•  
Fri, 26th May 2017

Anirudh Sethi Report

  •  

Archives of “exchange rate” Tag

Four Numbers to Watch in Forex

The US dollar’s downside momentum faded today.  While one should not read much into it, it could be an early sign that the market has discounted the recent news stream,  which includes the fear that the political turmoil in the Washington will adversely impact the President’s economic program, and the continued above trend growth in the eurozone.
The Fed funds futures continue to discount a strong change of a June Fed hike.  Bloomberg puts the odds at 95% of a hike, while the CME’s model says it is about 83% discounted.  Our calculation puts it at 81%.  A June hike would put the Fed funds target range at 1.00%-1.25%.  
Although the two-year note is trading a few basis points through the top of the presumed new range, the odds that the Fed funds target range will be 1.25%-1.50% by the end of the year is also rising slowly.  Bloomberg sees a 45% chance, up from about 28% a month ago.  The CME sees the odds at 39% compared with about 30% a month ago.  
European growth remains above trend and the flash May PMIs today suggest another strong quarter. However, price pressures remain elusive.  Prices in the PMI fell for the first time in 15 months.    To suggest the ECB could hike rates if it weren’t for the low inflation , is like asking, “Besides that Mrs Lincoln, how was the play?”

Japan Inc. heading for second straight record profit

Corporate Japan is on track to log a second year in a row of record net profit, driven by electronics makers, trading houses and other sectors making up for the weakness of automakers.

Aggregate fiscal 2017 net profit at listed companies is expected to grow 4% from the previous year to 21.81 trillion yen ($192 billion), with results improving at more than 60% of companies. Profit rose 21% to 20.9 trillion yen in fiscal 2016.

 Friday marked the peak of earnings season, with a record 767 companies with March book-closings releasing results. The Nikkei compiled results put out by 1,332 nonfinancial firms up to that day, representing 85% of listed companies and 92% of total market capitalization.

Electronics manufacturers, trading companies and shippers will enjoy strong profit growth this fiscal year. Sony’s sales of smartphone camera image sensors have improved, and the company projects a profit of more than 100 billion yen in its formerly money-losing semiconductor segment. It sees net profit growing 3.5 times to 255 billion yen in fiscal 2017. “We will deliver results,” Chief Financial Officer Kenichiro Yoshida said.

Fujitsu forecasts its first record profit in three years. “We are heading toward growth as the electronic devices market recovers,” said Hidehiro Tsukano, a senior executive vice president.

Emerging Markets :An Update

  • Malaysia’s central bank said it will allow investors to fully hedge their currency exposure.
  • Egypt declared a 3-month state of emergency after two deadly church attacks.
  • South Africa’s parliamentary no confidence vote has been delayed
  • Argentina central bank surprised markets with a 150 bp hike to 26.25%.
  • Brazil central bank accelerated the easing cycle with a 100 bp cut in the Selic rate.
In the EM equity space as measured by MSCI, South Africa (+3.1%), Turkey (+2.5%), and the Philippines (+0.9%) have outperformed this week, while Russia (-3.9%), Peru (-3.4%), and Brazil (-2.6%) have underperformed.  To put this in better context, MSCI EM fell -0.3% this week while MSCI DM fell -0.7%.
 
In the EM local currency bond space, South Africa (10-year yield -18 bp), Poland (-8 bp), and Indonesia (-8 bp) have outperformed this week, while Brazil (10-year yield +11 bp), Peru (+9 bp), and Colombia (+9 bp) have underperformed.  To put this in better context, the 10-year UST yield fell 15 bp to 2.24%.
 
In the EM FX space, ZAR (+2.5% vs. USD), RUB (+1.9% vs. USD), and ARS (+1.2% vs. USD) have outperformed this week, while HUF (-0.9% vs. EUR), KRW (-0.5% vs. USD), and PLN (-0.5% vs. EUR) have underperformed.

US Treasury decides China isn’t playing with its currency

The U.S. Treasury Department has decided not to label China a currency manipulator in a report published Friday on the foreign exchange policies of America’s key trading partners, backing away from President Donald Trump’s campaign promise to do so.

The move was apparently taken out of consideration for China, which the U.S. hopes will help rein in North Korea’s nuclear and missile programs.

 This was the Trump administration’s first release of the twice-yearly report, which evaluates the foreign exchange policies of major U.S. trading partners.

Although the report did not signal a major shift in Washington’s own currency policy, it is likely Trump will try to use the issue as a bargaining chip in negotiations with other countries. The U.S. may try to limit the dollar’s rise against the yen in its first economic dialogue with Japan, scheduled for Tuesday. Japan’s large trade surplus will probably be high on the agenda.

Trump’s Treasury Department used the same standards for determining currency manipulation as those of the previous administration under President Barack Obama. The report kept China, Japan, South Korea, Taiwan, Germany and Switzerland on a watch list as they met some of the criteria.

Emerging Markets :An update

  • Reserve Bank of India surprised markets with the start of the tightening cycle.
  • The Czech National Bank (CNB) ended the EUR/CZK floor.
  • Israeli central bank said it won’t hike rates until Q2 2018.
  • Both S&P and Fitch cut South Africa’s rating one notch to sub-investment grade BB+.
  • Moody’s put South Africa’s Baa2 rating on review for a downgrade
  • S&P upgraded Argentina one notch to B with stable outlook.
  • Brazil’s government will water down its pension reform plan
  • Brazil’s central bank corrected some errors in its inflation report.

In the EM equity space as measured by MSCI, the Philippines (+3.8%), Chile (+3.5%), and Poland (+3.4%) have outperformed this week, while Korea (-0.7%), Turkey (-0.6%), and Peru (-0.5%) have underperformed.  To put this in better context, MSCI EM rose 0.3% this week while MSCI DM fell -0.5%. 

In the EM local currency bond space, Bulgaria (10-year yield -11 bp), Chile (-6 bp), and South Africa (-6 bp) have outperformed this week, while India (10-year yield +17 bp), Turkey (+12 bp), and Indonesia (+10 bp) have underperformed.  To put this in better context, the 10-year UST yield fell 6 bp to 2.33%. 
In the EM FX space, CZK (+1.7% vs. EUR), INR (+0.9% vs. USD), and EGP (+0.7% vs. USD) have outperformed this week, while ZAR (-3.0% vs. USD), TRY (-2.7% vs. USD), and RUB (-1.6% vs. USD) have underperformed.

Reserve Bank of India surprised markets with the start of the tightening cycle.  It hiked the reverse repo rate 25 bp to 6.0% but left the repo rate steady at 6.25%.  The decision was unanimous, and we expect further tightening as the year progresses.

Japanese retailers quickly embracing bitcoin payments

Image result for bitcoinTwo Japanese retailing groups soon will accept bitcoin payments, a move that is likely to promote wider use of the virtual currency among domestic consumers.

Electronics chain Bic Camera is teaming up with Tokyo-based bitFlyer, which runs the largest Japanese bitcoin exchange. This Friday, they will begin a trial run of bitFlyer’s bitcoin payment system at Bic Camera’s flagship shop in Tokyo’s Yurakucho district and at Bicqlo Bic Camera, the hybrid outlet with Uniqlo located in Shinjuku.

 Customers are allowed to pay up to 100,000 yen ($904) using the cryptocurrency, and they will also get reward points at the same rate as for cash payments. Bic Camera may introduce the payment system at other locations based on usage trends at the two Tokyo stores.

Recruit Lifestyle, the retail support arm of human resources conglomerate Recruit Holdings, is partnering with another Tokyo bitcoin exchange operator, Coincheck. The virtual currency will become a payment option at shops that have adopted AirRegi, the point-of-sale app developed by Recruit Lifestyle, by this summer.

By using tablets or other devices provided by the store and one’s own smartphone, the customer can deduct the amount on the bill from the designated bitcoin account. Coincheck will convert the bitcoins into yen and transfer the funds to the store.

IMF First China Foreign Currency Report Puts Reserves at $10.8Trln

Yuan banknotes and US dollars are seen on a table in Yichang, central China's Hubei province on August 14, 2015Prior to Friday’s report, IMF currency data was limited to the US dollar, euro, Japanese yen, UK pound sterling, Australian dollar, Canadian dollar and Swiss franc, and an indistinguishable category of “other currencies.”

“With the separate identification of reserves in RMB [Renminbi], eight currencies are now distinguished,” the IMF publication stated.

Chinese holdings of US dollars were $5.1 trillion at the end of 2016, compared with $10.8 trillion in total foreign currency reserves, the report explained.

The remainder was divided among other currencies, with euro holdings the largest at $1.6 trillion, according to the IMF.

Overnight US Market :Dow closed + 150 points.S&P up 0.73%

S&P up +0.73%. Nasdaq up +0.60. Dow up 0.73%

The major US indices are ending the day with solid gains.
  • The S&P rose by +0.73%
  • The Nasdaq index increased by +0.60% and the
  • Dow industrial average rose by +0.73%.
The S&P index moved below the 50 day MA yesterday but closed back above the MA line. That was the first break since the November election.  Today, the low held above the MA line and also moved above the broken trend line.  The selling seems to be over for now.
In other markets, a snap shot of the major currencies vs each other shows that the AUD is ending the day as the strongest. It rose against all the major currency pairs. The GBP was the weakest.  The GBP tumbled on the day before the triggering of Article 50 tomorrow by PM May.
The USD recovered quite nicely and had strong gains against most currencies with the exception of the AUD (the USD was little changed ag. the CAD).
  • Spot gold was down by -$3.00 to $1251.30
  • WTI Crude recovered to $48.37 (up $0.64)
  • 10 year yield rose to 2.416% up 3. 7 bps

 

People’s Bank of China sets yuan reference rate at 6.8701 (vs. Friday at 6.8845)

PBOC open market operations today … well, the bank says none today. The Bank says bank liquidity is high.

By skipping OMOs in effect the bank has drained a net 80bn yen (maturing RRs)
CNY set at its highest against the USD for a month today.
RMB index: On Friday the CNY was set against its basket at 92.91, down 0.41 on the week

Euro climbs to 3-week high against dollar on rate speculation

The euro climbed to its strongest level against the dollar since mid-February as the markets reassessed the odds of a December rate rise by the European Central Bank.

A day after mildly hawkish comments from European Central Bank president Mario Draghi helped send the single currency higher, the euro tacked on another 0.9 per cent to hit a three week high of $1.0673 following a report that the ECB had discussed whether rates could rise before it ends its bond buying programme.

However, two people familiar with the discussions denied there had been any meaningful debate over the issue. One person said some members are keen for the council to consider raising the deposit rate, now at minus 0.4 per cent, before it ends its quantitative easing programme.

Against the pound, the euro was up 1 per cent at €1.1393 – a level last seen in mid-January. The currency also firmed more than 1 per cent against the Japanese yen at 122.83.