

So the scale of the problem is much larger than in Romania and therefore we should not be surprised that the Warsaw Voice reported this on Monday.

The Polish government would “solve nothing” but generate a “significant” cost to the banking system by passing the presidential bill on FX spread returns to relieve CHF mortgage borrowers, financial market regulator KNF head Andrzej Jakubiak said………..The cost is “a significant amount” and “a one-off hit,” to the banks’ financial results but not of the kind that would topple banks, Jakubiak also said.

Such thoughts are perhaps why he is the outgoing regulator! But under the surface there are other rumblings going on according to WBJ

More than 500 people have filed a class action lawsuit against mBank in the District Court in Łódź regarding contracts concluded by the bank for Swiss franc-denominated mortgage loans.

So the situation seems yet again dominated by vested interests as the banks which charged into such markets and booked profits seem as always to be able to slither out of the consequences.

For those wondering about property prices today’s update from Eurostat tells us they have risen by 0.4% over the past year.


This is a story of bad news arriving in battalions rather than single spies to use a Shakespearian idiom. Not only was Cyprus hit hard by the Euro area crisis via its links with Greece but some had Swiss Franc mortgages to repay as well. EU Property Solutions give us their spin on the tale.

In early 2016 Cypriot Banks begun to step up their perusal of UK based owners and are becoming more aggressive in their approach. Lenders have begun serving Writs of Summons due to borrowers defaulting on their loan agreements. Figures estimate that c20, 000 UK based borrowers could be effected by taking out Swiss-Franc mortgages………Cypriot properties have been plummeting in value yet some borrowers advise they have seen mortgage repayments TRIPLE from £400 – £1,200 whilst seeing their account fall into negative equity.

According to Cyprus Property News the overall situation could hardly be much worse.

Although Swiss Franc loans declined €274 million in the first half of the year, 80 per cent of the remaining €1,778 million are non-performing according to the head of the Cyprus Central Bank’s Supervision Division.

This next bit may not have you all falling off your seats.

“From the data available to us, it seems that the schemes offered by the banks work better for legal entities than households,” Demetriou told the committee.

Again there are threats of punitive legislation and of course those with incomes in UK Pounds have just taken another hit. If we look at house prices they have fallen by 8.9% in the last year in Cyprus according to Eurostat.


There was a lot of pain here too. But the much criticised Orbanomics took early action as the Financial Times observed in January 2015.

But in Hungary, which long had the biggest foreign exchange loan hangover in central and eastern Europe, consumers faced no additional burden. Last November, after several years of trench warfare, Hungary’s government agreed with banks to convert up to €9bn of foreign currency loans into forints at the then market rate.

So pain and some socialisation of bank losses but an example of not letting things get worse as they so noticeably did in January 2015.If we look at house prices they have risen by 10.3% in the last year in Hungary according to Eurostat.


With currencies in the news I wanted to remind everyone of the costs involved in large moves and in particular for the ordinary person and to some extent business. The senior bankers involved invariably escape scot-free and so quite often do the banks although some of the losses here did mean that some hit rough water. Of course people do not to take some responsibility for their actions and taking a foreign currency mortgage is something unlikely to be done lightly. But I was also struck by these replies to the Financial Times stating the environment back then in Hungary.

in 2002 or 2003 I was in Budapest and they were selling SF loans like MacDonald’s tries to sell it’s hamburgers. ( ldunoldont )

people are not perfect, and just remember the infamous TV ads peddling CHF loans, to be able to imagine the high pressure sales techniques they used on the poor souls who entered a branch to apply for a loan.

I know ppl, with an econ background, who went to the branch with a solid determination to take out an EUR loan and left, 3 hrs later, with a CHF loan…. ( hufnagel )

Whatever happened to the Carry Trade?

Tucked away at the end of the quarterly review from the Bank for International Settlements or BIS was a reminder of an issue that has been a theme on here for some time but hits the headlines rarely now. Well until the next crisis! This is the Carry Trade which is where borrowers who may be institutional, corporate or most dangerous of all an ordinary person borrow in another currency to which they use every day and more particularly earn in. This poses two clear and present dangers of which the first is the risk to those who do this as they are exposed to currency moves. Ironically if done on a large-scale as happened back in the day with the Swiss Franc and the Japanese Yen it lowers the currency and so not only is the interest cheaper but you have a capital gain. What could go wrong? Well we will come to that. But this same effect turned out to make things uncomfortable for both Japan and Switzerland as their currencies were pushed lower and lower.

What’s going on?

If we ask Marvin Gaye’s famous question we find that the BIS can give us some answers. Here is something which was already known but it does no harm to be reminded of the scale of it.

McCauley et al (2015) have demonstrated that since the Great Financial Crisis, the outstanding US dollar credit to non-bank borrowers outside the United States has increased from $6 trillion to $9 trillion.

Actually initially the US Federal Reserve would probably have welcomed the downwards push on the US Dollar but as we note a stronger period for the US Dollar something of a squeeze will have been put on the borrowers. A real squeeze was put on places like Russia and Ukraine when their currencies fell due to lower oil prices and the invasion of Crimea as they had US Dollar borrowings. The BIS regards this as causing bank deleveraging.

The Euro and QE

According to the new data there was a change when the ECB began its QE program back in January 2015. Not only is there more activity it is concentrated in particular locations.

For advanced European countries outside the euro area, the euro share in cross-border bank lending (32%) is almost equal to that of the US dollar (35%). In emerging Europe, the share of euro-denominated claims (40%) exceeds that of US dollar claims (31%). By contrast, non-European EMEs borrow only a small fraction in euros (6.5%).

As to the exact numbers the BIS records a rise as QE began but then the numbers get confused as there is always so much going on in the fog of finance but we do get a conclusion.

More concretely, higher shares of euro-denominated claims were associated with greater expansions in cross-border bank lending. This result appears to be driven primarily by lending to advanced economies outside the euro area.

Looking at the individual data I note that there seems to be borrowing in Euros going on in what is called emerging Europe again. Greek banks seem to be especially involved in Poland and Hungary which is troubling considering what happened last time around. Spanish banks seem to be active in this area full stop. For a small country Luxembourg seems to be involved a lot. So worrying signs which are just hints at this stage.

As to the players last time around it is harder to say as for example there is activity in what is classified as “others” but Austria is grouped in there with quite a few other countries. The Italian banks seem to be doing less than last time but of course many of them have what might euphemistically be called different circumstances these days.

There are echoes of the past here and whilst the BIS uses neutral language it poses more than a few questions.

The results are particularly relevant for policymakers in borrowing countries that rely heavily on cross-border bank lending.

Also there is this.

For example, euro lending by Swiss banks to Poland can be affected by the ECB’s monetary policy, even though neither country is part of the euro area.

This warning is more general and may even be aimed at the US Federal Reserve for this week.

our findings suggest that policymakers should closely monitor the currency denomination of cross-border bank lending as they assess the potential impact of possible policy moves, both in their own economies and abroad.

It sounds a bit like “Be afraid, be very afraid” ( the film The Fly I think) does it not?


On Saturday I pointed out on BBC Radio 4 a consequence of negative interest-rates in Sweden which is not predicted in conventional economics which is increased saving. Well here is Bloomberg from earlier this month on another one.

The G-10 currency is cheap, thanks to the Riksbank’s negative interest rates. Traders have been borrowing in low-yielding kronor and using the funds to invest in higher yielding currencies, such as Australian and New Zealand dollars, according to Royal Bank of Canada.

The Riksbank will welcome this in the same way I described for the US Federal Reserve as it wants a lower currency to help push inflation higher. Of course the ordinary Swedish worker and consumer will not welcome this at all and there is a deeper danger as should this end the experience of Switzerland and Japan shows that it blows up with a painful currency surge.

What could go wrong with this sort of thing?

In the past three months, selling the krona to buy the kiwi and Aussie dollars, as well as higher-yielding currencies such as South Africa’s rand and Brazil’s real, has returned 9-16 percent, beating the 6-12 percent paid by euro-funded deals and the 4-10 percent generated when using the U.S. dollar.

What about mortgages in Eastern Europe?

I decided to take a look at what was something of a disaster last time round as cheap interest-rates on Swiss Franc and Euro denominated mortgages turned into large foreign-exchange driven capital losses. From the National Bank of Poland.

Banks hold a large, long on-balance-sheet FX position related to the portfolio of foreign currency loans.

The information in the latest Financial Stability Report is as shown below as we get flashes of what was the position at the end of 2015.

The direct costs of restructuring, i.e. conversion of the principal of all loans at the KWO rate, can be estimated at about 35 billion zlotys. If, however, restructuring is used only by borrowers from the years 2007-2008, the costs would be approx. 29 billion zlotys.

There were also indirect costs.

The current value of such reduction in revenue, assuming that all borrowers would take advantage of compulsory restructuring, may be estimated at approx. 21 billion zlotys.

An idea of the amount of individual distress is shown below.

The total value of foreign currency loans with LtV greater than 100% can be estimated at around 77 billion zlotys.

Hungary another country where this issue was particularly prevalent there was a socialisation of the issue a while back. From the Financial Times.

Hungary’s government agreed with banks to convert up to €9bn of foreign currency loans into forints at the then market rate.

Those who took out foreign currency mortgages in Cyprus also faced falls in the value of the asset. From the Central Bank of Cyprus.

Given that until 2015Q1 house prices in real terms had dropped by 34,5% from their peak, in order to complete the correction of the bubble they should theoretically be reduced by a further 9,7% in real terms (4,7% in nominal terms). This would bring house prices at levels corresponding to 2006Q2.

Cyprus Property News told us this on the 7th of this month.

Although Swiss Franc loans declined €274 million in the first half of the year, 80 per cent of the remaining €1,778 million are non-performing according to the head of the Cyprus Central Bank’s Supervision Division.

Time for Ms Britney Spears.

Don’t you know that you’re toxic?
Don’t you know that you’re toxic?


There is much to consider here and we have an issue which is only likely to be made worse by the way that so many countries now have negative interest-rates. Great care is needed with any numbers in this arena as they invariably turn out to be inaccurate but what we do know is that there is great risk here. Also we know that this is a risk exacerbated by all the monetary stimulus that is going on.

Speculating in currencies is a dangerous game for those with lots of capital backing. I fear that in the future we may discover that one more time the unwary have been seduced into it.

BBC Radio 4

I was on Money Box on Radio 4 over the weekend. It was live on Saturday lunchtime and then repeated last night. Here is the clip.