From an interview Friday with BOJ deputy governor Hiroshi Nakaso.
Article is here: BOJ Deputy Governor Says Japan Is on Track (The Wall Street Journal is often gated, so if you're unable to access the article try a search of Google news using the headline) .
International Monetary Fund data showed on Friday the increase in Australian and Canadian dollar holdings by central banks:
Central banks held US$98.66 billion in the Australian currency globally as of the first quarter 2013, compared with US$89.74 billion in the final quarter of 2012
They held US$94.93 billion in Canadian dollars,(compared with US$90.05 billion in Q4 2012)
The IMF has previously classified central bank holdings in the Australian and Canadian dollars under “Other Currencies”, this is the first time they have provided details for these two separately
The Wallabies beat the Lions 16-15 in the second game of the series on Saturday evening in Melbourne. Australian captain, James Horwill, was quoed after the game: “Take that, Mike at ForexLive!” Sydney Morning Herald.
ECB’s executive board member Benoît Cœuré has told The Times that the ECB is looking carefully at forward guidance but it is too early to say whether it will be used more extensively.
Forward guidance is used by the US Federal Reserve
Is being considered by the Bank of England
Also:
Coeuré predicts the euro zone economy will recover slowly, with growth expected in the second half of 2013 and a further pick up in 2014
Schaeuble is quoted in German newspaper Frankfurter Allgemeine Sonntagszeitung, to be published Sunday.
“These bankers seem to like themselves in the role of aloof super humans who only have contempt for their fellow humans,” Schaeuble was quoted as saying. “Instead it is they who should get our contempt and to whose game we should put a stop.”
And, most importantly:
Schaeuble said the tape recordings highlighted “how necessary and important it was to introduce clear rules into the financial markets”.
If you’re just back from holdiay here’s some background information on the liquidity squeeze in China of the past two weeks. What caused China’s money market crunch?
Monday is the Canada Day holiday and the country celebrates 144 of independence from Britain by taking over one of the UK’s oldest institutions as Mark Carney becomes the first foreigner to lead the Bank of England.
The UK press has been sharpening its knives for Carney, who has an overblown reputation as the Superman of central banking. The FT has an extensive profile of Carney and a behind the scenes look at how he got the job.
Having won over many sceptics with his single performance in Britain since his appointment, and raised expectations to levels almost guaranteed to produce disappointment, the question is whether Carney can replicate his Canadian reputation once in post at the bank.
The good news for Carney is that he takes over from Mervyn King who was easily the worst central banker of his generation (although this columnist gives him some credit).
Yesterday, I woke up at an obscenely early hour to speak with BBC radio about Carney.
Andrew Sentance, who was on the MPC from 2006-2011, says Carney shouldn’t take any action in his first 100 days as BOE leader.
Carney should be predominantly in listening, observing and learning mode. Coming from Canada, his main challenge will be to familiarise himself with the British economy, the operation of the UK financial system and the views of key stakeholders. He should get out and about – both in the regions and in the City – and use the media to communicate the view that he is seeking to understand the challenges which the UK economy and financial system are currently facing as the basis for his actions over the next five years.
Inside the Bank, he should initiate a total overhaul of the Bank's Inflation Forecast and Inflation Report process. The Bank's recent forecasting performance has been poor and it has been far too optimistic on inflation.
Sentance was a lousy central banker and this is lousy advice. Carney needs to kick-start the moribund UK economy with action. A walk in the English countryside isn’t going to give him insight on how to cure the economy.
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ECB’s Noyer: ECB stands ready to act if necessary; policy to remain accommodative as long as necessary; ECB can’t use unconventional policy like Fed, BOJ
Fed’s Lacker: Fed not only leaving punch bowl in place it is still spiking the punch, albeit at a reduced pace; September one possible date for taper but depends on data
Chicago PMI slides to 51.6 in June from 58.7 in May
University of Michigan consumer sentiment index rises to 84.1 final in June from preliminary 82.7
S&P downgrades Cyprus to selective default, ECB suspends eligibility of sovereign debt as collateral
S&P 500 falls 0.5%
US 10-year note rises 2 bp to 2.497%
EUR/USD rallies strongly in early US trade, reaching 1.3103 early on before falling sharply as dovish ECB comments and talk of a September taper helped bolster the dollar. Much of the dollar demand was flow driven, to be honest, not a result of headlines. Dealers expected more mixed business at month-end but it turned out to be one-way traffic for the dollar.
USD/JPY reached 99.45, EUR/USD fell to 1.2992 near the month-end fixings.
Next week will be huge with multiple central bank meetings as well as loads of important US data (ISM, NFP). Expect more volatility ahead.
Month/quarter end has been a subdued affair so far.
We’ve seen some Japanese yen weakness, but nothing major. Nikkei gains, talk of toshin-related yen sales, talk of negative month/quarter end yen flows have all helped weigh on the Japanese currency.
USD/JPY up at 99.00 from early 98.75, having been as high as 99.13 after buy stops tripped through 99.00. Talk of more buy stops up in the 99.15/20 area.
EUR/USD effectively unchanged at 1.3060. Early rally couldn’t get through well-documented sell orders up at 1.3070/80 (area holds 200/55 dma) Buy stops above there ahead of more sell orders clustered 1.3100/10.
China’s Zhou: Consumer prices are stable / Current monetary policy is appropriate
Will adjust market liquidity as needed.
AUD/USD opened the day around 9280, falling gold price, various sell fixes and Shanghai comp opening down -0.7% had the AUD under intense pressure, falling to 9215 before any real buyers emerged.
The recovery in gold and the Shanghai comp going into positive territory, produced bargain hunters pushing the pair back up, more toshin interest similar to yesterday was also a driving factor, sending the antipodean back to 9250.
USD/JPY opened at the lows of 98.35 and drifted higher, the catalyst came from the futures market indicating decent gains for the Nikkei. After a good two way battle around 98.55, stops were tripped above 98.80, the buying was all Japanese and thought to be linked the toshin launches. We stopped just shy of 99.00, stops are said to be above 99.05 and 99.30, dips have remained shallow and so far limited to 98.70.
EUR/USD opened at 1.3038 and was dragged higher on cross flows, mainly EUR/JPY that rose from 128.18 to 129.37 on the day, gains linked to the toshin demand. The move stalled in the mid 1.3070s, 50 100 and 200 Day-MA’s are all between 1.3070/1.3079.
Most commentary and media coverage refers to the three main markets of bonds, equities and FX. And yet there are many other markets which deserve our attention. Unfortunately they are often ignored but it is often in these more obscure financial exchanges that significant moves and early warning signs can be found.
So with respect to interest rates, many look at 10 year government bond yields (borrowing costs) to give as the main indicator of rates. But to look for indications of what central bankers are expected to do, you need to look at the short term interest rate markets. And currently it is the money markets that have grabbed my attention. In the last month or two, there has been a significant change in the expectations of central bank actions. And it's not just in the United States, but in the UK, Europe and even China.
So the first chart to look at is the CIRVE curve. This is effectively a measure of the volatility in interest rate markets.
CIRVE 2011-2013
What you can see from this chart, is that there has been a massive increase in volatility. There is no longer a consensus of low rates forever. The increase in volatility shows that there are now more divergent views on where interest rates are going. The American CBOE (Chicago Board of Exchange) Interest Rate Volatility Index – SRVX index – shows the same, it has shot up over the last month.
So more volatility, but in what direction have markets moved? Not surprisingly given what Ben Bernanke has been saying, these markets are now predicting rates to increase earlier than they were expecting a month or so ago. But it's not just the US, markets are telling us that they now expect central bankers all over the world to tighten a lot sooner.
In the Eurozone the move has been dramatic and clearly will have caused some players large losses. According to my Broker mate "markets had gone too far pricing Europe as Japan….the front of the Euro curves was getting mad, discounting zero rates for a long time (which) was crazy".
So what has caused this correction over the last month and a half? Firstly it appears that markets got overly excited about the prospect of a negative deposit rates at the ECB, which is now deemed less likely. Secondly there has been slightly better EZ economic data, most recently better German IFO survey. Thirdly the message coming out of the ECB has contributed to the tightening theme – most notably that there are limitations to the effectiveness of extremely low interest rates. Add on the general environment created by the Fed reminding players that ZIRP (zero interest rate policy) is not going to last forever and there's been a significant change in the market. Markets had been expecting another rate cut from the ECB, now, no longer.
In the UK, it is a similar story – stronger economic data over the last month or two has ensured that markets had almost moved to price in a base rate increase by the end of the year! That is just six months' time and a lot sooner than had been expected (especially for all those with base rate tracker mortgages). It all kicked off on May 15with Mervyn King's most optimistic speech since the start of the crisis saying that the recovery had started (together of course with the Fed's warning about the end of QE).
However the story is complicated by the change at the top of the Bank of England. Soon to be Lord King is being replaced by the Canadian Mark Carney who starts on Monday. His arrival is causing uncertainty and extra volatility as markets have not yet got his measure. That has created wild swings this week coming up to the changeover. To quote one broker "a few guys have been hosed on these aggressive moves".
On Monday, the futures curve was predicting the first base rate rise by March 2014, by mid-week, it had moved out a whole year out to forecast the first rate rise in June 2015. But by Friday it had moved again to predict the first rate rise in September 2014. A highly volatile week's trading, especially given the low volatility of trading over the last few years as the 0.5% base rate was viewed as being almost permanent.
Mervyn King contributed to the move in his last speech ever as Governor on Tuesday. He stressed that the UK's economic recovery was precarious and that monetary stimulus was still needed, dismissing calls for a speedy return to "normal interest rates". Thus Lord King once again proved the power that central bankers have over markets. Power, soon to be transferred to the unknown Carney.
Not surprisingly this week has been exceeding busy in the Sterling money markets as traders and banks have sought to position themselves ahead of Carney's arrival. These markets will continue to be volatile until the new Governor is better understood. At the moment as an unknown he is causing volatility and fear. His early words will be very closely watched…
The changes in central bank tightening have been reflected in short dated government borrowing markets too. Yields on three month Treasury bills have gone from a low of 0.025% in mid May to 0.45% currently. In Italy the three month government borrowing rate rose this week to almost 0.8% the highest level in over a year and almost quadruple the low of 0.2% reached in April. And it is the same story in Spain with three month bill rates increasing to almost 1% from a low of 0.2% in April.
In summary these big and volatile moves are telling us that it is the beginning of the end of low rates. Markets have reappraised their previously held view of view of low central banks rates for the foreseeable future. The era of extraordinarily cheap money is ending and not just in the US. Of course some countries are closer to tightening than others- the US and UK clearly closer than Eurozone. But the markets are no longer assuming that the developed world is Turning Japanese.
This is a warning shot for all the indebted out there – both governments and individuals – that higher rates are coming.
From a Jon Hilsenrath (with Victorica McGrane) article late on Friday: Fed Officials Weigh In on Bernanke Comments (The Wall Street Journal is often gated, so if you're unable to access the article try a search of Google news using the headline)
Says Fed officials took an ‘unusual step’ in speaking “with remarkable cohesiveness about their policy plans”, and that the officials “repeatedly challenged perceptions in financial markets that they would quickly rein in the central bank’s easy-money policies” Hilsenrath/McGrane cite:
Fed governor Jeremy Stein – Investors were making “a mistake” if they thought the Fed had sharply changed its interest-rate plans in recent weeks,
San Francisco Fed President John Williams – “a large majority” of Fed officials don’t want to start raising short-term interest rates until 2015 or later,
Fed governor Jerome Powell – market movements were “larger than would be justified” by the Fed’s stance on interest rates,
and New York Fed President William Dudley – markets were “out of sync” with what the Fed was thinking
Hilsenrath/McGrane go on to say:
The common refrain shows how unnerved Fed officials were by the market’s initial reaction. The drop in stock prices and the rise in long-term interest rates could short-circuit the faster recovery that officials are hoping to achieve.
The article, in summing up, notes that not all this week’s comments were in unison though; with comments from Richmond Fed President Jeffrey Lacker that the sharp falls in bond and stock markets weren’t the result of any misunderstanding by investors, but rather that the declines were “a normal part of the process of incorporating new information into asset prices.”
- I would add that market participants are not going to wait until policy change is spelled out in detail to exit positions, a hint is often enough. This is how markets work.
The sharp moves show that the door to exit trades built on continuing QE and low interest rates is not wide – the rapid price moves are a natural response to a mismatch between those wanting to exit trades and those willing to take the positions off their hands. Why stick in a bid when there is a desperate herd wanting to sell? Lower the bid, at least, and get set at a better price.
Shadow banks, such as Citic Trust Co. in Beijing can arrange finance for businesses that may have trouble sourcing cash or that may have been rejected by China’s traditional banks
The so-called ‘shadow banks’ are made up of “trust companies, insurance firms, leasing companies, pawnbrokers and other informal lenders subject to limited oversight”
Shadow banks sometimes raise money from traditional banks and then on-lend it, or raise money from cash-rich companies and individuals
They lend at higher rates, typically with shorter terms
Loans are usually then packaged, often with others, into an investment product sold to investors, with promised high rates of returns funded by loan payments
Shadow banks are not as closely regulated as traditional banks, and information on default rates is difficult, if not impossible, to come by
There’s more at China’s ‘Shadow Banks’ Fan Debt-Bubble Fears (The Wall Street Journal is often gated, so if you're unable to access the article try a search of Google news using the headline)
The Financial Times reports that a custodial account (OD05) linked to giant sovereign wealth fund China Investment Corporation has reduced its total Japanese holdings from Y5tn at the end of September 2012 to Y4.8tn at the end of March 2013 (thats around a US$2bn reduction).
OD05 has reduced its holdings in “auto stocks (Toyota, Nissan, Honda), financials (Nomura, SMFG), industrials (Hitachi), pharma (Takeda, Eisai) and transport (East Japan Railway)”, but increased its holdings in the retail sector.
There is the possibility that CIC has been buying back in since the figures were collated for the end of March
It could just be a honeymoon period, but a poll in four seats in two of Australia’s largest cities conducted a day after the June 26 leadership change shows a boost to Rudd’s party of up to 10%. Not a lot of details in the reports, though. Bloomberg
The articles also note the September 14 election date is now in question, with some of Rudd’s comments being read as saying the election may come later (though it must be held before December 1).
The WSJ on Friday reported that Ding Xuedong is set to be named chairman of the $500 billion China Investment Corp., according sources. It’s the 5th biggest sovereign wealth fund in the world and most likely to throw its weight around.
The story offers little insight into where he might direct funds but notes that in the past he has worked closely with officials commonly perceived as reformers and has little foreign experience.
After posting a 4.3% loss on its overseas portfolio in 2011, the fund earned a 10.6% return on the portfolio last year, which came in a year when global markets were broadly higher.
Hints on how the fund intends to invest and what it plans to do with its Treasury holdings have implications for every market in the world. If I had to guess, I would suspect they will be continuing to buy commodities and invest in infrastructure.
Lacker says Sept meeting is possible time for taper but depends on data
IMF releases data on Canadian and Australian dollar reserves
Gold up $31 to $1231
S&P 500 up 12.6% in the first half. Strongest first half since 1998
S&P 500 down 0.4% to 1606 on the day
USD leads, AUD lags
The Australian dollar fell to the lowest since 2010 after a round of selling that kicked off early in US trading. Selling accelerated down to 0.9113 after Monday’s low of 0.9848 broke. It was a brutal quarter for the Aussie, falling nearly 12%. Some late buying sparked a bounce to 0.9150.
USD/JPY was a steady climber, hitting a three-week high of 99.45 as it broke the 50% retracement of the May-June decline and climbed above the 55-day moving average. The gains came on the heels of a solid 3.5% jump in the Nikkei as it rose to the highest since June 5.
EUR/USD whipsawed traders. The pair squeezed through the European high of 1.3080 to 1.3103 and then promptly collapsed more than a cent lower. Technical selling on the moving average cluster contributed to the decline and the reversal underscored the negative trend for the euro. Last at 1.3012.
The Festival International de Jazz de Montréal starts this weekend and runs until July 7. If the sun ever comes out, it should be a great time. Feist is playing a free show tonight.
Futures market speculative positioning data from the CFTC Commitments of Traders report as of the close on Tuesday, June 25:
EUR net long 17K vs long 20K prior
JPY net short 61K vs short 62K prior
GBP net short 19K vs short 20K prior
AUD net short 62K vs short 64K prior
CAD net short 10K vs short 26K prior
NZD net short 1K vs long 2K prior
CHF net long 2K vs long 6K prior
Dollar Index net long 12K vs 15K prior
Gold net long 34K vs 43K prior
I’m a bit surprised the market didn’t pile into US dollar longs after the FOMC. On the net, the changes were relatively small and suggests the FX market didn’t see tapering as a big deal in the same way as bond and stock markets.
The trim in Canadian dollar shorts is a surprise considering CAD fell 300 pips on the week. It points to some caution and profit taking but leaves the market plenty of room to bet against the loonie.
Another point is that net NZD positioning fell into a net negative for the first time since June 2012. The rule of thumb is to sell a currency when it crosses from positive to negative but that rule hasn’t worked particularly well in recent history.
US 10-year yields have fallen 4 basis points in the past hour to 2.48%. Earlier in US trading, they touched as high as 2.55%.
I suspect fund liquidations ran their course in the morning and now bond funds are buying in anticipation of a rally in the month ahead as the Fed stays on the sidelines. In the past two weeks, bond yields haven’t correlated particularly well with FX so there is no simple takeaway but if yields fall on diminished expectations of tapering, it will weigh on the dollar.
Let’s have a contest. At the end of the coming quarter, I’ll send a ForexLive t-shirt to whoever comes up with the five best predictions – judged by me on a combination of accuracy, boldness and simplicity. Explanations not required but appreciated.
1. The US dollar will be the best performing currency
So far the big buck is the best performer year-to-date and the Year of the Dollar will continue in Q3. The Australian dollar will make a push back to 0.9800 midway through the quarter but it will fade.
Year-to-date FX returns versus USD
2. The pound will be the worst performing currency
This would have been an easier prediction two weeks ago when GBP/USD was at 1.57 but it’s still my best bet. Carney has a big ego and will want to make a splash at the BOE. Shortly after next week’s meeting he will hint at more QE and deliver at the August or September MPC, raising the stock of holdings to 450B. The yen is another candidate but that’s the obvious choice.
3. The Fed will not taper in September
About half of economists expect the Fed to begin tapering in September. They’re wrong. The US economy will continue to strengthen in Q3 but the Fed has set the bar too high. In fact, most of the economists will abandon the idea long before the Sept 17-18 FOMC meeting. As the taper tantrum ebbs, 10-year Treasury yields fall back to 2.20%.
4. The Nikkei will break the May high
I promised bold predictions and here’s one. The Nikkei will gain 14% to hit 16,000 before the end of September. Today’s data on May industrial production and June retail trades showed some signs of the animal spirits coming alive. The public endorsed the Abenomics agenda and companies will begin to take bold steps.
5. Gold won’t hit $1000 but it will hit $1060
The gold bubble is bursting right before our eyes. The paper traders are fleeing to the exits and companies will be rushing to hedge as they attempt to maintain profitability.
Disclaimer: This is for fun. Overall, I don’t like the idea of making predictions, even on a three month horizon. This is ForexLive, as the news comes in, the story changes and we change our minds. There are no bonus dollars to be made in markets for stubbornness. Act accordingly.
The bottom feeders are picking up gold, pushing it to a fresh high.
Gold had grown extremely oversold with the daily RSI at 21 — the lowest since the crushing losses in April. Similar slumps have been met with bounces in the $75-100 range, which would target resistance in the $1275 zone.
The gold market is broken, in my opinion, and all rallies are selling opportunities. At the moment, would-be shorts can be patient.
The best trade to put on at the start of the quarter was long EUR/AUD. The pair gained relentlessly since the start of April in a cumulative 19 big figure move.
There are a number of trade recommendations floating around suggesting bets on a retracement of the huge one-way move but zooming out to the quarterly chart shows the gains could just be the start of a retracement of the relentless decline since the crisis.
EURAUD quarterly chart
Of course, both side could ultimately be proven right if the pair could drift back to 1.35/1.33 before resuming its upward climb.
