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from Global Investing:
Paid for the risk? Egypt’s tempting pound
Surprising as it may seem, the Egyptian pound has got some fans. The currency has languished for months at record lows against the dollar and the headlines are alarming -- the lack of an IMF aid programme, meagre hard currency reserves, political upheaval. So what's to like ?
Analysts at Societe Generale say that just looking at the spot exchange rate of the pound is missing the bigger picture. Instead, they advise buying 12-month non-deliverable forwards on the pound -- essentially a way of locking into a fixed rate for pound against the dollar in a year's time depending on where you think it may actually trade. They write:
The implicit yield at this point is 21 percent for the 12m NDF, which we think is quite attractive. The way to think about Egypt NDFs is to approach them as a distressed asset. The risk/reward is quite attractive, and a lot of the bad news has been priced in. Yes, there have been serious delays in the programme negotiations with the IMF and that has clearly been a negative for the overall country view, but I would like to point out that the actual 12m NDF level has hardly budged in the process. This to me suggests that the valuation looks particularly good.
One year forwards are typically calculated by assuming the currency will depreciate over 12 months by an amount equivalent to the currency's deposit rate over that period. However, the non-deliverable forward on dollar/pound, a cash-settled FX forward calculated from open market pricing, implied a pound exchange rate at 8.5 pounds per dollar in a year's time - more than 20 percent weaker than today's spot price of 6.9 per dollar. This means that there is more than 10 percent pure currency depreciation (i.e. outside of the deposit rate) priced on the NDF. Given that this is well in excess of what many assume will be the actual pound decline, the trade starts to look attractive despite all the economic and political pessimism. In other words, the NDF rate is assumed to have priced in excessive gloom.
from Global Investing:
Twenty years of emerging bonds
Happy birthday EMBI! The index group, the main benchmark for emerging market bond investors, turns 20 this year. When officially launched on Dec 31 1993, the world was a different place. The Mexican, Asian and Russian financial crises were still ahead, as was Argentina's $100 billion debt default. The euro zone didn't exist, let alone its debt crisis. Emerging debt was something only the most reckless investors dabbled in.
To mark the upcoming anniversary, JPMorgan - the owner of the indices - has published some interesting data that shows how the asset class has been transformed in the past two decades. In 1993:
- The emerging debt universe was worth just $422 billion, the EMBI Global had 14 sovereign bonds in it with a market capitalisation of $112 billion.
- The average credit rating on the index was BB.
- Public debt-to-GDP was almost 100 percent back then for emerging markets, compared to 69 percent for developed markets.
- Forex reserves for EMBI countries stood at $116 billion
- Per capita annual GDP for index countries was less than $3000.
Now fast forward 20 years:
- The emerging debt universe is close to $10 trillion, there are 55 countries in the EMBIG index and the market capitalisation of the three main JPM indices has swollen to $2.7 trillion.
- The EMBIG has an average Baa3 credit rating (investment grade) with 62 percent of its market cap investment-grade rated.
- Public debt is now 34 percent of GDP on average in emerging markets, while developed world debt ratios have ballooned to 119 percent of GDP.
- Forex reserves for EMBIG members stand at $6.1 trillion
- Per capita annual income has risen 2.5 times to $7,373.
from Breakingviews:
China FX swap may blur Bank of England mandate
By Peter Thal Larsen
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
The Bank of England is discovering the downside of being the City of London’s chief watchdog. The central bank is under pressure from financial institutions to set up a currency swap with the People’s Bank of China. Such a move would help to boost London as a centre for trading offshore renminbi. However, worrying about the City’s competitiveness also risks blurring the BOE’s main objective of preserving financial stability.
from Global Investing:
Asia’s ballooning debt
Could Asia be headed for a debt crisis?
The very thought may seem ludicrous given the region's mighty current account surpluses and brimming central bank coffers. But a note from RBS analysts Drew Brick and Rob Ryan raises some interesting concerns.
Historically speaking, most EM crises have been borne on the back of excessive capital inflows, Brick and Ryan write. And in many Asian countries, the consequence of these flows has been over-easy monetary policy that has left citizens and companies addicted to cheap money. Personal and corporate indebtedness levels have spiralled even higher in the past five years as governments across the continent responded to the 2008 credit crunch by unleashing billions of dollars in stimulus.
from Global Investing:
Carry currencies to tempt central banks
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.
from Global Investing:
Emerging market FX reserves again on rise
One of the big stories of the past decade, that of staggering reserve accummulation by emerging market central banks, appeared to have ground to a halt as global trade and economic growth slumped. But according to Bank of America/Merrill Lynch, reserves are starting to grow again for the first time since mid-2011.
The bank calculates that reserve accumulation by the top-50 emerging central banks should top $108 billion in September after strong inflows of around $13 billion in each of the first two weeks. Look at the graphic below.
from Global Investing:
Aussie: reserve managers’ new favourite
Lucky Australia. In a world of slowing economic growth its central bank today raised forecasts for 2012 GDP growth by a half point to 3.5 percent. That's down to a mining boom, driven of course by China. But there's a downside. Australia's currency, the dollar (or affectionately, the Aussie), has steadily risen in recent years, and is up 3 percent versus the U.S. dollar this year. Unsurprisingly, the Reserve Bank of Australia tempered its good news on growth with a warning over the Aussie's gains.
Analysts at Credit Agricole note that the Aussie's gains this year have come in tandem with a rise in Japan's yen. That in itself would have been highly unusual in the past: the yen is a so-called safe haven, the currency investors run to when all else is selling off, while the Aussie is a commodity currency, one that does well when world growth is looking good and risk appetite is high. CA analysts explain thus:
from Global Investing:
Battered India rupee lacks a warchest
The Indian rupee's plunge this week to record lows will have surprised no one. After all, the currency has been inching towards this for weeks, propelled by the government's paralysis on vital reforms and tax wrangles with big foreign investors. These are leading to a drying up of FDI and accelerating the exodus from stock markets. Industrial production and exports have been falling. High oil prices have added a nasty twist to that cocktail. If the euro zone noise gets louder, a balance of payments crisis may loom. The rupee could fall further to 56 per dollar, most analysts predict.
True, the rupee is not the only emerging currency that is taking a hit. But the Reserve Bank of India looks especially powerless to stem the decline. (See here for an article by my colleagues in Mumbai) . One reason the RBI's hands are effectively tied is that India is one of the few emerging economies that has failed to build up its hard currency reserves since the 2008 crisis and so is unable to spend in the currency's defence. Usable FX reserves stand now around $260 bilion, down from $300 billion just before the 2008 crisis. See the following graphic from UBS which shows that relative to GDP, India's reserve loss has been the greatest in emerging markets.
from Global Investing:
Buy more yen… to increase reserve returns
Japan has not been a sexy destination for investment. In an environment of rising sovereign risk, Japan's huge debt burden (+200% and rising) and lack of triple-A rating (Japan is rated AA-, Aa3 and AA by the main rating agencies) are not something that would attract the world's investors, including the powerful central bank reserve managers.
However, the yen is a different story. Enjoying a safe-haven status, the Japanese currency is staying just below its all-time high around 75.90 per dollar, while it also rose to an 11-year peak against the euro in January.
from Breakingviews:
China’s $100 bln missing reserves look ominous
By John Foley
The author is a Reuters Breakingviews columnist. The opinions expressed are his own
China has somehow misplaced $100 billion. That’s how much is unaccounted for in the country’s $3.2 trillion foreign exchange reserves, which fell for the first time in a decade over the last quarter. If that’s hot money leaving the country, so be it. But genuine capital flight would be another story.
