Reuters blog archive
from Global Investing:
Central bankers as carry traders? Why not.
As we wrote here yesterday, FX reserves at global central banks may be starting to rise again. That's a consequence of a pick up in portfolio investment flows in recent weeks and is likely to continue after the U.S. Fed's announcement of its QE3 money-printing programme.
According to analysts at ING, the Fed’s decision to restart its printing presses will first of all increase liquidity (some of which will find its way into central bank coffers). Second, it also tends to depress volatility and lower volatility encourages the carry trade. Over the next 12 months these two themes will combine as global reserve managers twin their efforts to keep their money safe and still try to make a return, ING predicts, dubbing it a positive carry story.
The first problem is that yields are abysmal on traditional reserve currencies. That means any reserve managers keen to boost returns will try to diversify from the dollar, euro, sterling and yen that constitute 90 percent of global reserves. Back in the spring of 2009 when the Fed scaled up QE1, its move depressed the dollar and drove reserve managers towards the euro, which was the most liquid alternative at the time. ING writes:
This time, however, we are not looking for the same kind of euro pick-up that we saw in 2009. FX reserve managers typically invest in securities rated AA or higher. Even if they extend durations out to the 5-year area of sovereign curves, an average of AA/AAA Eurozone yields only pays 0.75% – exactly the same as Treasuries.5-year UK gilts are not much better at 0.9 % while Japan pays a measly 0.2% on 5-year bonds.
from Global Investing:
Amid all the furious G7 money printing of recent years, Brazil was the first to sound the air raid siren in the "international currency war" back in 2010 and it continues to cry foul over the past week. With its finance ministry issuing fresh warnings last night over hot-money flows being dropped by western economies on its unsuspecting exporters via currency speculation, Brazil's central bank then set off its own defensive anti aircraft battery with a surprisingly deep interest rate cut late Wednesday. Having tried everything from taxes on hot foreign inflows to currency market intervention, they are braced for a long war and there's little sign of the flood of cheap money from the United States, Europe and Japan ending anytime soon. So, if you can't beat them, do you simply join them?
The prospect of a deepening of this currency conflict -- essentially beggar-thy-neighbour devaluation policies designed to keep countries' share of ebbing world growth intact -- was a hot topic this week for Societe Generale's long-standing global markets bear Albert Edwards. Edwards, who represent's SG's "Alternative View", reckons the biggest development in the currency battle this year has been the sharp retreat of Japan's yen and this could well drag China into the fray if global growth continues to wither later this year. He highlighted the Japan/China standoff with the following graphic of yen and yuan nominal trade-weighted exchange rates.
from Global Investing:
Emerging central banks that sold billions of dollars over the summer in defence of their currencies might soon be forced to do the opposite. Japan's massive currency intervention on Monday knocked the yen substantially lower not only versus the dollar but also against other Asian currencies. The action is unlikely to sit well with other central banks struggling to boost economic growth and raises the prospect of a fresh round of tit-for-tat currency depreciations. Already on Monday, central banks from South Korea and Singapore were suspected of wading into currency markets to buy dollars and push down their currencies which have recovered strongly from September's selloff. The won for instance is up 6.9 percent in October against the dollar -- its biggest monthly gain since April 2009. The Singapore dollar is up 4.5 percent, the result of a huge improvement in risk appetite.
Despite the interventions, the yen ended the session more than 2 percent lower against both the won and the Singapore dollar, and most analysts reckon Japan's latest intervention is by no means its last. That's bad news for companies that compete with Japan on export markets and will keep neighbouring central banks watching for the BOJ's next move. "Asian central banks are likely to play in the same game, and keep currencies competitive via regular interventions," BNP Paribas analysts said.
from Global Investing:
In less than two months, Turkey will mark the first anniversary of the start of an unusual monetary policy experiment, and it may well do so by calling it off. The experiment hinged on cutting interest rates while raising banks' reserve ratio requirements, and as recently as August, the central bank was hoping it would be able to slow a local credit boom a bit but still protect exports by keeping the currency cheap. Instead, an investor exodus from emerging markets has put the lira to the sword, fuelling at one point a 20 percent collapse in its value against the dollar. That has forced the central bank to roll back some of the reserve ratio hikes and last week it jacked up overnight lending rates in an attempt to boost the currency. It has also sold vast quantities of dollars and is promising to unveil more measures on Wednesday.
But what the market really wants to see is an increase in Turkey's main interest rate. "Not sure that 'measures' short of rate hikes will help," RBS analyst Tim Ash writes.
Gary Smith, head of central banks, supranational institutions and sovereign wealth funds at BNP Paribas Investment Partners, has written a special guest blog for Macroscope in which he argues that central banks should consider ways to hedge their FX reserves against the crisis.
"After the 2008 crisis, a mathematical approach to measure the adequate level of foreign exchange reserves – import cover or an equation relating to short-term debt – no longer has much credibility. In the absence of sensible guidelines on adequacy of reserves there is now a general desire to have plenty of reserves.
Five things to think about this week:
- Nominal bond yields have risen across the curve, while term premiums and fixed income volatility are higher in an environment of uncertainty about how central banks will exit from quantitative easing policies once recovery takes hold. Bonds have turned into the worst-performing asset class this year according to Citi and none of the factors which markets have blamed for this are about to disappear. Curve steepening seen in April/May has started to reverse and whether it continues is being viewed as a more open question than whether yields head higher still.
- World stocks' are struggling to extend the near-50 percent gains seen since March 9 but they have yet to succumb to gravity despite a back up in government bond yields. Citigroup analysts reckon global equity markets can rally as long as Treasury yields stay below 5-6 percent but it might be the speed of yield moves that determines whether equities get rattled or keep looking past higher borrowing costs to the recovery story.
All this talk about ditching the dollar as world reserve currency may be irrelevant -- central banks are already walking away. The latest International Monetary Fund figures show dollar share of world FX reserves falling to 64.0 percent in last year's fourth quarter from 64.4 percent the previous quarter. Doesn't sound much, but at that pace dollar is less than half of world reserves in less than a decade. years. It was the same for once mighty sterling. The pound's share dropped to 4 percent from 4.5 percent. The euro rose 1 percentage point to 26.5 percent.
Marc Chandler of Brown Brothers Harriman says not too much should be made of this though. "The reserve figures are heavily influenced by valuation swings," he says.