Friday, 28 April 2017
The dollar edged up in Asian trading on Friday but was on track for a losing month against a basket of currencies, while the euro shed some of its monthly gains after the European Central Bank maintained its easing bias.
The dollar index, which tracks the greenback against a basket of six major rivals, edged up 0.1 percent to 99.205, but down 0.8 percent for the week and 1.1 percent for April.
The euro was down 0.1 percent at $1.0863, but up 1.3 percent for the week and 2 percent for the month.
ECB chief Mario Draghi said on Thursday after the central bank's policy meeting that removal of the bank's easing bias was not discussed, stressing the barriers the ECB still faces before beginning to tighten its ultra-loose financing conditions.
However, he also said that euro zone's recovery was increasingly solid and downside risks had diminished.
"My feeling is that Draghi's statement will be an important factor to set the tone for the euro's movement next month," said Masashi Murata, currency strategist for Brown Brothers Harriman in Tokyo. "He said the ECB is unlikely to start its exit strategy this year."
Against its Japanese counterpart, the dollar inched 0.1 percent lower on the day to 111.30 yen, up 1.9 percent for the week but still down 0.2 percent for the month.
"The Japanese Golden Week holidays are ahead, and investors have already adjusted their positions," said Kaneo Ogino, director at foreign exchange research firm Global-info Co in Tokyo.
Tokyo markets will be closed for three days from May 3 for a string of holidays known as the Golden Week, and some market participants take additional time off.
"Because of the holidays, we're not seeing the usual Japanese profit-taking or exporter selling on the dollar's rise, though some investors are still hoping for a chance to buy the dollar on dips," Ogino said.
Liquidity is likely to be thin next week, which market participants say could exacerbate any sudden moves.
Traders continue to monitor tensions on the Korean peninsula, any escalations of which could give the perceived safe-haven yen a lift.
U.S. President Donald Trump told Reuters in an Oval Office interview on Thursday that a major conflict with North Korea is possible in the standoff over its nuclear and missile programs, but he would prefer a diplomatic outcome to the dispute.
On Thursday, the BOJ kept monetary policy unchanged as expected, but offered its most optimistic assessment of the economy in nine years, signaling its confidence that a pick-up in overseas demand will help sustain an export-driven recovery.
Japanese economic data released early in the session showed Japan's core consumer prices rose at a slower than expected pace in March from a year earlier, but they posted their third straight month of increase, driven by rising energy costs.
Later in the global session, investors will get a first look at the preliminary estimate for U.S. gross domestic product in the first quarter. Economists polled by Reuters expected an increase of 1.2 percent, and any downside surprise would likely pressure U.S. Treasury yields and the dollar.
The yield on benchmark 10-year Treasury notes stood at 2.292 percent in Asian trading, not far from its U.S. close of 2.296 percent on Thursday.
The dollar was steady against the Swedish crown at 8.8374 crowns per dollar, after it jumped on Thursday in the wake of a decision by Sweden's Riksbank extended its bond-buying. The central bank also predicted its first interest rate hike in mid-2018, later than previously projected.
The dollar only held its gains against the Japanese yen on Thursday after U.S. President Donald Trump's tax plan offered no surprises, slowing the greenback's rally.
The market also awaited the European Central Bank's monetary policy decision.
The Canadian dollar and Mexican peso, which had slumped earlier on reports the United States is considering withdrawing from the North American Free Trade Agreement (NAFTA), bounced sharply after Trump said he would not scrap the pact but renegotiate instead.
The U.S. dollar had surged to a four-week high of 111.780 yen on Wednesday before Trump's tax reform plans were unveiled. But it lost traction as the proposals failed to excite investors. The dollar was last up 0.2 percent at 111.20 yen.
The dollar index against a basket of major currencies slipped 0.2 percent to 98.841 .DXY after rising as far as 99.332 the previous day.
Trump's plan would cut the income tax rate paid by public corporations to 15 percent from 35 percent and reduce the top tax rate assessed on pass-through businesses, including small partnerships and sole proprietorships, to 15 percent from 39.6 percent.
"It (the plan) was kind of as we expected really. The dollar generally has come off on the view that the announcement of the so-called plan reads more like a wish list than a firm plan," said Adam Cole, currency strategist with RBC Capital Markets in London.
The euro was up 0.1 percent at $1.0913. It has had a buoyant week, climbing to a 5-1/2 month high of $1.0951 on Wednesday, as the first round of the French presidential elections held over the weekend reduced perceived risk toward the common currency.
The European Central Bank is due to announce its policy decision later on Thursday. It is not expected to move, waiting until its June meeting to signal any plans to pull back from its ultra-loose monetary policy.
The Swedish crown fell more than half a percent to 9.060 per euro after the Riskbank kept its benchmark interest rate at -0,5 percent, as expected, and said it would extend its bond-buying program by 15 billion Swedish crowns.
The Canadian dollar bounced 0.6 percent to C$1.3542 per dollar, while Mexico's peso strengthened 1.2 percent to 18.95 pesos per dollar as Trump's latest stance on NAFTA eased concerns toward U.S. trade protectionism for now.
Reference: Ritvik Carvalho
Thursday, 27 April 2017
The Bank of Japan kept monetary policy unchanged on Thursday and offered its most optimistic assessment of the economy in nine years, signaling its confidence that a pick-up in overseas demand will help sustain an export-driven recovery.
But the central bank slightly cut its inflation forecast for this fiscal year in a quarterly review of its projections, suggesting that it will maintain its massive monetary stimulus for the time being to achieve its ambitious 2 percent target.
At a post-meeting news conference due 0630 GMT, BOJ Governor Haruhiko Kuroda is likely to remind markets the Japanese central bank is nowhere near an exit from its massive stimulus, analysts say.
"The inflation and growth projections, as well as the upgrade of its economic assessment, were all in line with market forecasts, so there was no surprise at this meeting," said Yasunari Ueno, chief market economist at Mizuho Securities.
"As long as the economy maintains its momentum, the BOJ will likely stand pat at least until next spring, when Kuroda serves out his term."
In a widely expected move, the BOJ maintained its short-term interest rate target at minus 0.1 percent and a pledge to guide 10-year government bond yields around zero percent.
"Japan's economy has been turning toward a moderate expansion," the BOJ said a quarterly review of its long-term economic and price projections, compared with the previous month's view that it was "improving moderately as a trend."
It was the first time since March 2008 the BOJ used the word "expansion" in describing the state of the economy, signaling its conviction that the recovery was gaining momentum and that it sees no need for additional stimulus.
In the quarterly review, the BOJ cut its core consumer inflation forecast for the year ending in March 2018 to 1.4 percent from 1.5 percent, blaming stubbornly weak services and durable goods prices.
The BOJ also complained that public perceptions of future price rises remained weak with no clear signs of a pick-up.
But it maintained its projection that inflation will reach 2 percent during the fiscal year ending in March 2019 on the view that a tightening job market would gradually push up wages.
Many analysts remain doubtful inflation will accelerate as quickly as the BOJ projects, with slow wage growth keeping households from boosting spending.
"Consumer price growth is around zero, which makes all of these price forecasts look overly optimistic," said Shuji Tonouchi, senior market economist at Mitsubishi UFJ Morgan Stanley Securities.
"The BOJ upgraded its economic assessment, but this is due more to overseas demand. Japan's labor market is tight, but retailers still want to cut prices."
Japan's economy has shown signs of life, as exports rose the most in over two years in March and manufacturers' confidence hit the highest since the global financial crisis a decade ago.
But core consumer prices for February rose just 0.2 percent from a year earlier, as weak private consumption has discouraged companies from raising prices.
While a pioneer in deploying unorthodox stimulus, the BOJ is likely to lag behind its peers in withdrawing monetary support.
The U.S. Federal Reserve is already embarking on interest rate hikes, while the European Central Bank may send a small signal in June towards reducing stimulus.
Most analysts polled by Reuters expect the BOJ's next move to be a tightening of monetary policy, though many do not expect it to happen until next year at the earliest.
After more than three years of huge asset purchases failed to accelerate inflation, the BOJ revamped its policy framework last September to one aimed at capping long-term interest rates.
Reference: Leika Kihara
The dollar edged higher against the yen on Wednesday, while the euro held firm near a 5-1/2 month high due to receding concerns about the risks posed by the French presidential election.
The dollar rose 0.3 percent to 111.38 yen, pulling further away from a five-month low of 108.13 yen set on April 17.
Improving risk sentiment on reduced concerns over the French presidential elections helped weigh on the yen.
In a sign of the global bullish sentiment, the Nasdaq Composite hit a record high on Tuesday, while the Dow Jones Industrial Average and S&P 500 brushed against recent peaks, bolstered by strong corporate earnings.
Still, it remains to be see whether the dollar will see a sustained push higher against the yen, said Teppei Ino, analyst for Bank of Tokyo-Mitsubishi UFJ in Singapore.
"It's too early to say that the dollar will keep trending higher and head above the peak it saw in March," Ino said, referring to the dollar's March 10 high of 115.51 yen.
The focus will be on forthcoming U.S. economic data, especially after a softening in some recent indicators, he added.
The Trump administration's plans for tax reforms are another focal point for markets.
U.S. officials said late on Tuesday that President Donald Trump is proposing to slash the corporate income tax rate and offer multinational businesses a steep tax break on overseas profits brought into the United States.
Analysts said, however, that there was still uncertainty over just how quickly such fiscal policies would be implemented.
"Just presenting the plan doesn't mean the plan is going to be passed," said Mitul Kotecha, head of Asia macro strategy for Barclays.
"The reality is any tax changes or tax reforms or tax cuts, may not take place for some time, and Congress at this point is far from being agreed on what shape or form they are going to take," he added.
The euro edged up 0.2 percent to $1.0945. It touched a high of $1.0950, matching a 5-1/2 month high that was struck on Tuesday as the market digested centrist candidate Emmanuel Macron's victory in the first round of France's presidential election on Sunday.
In addition, three sources close to the European central Bank's Governing Council told Reuters that with the fading of the threat of a run-off between two eurosceptic candidates in France, and with the economy on its best run in years, many rate setters see scope for sending a small signal in June towards reducing monetary stimulus.
The Australian dollar was last down 0.2 percent at $0.7524, after underwhelming Australian inflation figures supported expectations of a benign interest rate outlook for months to come.
Reference: Masayuki Kitano
Wednesday, 26 April 2017
MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.5 percent, hovering near their highest since June 2015. Stock markets in Japan and Australia led gainers.
European markets were pointing higher in opening trades with index futures up between 0.05 and 0.1 percent.
"We are carrying on the momentum from the overnight rally in the U.S. markets and financials are in the spotlight on expectations of good earnings," said Alex Wong, a fund manager at Ample Capital Ltd in Hong Kong, with about $130 million under management.
The outlook for Asian markets is looking favourable with the MSCI Asia ex-Japan index having broken above a technical level, suggesting more room for gains.
A strong finish to U.S. markets was the main driver for Asia. The Nasdaq Composite hit a record high on Tuesday, while the Dow and S&P 500 brushed against recent peaks as strong earnings underscored the health of corporate America.
Fanning the market's rally were reports that President Donald Trump's tax reform proposals, due to be announced on Wednesday, would include a slashing of the corporate tax rate and lower taxes on offshore earnings stockpiled by U.S. companies overseas.
The threat of a U.S. government shutdown this weekend also receded after Trump backed away from demanding Congress include funding for his planned border wall with Mexico in a spending bill.
Financials led the Hong Kong stock market higher as fund managers bet on expectations the quality of banks' balance sheets will likely get better on an improving economic cycle and cheaper valuations.
In Hong Kong, for example, the financial sector trades at a forward price-to-earnings ratio of 8.7 times compared with traditional market darlings of technology stocks at 29 times, according to Thomson Reuters data.
In currency markets, the euro built on strong gains posted this week after business-friendly centrist Emmanuel Macron won the first round of the French vote on Sunday and opinion polls indicated less support for the eurosceptic Marine Le Pen.
While that is not expected to sway the European Central Bank into further action at Thursday's meeting, policymakers see scope for sending a small signal in June towards reducing monetary stimulus, according to sources, another factor underpinning the single currency.
"In our view, downside risks to growth have actually decreased with the outcome of the first round of the French election...the underlying tone of the press conference should still be positive," Holger Sandte, a strategist at Nordea markets wrote in a note.
The euro was steady at $1.09480, retaining most of Monday's 1.3 percent gain. On Monday it posted its strongest one-day performance in 10-1/2 months, which lifted the common currency to a 5-1/2-month high.
Growing appetite for risk meant safe-haven assets fell out of favour, with U.S. 10-year Treasury yields firming to 2.34 percent from 2.23 percent on Friday.
U.S. crude futures slipped after a volatile overnight session following an industry report showing a surprise build-up in inventories. U.S. crude futures were down 0.3 percent at $49.41 a barrel.
Reference: Saikat Chatterjee
Investors' enthusiasm for Asian stocks is waning as a raft of political and economic risks takes the shine off the best first-quarter returns in 26 years.
That period of strong gains could put Asian equities in the firing line for a sell-off, as funds investing in the region play it a lot safer than they were a few months ago on concerns that economic and business cycles may have peaked.
"Most of the positive news may be priced in already. But at the same time, if we’re seeing disappointments, this could be a trigger for more profit taking," said Tuan Huynh, Asia Pacific chief investment officer at Deutsche Bank Wealth Management, who now recommends an underweight exposure to Asian equities from overweight at the start of 2017.
“Earnings season in the U.S. and political events like elections in Europe may bring negative surprises that could lead to corrections," he said.
The MSCI Asia ex-Japan index, returned 12.8 percent in the first three months of 2017, the best first-quarter performance since 1991, as almost $17 billion of funds flowed into the region, excluding China and Malaysia.
But they've returned a pittance since then, and flows slowed to only $563 million in April through the 19th, according to Thomson Reuters data, as risks grew, including nuclear threats from North Korea, a series of elections in Europe and delays in fiscal stimulus and protectionist rhetoric from the United States.
Business activity in Asia, which had been above trend and improving in the second half of 2016 and earlier this year, is now above trend but decelerating, Goldman Sachs' Chief Asia Pacific Equity Strategist Timothy Moe said in a podcast this month.
Over the last 15 years, average three-month returns in a period of above-trend improving activity have been 7.9 percent for the MSCI Asia Pacific ex-Japan index earn, while returns have fallen to 1.5 percent in above-trend decelerating phases.
"We're going from a period of really juicy, good returns to a period where returns will be positive but decidedly more muted in magnitude," he said.
The modest acceleration in global expansion and inflation expected in 2017 and 2018 is also not enough to return trade growth to pre-global financial crisis levels, according to Schroders.
Cyclical upswings in China and the United States, which have helped trade, are likely to fade soon, Keith Wade, chief economist and strategist at the investment house, wrote in a note this month.
"Without the support of these two economies, global trade is likely to roll over (slow), at least in value terms, in the second half of 2017," he added. "The implication is that this will take emerging market equities with it."
Still, investors aren't bailing out of Asia entirely, even though stocks are the most expensive relative to other emerging markets since February 2015. That is because they are still cheaper than developed markets, and earnings growth is finally materializing after years of disappointments.
Analysts expect earnings across the region to jump 17 percent this year from 2016.
"For that earnings trajectory to roll over, you'd have to see a breakdown in global reflation. It's not our base case," said John Woods, Asia Pacific Chief Investment Officer at Credit Suisse Private Banking and Wealth Management.
"We're reasonably comfortable that this earnings story can continue for a year or so."
However, if earnings do disappoint or expectations are downgraded -- possibilities many investors are dismissing -- that could be another catalyst for a sell-off.
For those buying, selectivity is key. Deutsche's Huynh and M&G Investments' Matthew Vaight prefer North Asia, specifically South Korea and Taiwan, which, along with being the cheapest in the region, also benefit from global growth.
Vaight, emerging markets portfolio manager at M&G, is underweight India, the region's most expensive market, and also finds Indonesia and the Philippines overvalued.
India, which received the most inflows from foreign investors in the first quarter, is trading at 21.2 times earnings, compared with the cheapest, South Korea, at 12.1.
Investors appear split on China. While Goldman is overweight, on expectations that improving economic growth will filter through to earnings and that stability will be a priority ahead of the 19th National Congress in October, M&G cites concerns about Chinese banks.
"They are tools of state policy and poor allocators of capital," Vaight said. The high valuations of many "new" China stocks, such as internet companies, are also difficult to justify, he said.
Reference: Nichola Saminather
Tuesday, 25 April 2017
The euro steadied on Tuesday, pausing after a rally sparked by the first-round results of the French presidential election, while the Canadian dollar fell after the U.S. slapped duties on Canadian softwood lumber.
The euro last traded at $1.0866, off Monday's peak of around $1.0940, its highest level since Nov. 10, after centrist Emmanuel Macron won the first round of the French presidential elections.
Polls show Macron defeating anti-EU, anti-euro nationalist Marine Le Pen in a runoff vote due to take place next month.
The euro's sharp bounce on Monday was partly due to the triggering of stop-loss buying at $1.09, said Tan Teck Leng, forex analyst for UBS Wealth Management in Singapore.
After that rally, lingering caution over the risk of a surprise win by Le Pen in the runoff vote will probably limit the euro's gains for now, he said.
"Our view on the euro/dollar is that between now and May 7, you'll probably be trading between $1.08 and $1.10," Tan said.
Opinion polls indicate that the business-friendly Macron, who has never held elected office, will take at least 61 percent of the vote against Le Pen after two defeated rivals pledged to back him to thwart her eurosceptic, anti-immigrant platform.
The Canadian dollar fell 0.4 percent after U.S. Commerce Secretary Wilbur Ross said his agency will impose new anti-subsidy duties averaging 20 percent on Canadian softwood lumber imports.
The loonie slipped to C$1.3560 per U.S. dollar at one point, its lowest level since late December when it sank to C$1.3598.
The U.S. dollar rose 0.3 percent to 110.08 yen, as the safe haven yen edged lower.
There was little market reaction after media reports said North Korea put on a massive live-fire drill on Tuesday.
Market participants have been worried that North Korea could conduct its sixth nuclear test, or another long-range missile launch, to coincide with the 85th anniversary of the foundation of its army on Tuesday.
Analysts said there was some relief for now, over the lack of such action by North Korea.
They added, however, that concerns over geopolitical risks were likely to persist, limiting the yen's declines and tempering the dollar's gains against the Japanese currency.
"For the dollar to make a try for 112 yen, you'd like to see some type of positive news out of the United States and an easing in North Korea related tensions," said Satoshi Okagawa, senior global markets analyst for Sumitomo Mitsui Banking Corporation in Singapore.
One potential negative against the dollar is the risk of a U.S. government shutdown, Okagawa said.
President Donald Trump indicated an openness on Monday to delaying his push to secure funds for his promised border wall with Mexico, potentially eliminating a sticking point as lawmakers worked to avoid a looming shutdown of the federal government.
Trump is facing a Friday deadline for Congress to pass a spending bill funding the government through September or risk marking his 100th day in office on Saturday with a government shutdown.
Reference: Masayuki Kitano
Britain's top share index jumped on Monday as banking stocks surged after centrist Emmanuel Macron came out on top in the first round of France's presidential election.
The blue chip FTSE 100 .FTSE index rose 1.9 percent to 7,246.34 points by 0857 GMT, on track for its biggest one-day jump since early December 2016 and outpacing the mid caps .FTMC which were up 0.9 percent at a fresh record high.
French centrist candidate Emmanuel Macron won the first round of voting, qualifying for a May 7 runoff alongside far-right leader Marine Le Pen.
This quelled market worries about a potential anti-establishment shock in light of the UK's Brexit vote last June and Donald's Trump's election in the U.S.
"There’s the upside... and that’s a pro-European stance which Macron has campaigned on and that’s going to be something that also cheers the markets. It delivers some potential upside in terms of what it could mean for Europe going forward,” Dean Turner, economist at UBS Wealth Management, said.
UK banks jumped 2.4 percent, joining in with a broader risk-on rally among European lenders .SX7P, which surged 4 percent. Shares in Barclays rose nearly 5 percent, while Standard Chartered was up 3.4 percent and Royal Bank of Scotland gained 2.8 percent.
"It's the pro-growth backdrop that we're now starting to see come through rather than ... ongoing austerity which is providing quite a significant shift with the outlook for the European banks, in particular with the French banks very much leading the way, which of course sees their UK-listed counterparts rally quite significantly today as well," Dafydd Davies, partner at Charles Hanover Investments, said.
Shares in home improvement firm Kingfisher were also among the biggest gainers, rising 3.7 percent.
In March, Kingfisher warned that the impact from the Brexit vote and potential disruption from the French election could hit trade in its two main markets. France accounted for 38 percent of Kingfisher's sales in 2016.
Precious metals miners Randgold Resources and Fresnillo were among a handful of stocks in negative territory, falling 4 percent and 2.1 percent respectively as investors rotated out of more defensive safe-haven stocks.
Energy provider Centrica was the biggest FTSE faller, down 5 percent, while pee also dropped 3.2 percent after Prime Minister Theresa May's Conservative Party vowed to cap domestic prices if it retains power in an election in June.
Outside of the blue chips, shares in Kennedy Wilson Real Estate jumped 13.6 percent, while Computecenter gained 7.6 percent after an upbeat outlook.
Reference: Kit Rees
Monday, 24 April 2017
The euro briefly vaulted to five-month peaks on Monday after the market's favoured candidate won through the first round of the French election, reducing the risk of a Brexit-like shock and sparking a mass unwinding of safe-haven trades.
E-mini futures for the S&P 500 climbed 0.8 percent in early trade, while yields on 10-year U.S. Treasury notes rose almost 8 basis points to 2.31 percent.
Japan's Nikkei .N225 jumped 1.3 percent as the yen retreated, while MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS edged up 0.2 percent.
Shanghai shares .SSEC, however, fell 1.5 percent after state media signalled Beijing would tolerate more market volatility as regulators clamp down on riskier financing.
In France, Centrist Emmanuel Macron took a big step toward the presidency on Sunday by winning the first round of voting and qualifying for the May 7 runoff alongside far-right leader Marine Le Pen.
The outcome lessens the risk of an anti-establishment shock on the scale of Britain's vote to quit the European Union with Macron widely tipped to win the final vote and keep France in the union.
Opinion polls put Macron ahead by over 20 points, a lead so large that a repeat of the Brexit surprise seemed highly unlikely.
Investors had feared for the single currency's future if one of the far-left candidates had gotten through to fight Le Pen. The euro jumped in relief, and was last up 1.1 percent at $1.0845, having been as far as $1.0940, the highest since early November.
The safe-haven yen slipped across the board with the euro surging 2 percent to 119.32 yen while the U.S. dollar gained 0.9 percent to 109.99 yen. Likewise, gold fell 0.7 percent to $1,274.70 an ounce .
"The rise of the euro and risk appetite rebounding is understandable and this should also see yields in Europe fall, spreads to Bunds tighten and stocks rally," said Tim Riddell, an analyst at Westpac.
"However, such gains are likely to be contained when markets reflect upon the marked shift away from the "establishment" and just how effective the new president may be," he added.
SCEPTICAL ON TAX
Wall Street on Friday had only a modest lift from news President Donald Trump would announce the broad outline of his proposed tax package on Wednesday.
"Markets are sceptical that the real details will be forthcoming," said analysts at ANZ in a note.
"There is also plenty of conjecture about whether any tax cuts will be able to be revenue neutral, and that could affect their ease of passage through Congress."
The Dow .DJI ended Friday down a minor 0.15 percent, while the S&P 500 .SPX lost 0.30 percent and the Nasdaq .IXIC fell 0.11 percent.
Investors were also keeping a wary eye on tensions in the Korean peninsula.
North Korea said on Sunday it was ready to sink a U.S. aircraft carrier to demonstrate its military might, in the latest sign of rising tension as Trump prepared to call the leaders of China and Japan.
South Korea responded by asking Washington about holding joint drills with the USS Carl Vinson aircraft carrier strike group as it approaches waters off the Korean peninsula.
Oil prices recouped just a little of last week's hefty losses, still weighed by signs U.S. production and inventory growth were offsetting OPEC's attempts to reduce the global crude glut.
Brent futures were up 29 cents at $52.25 a barrel, while U.S. crude futures added 24 cents to $49.86.
Investors are no longer expecting a rate rise from the European Central Bank by March 2018, money market pricing suggests, marking a sharp reversal in expectations for higher interest rates from just a month ago.
ECB policymakers' comments playing down the scope for near-term changes to monetary policy, along with falling inflation expectations, explain the reassessment.
Money market rates tell the tale. Forward Eonia bank-to-bank rates -- the best gauge -- dated for the ECB meeting on March 8 next year stand at around minus 0.34 percent, two basis points above the Eonia spot rate of minus 0.36 percent.
Such a gap indicates markets are pricing in just a 20 percent chance of a 10 basis point hike in the ECB's minus 0.40 percent deposit rate by next March.
That's a sharp contrast to last month, when investors ratcheted up rate-hike expectations after the ECB at its March 9 meeting signalled a diminishing urgency for more policy action. Soon after, some policymakers even raised the prospect of raising rates before quantitative easing ends.
As a result, markets moved swiftly in March to fully price in a rate hike in the first quarter of 2018 and as much as an 80 percent chance of a rate rise in December, when the ECB's asset-purchased scheme is scheduled to end.
Now, markets have also unwound expectations for a rate rise by year-end with Eonia forward rates dated for the December 14 meeting indicating a less than 20 percent chance of a move.
"The market has pretty much priced out everything," said Peter Schaffrik, head of European rates strategy at RBC Capital Markets. "It is a combination of the rhetoric, which has played a crucial role, but also falling inflation expectations."
Prospects for the euro zone economy have improved but the time to withdraw support has not yet come, three ECB rate setters said on Wednesday, days before a tense French presidential election and the ECB's own policy meeting.
Data meanwhile has shown inflation in the euro zone has slowed from four-year highs of 2 percent hit in February.
A long-term gauge of euro zone inflation expectations tracked by the ECB, the five-year, five-year breakeven forward, has fallen in recent weeks to stand at around 1.60 percent below the ECB's near-2 percent target.
Disappointing U.S. economic data and signs that the Trump administration will struggle to push through tax cuts have also quelled expectations of faster inflation in the United States.
That has had a dampening impact on rate-hike expectations in the euro zone as well, analysts said.
The money market curve has flattened and two-year Eonia money market swap rates, also viewed as an indicator of ECB monetary policy, have fallen.
In the United States, the Federal Reserve hiked rates on March 15 after a string of hawkish comments from officials triggered a rapid turnaround in market expectations for a move then.
The fact that in recent weeks rate expectations in Europe and the United States have swung around rapidly highlights market sensitivity as central banks move towards normalising ultra-easy monetary policies put in place after the financial crisis as economic growth improves.
"Markets are quite sensitive now that we are running towards the end of (asset-purchasing)," said ING rates strategist Benjamin Schroeder.
Reference: Dhara Ranasinghe
Friday, 21 April 2017
Asian stocks were set to end the week on a positive note, unscathed by a U.S. trade probe on Chinese steel exports, while the euro remained on edge ahead of Sunday's first round in a tight French presidential election after a shooting overnight in Paris that was claimed by Islamic State.
European stocks were headed for a more muted start, with financial spreadbetters expecting Britain's FTSE 100 .FTSE to open flat and Germany's DAX .GDAXI to start the day up 0.1 percent. France's CAC 40 .FCHI is also expected to be steady at the open, retaining most of Thursday's 1.5 percent gain, its biggest in more than seven weeks.
MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS added 0.5 percent on Friday, taking its cue from Wall Street's solid performance overnight on expectations of strong first-quarter earnings growth. It is still poised for a 0.4 percent weekly loss.
Asian steelmakers were mostly steady or higher, as investors dismissed for now any negative impact from the launch of a U.S. trade probe against Chinese steel exporters, although Chinese companies shed some of their earlier gains. The move sent their U.S. counterparts surging over 8 percent overnight.
China's Angang Steel added 0.4 percent, while Baoshan Iron and Steel Co, Beijing Shougang and Hesteel Co. inched down between 0.1 percent and 0.2 percent.
The region's other major steel producers posted strong gains, with Nippon Steel & Sumitomo Metal Corp. (5401.T) jumping 1 percent, and South Korea's Posco surging 2.5 percent, its biggest daily gain in more than three weeks.
"The U.S. accounts for a small proportion of China's steel exports," said Yang Kunhe, steel analyst at Northeast Securities in Beijing, adding Northeast Asia and Africa have been growing markets for Chinese steel over the past few years.
“But if Trump’s probe translates into actions, it would increase the chance of trade friction, and hurt market sentiment.”
Only 0.8 percent of Chinese steel exports go to the U.S., according to a U.S. Commerce Department report from December.
Markets also mostly shrugged off White House comments that the U.S. may consider tit-for-tat tariffs on imports, and concerns raised by the International Monetary Fund that U.S. tax cuts could fuel financial risk-taking and increase public debt.
Japan's Nikkei .N225 advanced 0.8 percent, on track for a weekly gain of 1.4 percent.
Chinese shares in Shanghai .SSEC added 0.1 percent, set for a 2.2 percent weekly drop, their worst since mid-December. Hong Kong stocks .HSI were little changed, heading for a 0.8 percent loss for the week.
The first round of the French presidential election on Sunday kept the euro on edge though it traded largely flat on Friday, holding at $1.0717.
The common currency had hit a three-week high of $1.0778 on Thursday, but fell back after a policeman was shot dead in Paris and two others in an attack that was claimed by Islamic State.
Analysts feared the latest outrage could sway French voters in what is expected to be a tight election, by working against more moderate, centrist candidates.
The euro had made the earlier high thanks to opinion polls that showed French centrist Emmanuel Macron would easily beat far-right, anti-European Union candidate Marine Le Pen in the second round on May 7.
"Let's hope (Macron) doesn't get squeezed out, particularly in light of last night’s terrorist attack in Paris, which given the tightness of the polls, could influence events," Michael Hewson, chief market anaylst at CMC Markets in London, wrote in a note.
French 10-year Treasury yields slumped to a near-three-month low of 0.856 percent on Thursday, while safe-haven German bund yields jumped to 0.244 percent, their highest close in nearly two weeks.
Markets are awaiting several economic indicators from Europe later in the session, including Eurozone manufacturing and services data for April and British retail sales for March. U.S. manufacturing and services data for April and existing home sales for March were due to be released later in the global day.
Wall Street indexes closed between 0.75 percent and 0.9 percent higher on rising expectations for first-quarter corporate profits. S&P 500 stock index company earnings now are expected to have gained 11.1 percent in the first quarter.
The dollar was 0.1 percent lower at 109.19 yen . It is up 0.6 percent for the week.
The dollar index .DXY, which tracks the greenback against a basket of trade-weighted peers, was little changed at 99.806, on track to lose 0.75 percent this week.
In commodities, oil drifted on Friday following Thursday's choppy session as the tussle continued between worries over rising U.S. production and optimism over comments from leading Gulf oil producers that an extension to OPEC-led supply cuts was likely.
U.S. oil was up 0.1 percent at $50.74 a barrel, set for a weekly loss of 4.6 percent, the most since the week ended March 10.
Global benchmark Brent was steady at $53.00, heading for a 5.2 percent weekly loss, also its worst performance since March 10.
Gold slipped 0.1 percent to $1,279.87 an ounce, poised for a weekly loss of 0.4 percent.
Reference: Nichola Saminather
World finance leaders are gathering on U.S. President Donald Trump's home turf on Thursday to try to nudge his still-evolving policies away from protectionism and show broad support for open trade and global integration.
The International Monetary Fund and World Bank spring meetings bring the two multilateral institutions' 189 members face-to-face with Trump's "America First" agenda for the first time, just two blocks from the White House.
"These meetings will all be about Trump and the implications of his policies for the international agenda," said Domenico Lombardi, a former IMF board official who is now with the Centre for International Governance Innovation, a Canadian think-tank.
He added that IMF Managing Director Christine Lagarde is aiming to "socialize" the new administration to the IMF's agenda and influence its policy choices.
The IMF in particular has sounded warnings against Trump's plans to shrink U.S. trade deficits with potential measures to restrict imports, arguing in its latest economic forecasts that protectionist policies would crimp global growth that is starting to gain traction.
Trump administration officials are now pushing back against such warnings by arguing that other countries are more protectionist than the United States.
Trump launched the week by signing an executive order to review "Buy American" public procurement rules that have long offered some exemptions under free trade agreements, and by lashing out at Canadian dairy restrictions.
In addition to warnings on trade, the IMF on Wednesday unveiled two studies pointing out dangers from fiscal proposals that Trump is considering. These included warnings that his tax reform ideas could fuel financial risk-taking and raise public debt enough to hurt growth.
Making tax reforms "in a way that does not increase the deficit is better for growth," added IMF fiscal affairs director Vitor Gaspar.
The advice may simply be ignored, especially after U.S. Treasury Secretary Steven Mnuchin last month insisted that an anti-protectionism pledge be dropped from a Group of 20 communique issued in Baden-Baden, Germany, said Eswar Prasad, former head of the IMF's China department
"The IMF has little leverage since its limited toolkit of analysis-based advice, persuasion, and peer pressure is unlikely to have much of an impact on this administration's policies," said Prasad, now an international trade professor at Cornell University.
Mnuchin's decision against naming China a currency manipulator last week removed one concern for the IMF ahead of the meeting.
Lagarde also noted on Wednesday that the IMF would listen to all of its members, and work for "free and fair" trade. Lagarde is set to interview Mnuchin on stage during the meetings.
Reference: David Lawder
Thursday, 20 April 2017
The dollar index, which tracks the U.S. currency against a basket of six major rivals, was slightly higher on the day at 99.752, moving away from a three-week low of 99.465 plumbed on Tuesday.
The euro edged up 0.1 percent to $1.07200, and was expected to tread water ahead of this weekend's vote.
Centrist Emmanuel Macron held on to his lead as favourite to emerge as the eventual victor, a closely watched poll showed, although it indicated that the outcome of the first round of voting on Sunday was too close to call.
Millions of French voters remain undecided, making this the least predictable vote in France in decades, and raising fears of a potential surprise result that could spread turmoil in markets.
"Some people thought, no way would Brexit pass, no way would Trump win," said Ayako Sera, senior market economist at Sumitomo Mitsui Trust.
"There have too many recent surprises, so investors are wary of taking positions," she said.
Data released early on Thursday showed Japan's exports rose in March at the fastest pace in more than two years, though fears of trade friction clouded the outlook.
Deputy Prime Minister Taro Aso, who heads Japan for a newly-created bilateral economic dialogue with the United States, said on Wednesday that Japan has less room to compromise with the United States under a bilateral trade deal.
Against its perceived safe-haven Japanese counterpart, the dollar was up 0.1 percent at 108.99 yen, pulling away from five-month lows touched on Monday.
"There was a reversal of the recent flight-to-safety trend on Wednesday that we'd been seeing," said Bill Northey, chief investment officer at the private client group of U.S. Bank in Helena, Montana.
"You can see that reflected in the U.S. yield curve, as rates moved a bit higher after release of the Beige Book," he said, referring to the U.S. Federal Reserve's periodic report on the economy.
The benchmark 10-year U.S. Treasury yield, which wallowed at five-month lows earlier this week, stood at 2.205 percent in Asian trade, edging up from the U.S. close of 2.202 percent on Wednesday.
The Beige Book showed the economy expanded at a modest-to-moderate pace between mid-February and the end of March, but inflation pressures remained in check despite more difficulties in attracting and retaining workers.
The Fed raised its benchmark interest rate in March for the second time in three months. But in recent weeks, weaker-than-forecast data on employment, consumer spending and inflation, as well as geopolitical tension in Syria and North Korea, have prompted investors to trim their expectations for two more hikes this year, according to interest rate futures.
Secretary of State Rex Tillerson said on Wednesday that the United States was looking at ways to pressure North Korea over its nuclear programme as North Korean state media warned the Americans of a "super-mighty preemptive strike" and said don't "mess with us."
Investors also remain concerned over doubts whether President Donald Trump's administration would be able to pass fiscal or tax reforms any time soon.
Sterling added 0.2 percent to $1.2797 after notching a more than six-month high of $1.2908 on Tuesday following British Prime Minister Theresa May's call for an early general election ahead of Brexit negotiations.
Reference: Reuters Tokyo
Stocks flatlined and gold fell on Wednesday as investors continued to question the 'reflation' trades that had lifted markets since the election of U.S. president Donald Trump in November, while sterling basked in the glow of a six-month high following Tuesday's surprise news of a snap UK election.
Safe-haven bonds dipped slightly but largely held onto most of their recent gains before presidential elections in France and on escalating tensions between the United States and North Korea.
European stocks were flat in early trade .FTEU3, following the 0.6 percent fall in Asian equities outside Japan to a one-month low, .MIAPJ0000PUS while E-mini futures for the S&P 500 ESc1 were all but flat too.
Sterling was just off a six-month peak against the dollar above $1.28 having surged when British Prime Minister Theresa May called an early general election for June 8, seeking to strengthen her party's majority ahead of Brexit negotiations.
"Sterling rallied across the board yesterday on the back of Prime Minister May’s announcement of snap UK elections. The market interpreted the move as an effort to strengthen the prime minister's majority and reinforce a more unified stance for the upcoming negotiations with the EU," Unicredit analysts said in a note on Wednesday.
"Geopolitical tensions are providing strong support to U.S. Treasuries ... (and) in the euro zone Bunds are receiving support from the general decline in risk appetite and uncertainty related to the French presidential election," they added.
Germany's DAX was unchanged at around the 12,000-point mark .GDAXI, and Britain's FTSE 100 fell a further 0.2 percent following Tuesday's 2.5 percent slide, its biggest fall since June last year.
British stocks are vulnerable to a rising pound because more than two thirds of FTSE 100 company earnings are derived from operations overseas. The FTSE has now erased all its gains for the year.
The pound was lording it at $1.2824 on Wednesday having shattered a month-old trading range with a jump of 2.2 percent overnight. It also cleared the 200-day moving average for the first time since June, putting the squeeze on a raft of speculative short positions.
WALL ST LOSES STEAM
Earlier in Asia Japan's Nikkei .N225 closed a smidgen higher at 18,432 points, but Shanghai .SSEC extended its recent retreat with a drop of 0.8 percent. The Chinese market has fallen for four straight sessions on concerns over tighter regulations.
The dollar managed to recoup its broader losses in the Asian session, and was flat against a basket of currencies .DXY in early European trading. The euro stood at a three-week high of $1.0736 EUR=.
Against the yen, the dollar was up 0.4 percent at 108.80 JPY= having been as low as 108.39 earlier.
The dollar was undermined in part by an eroding interest rate advantage as U.S. bond yields dived to five-month lows. Yields on 10-year Treasury paper sank to 2.17 percent, a world away from the 2.629 peak seen in March. They were last up slightly on the day at 2.19 percent.
A run of disappointing U.S. economic data and doubts that the Trump administration will progress with tax cuts have quelled expectations of faster inflation and boosted fixed-income debt.
That, in turn, has taken the steam out of Wall Street. The Dow .DJI fell 0.55 percent on Tuesday, while the S&P 500 .SPX lost 0.29 percent and the Nasdaq .IXIC 0.12 percent.
Goldman Sachs lost 4.7 percent in the largest daily drop since June after its earnings missed expectations as trading revenue dropped.
In commodity markets, profit taking nudged gold down 0.4 percent to XAU= $1,287.10 an ounce, and away from Monday's peak of $1,295.42.
Oil prices slipped as U.S. crude stockpiles fell by less than expected and a U.S. government report said shale oil output in May was likely to post the biggest monthly increase in more than two years.
Brent crude was last little changed at $54.93 a barrel, while U.S. crude was also steady at $52.42.
Reference: Jamie McGeever
Wednesday, 19 April 2017
Nearly thirty years ago, the foreign exchange market (Forex) was characterised by trades conducted via telephone, institutional investors, opaque price information, a clear distinction between inter dealer trading and dealer-customer trading and low market concentration. Today, technological advancements have transformed the market. Trades are primarily made via computers, allowing retail traders to enter the market, real-time streaming prices have led to greater transparency and the distinction between dealers and their most sophisticated customers has largely disappeared.
One particularly significant change is the introduction of algorithmic trading, which, while making significant improvements to the functioning of Forex trading, also poses a number of risks. By looking at the basics of the Forex market and algorithmic trading, we will identify some advantages algorithmic trading has brought to currency trading while also pointing out some of the risks.
Forex is the virtual place in which currency pairs are traded in varying volumes according to quoted prices whereby a base currency is given a price in terms of a quote currency. Operating 24 hours a day, five days a week, Forex is considered to be world's largest and most liquid financial market. Per the Bank for International Settlements (BIS) the daily global average volume of trading in April 2013 was $2.0 trillion. The bulk of this trading is done for U.S. dollars, euros and Japanese yen and involves a range of players, including private banks, central banks, pension funds, institutional investors, large corporations, financial companies and individual retail traders.
Although speculative trading may be the main motivation for certain investors, the primary reason for the Forex market’s existence is that people need to trade currencies in order to buy foreign goods and services. Activity in the Forex market affects real exchange rates and can therefore profoundly affect the output, employment, inflation and capital flows of any particular nation. For this reason, policymakers, the public and the media all have a vested interest in what goes on in the Forex market.
Basics of Algorithmic Trading
An algorithm is essentially a set of specific rules designed to complete a clearly defined task. In financial market trading, computers carry out user-defined algorithms characterized by a set of rules consisting of parameters such as timing, price or quantity that structure the trades that will be made.
Four Basic Types of Algorithmic Trading
There are four basic types of algorithmic trading within financial markets: statistical, auto-hedging, algorithmic execution strategies and direct market access. Statistical refers to an algorithmic strategy that looks for profitable trading opportunities based on the statistical analysis of historical time series data. Auto-hedging is a strategy that generates rules to reduce a trader’s exposure to risk. The goal of algorithmic execution strategies is to execute a predefined objective; such as reduce market impact or execute a trade quickly. Finally, direct market access describes the optimal speeds and lower costs at which algorithmic traders can access and connect to multiple trading platforms.
One of the subcategories of algorithmic trading is high frequency trading, which is characterised by the extremely high frequency of trade order executions. High-speed trading can give significant advantages to traders by giving them the ability to make trades within milliseconds of incremental price changes, but it may also carry certain risks.
Much of the growth in algorithmic trading in Forex markets over the past years has been due to algorithms automating certain processes and reducing the hours needed to conduct foreign exchange transactions. The efficiency created by automation leads to lower costs in carrying out these processes. One such process is the execution of trade orders. Automating the trading process with an algorithm that trades based on predetermined criteria, such as executing orders over a specified period of time or at a specific price, is significantly more efficient than manual execution by humans.
Banks have also taken advantage of algorithms that are programmed to update prices of currency pairs on electronic trading platforms. These algorithms increase the speed at which banks can quote market prices while simultaneously reducing the number of manual working hours it takes to quote prices.
Some banks program algorithms to reduce their exposure to risk. The algorithms may be used to sell a particular currency to match a customer’s trade in which the bank bought the equivalent amount in order to maintain a constant quantity of that particular currency. This allows the bank to maintain a pre-specified level of risk exposure for holding that currency.
These processes have been made significantly more efficient by algorithms, leading to lower transaction costs. Yet, these are not the only factors that have been driving the growth in Forex algorithmic trading. Algorithms have increasingly been used for speculative trading as the combination of high frequency and the algorithm’s ability to interpret data and execute orders has allowed traders to exploit arbitrage opportunities arising from small price deviations between currency pairs.
All of these advantages have led to the increased use of algorithms in the Forex market, but let’s look at some of the risks that accompany algorithmic trading.
Risks Involved in Algorithmic Forex Trading
Although algorithmic trading has made many improvements, there are some downsides that could threaten the stability and liquidity of the Forex market. One such downside relates to imbalances in trading power of market participants. Some participants have the means to acquire sophisticated technology that allows them to obtain information and execute orders at a much quicker speed than others. This imbalance between the haves and have-nots in terms of the most sophisticated algorithmic technology could lead to fragmentation within the market that may lead to liquidity shortages over time.
Furthermore, while there are fundamental differences between stock markets and the Forex market, there are some who fear that the high frequency trading that exacerbated the stock market flash crash on May 6, 2010 could similarly affect the Forex market. As algorithms are programmed for specific market scenarios, they may not respond quickly enough if the market were to drastically change. In order to avoid this scenario markets may need to be monitored and algorithmic trading suspended during market turbulence. However, in such extreme scenarios, a simultaneous suspension of algorithmic trading by numerous market participants could result in high volatility and a drastic reduction in market liquidity.
The Bottom Line
Although algorithmic trading has been able to increase efficiency, therefore reducing the costs of trading currencies, it has also come with some added risks. For currencies to function properly, they must be somewhat stable stores of value and be highly liquid. Thus, it is important that the Forex market remain liquid with low price volatility.
As with all areas of life, new technology introduces many benefits, but it also comes with new risks. The challenge for the future of algorithmic Forex trading will be how to institute changes that maximize the benefits while reducing the risks.
Reference: Matthew Johnston
U.S. stock index futures were lower on Tuesday as investors weighed a possible delay in tax reforms, while keeping an eye on quarterly earnings and global politics.
* U.S. Treasury Secretary Steven Mnuchin told the Financial Times on Monday that the Trump administration's timetable for tax reform was probably delayed following setbacks in negotiations with Congress over healthcare.
* Mnuchin's statement added to concerns about President Donald Trump's ability to deliver on his promises to cut taxes and simplify regulations - bets on which U.S. stocks have hit record highs since his election.
* A raft of quarterly earnings from corporate heavyweights is expected to keep investors busy. Bank of America (BAC.N) shares rose 1.3 percent premarket after the company reported a strong jump in quarterly profit.
* Goldman Sachs (GS.N), which is scheduled to report results before markets open, was up 0.3 percent.
* Safe-haven bets continued to be in favor as investors remained on the edge ahead of critical presidential elections in France and tensions between the United States and North Korea.
* In an unscheduled statement, British Prime Minister Theresa May called for an early election on June 8 to guarantee political stability as the country negotiates its way out of the European Union.
* Gold prices hovered close to five-month highs, while the dollar dipped.
* Wall Street had closed higher in very thin trading volumes on Monday as investors bought technology and bank stocks.
* Shares of Dow component UnitedHealth rose 2.3 percent to $170.95 premarket after the health insurer reported quarterly revenue and profit that beat analysts' estimates.
* Johnson & Johnson (JNJ.N) slipped 0.9 percent to $124.60 after the healthcare conglomerate reported quarterly revenue that missed analysts' expectations.
* A report on March building permits is due at 8:30 a.m, while manufacturing output data for the month is expected at 9:15 a.m. ET.
Futures snapshot at 6:55 a.m. ET:
* Dow e-minis 1YMc1 were down 27 points, or 0.13 percent, with 27,231 contracts changing hands.
* S&P 500 e-minis ESc1 were down 6.75 points, or 0.29 percent, with 149,238 contracts traded.
* Nasdaq 100 e-minis NQc1 were down 12.75 points, or 0.24 percent, on volume of 26,730 contracts.
Reference: Yashaswini Swamynathan
Tuesday, 18 April 2017
The role of Central Banks
Central banks are at the heart of the financial system of any given country in that they are the authorities controlling the supply of money, and therefore control how a region’s economy functions. They evolved from the lack of stability in financial market that ruined a lot of economies during the 19th century. The first central bank was the Swedish Riksbank, which was created in the 17th century, with many following in the 18th and 19 century. The U.S. Federal Reserve appeared at the beginning of the 20th century. Over time, the roles of central banks in different countries have developed differently.
The European Central Bank's main duty is to assure price stability, by keeping "inflation rates below, but close to, 2% over the medium term" as measured in their CPI.
The Federal Reserve of the United States has four responsibilities: 1. Conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates 2. Supervising and regulating banking institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers. 3. Maintaining the stability of the financial system and containing systemic risk that may arise in financial markets. 4.Providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation's payments system
The Bank of Japan states: "currency and monetary control shall be aimed at contributing to the sound development of the national economy, through the pursuit of price stability."
The Bank of England's mission is to assure stable prices and confidence in the currency through monetary policy and to detect and reduce threats to the financial system as a whole through financial policy
Even if in practice, central banks roles may sound different and even complicated, in pure theory their role is to increase the expansion phase of business cycle and reduce the contraction phase while still assuring future and prospective growth. These targets can be affected through monetary policy conducted by central banks via economic levers like interest rates, open market operations and reserve requirements. In order to conduct them, central banks must hold foreign reserves and gold reserves.
Interest rates are the most important economic lever that a central bank can control. In a classic economy, interest rates are viewed as "the price of money". A high interest rate will attract foreign capital and a low interest rate will tend to force capital to move outside the country in a search for a better income source (higher yields). Forex traders experience this by carry trading. We borrow in Yen, paying a 0.5% annual interest rate and buy, or go long in GBP, EUR, AUD or NZD because those currencies have higher rate of interest, or yield. Lower interest rates will boost lending because it makes the price of borrowing cheaper, giving corporations the ability to grow and giving consumers the "free hand" for spending. Over time this will create inflation and tend to cause interest rates to go up.
The central banks choose their desired interest rate in organized meetings, through voting on the short term interest rate. There are two types of interest rate that we should be aware of, they are; the nominal interest rate, and the discount interest rate from which central banks offer lending to commercial banks. Open market operations (OMO's) are one way a Central Bank controls interest rates. OMO's are simply a buying and selling operation that raises or lowers the money supply, which has an immediate effect on the interest rate and on currency valuation. Each central bank has its favourite way of influencing the interest rate through open market operations, but because of being the simplest and the most influential, we will focus on the Fed's method.
The Fed choose nominal interest rate (named fed fund target rate) through lending and borrowing for collateral securities from 22 banks and bonds dealers (called primary dealers). These operations are nicknamed "Repo" (repurchase operations). Traders should check the open market operations from time to time; they have a significant influence over forex. Most major central banks, including the FED, ECB, BoE, BoC and others use the 'corridor system' to stabilize the intraday money market conditions. In its simplest form, the 'corridor system' allows central banks to attract deposits and provide liquidity in an unlimited amount for overnight operations. This system allows banks to achieve the target overnight rate without creating volatility by channelling (a corridor) those deposits and withdrawals in a very controlled fashion. The discount window is for short-term Institutional lending, normally week-to-week.
Open market operations are the buying and selling of US Treasuries. These daily transactions control the supply of money. Treasuries are Government Debt that is sold to investors at a set rate of return. About half of the US debt is held by the Federal Reserve, a fact that seems strange to some; the Central Bank owns half the Country's debt. The reason is that the Fed can then control the flow of available Dollars. When Rates are required to go up the Fed buys back the Debt. When Rates need to go down the Fed sells Debt with the $ reserves, money that then goes into the banking system. Rates going up creates a squeeze on the Money Supply and the $ strengthens. Rates going down therefore increases the Money Supply and the $ weakens.
Minimal Reserves are another way of influencing the money supply used by central banks. Commercial banks are required to hold a percent of their liabilities in central banks, in order to avoid over-levering themselves. This is a good measure of reducing money supply or trying to increase money demand. This is arguably the most ineffective and definitely the least used monetary tool. Reserve requirements are the percentage of deposited money that a bank must keep on hand to satisfy withdrawal demands, and was more popular in the early part of the 20th century when the US banking system was far less stable, but that challenge may be coming back to be addressed. In theory raising reserve requirements limits a bank's ability to lend out deposited money, and likely increase the cost of borrowing.
Paying no interest on Reserves, as is the Fed policy, makes U.S. Banks hold no more than they are legally required to do, and with any and all cash surplus then lent to other Banks in times of need, usually underneath the Fed Funds rate (Discount Window), it puts additional and unwanted pressure on the system. This pressure can be very negative, especially when the Central Bank, in this case the Fed, is in a rate changing cycle. Banks borrowing under the Fed Funds sends rates down, at a time that the Fed needs them up to be able to fight inflation. We have witnessed the volatility in the Treasury yields, in the Libor rates, and seen it reflected in the intra-day volatility in the USD/CHF.
That is the problem when the Central Bank has a dual mandate, in reality you can either fight inflation, or you can have growth- but growth at a dear price, as we can see in the Commodity Bubble; the value of any growth produced is stripped away in inflationary costs.
A good example of the reserve Requirement has been seen in how the People's Bank of China tried to reduce inflation by increasing bank minimal reserves requirements nine times. The central bank has also moved five times in five months to increase the reserve requirements. They stepped up the rate of increase with two extra moves in late June that increased the mandatory holdings of dollar reserves, from 15% to 17.5%, of anything that is lent out by commercial banks. The impact has been to peg the Yuan lower, and in that in effect has eased the burden of Chinese exporters struggling with a global economic slow-down.
It is estimated that just under $50B was moved in that year in June alone, and will be added to by the cuts to the amount of foreign debt Chinese banks can hold, once again forcing those banks to be net buyers of dollars. China’s foreign reserves stand at close to $1,800B, and moves in that market will have knock-on effects to all global forex markets.
Monetary policy controls the supply and cost of money and credit. A central bank will increase the supply of money and decrease the cost of borrowing to stimulate an economy and vice versa to slow down an economy. While measuring the cost of borrowing is fairly easy (yield on Treasury bonds), measuring the money supply can be a more daunting task. Most central banks release information on the amount of money currently in circulation. M1 measures the amount of currency, deposits in central banks, and checking deposits. M2 includes M1 and all money in CD's and savings and money market accounts. M3 includes M1 and M2 as well as US denominated Bonds held outside the US. M3 is the broadest measure of the supply of money. Recently the Federal Reserve decided to stop publishing M3 data, citing the large cost of computing the figure. The move has been widely criticized, as many believe it was initiated to hide the large amount of money the Federal Reserve has been printing in recent years.
Even though a central bank needs to be as independent as possible, governments and politicians still have influence in its aims and targets. Depending on the country, a central bank's president or commission is set by the government which sometimes may have influence on bank's decisions at turning points, like at the peak of business cycle or during elections. The Finance Ministry of Japan is an example of a dominant government body influencing the central bank.
One of the major requirements of the European Union for proposed countries for acceptance, is that the Central Banks are independent from politics. With all this, central banks and government must choose their real economic targets, by trying to choose the best way for their own national economy, and as we have seen recently that can create some huge swings in perceived currency valuations.
Reference: The LFB Trade Team
Shares and the U.S. dollar dipped on Monday while U.S. bond yields slumped to five-month lows after soft U.S. economic data hurt investor sentiment already frayed by worries over North Korea and coming French elections.
That dwarfed any relief for market players after the U.S. Treasury department did not name China as a currency manipulator, avoiding an all-out confrontation on currencies between the world's two largest economies.
S&P 500 mini futures declined 0.15 percent to 2,324, edging near a six-week low of 2,317.75 touched in late March following U.S. President Donald Trump's defeat on healthcare reform.
MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.1 percent in holiday-thinned trade, while Japan's Nikkei fell as much as 0.6 pct to hit a five-month low before ending up 0.1 percent.
Most European share markets will be closed for Easter holidays.
A raft of Chinese economic data beat market expectations but did not produce notable market reactions as investors had been already optimistic following a recent string of positive China numbers.
China's economy grew 6.9 percent in the first quarter from a year earlier, a tad above economists' forecast of 6.8 percent.
However, mainland Chinese shares fell, with Shanghai Composite Index down 1.0 percent at 3,212, risking a close below its 60-day average at 3,216, seen as an important support by investors and weighed by warning from top securities regulator to combat market misbehavior.
U.S. retail sales dropped more than expected in March while annual core inflation slowed to 2.0 percent, the smallest advance since November 2015, from 2.2 percent in February, data showed on Friday.
That helped to drive down the 10-year U.S. Treasuries yield to 2.200 percent, its lowest level since mid-November from around 2.228 percent on Thursday before a market holiday on Friday.
The yield had risen above 2.6 percent in December and again in March, from around 1.85 percent before the U.S. presidential election, on expectations of Trump's stimulus.
But growing perception that Trump will struggle to push any tax cuts and fiscal spending programs through the Congress has prompted unwinding of the "Trump" trade.
"At the moment, it is hard to see any factors that could drive up bond yields," said Hiroko Iwaki, senior strategist at Mizuho Securities.
"And compared to U.S. bond yields, which have given up much of their gains after the election, U.S. share prices, having gone through a limited correction, look vulnerable given potential developments in North Korea or the French election," she said.
Fed fund futures <0#FF:> rose in price, now pricing less than a 50 percent chance of a rate hike in its June 13-14 meeting for the first time in about a month.
Trump's administration declined to name any major trading partner as a currency manipulator in a highly anticipated report on Friday, backing away from a key Trump campaign promise to slap such a label on China.
"Concerns about U.S.-Sino trade frictions have eased for the time being," said Naoki Tashiro, the president of TS China Research.
"But this is also thought to be a part of a barter, namely the U.S. wants China to take tougher actions against North Korea in exchange," he said.
There is no sign of easing in tensions over North Korea's nuclear and missile program after the reclusive country's failed missile test on Sunday.
Trump's national security adviser said on Sunday that the United States, its allies and China are working together on a range of responses to North Korea.
"In essence, North Korea made a provocation that would not transcend the U.S. 'red line'. But depending on how China will react, Trump could lose his patience," said Makoto Noji, senior strategist at SMBC Nikko Securities.
Safe-haven gold gained as much as 0.8 percent to hit a five-month high of $1,295.5 per ounce on continued concerns on tensions over North Korea.
The dollar slipped to as low as 108.13 yen, a five-month low and 0.4 percent below its late U.S. levels.
The semi-annual U.S. Treasury currency report maintained the six countries on a "monitoring list" -- China, Japan, Germany, South Korea, Taiwan and Switzerland -- suggesting Washington could put more pressure on those countries to take steps to reduce their trade surplus with the United States in future.
The euro stood at $1.0622, little moved so far, and not far from a one-month low of $1.0570 touched last Monday, with focus on the French presidential election.
Ahead of the first round of voting on April 23, the race looked tighter. Two polls put any of the four frontrunners, including far-right candidate Marine Le Pen and hard-left challenger Jean-Luc Melenchon, within reach of a two-person run-off vote.
The Turkish lira jumped about 2.5 percent to 3.6300 per dollar versus 3.7220 on Friday after President Tayyip Erdogan snatched a victory in a referendum to grant him sweeping powers in the biggest overhaul of modern Turkish politics.
It last traded at 3.677.
Oil prices slipped on signs the United States is continuing to add output, undermining OPEC efforts to support prices.
Reference: Hideyuki Sano