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Tue, 25th April 2017

Anirudh Sethi Report

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Archives of “federal reserve system” Tag

Forex reserves increase by $889.4 mn to $369.887 bn

India’s foreign exchange reserves rose by USD 889.4 million to USD 369.887 billion during the week ended April 14, helped by increase in foreign currency assets, the Reserve Bank said.

They had declined by USD 956.4 million to USD 368.998 billion in the previous reporting week.

The reserves had touched a life-time high of USD 371.99 billion in the week to September 30, 2016.

Foreign currency assets (FCAs), a major component of the overall reserves, surged by USD 881 million to USD 346.248 billion in the reporting week, RBI said.

Expressed in US dollar terms, FCAs include the effects of appreciation/depreciation of non-US currencies, such as the euro, pound and the yen, held in the reserves.

Gold reserves remained unchanged at USD 19.869 billion, the apex bank said.

The special drawing rights with the International Monetary Fund was up by USD 3.1 million to USD 1.446 billion.

India’s reserve position with the Fund, too, rose by USD 5.3 million to USD 2.323 billion, RBI said.

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.

Trump puzzles traders, but sends European bonds to highest point of the year

“I like a low interest rate policy, I must be honest with you,” Donald Trump told the Wall St Journal yesterday. His comments have further fired up already strong US government bonds, with the effects spilling over into European debt this morning. Like their US counterparts, German 10-year bond prices are now around their strongest point of the year.

Mr Trump’s new comments are not the only weight on global bond yields. Among other things, geopolitical nerves and the failure of his healthcare plans have also imposed a longer-term weight.

Still, 10-year Bund yields have sunk by 0.02 percentage points so far today to 0.175 per cent. (Yields fall when prices rise.) That’s the strongest level for Bunds since late December.

US yields, which exert a strong gravitational pull on other core markets, now stand at 2.32 per cent, the lowest since mid-November.

Some have doubts this will last.

Trump just set some kind of record for reversing rhetoric

Four election promises/statements reversed within an hour

Trump just reversed his position on NATO.

“NATO is not obsolete,” he said at a press conference today.

  1. He had previously said: “I said a long time ago that NATO had problems,” Trump said during the interview with the Times of London and Germany’s Bild. “Number
    one, it was obsolete, because it was designed many, many years
    ago. Number two, the countries weren’t paying what they’re supposed to
    pay.”
  2. Yellen is ‘toast’, he had said.  He railed against Yellen and Federal Reserve in one of the debates but now he’s having second thoughts, saying he likes Yellen and is open to extender her term.
  3. Low rate policy. “They’re not doing their jobs,” by keeping rates low at the Fed, he said in the debate. Today: “I like low rate policy.”
  4. “China isn’t manipulating it’s currency,” he said today. That’s a 180-degree turn from what he was saying in the final weeks of the campaign, when he promised to label China a currency manipulator.

To top it off, he just said “Right now we’re not getting along with Russia at all. We may be at an all-time low” in the relationship. He also said that going it alone against North Korea means going at it with other nations. “Going it alone means going it with lots of other nations.”

Raghuram Rajan Warns “The Fundamental Problems Of The Financial Crisis Are Still With Us”

Raghuram Rajan, Professor of Finance at the University of Chicago and former governor of the Reserve Bank of India, warns of more turmoil ahead if the developed world fails to adapt to the fundamental forces of global change.

 

It is a pivotal moment on the eve of the financial crisis. In the late summer of 2005, the world’s most influential central bankers and economists gather in Jackson Hole at the foot of the Rocky Mountains. The atmosphere is carefree. Financial markets have nicely recovered from the bust of the dotcom bubble and the global economy is humming. Under the topic »Lessons for the Future» the presentations celebrate the era of Federal Reserve chairman Alan Greenspan, who has announced to resign in a few months. Since 1987 at the helm of the world’s most powerful central bank, he presided over a period of continuous growth and was one of the leading forces of deregulation in the financial sector.

 But when Raghuram Rajan steps to the podium the mood suddenly turns icy. At that time the chief economist at the International Monetary Fund, the native Indian warns that unpredictable risks are building up in the financial system and that the banks are not prepared for an emergency. His dry analysis draws spiteful remarks. »I exaggerate only a bit when I say I felt like an early Christian who had wandered into a convention of half-starved lions», he recollects.

 Soon, however, his prediction turns out to be correct. Less than one year later, the US housing boom runs out of steam which triggers the worst recession since the Great Depression. Today, Mr. Rajan who governed the Reserve Bank of India until last fall and now teaches finance at the University of Chicago, is reputed as one of the most distinguished economic thinkers on the planet. So what prompted him to voice his concerns at that time in Jackson Hole? Where does he think the world stands in the spring of 2017? And what is his outlook for the coming years?

Hedge funds slash short 10-year Treasury future positions

Hedge funds have cut their short position in 10-year Treasury futures by nearly two-thirds from a one-year high set at the start of March, unwinding a popular trade as US sovereign debt has rallied.

Leveraged funds, a proxy for hedge funds, reduced their net short in 10-year Treasury futures by nearly 49,000 contracts in the week to April 4, data from the Commodity Futures Trading Commission showed on Friday. The net short totaled 136,322 contracts, down from 365,650 contracts on March 7.

Traditional asset managers, who have taken the opposite side of the trade, have also reduced their net long to 226,655 contracts, the lowest level since February.

The central bank’s perceived hawkishness, alongside a sell-off in Treasuries after the US election, sent yields on the 10-year Treasury to a high of 2.62 per cent in December. Yields on the note have since slid, as the so-called Trump trade fades.

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.

Citi: Central Banks “Took Over” Markets In 2009; In December The “Unwind” Begins

Citigroup’s crack trio of credit analysts, Matt King, Stephen Antczak, and Hans Lorenzen, best known for their relentless, Austrian, at times “Zero Hedge-esque” attacks on the Fed, and persistent accusations central banks distort markets, all summarized best in the following Citi chart…

… have come out of hibernation, to dicuss what comes next for various asset classes in the context of the upcoming paradigm shift in central bank posture.

In a note released by the group’s credit team on March 27, Lorenzen writes that credit’s “infatuation with equities is coming to an end.”

 What do credit traders look at when they mark their books? Well, these days it is fair to say that they have more than one eye on the equity market.

Understandable: after all, as the FOMC Minutes revealed last week, even the Fed now openly admits its policy is directly in response to stock prices.

As the credit economist points out, “statistically, over the last couple of years both markets have been influencing (“Granger causing”) each other. But considering the relative size, depth and liquidity of (not to mention the resources dedicated to) the equity market, we’d argue that more often than not, the asset class taking the passenger seat is credit. Yet the relationship was not always so cosy.  Over the long run, the correlation in recent years is actually unusual. In the two decades before the Great Financial Crisis, three-month correlations between US credit returns and the S&P 500 returns tended to oscillate sharply and only barely managed to stay positive over the long run (Figure 3).”

Soft NFP data has USD in retreat again but buyers lurking still

weaker than expected US non-farm payrolls data left bulls disappointed

  • Fed funds futures imply 61% now see June rate hike from 70% yesterday
  • 2year treasury yields hit 5 week low of 1.198%
  • 30yr yields touch lowest since 18 Jan at 2.939%
  • 5year yields 1.784% lowest since Nov 2016

So who thinks a rate hike is imminent now? Ok, so one swallow doesn’t make an summer but if the Fed is data dependent then this will have them scratching their chins at the very least

USD buyers returning though as I type as befits a market that’s chasing shadows with Syria and Trump/Xi talks also in the mix as I highlighted earlier.

GBPUSD back to 1.2428 after failing at 1.2450 again. USDJPY 110.44 from 110.16. EURUSD 1.0624 from 1.0667.

As we were then before the data came out but I hope you took the opportunity to take some profit or enter into fresh trades.

Swiss reserves swell again to new record

With the reliability of a finely-tuned watch, the latest release of foreign-currency reserves held at the Swiss National Bank has shown yet another record, in a sign the central bank continues to swim against the tide.

Reserves swelled to SFr683.2bn ($SFr679.3bn) in March, up by nearly SFr15bn on the previous month.

The euro now trades at SFr1.07. Deutsche Bank thinks the Swiss currency will climb much further from here, taking that rate to parity.

Among the reasons, it says the Swiss authorities may feel some pressure from the US:

The US Treasury looms large, as it is due to release its latest report on the FX policies of US trading partners sometime this month. As argued elsewhere, Switzerland is already closest to meeting all three criteria of currency manipulation. Its current account surplus runs well above 3% of GDP, and the SNB has intervened well in excess of 2% over the past year. In the past, the Treasury acknowledged the constraints on domestic asset purchases given the limits of the Swiss bond market; but such subtleties could fall by the wayside under the Trump administration. Free trade with the US is too important for Switzerland to be risked by continued FX intervention.

In addition, inflation is picking up, and the German bank disputes the idea that the franc is overvalued.