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Thu, 29th June 2017

Anirudh Sethi Report

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Archives of “reserve currency” Tag

Analysts debate possible September start for Fed balance sheet run-off

Federal Reserve chair Janet Yellen said on Wednesday that the central bank could begin shrinking its $4.5tn balance sheet “relatively soon“, and while she demurred on a specific date, some analysts have now pegged that announcement for September — although others aren’t so sure.

Over the past few months, analysts have tried to piece together a clearer picture of the Fed’s timing for moving on the three expected interest-rate increases this year, as well as when it intends to start the process of unwinding its massive balance sheet.

On Wednesday, the Fed moved forward with its second rate rise of 2017 and unveiled some details of its plan to shrink the balance sheet that has grown to a massive size in the wake of the financial crisis. That has left analysts to ponder when to expect the Fed’s next moves at its four remaining meetings of the year. 

In a note following today’s announcement, Bank of America Merrill Lynch analysts said in a report that they now expect the balance sheet normalisation to begin in September, with the third rate increase of 2017 penciled in for December:

An Update for US Dollar ,Euro ,GBP ,CAD ,AUD ,CRUDE

The technical indicators warn that the US dollar is stretched, but the combination of disappointing auto sales and jobs report may deny it the interest rate support needed to facilitate a resumption of the bull market. While there are many observers talking about the abdication of the US from its global leadership role given the decision to pull out of the Paris Accord and the TPP, we think the dollar’s performance can be explained by changing perceptions about the pace of US economic activity, the direction of inflation, and prospects for significant tax reform and infrastructure spending.  
There is a light US economic calendar in the week ahead, and the quiet period ahead of the June 13-14 FOMC meeting means that investors are unlikely to get much guidance from officials.  The focus will be squarely on Europe with the ECB meeting and the UK election.  
The Dollar Index finished the week at new lows for the year, and just above the 61.8% retracement objective of the rally from the lows seen in May last year (96.45).  A convincing break brings two technical levels into view.  The first is around 95.20.  It is a measuring objective of the old head and shoulder pattern that had been formed between December 2016 and March 2017.  The second is near 94.20.  It is the 38.2% retracement objective of the Dollar Index’s 2012-2014 lows near 78.60.  
The euro appreciated for the sixth week of the past eight.  Nearly three-quarters of the 0.7% gain on the week were scored on the back of the disappointing US jobs report.  Before the weekend, it posted its highest close since last September, as works its way closer to the spike high last November ($1.13).  The strength of the close warns of risk of a gap higher opening in Asia on June 5.  Given the proximity of $1.1300, current volatility, and momentum, an upside break cannot be ruled out.  A break of $1.1300 could signal a move to $1.1400-$1.1425.  

Overnight US Market :S&P closed at Record High

What sell-off? In a feat that has not been accomplished in more than a week, the S&P 500 on Wednesday notched a fresh record closing high.

The S&P 500 gained 0.25 per cent to 2,404, the Dow Jones Industrial Average added 0.36 per cent to 21,012.4, and the Nasdaq Composite gained 0.44 per cent to 6,163.

Last week, equities markets took a blow from rising concern over the political fortunes of US President Donald Trump.

Still, after Wednesday’s gains, the most recent bout of selling has been entirely reversed and then some. The S&P 500 index is up 7.4 per cent for the year.

Investors on Wednesday parsed through minutes from the Federal Reserve’s May meeting, which set the table for next month’s meeting, which could see it raise rates for the second time this year. Investors interpreted the news as dovish on margin, however, with the US dollar slipping 0.26 per cent against a basket of six peers.

The yield on the benchmark 10-year Treasury note fell 0.0298 per cent to 2.2502 per cent.

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.

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.

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.”

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.

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.

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.