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Wed, 24th May 2017

Anirudh Sethi Report

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Archives of “pound sterling” 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?”

China Reserves Jump Most In 3 Years to $ 3.03 Trillion

In all the drama surrounding the French elections, few noticed the PBOC’s announcement that China’s FX reserves rose for the third straight month in April, increasing by $20.45 billion to $3.03 trillion, more than the $11 billion expected and the single biggest monthly increase in three years going back to April 2014, on the back of a weaker dollar and increasingly more draconian capital controls on outflows.

Cited by the WSJ, some economists attributed April’s increase to a dollar that continued to decline in the past month especially after Trump said the U.S. currency “is getting too strong.” The value of other currencies in China’s reserve basket, including the euro, the British pound and Japan’s yen, similarly played a significant role in the rise, said Yan Ling, an economist with China Merchants Securities.

Besides USD softness (USD has weakened against the CFETS basket by over 2% year-to-date through April) and perhaps stronger RMB sentiment, the capital flow management measures introduced over the last several months have also contributed to the slowdown in outflows, Goldman speculated in a Sunday note. That could reverse, as there may be incremental relaxation of the capital account as the flow situation has improved and an overly tight capital account could hinder legitimate international trade and the authorities’ long-term RMB internationalization goals.

Yuan falling out of favor in global trade

Overseas use of the yuan for trade and other payments has fallen dramatically as government efforts to stem capital outflows sideline Chinese President Xi Jinping’s ambition to take the currency global.

Yuan trade settlement had surged after Beijing first allowed it in 2009, with the proportion of Chinese cross-border trade settled in the currency peaking at 27% in 2015. But its share fell to 19% in 2016, marking the first year-on-year decline, and slumped further to 14% in January through March of this year. Excluding trade with Hong Kong, where the yuan is often used, would likely push the figure even lower.

 The decline is not limited to trade. Cross-border yuan settlements in Shanghai totaled 441.3 billion yuan ($63.9 billion) in the January-March quarter, down 23% from a year earlier, data from the People’s Bank of China shows. This figure encompasses trade as well as other payments ranging from capital transactions to costs for studying abroad. Settlements have fallen by more than half on a quarterly basis since July-September 2015, when they reached 1 trillion yuan.

The yuan was used for just 1.8% of international payments in March, ranking sixth behind the U.S. dollar, euro, pound, yen and Canadian dollar, according to the Society for Worldwide Interbank Financial Transactions, or SWIFT. The Chinese currency had placed fourth in August 2015 with a 2.8% share, overtaking the yen.

Overseas yuan holdings are shrinking as well. In Hong Kong, the largest yuan hub outside mainland China, yuan deposits hit a six-year low of 507.2 billion yuan at the end of March. This represents a drop of nearly half from 1 trillion yuan in December 2014.

This trend stems mainly from stepped-up capital controls. The Chinese government has gradually imposed stricter curbs since 2015, aiming to rein in outflows and the ensuing softening of the yuan. A measure implemented last November made advance approval necessary for currency conversions or overseas transfers — including in yuan — exceeding $5 million.

An Update for Forex ,Crude Oil -Positions

It was feast or famine in the adjustment of speculative positions in the currency futures market during the CFTC reporting period ending May 2. Speculators either made large adjustments or very small adjustments, and little in between.  
Speculators covered 17.7k previously sold euro contracts to reduce the gross short position 161.1k contracts. It has been reduced by around 46k contracts over the last few weeks.  The gross long position edged 1.6k contracts higher to 159.4k.  It has fallen by around 16k contracts in the past few weeks.  The net position was reduced primarily due to buying related to short-covering and now net short by 1.7k contracts, the least since June 2014.
Speculators liquidated 11.0k long yen futures contracts to 37.5k contracts.  The gross short speculative position fell to 68.0 contracts, a 7.4k decline.  The result was the net short yen position increased to 30.5k contracts from 26.9k. 
The Canadian dollar was very much in play.  Some bulls tried picking a bottom and added 14k contracts to the gross long position, which stood at 66.6k contracts at the end of the statement period.  The bears were still in control.  They added another 19.1k contracts to the gross short position.  It stands at 114.3k contracts, which is the most since at least 1993.  
It has been a rapid accumulation of gross short contracts.  It has doubled, for example, since the end of March.  The gross short position has increased for three weeks in a row and eight of the last nine.  Some of these late shorts are in weak hands.  The key reversal posted in spot before the weekend warns of their vulnerability.  This vulnerability is best understood by looking at gross positions, not net.  
 
Outside of a 9.6k contract reduction of the gross short sterling position, speculators did not make any other gross position adjustments of more than 5k contracts.  Nearly a third of the 16 gross positions we track were adjusted by less than one thousand contracts.  
Overall, speculators showed a penchant for reducing the gross short currency exposure.  The only exceptions were Mexican pesos and Canadian dollars.  There did not appear to be a clear pattern among the gross long position adjustments.  
The bears in the oil market pressed their advantage while some bulls bought into the weakness.  The bears added 50.6k contracts to their gross short position, lifting it to 257.5k contracts, the largest of the year.  Almost 12k contracts were added to the gross long position.  It stands at 630.7k contracts. The net long position fell by 38.7k contracts to 373.1k.  
The bears in the 10-year Treasury note futures tried picking a top ahead of the FOMC meeting and US jobs data.  They added 38.7k contracts so the gross short position was lifted to 6506k contracts.  The longs stayed pat, adding a mere 4k contracts to round up the gross long position to 830.4k contracts.  The net long position fell to a little less than 180k contracts from 214.6k.

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.

IMF hikes UK growth forecast to 2% in 2017

The International Monetary Fund has delivered another hike to its UK growth forecast, reversing nearly all of the downgrade it pencilled in after last summer’s Brexit vote.

In its latest assessment of prospects for global growth, the Washington-based fund predicted the UK economy will grow this year by 2 per cent, an increase of 0.5 percentage points from the forecast it made in January. The IMF also upgraded its UK growth forecast for next year, from 1.4 per cent to 1.5 per cent.

The world economy will grow faster than previously expected this year thanks to increased trade, investment and manufacturing said the IMF, which also warned the threat of protectionist policies meant “the balance of risks remains tilted to the downside”.

The revision came primarily due to better than expected economic news from Europe, China and Japan and a broad-based recovery in global manufacturing since the middle of 2016.

Before the UK’s EU referendum last year, the IMF forecasted that the UK economy would grow 2.2 per cent in 2017. But it cut the forecast to 1.3 per cent last July, weeks after the Brexit vote, and downgraded its forecast further, to 1.1 per cent, in October.

Nigeria naira slides to 405 to dollar on black market

When it comes to Nigeria’s currency, mind the gap, again: the spread between the official and parallel market rates for the naira is widening once more.

During a more than two-week run, the naira strengthened to a six-month high of 390 per dollar on the black market – close to one of the multiple official exchange rates, but still far off the interbank rate of around 305 to the dollar.

However, the naira is weakening once more on the black market, slipping below 400 to the dollar, to 405 to the dollar on Monday, according to traders.

In the absence of adequate supplies of dollars in the official market, businesses and individuals have been forced to buy hard currency on the black market, stoking demand there and eventually weakening the naira to a record low of 520 in February. Analysts said the gap between the official rate of just over 300 to the dollar and the black market one indicated the scale of unmet demand for hard currency in Africa’s most populous nation.

Asian companies muddle through Brexit uncertainty

Nine months after it voted in a referendum to leave the European Union, the U.K. on Wednesday formally notified the EU that it is breaking away from the single market. Next up … at least two years of negotiations toward the exit.

A chief concern for Asian financial institutions is whether the U.K. can keep its “passporting” rights, which allow lenders, insurers and other providers to sell financial services across the EU.

 A vocal presence in this respect has been HSBC, headquartered in London and jointly listed on the Hong Kong stock exchange. Chairman Douglas Flint in January told British lawmakers that his bank has a contingency to move thousands of jobs to France from London should those rights be revoked.

In a sign of the erosion of confidence in London as a European financial center, HSBC is aiming to boost its presence in Asia, which contributed 48.6% to the group’s 2016 revenue and hosts 53% of its workforce. While the bank is slashing as many as 25,000 jobs worldwide to achieve its cost savings target of $6 billion by the end of 2017, it is planning to add 1,000 employees at its Chinese retail and wealth management arm.

“We aim to grow our business in China’s Pearl River Delta and the ASEAN region, and we continue to strengthen our leadership position in the internationalization of China’s renminbi currency,” the bank said in its annual report.

KB Kookmin Bank, the flagship banking unit of South Korea’s KB Financial Group, is moving to downgrade its U.K. operations. The Seoul-based lender says there is little reason to keep its British outpost now that the U.K. is about to kick off Brexit negotiations. It has filed papers with the U.K. financial regulator to change the status of its business in the country and is awaiting a response.

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

 

Overnight US Market :Dow closed -8.50 points.Nasdaq Unchanged

Nasdaq unchanged.  Dow down about -0.04%

The S&P index is ending the day down about -0.20% on the day to 2273.50. The high reached 2379.55. The low 2369.66.
The Nasdaq was unchanged at 5901.50. The high reached 5915.12. The low 5888.
The Dow was down about 8.5 points to 20906. The high reached 20955. The low extended to 20885.
In other markets:
  • 2 year yield fell -2.6 bp to 1.288%
  • 5 year yield fell -3.1 bp to 1.986%
  • 10 year yield fell -3.7 bp to 2.462%
Spot gold is up $5 to $1234.39. The high reached 1235.78. The low 1229.15.
WTI Crude oil is trading at $48.21, down -$0.57
The snapshot of the major currencies shows the NZD is the strongest while the GBP is the weakest (PM May will trigger Article 50 on March 29th). The USD was mixed with the dollar gaining against the GBP. It was down against the AUD and NZD and little changed against the other major currencies.