from Rolfe Winkler:
Go for it Gary
Gary Gensler -- regulator and, yes, Goldman alum -- has distinguished himself in Washington. As CFTC Chairman, he's fought to impose stricter rules on OTC derivatives and recently proposed rules that would cut the leverage currency traders are allowed to deploy from 100:1 to 10:1. Lest we all forget how dangerous leverage can be when traders misuse it, there's LTCM to serve as exhibit A. In a clear sign that Gensler is fighting the good fight, traders are screaming about the proposed rule. Fantastic.
From Carolyn Cui and Sarah Lynch at WSJ: Foes take on leverage curbs from CFTC
An attempt by regulators to protect investors from volatile global currency markets has triggered an uproar among lawmakers, currency dealers and thousands of small traders.
The Commodity Futures Trading Commission has proposed rules that would reduce the amount of borrowed funds that retail investors can use when investing in the U.S. foreign-exchange market to as much as 10-to-1, from the existing 100-to-1 for major currencies.
Under current rules, a customer putting up a security deposit of $1,000 in cash will be able to trade a notional amount of $100,000, a common contract size for currencies such as the dollar and the Japanese yen. The new rule would cap that amount at $10,000.
The rules also would require dealers to abide by new capital and disclosure requirements.
If the rules come into force, investors would be required to either put more capital in their accounts or pare their positions.
Unfortunately, what I'd like to start calling "the politics of easy credit" may get in the way of this sensible new rule:
"If our leverage rules are 10-to-1 and leverage rules elsewhere are 100-to-1, the business is going to move elsewhere," House Agriculture committee member Jim Marshall (D., Ga.) said.
Thanks Congressman Marshall, for protecting American entrants in the race to the bottom.
As I argued yesterday, on the one hand we want tougher financial reforms, but reforms are related in the sense that they're all designed to reduce the availability of credit. Call it what you want: leverage, credit, debt finance. Americans love the stuff because it magnifies rewards. The less you put down for an investment -- whether you're a bank, mortgagee or currency trader -- the more juice that comes back to you if a trade goes right.
from The Great Debate UK:
Greece loses a major incentive to stay within EMU
-Jane Foley is research director of Forex.com. The opinions expressed are her own.-
Germany’s Finance Ministry this week denied a report in Le Monde that Germany, France and other countries were working on a package to rescue Greece. It seems that for now the official line from the grandfathers of European Monetary Union is that Greece can sort out its own budget deficit. The official line from the Greek government is much the same; it continues to maintain that it doesn’t need a bailout.
The problem with this is that this lacks credibility. The blowing out of the yield spreads on Greek government bonds over bunds and the price of credit default swaps are evidence of that. In the months after EMU, the 5 year Greek-bund spread was less than 200 bps. This week it was over 400 bps. Unless the impact of bond yields can be contained Greece loses a major incentive to stay within EMU.
As with many of the less well fiscally managed countries in the approach EMU in 1999, Greece benefitted hugely from convergence trades. Technically, the spread between Greek bond yields and Germany’s should have closed only after budgetary reform led to a much smaller budget deficit.
In practice what happened with many countries is that the market pre-empted the convergence trade and the countries which had previously suffered from high debt maintenance costs saw the burden of financing their deficits decline markedly. In turn the savings made on financing the deficit hid the fact that true budgetary reform was in certain cases avoided. Years of strong growth allowed the government in Greece to get away with it. That the recession has uncovered the cracks is not really a surprise.
While EMU offers Greece many political advantages, the question now must be can it afford to stay within EMU? It is no longer benefitting from German-like bond yields and it is suffering the pressure of what is still a very strong exchange rate. It is not without precedent that a country can turn its fiscal situation around. Sweden’s experience in 1994 is a very good example of this. Canada also suffered years of austerity in the 1990s and transitioned its economy into one which was better positioned than most to cope with the latest recession.
Ireland also appears to be swallowing the bitter bill of budget reform. What makes Greece different is that it is highly questionable as to whether the electorate have the stamina to suffer reform. The farmers have this month been blockading roads; the risk of rising social discontent is high.
I am not an economist but surely such abail-out would set an unhealthy precedent. How could the EU respond if Spain’s and later Italy’s dire problems brought them begging at the ECB’s door in the same way?
from The Great Debate UK:
Tides may turn in the forex market into 2010
-Jane Foley is research director at Forex.com. The opinions expressed are her own.-
The final weeks of 2009 have brought a sense that tides may be turning in the foreign exchange market reflecting broader developments in the global economy. The predominant changes relate to the dollar.
December’s 5 percent recovery in the USD index is linked to an improved outlook for the U.S. economy.
There are risks to this optimism, but short dated U.S. yields have pushed higher since late November allowing the dollar to shrug off the downtrend that characterised it during 2009 and potentially embark upon a cyclical recovery; at least against some currencies.
Better U.S. economic data in early December couldn’t have come soon enough for the Japanese authorities. In late November USD/JPY had fallen to a 14-year low.
Having proclaimed the economy to be in deflation the Japanese government openly pressured the Bank of Japan to take further supportive policy measures.
The Bank announced an emergency credit facility and subsequently stated it will not tolerate a negative inflation rate. This, combined with a rise in short dated U.S. yields, has allowed the JPY to take back the mantle of favoured funding currency from the dollar. The downtrend in USD/JPY that has been in place since mid 2007 may be turning.
from The Great Debate UK:
Development of the risk trade
- Jane Foley is research director at Forex.com. The opinions expressed are her own.-
A willingness to differentiate between risk on a country or at a regional level is an important part of the repair process in financial markets.
Credit worthiness is at the core of any assessment of risk and naturally credit worthiness can sort "risk" into a hierarchy which should be instrumental to the pricing of assets and currencies.
At the start of this year, fear and uncertainly herded investors in and out of "risky" investments fairly indiscriminately. Even though the overall rally in risk since the spring suggests that broad based fear has been dispersing, strong correlations between some of these "risky" assets persist.
Forecasts of slow levels of growth for most of the G10 in 2010 suggests that there are still a few more negative shocks in store for the markets in the coming months.
That said, reduced levels of fear should allow fundamentals including assessments of credit worthiness to play a greater part in asset allocations.
from The Great Debate UK:
Is a bubble burbling in financial markets?
-Jane Foley is research director at Forex.com. The opinions expressed are her own.-
The discrediting of the efficient markets theory in the aftermath of the financial crisis appears to have been accompanied with growing support for the view that rather than efficient in nature, financial markets are predisposed towards the formation of bubbles.
A bubble can simply be defined as an occurrence that begins when the price of an asset has been driven significantly above it "fair" value. According to the efficient markets theory this would not happen.
If bubbles are a natural outcome of financial market activity it is relevant to ask whether the very loose fiscal and monetary policies of many central banks and governments are presently sowing the seeds of the next bubble.
Even though the real economies of the U.S., UK, Eurozone and Japan continue to be defined by expectations of rising unemployment and falling real wages, access to cheap money has already helped restore the profitability of many investment banks.
In turn, this has fed risk appetite which is evident in the rally in stocks since the spring, increased demand for "risky" currencies and a recovery in commodities prices. Brent oil has rallied by 128 percent from its 2009 low. The ability of oil to rally despite the existence of oil supplies well above the seasonal average suggests there is already speculative element in this market which could be in danger of driving prices above their fair value.
This week’s meetings of the Federal Reserve, the Bank of England and the European Central Bank have focussed attention not so much on rates, but on the extraordinary policy decisions taken by these central banks in the wake of the financial crisis and whether conditions are ripening in favour of a gradual withdrawal of some of these policies.
Jane, since you assert that the demand for crude was flat while the price was rising, a plausible explanation would be that the whole production curve has been elevated to compensate the loss in US$ value. I think that conditions for spotting a bubble formation stages should be investigated in correlation with the level of affordability for the end consumer. The housing bubble was predicted 2 years in advance, based on this kind of approach.
However, in repeated statements, Middle East suppliers were not shy spelling out that their comfort zone prices were between US$75 and US$80 when the barrel was hovering around US$60. In very short time, prices on the market have been elevated to a plateau of US$80, with no apparent changes in observable factors concurring in price formation. Therefore, what is the mechanism of translating a statement of desire into effective pricing in a market deemed free?
from The Great Debate UK:
Slow growth and deficit stem lure of dollar
-Jane Foley is research director at Forex.com. The opinions expressed are her own.-
The U.S. dollar may have found support this week but the USD index remains at a 14-month low.
The impact of the financial crisis in drawing buyers to the "safe-haven" dollar has in effect been almost cancelled out by the healing in risk appetite. The dollar looks to have re-embarked on the downtrend that had been in place for more than two years prior to the start of the financial crisis, only now the U.S. fundamentals have arguably deteriorated further.
Slow growth and a hefty budget deficit are likely to hamper the attraction of the dollar for some time. That said, there is a huge invested political interest in ensuring that any further declines in the dollar remain orderly.
The weakness of the dollar has already prompted some Asian countries such as South Korea and Taiwan to intervene in order to prevent the appreciation of their currencies impacting competiveness. This action can be viewed as a protest against the renminbi-dollar peg and a guard against losing competitiveness to China.
As the euro rises against the dollar, it is also rising against the renminbi and -- spurred on by the actions of other Asian central banks -- the chances are that it will continue to appreciate against a host of other Asian currencies.
Since the start of last year, the euro has risen by 37 percent against the South Korean won. In recent comments, French Finance Minister Christine Lagarde stressed that she did not want to see the euro bearing the brunt of the downward adjustment of the dollar.
“In recent comments, French Finance Minister Christine Lagarde stressed that she did not want to see the euro bearing the brunt of the downward adjustment of the dollar.”
Of course not. What she wants is most of other major currencies also rise against the dollar. This way the US gets to depreciate its currency in a more controlled manner, a preferred course given the dollar MUST be depreciated anyway. Therefore it is the task of G20 to manage a coordinated currency rise against the dollar, so the their own competitiveness is maintained. Doing this requires the best of G19 wisdom. G19 because the US has already decided on a course of depreciation and it will do it with or without G19 cooperation.
from The Great Debate UK:
Whose money will prevail as reserve currency?
-Jane Foley is research director at Forex.com. The opinions expressed are her own.-
If there is one foreign exchange story that will run and run it is the one about the U.S. dollar (USD) and its future as the world’s dominant reserve currency. The discussions on this topic have at least brought some agreement, namely that there is no clear alternative and therefore there can be no quick fix change. That said, much uncertainty remains as to what can, if anything, eventually replace the dollar.
The basis for questioning the USD’s position as global reserve currency stems from its declining value and its "poor" fundamentals. The dollar index is currently trading close to where it was 14 mpnths ago, ahead of the financial crisis. At that point the USD had been on a downtrend for over two years. The widening in the U.S.’s budget deficit this year has worsened the fundamental backdrop and drawn attention to its "twin deficits". This has made creditor nations nervous.
So, how bad are these fundamentals?
The U.S. current account deficit this year has actually improved. However, once the U.S. recovery gets underway, many expect to see the current account widen again. Textbooks suggest that a current account deficit should lead to a downward adjustment in the currency which will help address the imbalance. This is not always the case. Australia presently has a current account deficit of around 4.5 percent of GDP and the effective Australian exchange rate has rallied by 27 percent since January 1, 2009.
Current account imbalances, while always a potential currency negative, only weigh if international savers become less keen to fund it. Investment decisions will be determined by other factors such as relative growth and interest rates, political stability and fiscal coherence. A huge USD negative this year has been the widening in the budget deficit to potentially 11 percent of GDP from 4.7 percent in 2008. This implies huge bond issuance.
So much has been written and debated about this, Rolfe Winkler has a very informative Lunch Time Link of yesterday to The Economist.
I am going to be a real accountant and move away from supply and demand principles.
Why do we not simply add public and private sector assets (+ off-shore)together, subtract combined liabilities, remove double counting upon this consolidation, thereby calculating owners’ equity. If we are short, we revalue the assets and create a realistic non-distributable reserve.
For good measure, let’s convert it per capita to determine the equity value per citizen and repeat the exercise for the G20.
That might cause some people to jump from the Green Back onto the Hairy Back.
Global rebalancing to weaken dollar, quietly
– Neal Kimberley is an FX market analyst for Reuters. The opinions expressed are his own –
Twenty-four years ago, major nations called for depreciation of the dollar to rebalance the global economy. Now, as another effort at rebalancing looms, the dollar will again bear the brunt — though officials will try to ensure its fall is less dramatic this time.
That’s the implication of President Barack Obama’s announcement this week that he will push world leaders for a new global “framework” in which the United States would cut its huge trade and budget deficits.
Agreeing on this framework would be politically difficult, since it would require policy changes by many countries — China, for example, would probably have to rein in its explosive export-led growth.
But as the euro’s climb to a new one-year high versus the dollar this morning shows, markets are starting to think the rebalancing process may start as soon as this week’s Pittsburgh summit of leaders from the Group of 20 nations.
The Plaza Accord of 1985 called for “orderly appreciation of the main non-dollar currencies against the dollar”; it was followed by central banks’ coordinated intervention to ensure that happened.
This time, with the world shakily emerging from a financial crisis, policymakers are likely to try to manage the dollar’s drop in a more low-key fashion.
Well said Casper Lab. I find the rise in Gold an ancient way of hedging the dollar rise. It is a fool’s game.
I concur, some of the earlier comments are uncalled for, offensive and unjustifiable.
Anibus:
We’re ever becoming more dependent on each other in trade. Manufacturing is integral as a country is developing. There are several economies of scope and scale during a country’s expansion of capacity growth through infrastructure and some of this can be captured through the manufacture of non-durable and semi-durable goods. As infrastructure demand begins to decline (as a rate of demand), countries then move onto higher skilled areas as the value of human skill, capital and technology have higher returns in these areas.
No doubt that there must be some level of manufacture within a country, however, to mandate a minimum level of manufacturing (a so called manufacturing output base) is moving backwards. Besides, how would this be made feasible? Subsidies, lower taxes, tax holidays? This is what distorts the market and transfers the tax burden on individuals.
Don’t cry for the dollar, yet
– Agnes T. Crane is a Reuters columnist. The views expressed are her own –
It looks bad for the dollar, but looks can be deceiving.
Its sharp decline in the last week has pushed the euro to its highest level in a year and reignited fears that there’s only one place for the dollar to go, and that’s down.
Rhetoric from influential investors like Warren Buffett as well as big foreign buyers of U.S. debt like China and Russia has fed that sense of doom.
Then there’s the yen-like role of the dollar as the funding currency, which is casting a pall over the buck since the longer the Fed keeps a lid on interest rates, the longer the pressure stays on the currency.
Yet the dollar is still the No. 1 currency stashed in reserves around the world, by a long shot. International Monetary Fund data showed the dollar accounting for 65 percent of total allocated reserves in the first quarter.
That means there’s only so far you can push the currency before the self-interest of the world’s savers kicks in to support the buck.
“That means the dollar is still the only game in town, rightly or wrongly, which should provide some comfort to those fearing the worst — a dollar in freefall without a net.”The dollar is the only game in town because it’s used to purchase oil from OPEC. therefore requiring nations to hold it in their reserves, thus creating demand for the dollar. When the price of Oil goes up, the dollar goes down (takes more dollars to buy the oil), . Seems like a false sense of security, all we need to fear is a giant oil bourse.
