MacroScope

Giant FX market now $4 trillion gorilla

Global foreign exchange has always been one of the biggest markets in the world but its exponential growth keeps accelerating. The triennial survey by the Bank for International Settlements shows global foreign exchange market turnover leapt 20 percent to $4 trillion, compared with $3.3 trillion three years ago.

FXBIS

The increase in turnover was driven by growth in spot transactions, which represent 37 percent of FX market turnover.  Turnover was driven by trading activity by “other financial institutions” — a category that includes hedge funds, pension funds and central banks, extending a trend seen in the past several years where buyside firms are increasingly trading currencies themselves, via prime brokerage, rather than turning to interbank dealers.

Also notably, emerging market currencies are gradually increasing their share in the marketplace. Turnover of the Russian rouble has increased its share in total turnover to 0.9 percent of 200 percent (FX is double counted as transaction involves two currencies), up from 0.7 percent three years ago, while the Brazilian real rose to 0.7 percent from 0.4 percent. The Indian rupee’s share rose to 0.9 percent from 0.7 percent. The dollar keeps its dominance, although off its 2001 peak, with its share standing at 84.9 percent.

Diplomacy in central banking debate comes back to bite Weber

German central bank board member Thilo Sarrazin

German central bank board member Thilo Sarrazin

Fresh from asserting that diplomacy is over-rated for central bankers, German Bundesbank President Axel Weber is now embroiled in an embarrassing scandal over undiplomatic comments from one of his board members which could ultimately damage Weber’s own career ambitions.

Thilo Sarrazin, who joined the central bank’s board last year, has unleashed a debate in Germany over immigration and integration policy with a book critical of Turkish immigrants and has drawn rebukes from political leaders, including Chancellor Angela Merkel, for asserting that Jews and Basques have a “particular gene” that sets them apart.

The Bundesbank condemned his comments as harming the reputation of the institution and is considering its options, but under German law – designed to safeguard the independence of the central bank from political swings and roundabouts — has only limited options to get him removed.

Central banks should hedge: Gary Smith

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.

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What is lacking from the reserves debate, however, is whether National Wealth Managers in general (and central bank reserves managers in particular) should invest in assets that might increase in value during a crisis.

Should central banks now sell gold?

Central banks in debt-strapped countries have a golden opportunity ahead of them, if you will excuse the pun, to help their countries’ finances by selling their yellow metal holdings.

At least, that is the message that Royal Bank of Scotland’s commodities chief Nick Moore has been giving in recent presentations — and he thinks it might happen.   The gist is that gold is now at a record price but banks have not come close to  meeting their sales allowance for the year.

Under the Central Bank Gold Agreement there is a quota of 400 tonnes that can be sold by central banks within a 12 month period and with only about three months to go in the latest period less than 39 tonnes has been sold.  At today’s price that remaining 361 tonnes is worth some $14 billion.

The ECB’s half-trillion euro question

ReutersEuropean banks must pay back almost half a trillion euros to the European Central Bank on July 1 as the ECB’s first-ever one-year loans fall due, potentially putting pressure on banks’ ability to refinance and on money market interest rates.

But the ECB is confident it has put the necessary crash protection in place, with offers of unlimited three-month and six-day funds on the menu next week to make sure banks are not starved for funds.

 ”We have taken all precautions,” Austrian central bank governor Ewald Nowotny assured journalists on Friday. “We are confident that this will all occur without tensions.”

No more Mr. Nice Guy

By Louise Egan

Canadian Finance Minister Jim Flaherty catapulted to “rock star” status at international meetings in Washington on the weekend, where he took his anti-tax crusade and stared down the powers in Washington and Europe who had plans for a global bank levy.

The Canadians are traditionally peacemakers at these events, building bridges between opposing camps and forging consensus. So when Flaherty stormed into Washington railing against a bank tax being proposed by some of the world’s most powerful leaders in the G20, the reactions ranged from bemused to outright flabbergasted.

“What has happened to the mild-mannered Canadians?” said one bewildered journalist covering the talks among the G20 developing and developed nations.

ECB takes a turn to taciturnity

European Central Bank (ECB) President Jean-Claude Trichet attends a session at the World Economic Forum (WEF) in Davos January 26, 2008. REUTERS/Denis Balibouse

The European Central Bank’s normally loquacious policymakers have been struck dumb over the last month.

The ECB’s 22 rate-setters generated just 14 Reuters news stories in February, much lower than January’s total of 24 and the 27 stories I count in December.  Even the core Executive Board members have managed only four speeches between the six of them, compared to a flurry of 10 speeches and interviews in the previous two weeks after policymakers returned to work from their end-of-year break.

Even the U.S. Federal Reserve, playing two team members short with just 17 policymakers at the moment, has out-talked the ECB with a rough tally of 26 news stories generated so far this month, a 30 percent increase on January.

from Global Investing:

It’s the exit, stupid

Ghoul

Anyone wondering what ghoul is most haunting investors at the moment could see it clearly on Tuesday -- it is the exit strategy from the past few years' central bank liquidity-fest.

Germany came out with a quite positive business sentiment indicator, relief was still there that Greece had managed to sell some debt a day before, and Britain formally left recession -- albeit in a limp kind of way.

But what was the main global market mover? It was China implementing a previously announced clampdown on lending.

Asking a banker about the Olympics

Henrique Meirelles, Brazil’s highly rated central bank president, gave unusual insight into current thinking at the International Olympic Committee in a speech in Oxford the other night.

Diverging from his main theme on Brazil’s remarkable journey from economic basket case to emerging market superpower, Meirelles said that he had gone to Copenhagen last month as part of Rio de Janeiro’s successful bid for the 2016 Olympics. The reason: The IOC asked him to come.

Meirelles said that the IOC knew that Brazil currently had all the conditions needed to host the Games, but wanted to know about how predictable it was that this would carry through over the next seven years. “They wanted to know what is really happening,” he said.

The Fed’s Signal-To-Noise Ratio

Conflicting signals from Fed speak have central bank watchers back to playing the word game, adding renewed weight to every nuance that can be gleaned from official speeches and pronouncements. There is good reason for the mixed messages. Fed policymakers face a tricky task trying to ensure their commitment to an accommodative stance while also having to assure investors and the public that they will remove the punchbowl before the party gets out of hand.

Eric Lascelles at TD Securities applies a little physical mechanics to the study of Fed chatter.  

The contemplation of signal-to-noise ratios is usually the exclusive domain of electrical engineers. But this subject has become of increasing relevance to economists due to the sheer number of Fed Governors and Presidents who are now proffering their myriad views on a daily basis. It has become increasingly difficult to separate what constitutes a reliable signal of future monetary policy from the inconsequential noise. The monetary policy signal-to-noise ratio is currently very low. This partly explains why expected bond market volatility remains so high – central bankers as a collective are not offering anything close to a clear path forward.