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Fri, 20th January 2017

Anirudh Sethi Report

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Archives of “exchange rate” Tag

China’s 2016 capital outflows estimated at over $700bn

A new report from Standard Chartered estimates capital flows out of China totalled almost $730bn in 2016, a near-record level.

Analysts Shuang Ding and Lan Shen estimated outflows had moderated in December to $66bn, down from November’s $75bn.

Beneath the headline figure foreign direct investment flows turned positive for the first time in eight months with a $3bn inflow, while non-FDI outflows remained unchanged from the previous month at $69bn.

They also estimated China’s foreign exchange reserves had fallen $41bn last month to end the year at $3.01tn as depreciation of the euro, yen and pound against the greenback. That reduced the dollar value of China’s holdings in those currencies by about $13bn.

“Humiliated” by post-note ban events, RBI staff write to Urjit Patel

Feeling “humiliated” by events since demonetisation, RBI employees today wrote to Governor Urjit Patel protesting against operational “mismanagement” in the exercise and Government impinging its autonomy by appointing an official for currency coordination.

In a letter, they said autonomy and image of RBI has been “dented beyond repair” due to mismanagement and termed appointment of a senior Finance Ministry official as a “blatant encroachment” of its exclusive turf of currency management.

“An image of efficiency and independence that RBI assiduously built up over decades by the strenuous efforts of its staff and judicious policy making has gone into smithereens in no time. We feel extremely pained,” the United Forum of Reserve Bank Officers and Employees said in the letter addressed to Patel.

Commenting on “mismanagement” since November 8, when note ban was announced, and the criticism from different quarters, the letter said, “It’s (RBI’s) autonomy and image have been dented beyond repair.”

At least two of the four signatories — Samir Ghosh of All India Reserve Bank Employees Association and Suryakant Mahadik of All India Reserve Bank Workers Federation — confirmed the letter. The other signatories are C M Paulsil of All India Reserve Bank Officers Association and R N Vatsa of RBI Officers Association.

The forum represents over 18,000 employees of the RBI across the ranks, Ghosh said.

BOJ taking ‘a step forward,’ says Kuroda

The Bank of Japan revised its economic outlook for the first time in 19 months during the two-day policy meeting that ended Tuesday. But that is apparently the only step the central bank is taking at this time.

“The headwinds seen in the first half of this year have ceased,” BOJ Gov. Haruhiko Kuroda told reporters following the meeting. Markets were riled by heightened concerns directed at emerging economies at the beginning of 2016, only to be shocked in June by Britain’s referendum to exit the European Union. The BOJ was forced to loosen its policy in July, raising its target for exchange-traded fund purchases.

 During the second half of 2016, the economic landscape has slowly brightened, beginning with U.S. readings. The Japanese economy has followed suit with increased exports and production. Consumption also recovered from a slump caused by a soft stock market and inclement weather at the beginning of the year.

“Japan’s economy has continued its moderate recovery trend,” the BOJ said in a statement published after the meeting. The central bank had previously qualified that view by highlighting sluggish exports and production.

New RBI guidelines on cash deposits of demonetised notes add to confusion

Fresh guidelines issued by the Reserve Bank of India on Monday on limiting cash deposits of demonetised bank notes have added to the confusion. The central bank issued guidelines where it said that individuals will only be able to deposit demonetised bank notes above ₹5,000 only once till the remainder of the deposit deadline i.e. December 30, 2016.

On the surface, the guideline appears to be one that will hit the remaining black money hoarders in a single blow. However, the government hasn’t been able to plug laundering and cash leaks at banks. Therefore, the common person, who would’ve planned to deposit the money at a later stage, for various reasons like possibly to beat the early queues, would be hit unnecessarily.

Since the time demonetisation was announced, RBI has played a less than stellar role in managing the currency exchange and currency distribution process. Regular guidelines coming at regular intervals put the country in a state of confusion as to what will follow next and the damage control seems to be never-ending.

Emerging Markets : An Update

EM ended the weak on a soft note, as the hawkish Fed decision continued to have reverberations for global markets.  Worst performers in EM last week were CLP (-3.3%), ZAR (-2%), and KRW (-1.5%).  With little fundamental news expected this week, markets may take a more consolidative tone, especially with the holidays approaching.  However, we continue to believe that the global backdrop for EM remains negative.
 
Several EM central banks meet, including Turkey, Hungary, Czech Republic, the Philippines, Taiwan, and Thailand.  None are expected to move except Turkey, which is likely to hike rates for the second straight month in response to the weak lira.  We were surprised by Colombia’s rate cut last Friday, and expect the peso to open weaker this week as a result.  
 
Poland reports November industrial and construction output, real retail sales, and unemployment Monday.  Consensus forecasts are 1.7% y/y, -18.9% y/y, 5.3% y/y, and 5.5%, respectively.  Central bank minutes will be released Thursday.  Recently, central bank Governor Glapinski said that the next move is likely to be hike but unlikely until 2018.  CPI was flat y/y in November, the first non-negative reading since June 2014.  Low base effects should see the y/y move sharply higher in 2017, and should move the timing of the first rate hike forward into 2017.
Taiwan reports November export orders Tuesday, which are expected to rise 6.0% y/y vs. 0.3% in October.  The central bank meets Thursday and is expected to keep rates steady at 1.375%.  The last move was a 12.5 bp cut back in June, and then left rates steady at its next quarterly meeting in September.  November IP will be reported Friday, and is expected to rise 5.2% y/y vs. 3.7% in October.

Bitcoin trade volume hits record in November

A record 174.7 million bitcoins changed hands, so to speak, in November, a 50% or so increase from the previous month’s trade volume, according to Bitcoinity.org.

The spike came as Chinese jumped into the digital currency as a way to shift their assets into dollars.

 The previous monthly record, which came in March, was 148.6 million bitcoins.

The November trading volume was worth $137 billion.

The yuan has been weakening against the U.S. currency since Donald Trump’s victory in the presidential election on Nov. 8.

Many Chinese evade restrictions on directly buying dollars by taking a detour into bitcoins. This is what they were doing last month.

‘Reveal who attended RBI’s Nov 8 meet’ -P Chidambram

Former finance minister P Chidambram on Tuesday demanded the Reserve Bank of India should make public minutes of its November 8 meeting whose outcome empowered government to scrap specified notes of Rs 500 and Rs 1,000 denominations.

On November 8, the Narendra Modi government in a televised address announced it was abolishing the legal tender status of Rs 1,000 and Rs 5,00 currency notes.

These high value notes comprised a huge 86 per cent of total currency in circulation and the decision has led to severe cash crunch in country causing inconvenience to the citizens.

“RBI should publish the minutes of meeting on Nov 8, let country know who were the directors who attended the meeting,” Chidambaram demands.

The government had banned these specified notes through an executive order instead of passing a legislation in parliament as part of its drive to curb black money and prevent recurrence of fake currency incidents.

According to the RBI Act, 1934, the Central Board of the apex bank takes a call on legal tender, its validity or invaldity, in circulation in country and proposes government accordingly.

China says they will further advance supply-side structural reforms in 2017

Reuters reporting statement published on Xinhua 9 Dec

  • will further open its economy in 2017
  • will work proactively to attract foreign investment
  • certain that China will complete its key economic targets for 2016

PBOC also announces that China will start direct trading between yuan and 7 currencies from 12 Dec inc

  • PLN
  • SEK
  • TRY
  • MXN
  • NOK
  • DKR
  • HUF

CFETS the part of the PBOC that runs the interbank FX market says the aim is to facilitate bilateral trade and investment with these countries and lower exchange rate costs.

Previously the US $ has been used to determines the cross rate for the yuan against these ccys.

New Currency Is Not 100% ‘Made In India’, RBI Is Sourcing ‘Raw Materials’ From Other Countries

The ‘Make In India’ drive has been considerably promising and futuristic in the past couple of months. Modi too had been a notable zealot about inducing this process in almost every system. 

On the website, the campaign defines itself as a “Major national initiative, designed to facilitate investment, foster innovation, enhance skill development and build better best-in-class manufacturing infrastructure.” 

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However, the drive is not all that successful when it comes to the management of latest currency hoopla. 

As reported by India Today, around 16 million tons of paper is being imported from the UK. 

RBI is sourcing the specialised security thread used in new notes from centres across Italy, Ukraine and the UK.

Thus, the note that we have now is not completely made in India. Due to the high demand of currency in the market and poor capacity of its production material, the RBI is working on a 50:50 ratio of sourcing paper from UK and Hoshangabad(MP). 

The intaglio ink, which is used to print the notes is supplied from Madhya Pradesh, Sikkim and Rajasthan, however, it’s now being produced abroad, and then being sourced through local centres. 

Emerging Markets -An Update

EM FX ended the week on a soft note, as higher US rates continue to take a toll. EM policymakers are getting more concerned about currency weakness, with Brazil, Malaysia, Korea, India, and Indonesia all taking action to help support their currencies. If the EM sell-off continues as we expect, more EM central banks are likely to act to slow the moves.
Several EM central banks (Hungary, Malaysia, South Africa, Turkey, and Colombia) meet. Most are struggling with sluggish growth, but FX weakness is likely to keep all of them on hold for now. We do not think individual country themes will be very important to investors in this current environment.
Korea reports trade data for the first 20 days of November on Monday. Both exports and imports continue to contract. While the external accounts have been worsening a bit in recent months, the current account surplus is still expected to end the year at around 8% of GDP. Yet the economy remains weak even as political tensions rise. 
Thailand reports Q3 GDP Monday. Growth is expected to slow to 3.3% from 3.5% in Q2. For now, the central bank is likely to remain on hold, but low inflation should allow for easing next year if the economy slows further. Next policy meeting is December 21, no change seen then.