The world wants and needs US Dollars and it wants them now

In the midst if the financial market turmoil there has been a consistent theme which can be missed. Currency markets rarely get too much of a look in on the main stream media unless they can find something dramatic. But CNN Business has given it a mention.

The US dollar is rallying against virtually every other currency and it seems like nothing can stop it.

There are lots of consequences and implications here but let us start with some numbers. My home country has seen an impact as the UK Pound £ has been pushed back to US $1.20 and even the Euro which has benefited from Carry Trade reversals ( people borrowed in Euros to take advantage of negative interest-rates) has been pushed below 1.10. Even the Japanese Yen which is considered a safe haven in such times has been pushed back to 107.50. We can get more thoughts on this from The Straits Times from earlier today.

SYDNEY (REUTERS) – The Australian dollar was ravaged on Wednesday (March 18) after toppling to 17-year lows as fears of a coronavirus-induced global recession sent investors fleeing from risk assets and commodities, with panic selling even spilling over into sovereign bonds.

The New Zealand dollar was also on the ropes at US$0.5954, having shed 1.7 per cent overnight to the lowest since mid-2009.

The Aussie was pinned at US$0.6004 after sliding 2 per cent on Tuesday to US$0.5958, depths not seen since early 2003.

So there are issues ans especially in a land down under as an Aussie Dollar gets closer to the value of a Kiwi one. In fact the Aussie has been hit again today falling to US $0.5935 as I type this. No doubt it is being affected by lower commodity prices signalled in some respects by Dr. Copper falling by over 4% to US $2.20

Sadly the effective or trade-weighted index is not up to date but as of the 13th of this month the official US Federal Reserve version was at 120.7 as opposed to the 115 it began the year.

Demand for Dollars

It was only on Monday we looked at the modifications to the liquidity or FX Swaps between the world’s main central banks. Hot off the wires is this.

BoE Allots $8.210B In 7 Day USD Repo Operation ( @LiveSquawk )

This means that even in the UK we are seeing demands for US Dollars which cannot be easily got in the markets right now. Maybe whoever this is has been pushing the UK Pound £ down but we get a perspective by the fact that this facility had not been used since mid-December when the grand sum of $5 million was requested. There were larger requests back in November 2008.

I was surprised that so little notice was taken when I pointed this out yesterday.

Interesting to see the Bank of Japan supply some US $30.3 billion this morning until June 11th. Was it Japanese banks who were needing dollars?

Completing the set comes the European Central Bank or ECB.

FRANKFURT (Reuters) – The European Central Bank on Wednesday lent euro zone banks $112 billion at two auctions aimed at easing stress in the U.S. dollar funding market, part of the financial fallout of the coronavirus outbreak.

The ECB said it had allotted $75.82 billion in its new 84-day auction, introduced by major central banks last weekend in response to global demand for greenbacks, and $36.27 billion at its regular 7-day tender.

Actually it was good the ECB found the time as it is otherwise busy arguing with itself.

With regards to comments made by Governor Holzmann, the ECB states:

The Governing Council was unanimous in its analysis that in addition to the measures it decided on 12 March 2020, the ECB will continue to monitor closely the consequences for the economy of the spreading coronavirus and that the ECB stands ready to adjust all of its measures, as appropriate, should this be needed to safeguard liquidity conditions in the banking system and to ensure the smooth transmission of its monetary policy in all jurisdictions.

So we see now why the Swap Lines were reinforced and buttressed.

Oh and even the Swiss Banks joined in.

*SNB GETS $315M BIDS FOR 84-DAY DOLLAR REPO ( @GregBeglaryan )

Emerging Markets

This is far worse and let me give you a different perspective on this. During the period of the trade war we looked regularly at the state of play in the Pacific as it was being disproportionately affected.

Let me hand you over to @Trinhnomics or Trinh Nguyen.

Swap lines to EM please (also to Australia – we like Australia in Asia too as it’s APAC). “the supply of liquidity by central banks is beneficial only to those who can access it,

Her concern was over that region and EM is Emerging Markets. I enquired further.

Operationally, the bid for USD in Asia and squeeze in liquidity reflects the massive role of the USD in the global economy & finance. For example, 87% of China merchandise trade is invoiced in US. and the loss of income from export earnings will further push higher the demand of USD. To overcome the global USD squeeze, the Fed must step up its operational support via swap lines with economies such as South Korea.

That was from a piece she wrote for the Financial Times but got cut from it. On twitter she went further with a theme regular readers will find familiar

Guys, the reason why we have a dollar shortage is because we have levered!!!!!!!!!!! So when income collapses, we got major problem because we have leveraged & so debt needs servicing etc. Aniwaize, the stress u see is because we live in a world that’s too leveraged!!!

And again although I would point out that leverage can simply be a gamble rather than a hope for better times.

Don’t forget that low rates only lower interest expense, u still got principal that is high if ur debt stock is high. When u lever, u think the FUTURE IS BETTER THAN TODAY. Obvs very clearly that whoever thought there was growth is in for a surprise given the pandemic situation.

She looks at this from the perspective of the Malaysian Ringgit which has fallen to 4.37 versus the US Dollar and the Singapore Dollar which is at 1.44.

Comment

We are now seeing a phase of King Dollar or Holla Dollar and let me add some more places into the mix. We have previously looked at countries which have borrowed in US Dollars and they will be feeling the strain especially if they are commodity producers as well. This covers quite a few countries in Latin America and of course some of those have their own problems too boot. I also recall Ukraine running the US Dollar as pretty much a parallel currency.

The beat goes on.

In times of stress, capital flees emerging markets to seek safety in $USD . This crisis is no different. ( @IceCapGlobal)

which got this reply.

Investors have yanked at least US$55bn from EMs since January 21, according to the Institute of International Finance, exceeding the withdrawal in 2008. ( @alexharfouche1 )

Let me finish by reminding you that ordinarily we discuss matters around the price of something. But here as well as that we are discussing how much you can get and for some right now that people will not trade with you at all. That is why we are seeing what is effectively the world’s central bank the Federal Reserve offering US Dollars in so many different ways. It is spraying US $500 billion Repo operations around like confetti but I am reminded of the words of Glenn Frey.

The heat is on, on the street
Inside your head, on every beat
And the beat’s so loud, deep inside
The pressure’s high, just to stay alive
‘Cause the heat is on

The Investment Channel

What does Safe Haven mean in these troubled times?

We find ourselves yet again in a crisis and are reminded that some perspective is needed.  From CNBC at the end of last year.

The S&P 500 has returned more than 50% since President Trump was elected, more than double the average market return of presidents three years into their term, according to Bespoke Investment Group.

After that the equity market took the advice of Jeff Lynne and ELO as 2020 began.

And you, and your sweet desire
You took me higher and higher, baby
It’s a livin’ thing

Whereas a few minutes ago Bloomberg tweeted this.

European equities are poised for their worst week since the 2008 financial crisis.

So ch-ch-changes and another clear reminder of this came from Bloomberg as recently as the 20th of this month.

Virgin Galactic climbed again to a record high, defying analysts who say the stock is overdue for correction

We can stay with the theme of the man who fell to earth because since then the share price has halved from $41.55 to $21.30 after hours last night.

If we take this as a broad sweep ELO were on the case it seems.

It’s a terrible thing to lose
It’s a given thing
What a terrible thing to lose

Where can you go?

Japanese Yen, Swiss Franc and Euro

You may be questioning two of those so let me explain. If you look back in time I wrote quite a few articles on the “Currency Twins” the Yen and the Swissy. This was because they were borrowed heavily in before the credit crunch and people rushed to cover positions as it developed. This was equivalent to buying them and they surged building a safe haven psychology. Although it was more minor there was some of this in the Euro as well.

If we move forwards to now the simplest is the Swiss Franc based as it is in a country which is considered safe and secure, hence the demand at times of fear and uncertainty. The Swiss National Bank has returned to selling the Swiss Franc recently to try and keep it down. Switching to the Yen the main issue here is the large size of Japanese overseas private investments. At times of uncertainty the fear is that the Japanese will start to repatriate this and push the Yen higher so markets shift the price just in case. The Euro is not quite so clear but the area does have strengths as for example its current account surplus. Also at times like this it gets a bit of a German sheen as well.

You may have noted an interesting similarity here. This is that all these three currencies have negative interest-rates and I have posted before that there are avenues ahead where the SNB will cut to -1%.

US Treasury Bonds

There are two factors here of which the opening one is the effective reserve currency status of the US Dollar. So you can always buy commodities and the like in US Dollars with no risk of devaluation or depreciation. Next comes the fact that bonds offer a guaranteed return as in you will always get your nominal US $100 back as well as some interest, or if you prefer yield or coupon. So you get both the reserve currency and some interest, hence the knee-jerk rush into US Treasuries at a time like this.

The problem is the old familiar refrain that things aren’t what they used to be. In particular you get a lot less yield now as for example both the two and five-year yields have fallen below 1% overnight. I have chosen these because in a safe haven trade you tend  buy short maturity bonds. But it is also true that longer-dated bonds do not offer much these days as even the ten-year Treasury Note has seen its yield fall below 1.2% now. Some events here are contradictory because the two-year future is up 27 ticks this week and whilst that is really rather satisfactory for those who got in early it should not move like that if you are looking for stability. You do not want Blood Sweat and Tears.

What goes up must come down
Spinnin’ wheel got to go ’round
Talkin’ ’bout your troubles it’s a cryin’ sin
Ride a painted pony let the spinnin’ wheel spin

Some of the logic above applies to other bond markets which have soared too. Although in some cases the logic gets awkward because both the German and Swiss bond markets have yields which are negative across all maturities. So here we are back to the currency being a safe haven and such a strong one that people are willing to accept increasingly negative yields to take advantage of it. My home country the UK has seen Gilt yields plummet too as a combination of factors are in play. The irony is that the safest UK  haven which is RPI linked Gilts already were extremely expensive and frankly having little relationship with inflation which seems set to fall in response to the present crisis.

Gold

This is something of an old curiosity shop in these times. In general we have seen a gold price rally which continues a phase we have been noting in recent months. But it is also true that just when we might have expected it to rally rally further the price of gold fell backwards.  There are an enormous number of conspiracy stories about gold and its price but for out purposes it is something of a patchy safe haven. Our favourite precious metal was of course “The Precious! The Precious! ” in Lord of the Rings but in our world the central banks give that title to other banks.They however are most certainly not a safe haven as we learn more about the use of the word “resilient ” by central bankers.

Comment

Let me add another factor in the safe haven world which is timing.If you had movd into any of the markets above earlier this week you would now be doing rather well. This comex with an implication that prices and levels matter which often gets forgotten in the melee and excitement.

There are also other winners which get given temporary safe haven status at times like these.For example those producigface masks or involved in teleconferencing.  I have to confess I had a wry smile at the price of teleconferencing companý Zoom rising as it did not work on my laptop when I tried it for Rethinking the Dollar.

Apologies to those affected by a blog misfire earlier as Windows 10 played up again.

The Bank of Japan fears no longer being the “leader of the pack”

The next two weeks look set to bring a situation you might not expect. After all Japan has built a reputation as the “leader of the pack” as the Shangri-Las would put it in terms of monetary policy easing. Except that it is now facing a situation where it looks set to be left behind. On Thursday the European Central Bank will announce its latest moves and its President Mario Draghi has been warming us up for some action. Either he will announce an interest-rate cut or he will signal one for September. So there are two perspectives here for Japan. The first is that the Euro area looks set to cut by the total amount that Japan has below zero as 0.1% is the minimum and of course 0.2% would be double it. Next is the issue that the new rate of -0.5% or -0.6% would be a considerable amount lower than in Japan.

If we now shift to the United States the US Federal Reserve looks set to cut interest-rates as well when it meets at the end of the month. There was a spell last week when financial markets switched to expecting a 0.5% cut which would put the new rate at 1.75% to 2%. Personally I am far from convinced by that and a 0.25% cut seems much more likely but nonetheless it puts the Bank of Japan under pressure.

The Yen

The factors we have looked at above will be putting some upwards pressure on the Yen as interest-rate expectations shift against it. This has been reinforced by an unintended consequence of the policy applied by the central planners at the Bank of Japan.

The Bank will purchase Japanese government bonds (JGBs) so that 10-year JGB yields will remain more or less at the current level (around zero percent). With regard
to the amount of JGBs to be purchased, the Bank will conduct purchases more or less in line with the current pace — an annual pace of increase in the amount outstanding
of its JGB holdings at about 80 trillion yen — aiming to achieve the target level of a long-term interest rate specified by the guideline. JGBs with a wide range of maturities will continue to be eligible for purchase, while the guideline for average remaining maturity of the Bank’s JGB purchases will be abolished.

The problem here as I have pointed out before is that something which was supposed to have kept Japanese Government Bond ( JGB) yields down has ended up keeping them up. Ooops! As world bond markets have surged Japan has been left behind because its bond market is essentially run by the Bank of Japan ( 80 trillion yen a year buys you that) and it has been wrong footed completely. The recent surge began in early March and the German ten-year yield has fallen as much as by 0.6% and the US by 0.8% but Japan by only 0.16%.

So as you can see relative interest-rates and yields have moved to support the Yen since the early spring of this year. The policy of “yield curve control” aiming for bond yields of 0% to -0.1% no doubt seemed a good way of continuing the Abenomics policy of weakening the Yen at the time. However over the period that bond markets have surged the Yen has strengthened from 112 versus the US Dollar to 108 now. That is before we see any shift in the rhetoric of President Trump who as the tweet from the early part of this month below points out, wants a weaker US Dollar.

China and Europe playing big currency manipulation game and pumping money into their system in order to compete with USA. We should MATCH, or continue being the dummies who sit back and politely watch as other countries continue to play their games – as they have for many years!

That will have been viewed with horror in Tokyo because whilst The Donald is not currently putting Japan in his cross hairs they have looking to weaken the Yen since Abenomics began back in 2013. This would be quite a reverse for Japan as it would not want to get into a currency war with the United States.

Moving to other currencies we see that the Yen has been strengthening against the Euro and the UK Pound as well. Indeed we get another perspective I think from looking at Switzerland which regular readers will know I labelled as a “Currency Twin” with Japan due to the way both currencies were borrowed heavily in the pre credit crunch period. There are increasing rumours that the Swiss National Bank has been getting the equivalent of an itchy collar over the strength of the Swiss Franc and has been checking the markets as a hint that it may intervene again. It may well find itself having to match any ECB interest-rate cut and that will echo in Tokyo as well as giving us a new low for negative interest-rates.

The Pacific Trade Crisis

The stereotype of this area is of fast growing economies with the image of many of them being Pacific Tigers compared to the more sclerotic Western nations. Yet troubles are there too now so let us go to Seoul on Thursday.

The Monetary Policy Board of the Bank of Korea decided today to lower the Base Rate by 25 basis points, from 1.75% to 1.50%.

Okay why?

With respect to future domestic economic growth, the Board expects that the adjustment in construction investment will continue and exports and facilities investment will recover later than originally expected,
although consumption will continue to grow. GDP is forecast to grow at the lower-2% level this year, below the April forecast (2.5%).

This morning has brought more news on that front. From Bloomberg.

South Korea’s exports, a bellwether for global trade, appear set for an eighth straight monthly decline as trade disputes take a toll on global demand. Exports during the first 20 days of July fell 14 percent from a year earlier, data from the Korea Customs Service showed Monday. Semiconductor sales plunged 30 percent, while shipments to China, the biggest buyer of South Korean goods, fell 19 percent.

Korea is a bellwether as these numbers are released very promptly and many of its companies are integrated into global supply chains, so it gives a signal for world trade. Currently it is not good and there is a direct link to Japan.

Imports from the U.S. rose 3.7 percent, while those from Japan dropped 15 percent.

Also on Thursday Bank Indonesia decided to join the party.

The BI Board of Governors agreed on 17th and 18th July 2019 to lower the BI 7-day Reverse Repo Rate by 25 bps to 5,75%,

A day earlier say troubling news for the economy of Singapore.

SINGAPORE’S exports, already in double-digit decline for three straight months, fell again in June, according to Enterprise Singapore data released on Wednesday morning.

Non-oil domestic exports (NODX) were down by 17.3 per cent on the year before – a six-year low  ( Business Times )

Comment

The Bank of Japan finds itself between a rock and a hard place on quite a few fronts. The Yen has been strengthening and other central banks are on their way to matching its policies. That is before we get to the issue of the clear trade slow down in the Pacific region. This will add to the problem hidden in what looked on the surface as solid economic growth in the first part of the year.

In the three-month period, exports dropped 2.4 percent and imports sank 4.6 percent, as in the initial reading. As a result, net exports — exports minus imports — pushed up GDP by 0.4 percentage point. ( Japan Times).

In all other circumstances the Bank of Japan would cut interest-rates in a week. But they do not like negative interest-rates much and they are buying pretty much everything ( bonds, equities and commercial property) as it is! In October another Consumption Tax rise is due as well. Perhaps Bryan Ferry was right.

Say, when you’ve been around, what’s left to do?
Don’t know? Ask Tokyo Joe
So inscrutable her reply
“Ask no question and tell me no lie”

Podcast

 

 

What does risk-off actually mean?

Today I intend to look at a subject which gets bandied about a fair bit but is not always well explained. Along the way we find that some of our regular themes and subjects are in play here. Whilst the concept of risk off may look simple we have learnt in the credit crunch era that such things rarely are as we introduce the issue of perception. One man or woman’s risk-off may seem rather risky to others. Also we have been taught that things that the finance equivalent of economics 101 would tell us are risk-free in fact are not. So let us advance cautiously.

Sovereign bond markets

There was a perception that these were risk-free although as someone who worked for many years in them I was only too aware that you could lose money in them. The bond market in my country the UK saw several solid falls in my time meaning that investors lost money. The risk-free element here was that you would always get your nominal amount back at the maturity of the UK Gilt. Although that always was something of an Ivory Tower definition as in the meantime inflation could and in the UK’s case is usually very likely to eat into the real value of your investment and foreign investors also have a currency risk. As over time the UK Pound £ has tended to depreciate then on average you would be a loser here.

At this point we see that “risk-free” was never really that anyway. Those who recall the heights of the Euro area crisis will recall the European Central Bank insisting that Greek government bonds be recorded as risk-free in banking accounts, or more specifically a risk-weighting of 0. This was something of a further swerve as the ECB with its many national treasuries is not linked to them in the way that most central banks which only deal with one are.

Be that as it may central banks have advanced the case of sovereign bonds being risk-free by the advent of the QE ( Quantitative Easing) era where they have bought them on an enormous scale. This has two main features, investors tend to be too busy congratulating themselves when large profits are made to worry much about the risk assumed. Next comes the concept of the world’s main central banks being effectively buyers of last resort for sovereign bonds and thereby providing a put option for the price. On this road we see that whilst in theory the risks have got higher in practice they may well have got lower because the central bank will not allow falls. The latter argument is reinforced by those of us who believe they cannot do so without revealing that they have not achieved the successes they claim.

Today

The thoughts above are highlighted by the fact that sovereign bond markets have been rallying strongly again over the last week or two. The risk-off theme has seen them rally in a new version of what used to be called a flight to quality. We have learnt that bonds may not be quality but that has been anaesthetised by the likely reality of central bank action. Putting this into numbers the US ten-year yield is 2.37% as I type this compared to this on the 22nd of March.

I will come to the cause of this in a moment but if we stick with the event we see that the ten-year US Treasury Note now yields 2.5%. The Trump tax cuts were supposed to drive this higher as we note that it was 3.24% in early November last year.

This type of risk-off trade has also been seen elsewhere as for example the UK ten-year Gilt yields 1.04%. This has mostly been missed in the wider debate as the UK could plainly borrow if it chose but we seem locked into a belief that borrowing is unaffordable when it is the reverse. The headliner in terms of numbers is Germany which has a ten-year bund yield of -0.11% and therefore is actually being paid to borrow all the way up to the ten-year maturity. Japan is the same although the negative yield is smaller.

Currencies

There are currencies which are perceived to be safe havens and thus see a flow of buying when fear appears. The stereotypes for this were the German Deutschmark and the Swiss Franc. In more modern times not only has the Euro taken over the role of the Deutschmark in the main but we have seen the Japanese Yen not only join the list but often be at the top of it. The present state of play is summarised by Dailyfx.com below.

The Japanese Yen’s current backstory is of course fundamental, with risk aversion stemming from increased US-China trade tensions supporting what is, after all, perhaps the quintessential anti-growth currency play.

The US Dollar has haven appeal too, of course, but the Japanese Yen is certainly beating it at present, with USD/JPY having wilted very sharply back to lows not seen since the start of February.

As they point out the picture is muddied by the fact that there are times that people go “holla dollar” or as Aloe Blacc put it.

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
And I said I need dollar dollar, a dollar is what I need
And if I share with you my story would you share your dollar with me
Bad times are comin’ and I reap what I don’t sow.
The other side of the coin is emerging market currencies which tend to be hit and at the moment our eyes are usually drawn to the Turkish Lira or the Argentine Peso. Hence the rumours out of Turkey yesterday that capital controls may be on the way as frankly there is not much else left to try.
The last couple of weeks has perhaps seen a new entry to the charts. What I mean by that is the way that the price of Bitcoin has been rallying and at times surging. As I type this it is above US $8000 on several exchanges which leaves us with plenty to mull as the last year or so has left us observing various crises in the new coin structure.
Comment
I have left to last the main other side of the coin which is equity markets which fall and the go lower. That is partly because of the ch-ch-changes here where even relatively small falls tend to have markets on alert for more central bank easing. This trend has been exacerbated by the way that US President  Donald Trump focuses on the stock market so much. However that does provide another argument in favour of bond markets as for example we have already seen the reverse QE programme called QT given an end date. I have written before that I would not be surprised if we saw more bond purchases by the US Federal Reserve in what would no doubt be called QE4. That could easily be sparked if the Chinese should start to sell their holdings of US Treasuries in any real size.
Thus we see that it is really only a perceived risk-off really and let me conclude by throwing in another factor. For some time individuals have seen foreign property investments as a type of risk-off trade but now we are seeing house price falls in many of the places they invested that may change. Although of course from the perspective of places like Argentina and Turkey that is small-fry and should things really light up again in the Middle-East many things will look relatively risk-free.

 

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.

Comment

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

 

 

Currency Wars continue to rage in the Far East

Today we travel to the other side of the world to review a small country which departed from a larger companion in 1965. But do not worry I am not looking at implications for Brexit today but noting the salvo fired this morning in the currency wars by the city-state of Singapore. Here is the statement from the Monetary Authority of Singapore or MAS.

 MAS will therefore set the rate of appreciation of the S$NEER policy band at zero percent, beginning 14 April 2016.

This replaced this.

 In October 2015, MAS kept the Singapore dollar nominal effective exchange rate (S$NEER) policy band on a modest and gradual appreciation path, but reduced its rate of appreciation slightly.

Which replaced this from January 2015.

MAS will therefore continue with the policy of a modest and gradual appreciation of the S$NEER policy band.  However, the slope of the policy band will be reduced.

These policy moves represent a clear change from the previous policy of currency appreciation. This started in 2012 and was an anti-inflation measure. However back in January 2015 the MAS was noting this.

The depreciation of the S$ against the broad-based strength of the US dollar was partly offset by the appreciation of the S$ against the Malaysian ringgit, euro, and Japanese yen. Thus, movements in the S$NEER have been relatively muted compared to bilateral S$ movements against the major currencies.

So they were seeing a feature of the times as we note that in addition to its domestic neighbour we see that 2 of the main currency depreciators are on the list and on the other side the strong US Dollar was on the list too. Even effective or trade weighted exchange rates can be an example of “you can’t always get what you want” to quote the Rolling Stones. The switch today seems to be an example of trying “to get what you need” as Singapore sets out a plan which no longer includes a rising currency.

At this point let me pose the question, how many countries these days will accept a rising currency and where does that leave those who want theirs to fall?

Why have they done this?

If we look at the outlook for inflation and growth we see this.

CPI-All Items inflation will remain negative throughout 2016……..According to the Advance Estimates released by the Ministry of Trade and Industry today, the Singapore economy registered 0% growth on a quarter-on-quarter seasonally adjusted annualised basis in Q1 2016, following the 6.2% expansion in Q4 2015.

Ouch! That is quite a growth slow down is it not? Anyway in a familiar theme it is all apparently Johnny Foreigner’s fault.

The outlook for the global economy has dimmed since October…….held down by sluggish external conditions….a less favourable external environment……subdued growth in Singapore’s major trading partners.

Can we continue all blaming each other? That is a clear central banking theme these days as they all sing along with Lilly Allen’s album “It’s not me it’s you” Also I note the use of the current central banking buzzword “vigilant”.

Also you may note that there is no change to interest-rates. I suspect that having reduced its deposit rate to 0% the MAS has – wisely in my view – decided not to plunge into the icy cold world of negative interest-rates, for now at least.

Oh and there was a time where mild disinflation and a growth rate expected to be between 1 and 3% in 2016 would have been seen as an economic nirvana. How times change….

Never believe anything until it is officially denied!

From the MAS

This is not a policy to depreciate the domestic currency,

From Bloomberg

Singapore’s dollar slid 1.2 percent to S$1.3667 to the U.S. currency as of 6:51 a.m. in London, the biggest drop since Aug. 11.

Actually it also took a few other currencies with it as the phrase “competitive devaluations” came back into use.

New Zealand’s dollar tumbled 1.2 percent to 68.38 U.S. cents, the ringgit declined 0.9 percent to 3.9088 per dollar and Indonesia’s rupiah weakened 0.4 percent to 13,210.

Actually the South Korean Won fell by as much too.

Japan and the Yen

There is quite an irony in the Yen being described as an appreciator and there will be much chuntering into their sake at both the Bank of Japan and the Ministry of Finance at this description. But we know that in spite of this weeks decline the Yen at 109.2 versus the US Dollar is up some 8.5% on a year ago. They are of course still “watching” it although today’s spokesman seems to have been smoking something strong.

CHIEF GOVT SPOKESMAN: CAUTIOUS OF ONE-SIDED FOREX MOVES, READY TO TAKE APPROPRIATE STEPS IF NEEDED. (h/t @moved_average)

Oh and as of this morning the Yen has strengthened against many of its neighbours as they follow the Singaporean Dollar lower. Indeed the Yen weakened after comments like this. From Bloomberg.

Even if Japan wants a weaker yen, any government action would be futile as “Abenomics is nearing its best-before date,” said Eisuke Sakakibara, in charge of intervention at the Ministry of Finance from 1997 to 1999. He said an expansion of Bank of Japan stimulus would only temporarily slow the yen’s gains to 100 by year-end.

He picked the turn nicely.

China

Here the foreign exchange news gets swamped by the US Dollar exchange rate but the official communique at the beginning of this month said this.

On March 31, 2016, the CFETS RMB exchange rate index closed at 98.14, losing 1.50 percent from the end of February;

The new effective exchange rate has fallen from 100.94 at the turn of the year to 97.64 now so China’s leaders will have been reflecting on a gradual depreciation so far in 2016. This will be welcome as they struggle to keep the dream alive.

However whilst a 0.8% fall against the Singaporean Dollar to 4.75 may not be a major factor in Chinese calculations the fact that other currencies have fallen with it changes things. We will have to wait and see how they respond to this. They will also be noting that the Euro has drifted lower like the Yen this week as the currency environment shows a hint of ch-ch-changes.

Comment

The MAS has decided that a lower currency is something to which they can sing along to with The Cars.

I guess you’re just what I needed
I needed someone to feed
I guess you’re just what I needed
I needed someone to bleed

The environment has changed as they usually only make such a move in response to a recession and further food for thought is provided by the fact that at the end of last year economic growth was at 6.2%. Is that a new lower bound?

As to other devaluation/depreciation efforts we wonder in terms of album titles, Who’s next?

Still I guess those selling property near me in Nine Elms and at Battersea Power Station will be very grateful if new Far Eastern buyers emerge ahead of any future competitive devaluations. According to the mood music from there they may be sorely needed……

BP

Large losses seem to have been accompanied by a large pay rise for the Chief Executive and this response raised a smile.

think of how much bigger the loss could have been if he wasn’t being properly incentivised! (h/t @RealFinney)