The most authoritative source of reserve data, the IMF's COFER data was just released for the second quarter. Central banks are rebuilding their reserves. Reserves peaked in Q2 08 at about $6.96 trillion. In Q1 09 they had fallen to $6.49 trillion and in Q2 they rose to $6.80 trillion.
Wednesday, September 30, 2009
Tuesday, September 29, 2009
Perhaps one of the most noteworthy developments at the recent G20 meeting is what wasn't said. There was no major call for a new international monetary regime or a new international reserve asset, like the Chinese and others pushed for at the previous G20 meeting. Similarly there were no calls from US or European officials for a renewed yuan appreciation. Promises to pursue more balanced growth is not the same thing. Price changes should not be confused with the kind of structural reforms that are necessary.
|More on Ireland Here|
Ireland goes back to the polls Friday to approve the Lisbon Treaty after rejecting it in June 2008. Irish voters have been subject to a full court press, with even the EU, under the guise of simply informing voters, has seen to be weighing in heavily. All the lobbying and reassurances appear to be yielding the desired outcome. Polls out in recent days show the "yes" camp with a clear lead. The Sunday Independent puts it at 68%-17%. Separately, the Sunday Business Post puts it at 55%-25%, but if the undecided are removed the results shift to 67%-33%. The leadership of all the political parties and a number of business leaders have endorsed the Lisbon Treaty. One group that rejected the Treaty last year but may vote in favor of it now are the Irish farmers.
Monday, September 28, 2009
It is a study of contrasts. About midway through the 24-hour trading day on Wednesday, 23 September, the Norwegian central bank announced that although it had considered raising its key rates, it decided not to. A few hours later, the Federal Reserve announced that not only would rates be left on hold, it anticipates the economic conditions that will allow its target rate to remain exceptionally low for an extended period of time.
Thursday, September 24, 2009
Nobel prize winning economist Robert Mundell has renewed his call for fixing the euro-dollar exchange rate. Although he has advocated this before, this time he has added it to the Chinese call to increase the role of the SDRs. He argues that by fixing the euro-dollar exchange rate, the new economic zone would represent 45%-48% of the world economy and make the adoption of the SDR easier.
Canada reports its international reserves on a weekly basis. It just reported its reserves as of Sept 13. They stood at $57.9 bln, up about $635 mln in the past week, which appear largely to be a reflection of valuation. The swings in currency valuation often are overlooked when talking about changes in reserves. Another interesting point is that although the US absorbs the vast majority of Canada's exports, less than half of Canada's reserves are in US dollars. Specifically, Canada reports that its US dollar holdings are worth about $25.6 bln and other currencies account for $20.4 bln, with special drawing rights amounting to another $9.3 bln and its reserve position and gold holdings are worth another $2.55 bln. The point is that Canada had no problem diversifying reserves. Reserves are concentrated in about a dozen countries. The lack of a clear alternative to the dollar may very well apply to them, but for the bulk of the remaining countries, Canada shows the way. The thing that those countries lack seems to be will not alternatives. Lastly, reporting the currency composition of one's reserves is part of the best practices of IMF members. China remains the chief exception.
The Australian dollar was faring better than most currencies against the US dollar today, but has come under some pressure after European markets closed. In addition to weaker commodity stories, one of the weights on the Australian dollar may be in a story in the Australian press suggesting that contrary to what Chinese officials have said, the bilateral relationship is strained. Not only is the bad taste from the Rio Tinto affair still lingering, but the Chinese government's willingness to assist state-owned enterprises in renegotiating losing derivative positions, raises questions about the sanctity of contracts.
Wednesday, September 23, 2009
The greenback was treading water today awaiting the FOMC statement. The FOMC statement did not contain any surprises and the dollar has sold off in its aftermath. If anything the FOMC statement was a somewhat more dovish than some might have seeming to be more concerned about deflation. It did upgrade its assessment to the economy, which is not unexpected. It did extend its purchases of MBS and Agency bonds through the end of March 2010, which was also largely anticipated by the market. The debt markets have recovered from their earlier weakness as the FOMC repeated its assessment that the Fed funds target will likely remain low for an extended period of time. The equity market and commodities also seem to like the fact that the event risk is past and that the Fed is not about to tighten policy. This means the the cyclical forces that at work that favor risk taking remain in the key driver. This means further dollar declines against the major and EM currencies. It means the liquidity driven gains in commodities, like gold, continue. It would also seem favorable equities, but key levels near 1100 in S&P is being approached as is quarter end, as portfolios are adjusted.
Monday, September 21, 2009
The FOMC meets Tues and Wed this week. With no expectation of a change in the Fed funds target, the key focus is on the assessment and guidance the Federal Reserve provides.
Friday, September 18, 2009
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As the third quarter draws to a close, the U.S. dollar is under pressure, falling to the lowest level in a year against a wide swathe of major and emerging market currencies alike. After putting in a strong performance from the middle of 2008 through the first quarter of 2009, the greenback has surrendered a significant proportion of those gains.
At first many attributed the dollar’s decline to structural forces. Numerous observers emphasized diversification of reserves. There is little factual evidence this is actually taking place. The dollar’s share of reserves has remained amazingly steady and, if anything, has increased slightly in recent quarters.
US household net worth rose by $2 trillion in Q2, which is more than the annual GDP of Canada or any of the BRICs, but one (China) or the combined GDP of 6 euro zone members (Portugal, Finland, Ireland, Belgium, Greece and Austria). At $53.1 trillion, US household net worth is still a little more than $11 trillion off the peak recorded in Q3 07.
Wednesday, September 16, 2009
A year ago or so there was much consternation about the encroachments into the sanctity of contracts in the United States, especially if judges could modify private mortgage contracts. Then again in the bankruptcy of GM and Chrysler the sanctity of contracts, and in particular the rights of senior debt holders, was arguably undermined.
Part and parcel with its overall slide, the US dollar has fallen to its lowest level against the Chinese yuan since late May. Even within the narrow ranges that have prevailed this year, there is scope for additional albeit minor dollar losses against the yuan. Still, there is no sign that Chinese officials are going to let the yuan resume its float any time soon.
Tuesday, September 15, 2009
The Polish zloty has stabilized today after yesterday's trade-deficit induced slide. The higher than expected August consumer price increase reinforces ideas that the Poland has reached the end of its easing cycle and that the next move will be higher rates, though we envisage this to be a few quarters away. Hungary, Turkey and Russia are still in an easing mode, while there may be another cut left for the Czech Republic.
August retail sales data was much stronger than the consensus expected, even excluding the cash-for-clunker induced auto sales. The 2.7% increase in the strongest in 3-year and excluding autos, the 1.1% rise is the best showing in six months. Retail sales excluding auto, gasoline and building materials which feeds into calculations of GDP rose 0.7% in August after a 0.3% decline in July. The strength of the data is likely to see economists revise up Q3 GDP estimates, which have kept up in recent weeks to around 2.75% according a new wire survey. Strength was seen in clothing, sports goods, general merchandise, which all rose more than 2% each. Furniture and building material sales remained weak.
The central bank has Kazakhstan announced its intentions to reduce its US dollar holdings in reserves over the long-term. The central bank has reserves of just below $17 bln at the end of July. The Kazakh central bank, like others, says there is simply no alternative to the US dollar, but over the next 10-15 years there will be.
Monday, September 14, 2009
U.S President Obama is scheduled speak in NY near midday. He speech is expected to focus on the economy and the financial situation. As policy makers move from triage to reform, stark contrasts are emerging between the US and European approaches.
Every so often, a pundit or economist will put forward the idea that the US may chose or have to issue foreign currency bonds. It is understood as a sign of weakness. And yet few have noted that that the Swiss National Bank, whose country enjoys among the the largest current account surpluses among the advanced industrialized countries has issued US dollar bills this year.
Last week, Spain and Belgium together issued about $3.5 bln in 3-year notes. Spain's $2.5 bln issue was priced about 18 bp above mid-swap rates. Today Germany is putting the final touches on its own dollar issue, the first in four years. The book closing and pricing are expected to take place today and settlement for next Monday. It looks to be priced around 25 bp below mid-swaps rate. Indications from market makers is that it is being well received.
The German government justified its dollar offering on grounds that it would produce savings. Barron's Current Yield column argues that the 7 bp spread between US and German 3-year instruments were trivial and that the real savings would likely come from the currency side. Really?
First the German government is most likely to swap the dollars into euros, eliminating the currency risk and potential to profit on dollar depreciation. no betting that the dollar continues to decline as Barron's suggests. Second, The savings looks to closer to 10 bp, which on $4 bln over three years is $12 mln risk free. Third, the German government is raising nearly 350 bln euros of debt this year. It has already had an auction that was under-subscribed (failed) and a dollar issue would broaden its likely investor base.
Ironically, these dollar issues by Germany, Belgium and Spain, coupled with a number of European corporate dollar offerings, take place at the same time, of course, that the US Treasury supply is nearly non-stop and corporate America has been very active as well. The dollar-denominated bond market appears to have thus far absorbed the huge supply relatively smoothly.
The market is regarding the raising of foreign currency debt by three euro zone members and Switzerland markedly different than it would likely respond to the US issuing euro or Swiss franc denominated debt. Rather than be a sign pending dollar weakness as Barron's claimed, we suspect it is more about the desire to broaden the investor base and make marginal cost savings.
Saturday, September 12, 2009
Friday, September 11, 2009
The gold "bugs" seem to imply that nothing has outperformed gold in the long run and they see its return over the past decade (246%) as proof its superiority.
The Stage is Set
The U.S. dollar has been trending lower since late 2000, around the time the U.S. Treasury last authorized intervention and that was in conjunction with other major countries to support the euro. This trend should be understood, at least in parts, as the unwinding of the dollar’s gains, which some argue were overshoot, from the second half of the 1990s.
Thursday, September 10, 2009
Often disputes over the past are really disputes over the present and future. This seems true about the dollar now. One camp argues that the dollar's rally in H2 08 and Q1 09 was a function of safe haven flows. As the acute phase of the crisis abated, the safe haven was not needed and the dollar has generally weakened in Q2 and through Q3 as the safe haven flows were unwound.
The combination of broad based US dollar weakness, especially pronounced since the start of the month, and expectations that China's export contraction is bottoming is helping send 12-month non-deliverable forward to its best level in 3 months this week. The PBOC has been fairly generous in their money market operations, providing net injections and keeping the key 7-day repo rate soft (it fell 12 bp today to 1.54%).
Wednesday, September 9, 2009
The US Commerce Dept is expected to announce its decision regarding oil and gas pipe imports from China later today. US steel workers and US Steel have joined forces with US affiliate of Russia's second largest steel producer and Wheatland Tube, a Pennsylvania-based steel company to file formal complaints again Chinese steel pipe imports. US steel pipe imports from China amounted to around $2.8 bln last year, while the increased demand for pipe helped US producers record a $2.4 bln profits in 2008, a three-fold increase 2007. Since then oil prices have tumbled and Chinese imports have fallen, partly because of the fear that the duties the US Commerce Dept could impose may be retroactive.
Meanwhile, by the end of next week (Sept 17) President Obama will have to decide whether to approve the US-based International Trade Commission finding against Chinese tire imports and impose the recommended 55% duty (vs 4% currently). Of note unlike in the steel pipe case, this is largely a labor case.
Last year the US imported about $1.5 bln worth of Chinese tires. As we have noted before, it is the first case before the Obama Administration under the "safe-guarding" clause in the WTO agreement that allowed China to join in late 2001. Four such cases made it this far in the previous administration and in each case President Bush rejected the ITC's recommendations.
During last year's campaign, Obama sounded somewhat more sympathetic to the unions' position and seemed more antagonistic to China. But in a close call, we are inclined to expect mild US actions. These are not glaring unambiguous examples of Chinese dumping or materially hurting US interests. With over $400 bln in Sino-American trade, China is the US second largest trading partner after Canada. These are relatively small cases so even if some kind of sanction is imposed the direct impact may be minor.
However, China does not like the embarrassment and would seem to prefer a negotiated settlement. Meanwhile, many are concerned that despite the pledges to resist, protectionism is lurking near the surface, nurtured perhaps by the highest unemployment in more than a quarter of a century. Obama, along with the other G20 have agreed to resist protectionist pressures, and although countervailing duties can be legitimate defenses, given the particulars in these cases, it is not clear retaliatory action won't appear protectionist in spirit.
It behooves the Obama Administration to 1) find clearer cases of harm from unfair Chinese trade practices, 2) avoid unilateral action by using the WTO more, and 3) set a high bar for best practices. Trade seems to always produce frictions and the more the trade the more opportunity for complaints and disputes. That is not a problem. The key lies in conflict resolution. Issues of subsidies and government assistance is bound to be more involved in the period ahead as the official response to the crisis, in the US and elsewhere has, of course, seen nearly unprecedented government action in the economy.
Former Fed chief Greenspan is speaking in NY today. While warning that there still are excessive inventories, the pieces are falling into place for a recovery, which he suggests could be "fairly pronounced."
Thursday, September 3, 2009
Germany holds national elections on Sept 27. It has long been anticipated that the grand coalition of CDU and SPD would end with the CDU possibly forming a coalition with the FDP. However, the recent polls and last weekend's elections warn that of a risk that a grand coalition may be the only logical outcome.
Risk on. Risk off. The markets are moving together. Risk on trades are thought to be short U.S. dollar, yen, and bonds; long equities, commodities, and EM. There is nothing cast in stone about these patterns and in the past the pattern was different. In the late 1990s and again in the 2002-2004 period, the euro and the S&P 500, for example, were inversely correlated. When existing pattern breaks down, there will be many caught wrong-footed.
Wednesday, September 2, 2009
Agriculture subsidies by Europe and the US sticks in the craw of many developing countries. It can distort prices, spur excess production and retard development. In recent years US corn subsidies and EU sugar subsidies have been challenged. The World Trade Organization has succeeded the GATT, which some believe stood for the General Agreement to Talk and Talk, and is also engaged in lengthy legal maneuverings. And like the wheels of the gods grinds slowly, so too does the WTO. Yet one of the most noteworthy aspects to both GATT and the WTO is the conflict resolution process.
Stronger than expected US auto sales point to an constructive August retail sales report, when it is released on Sept 15. However, the risk is that due to lighter back-to-school traffic, sales excluding autos and gasoline may be somewhat softer than the headline.
Tuesday, September 1, 2009
With China contributing mightily to the world economy, many investors are casting a watchful eye on the Shanghai Composite, the largest of the Chinese equity markets. It fell more nearly 22% in Aug, leaving it about 46.5% higher than the start of the year. There seems to be a tendency to exaggerate the significance for other markets.
We looked at correlations between the Chinese equity market and other markets. To disclose our methodology, we calculate the correlations based on percentage change rather than absolute levels on the understanding this is the more robust approach.
Over the two past years, the correlation between the euro-dollar exchange rate and the Shanghai Composite is 12%, same as the year to date. In the most recent 3 months the correlation has risen to just above 21%--~1 day a week. This this the highest correlation since Q2 07. The highest over the past decade was recorded in Aug 2005 with a correlation of about 40%.
The yen's correlation with the Chinese equity market is not statistically significant. Over the past two years, the correlation is about 4% and year to date it has fallen to a little more than 2%, but in the past three months has risen to about 5.5%.
What about the US stock market ? Over the past two years, the S&P 500 and the Shanghai Composite have a 4.5% correlation, while the year-to-date correlation is has doubled that to 9%. In the last three months it has doubled again to 18%.
Out of the range of currencies and commodities we looked at, which was by no means exhaustive as much as suggestive, copper looked the most interesting. The correlation between the front month copper futures contract and the Shanghai Composite over the past two years has been 16.5% and since the start of the year it has risen to 27.4% and in the past three months, it has risen to just above 30%.
Bottom line: Correlations between currencies, S&P 500 and copper prices and the Shanghai Composite have risen, for the most part the relationship is not that tight. It is not so much a question of decoupling as they do not appear to have been tightly linked in the first place. The dollar's movement against the euro and yen does not appear to be influenced very much by the Chinese stock market performance.
FX trading was particularly difficult in the month of August. The most commonly traded currency pair the euro and the dollar were essentially unchanged on the month. The euro eked out a 0.27% gain or about 4/10 of a penny. The Swedish krona (+0.22%) and the Australian dollar (-0.07%) were for all practical purposes flat. The best performing G10 currency was the high yielding New Zealand dollar, which gained almost 2.9%. The low yielding Japanese yen was second, gaining 1.8% against the dollar. The Norwegian krone came in third with a 1.4% rise, encouraged by higher oil prices and ideas that the Norges Bank could be among the first central banks to hike rates. The Swiss franc, which the Swiss National Bank has been determined to prevent from rising appreciated 0.8% against the dollar and about 0.5% against the euro.