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Thu, 25th August 2016

Anirudh Sethi Report

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Archives of “Analysis” Category

August 2016 German IFO business climate 106.2 vs 108.5 exp

August 2016 German IFO business climate report

  • Prior 108.3
  • Current conditions 112.8 vs 114.9 exp. Prior 114.7. Revised to 114.8
  • Expectations 100.1 vs 102.5 exp. Prior 102.2. Revised to 102.1

Looking a bit sucky right now with only the construction not looking down again.

German IFO business climate

For the record, EURUSD is doing nothing around 1.1270

Yellen to disappoint USD bulls at Jackson Hole – Citi

Citi have been surveying the possible Jackson Hole outcome and dollar bulls won’t like the results

  • The overwhelming expectation is of a dovish hike signal
  • 85% see Yellen leaning to 1 hike in 2016
  • Around 66% Yellen to indicate Dec as the main date
  • Respondents see the market expecting just over 50% probability that a hike is mentioned in her speech
  • If Yellen signals a 2016 hike with a dovish message for the future nearly 50% expect Emerging markets as the main gainers. Investors are expected to;
  • Buy EM
  • Buy S&P
  • Buy US 10yr Treasuries
  • Sell US 2’s
  • Buy EM debt or other parts of US yield curve
  • Two thirds think Yellen won’t change inflation language of 2% target but 29% think The Fed will change their targets in the next 2 years

Four More Mega-Banks Join The Anti-Dollar Alliance

That was fast.

Yesterday I told you how a consortium of 15 Japanese banks had just signed up to implement new financial technology to clear and settle international financial transactions.

This is a huge step.

Right now, most international financial transactions must pass through the US banking system’s network of correspondent accounts.

This gives the US government an incredible amount of power… power they haven’t been shy about using over the last several years.

2014 was one of the first major watershed moments when the Obama administration fined French bank BNP Paribas $9 billion for doing business with countries that the US doesn’t like– namely Cuba and Iran.

It didn’t matter that this French bank wasn’t violating any French laws.

Nor did it matter that only months later the President of the United States inked a sweetheart nuclear deal with Iran and flew down to Cuba to attend a baseball game with his new BFFs.

BNP had to pay up. A French bank paid $9 billion because they violated US law.

And if they didn’t pay, the US government threatened to kick them out of the US banking system.

$9 billion hurt. But being kicked out of the US banking system would have been totally crippling.

Big international banks in particular cannot function if they don’t have access to the US banking system.

As long as the US dollar remains the world’s dominant reserve currency, major banks must able to clear and settle US dollar transactions if they expect to remain in business.

This means having access to the US banking system… the gatekeeper of the US dollar.

But having watched BNP Paribas get blackmailed into paying an absurd $9 billion fine to the US government, the rest of the world’s mega-banks knew instantly that their heads could be next ones on the chopping block.

So they started working on contingency plans.

Blockchain technology provided an elegant solution.

Instead of passing funds through the US banking system’s costly and inefficient network of correspondent accounts, blockchain technology provides an easy way for banks to send payments directly to one another.

I cannot understate how important this technology is.

Blockchain may very well be what neutralizes the US government’s domination of the global financial system.

And while there’s been a lot of momentum in this direction (hence yesterday’s letter to you), even I’m surprised at how fast it’s moving.

Today, four of the world’s largest banks announced a brand new joint venture to create a new financial settlement protocol built on blockchain technology.

Deutsche Bank from Germany, UBS from Switzerland, Santander from Spain, and Bank of New York Mellon have joined together to launch what they’re naming the very un-sexy “utility settlement coin”.

Like Ripple, Setl, Monetas, and several other competing technologies, Utility Settlement Coin has the potential to end the reliance on the US banking system for cross-border payments and financial transactions.

Banks will be able to send payments to one another directly without having to transit through the Wall Street financial toll plaza.

(Global consulting firm Oliver Wyman estimates that the cost of clearing and settling international financial transactions at up to $80 billion annually.)

This has enormous implications, especially for US banks.

USDJPY could hit 85.00 if BOJ policy hits the skids – Sumitomo

Sumitomo Mitsui Banking Corp with some cheerful expectations for USDJPY

  • BOJ may drop inflation target time frame at Sep meeting
  • May flag external factors like oil and slower global growth as impediments to hitting inflation goal, even while saying the correct policy actions have been taken
  • BOJ may change QQE range to ¥70-90tn from current ¥80tn
  • Would be difficult for BOJ to cut rates further into the negative
  • USDJPY could undo all the Abenomic gains to fall to 85.00

Sumitomo’s Daisuke Uno gave an interview yesterday. Following my post from yesterday, I came in today to see that the 100 level survived another close shave but once again, it just can’t pull itself away.

ANZ on Yellen’s speech at Jackson Hole

ANZ looking at what is expected from Yellen’s speech through the lens on how it will impact on Australia and the AUD

  • The short-term market is hanging onto the words of Fischer, Williams, and Dudley, hoping that a clearer signal is provided about the timing and quantum of short-term rate hikes
  • Yellen will need to clearly echo these sentiments for the AUD to depreciate markedly
  • However, this message will also be complicated by any discussion of a lower neutral rate. If signals are provided that the neutral rate has been downgraded further, then any reaction to the signalling on the very near-term trajectory of rates will likely be muted as it implies that policy is not as accommodative as thought and that the path higher will be slower.
  • This suggests the US curve may flatten, with the front end selling off more than the long end. This should see the USD strengthen further against the EUR and JPY, but a somewhat muted reaction in the AUD and NZD. This would suggest that we are due for some unwinding of the recent EUR/AUD outperformance.