Category Archives: Currencies

Euro trade data

Posted on by

So looks to me that China shifted to buying more euro just as the trade flows were turning the other way and might have otherwise been weakening the euro.

This means that when they stop buying there could be serious gap down until it gets to where it would have gotten had China not been buying. (Kind of like taking your finger out of the hole in the dam.)

Which is maybe what happened when it peaked a few weeks ago at the time of Bernanke’s first strong dollar speech?

And the rising euro zone debt to GDP ratio (which is only through 2010 on the below chart) though falling some this year with austerity, may now be rising again due to new weakness created by that same austerity.

It’s all starting to look a lot like the beginnings of the traditional banana republic model- high unemployment, high ‘bad’ deficits from weak economies, and a falling currency that keeps debt to gdp ratios capped as ‘inflation’ floods in through the fx window.

Share

thoughts on the euro

Posted on by

So my story has been that while most thought QE was a bumper crop for the dollar- Fed printing money and flooding the system with liquidity and all that-

It was in fact a crop failure for the dollar, as evidenced by the Fed turning over $79 billion in QE profits (that would have otherwise gone to the economy) to the Tsy.

And because everyone thought it was a bumper crop, they all sold the heck out of dollars in all kinds of theaters and iterations, from outright selling of dollars, to buying of commodities and stocks and in general making all kinds of dollar ‘inflation bets.’

And then a few weeks ago Chairman Bernanke comes on tv and starts talking about how his policies are strong dollar policies, just as the dollar index hit its lows and within a day or so headed north.

At the time it seemed strange to me that he’d suddenly, out of nowhere, break silence on the dollar and make those kinds of strong dollar statements previously left to Treasury. Unless he had a pretty good idea the dollar would start going up.

And only a few days ago he again spoke about how his policies were strong dollar policies, and the dollar traded around a bit, but remained above the lows and then headed back up. Especially vs the euro.

And shortly after that we find out China had let maybe $200 billion in T bills run off since QE2 started, and while their dollar holdings didn’t fall, their reserve growth was allocated elsewhere, and, from market action, there were substantial allocations to the euro. This hunch was further supported by their earlier announcement that they would be buying Spanish bonds to ‘help them out’ as a Trojan horse to buy euro to support their exports to the euro zone.

So my story is maybe the T bill runoff thing was a shot across the Fed’s bow? China was in the news objecting to QE and demanding what they considered ‘sound money’ policy. So it would make sense, to let the Fed know they were serious, to do something like let their T bills run off and alter fx allocation ratios away from the dollar and toward the euro, all of which caused the dollar to sell off for several months. And with the implication, and maybe also in private conversation, that any more QE would mean outright selling of dollar reserves. And the Fed Chairman taking this to heart and with other FOMC members also objecting to more QE, and maybe even knowing that QE doesn’t do anything anyway apart from scaring global portfolio managers, including those in China and Russia, etc. out of dollars, maybe somehow reached an understanding with China, where China would return to ‘normal’ fx allocations and there would be no QE3? And the subsequent strong dollar speeches that followed had the knowledge behind them that China had returned to dollar financial asset accumulation, which would likely end the dollar slide and reverse it?

This also means the euro has lost this ‘extra’ support it’s ‘enjoyed’ for the prior several months, which means it’s all a lot worse for the euro than it is good for the dollar, as they have bigger fish to get deep fried than just the level of the currency. Seems the last thing they need now is for a major buyer of euro denominated debt to switch allocations to dollars.

And it also could be that this ‘extra’ euro debt buying has been delaying the euro crisis for the last several months as well. This means it’s all been propped up while getting worse down deep, which means if that support has now been pulled, it falls that much harder.

A lower euro also works to ‘inflate away’ euro zone national govt debt ratios, and currency depreciation in general as a market induced path to debt relief is a well known phenomena, though one the ECB is likely to fight to comply with its low inflation mandate. And fighting inflation means hiking interest rates, which, while initially helping some, actually work to increase national govt deficits and hurt their credit ratings, as well as further depress the euro.

Share

Bernanke Admits Economy Slowing; No Hint of New Stimulus

Posted on by

In fact, no one on the FOMC has called for QE3, so it’s highly unlikely with anything short of actual negative growth.

So the question is, why the unamimous consensus?

I’d say it varies from member to member, with each concerned for his own reason, for better or for worse.

And I do think the odds of their being an understanding with China are high, particularly with China having let their T bill portfolio run off, while directing additions to reserves to currencies other than the $US, as well as evidence of a multitude of other portfolio managers doing much the same thing. This includes buying gold and other commodities, all in response to (misguided notions of) QE2 and monetary and fiscal policy in general. So the Fed may be hoping to reverse the (mistaken) notion that they are ‘printing money and creating inflation’ by making it clear that there are no plans for further QE.

Hence the ‘new’ strong dollar rhetoric: no more ‘monetary stimulus’ and lots of talk about keeping the dollar strong fundamentally via low inflation and pro growth policy. And the tough talk about the long term deficit plays to this theme as well, even as the Chairman recognizes the downside risks to immediate budget cuts, as he continues to see the risks as asymetric. The Fed believes it can deal with inflation, should that happen, but that it’s come to the end of the tool box, for all practical purposes, in their fight against deflation, even as they fail to meet either of their dual mandates of full employment and price stability to their satisfaction.

They also see downside risk to US GDP from China, Japan, and Europe for all the well publicized reasons.

And, with regard to statements warning against immediate budget cuts, I have some reason to believe at least one Fed official has read my book and is aware of MMT in general.

Bernanke Admits Economy Slowing; No Hint of New Stimulus

June 7 (Reuters) — Federal Reserve Chairman Ben Bernanke Tuesday acknowledged a slowdown in the U.S. economy but offered no suggestion the central bank is considering any further monetary stimulus to support growth.

He also issued a stern warning to lawmakers in Washington who are considering aggressive budget cuts, saying they have the potential to derail the economic recovery if cuts in government spending take hold too soon.

A recent spate of weak economic data, capped by a report Friday showing U.S. employers expanded payrolls by a meager 54,000 workers last month, has renewed investor speculation the economy could need more help from the Fed.

“U.S. economic growth so far this year looks to have been somewhat slower than expected,” Bernanke told a banking conference. “A number of indicators also suggest some loss in momentum in labor markets in recent weeks.”

He said the recovery was still weak enough to warrant keeping in place the Fed’s strong monetary support, saying the economy was still growing well below its full potential.

At the same time, Bernanke argued that the latest bout of weakness would likely not last very long, and should give way to stronger growth in the second half of the year. He said a recent spike in U.S. inflation, while worrisome, should be similarly transitory. Weak growth in wages and stable inflation expectations suggest few lasting inflation pressures, Bernanke said.

On the budget, Bernanke repeated his call for a long-term plan for a sustainable fiscal path, but warned politicians against massive short-term reductions in spending.

“A sharp fiscal consolidation focused on the very near term could be self-defeating if it were to undercut the still-fragile recovery,” Bernanke said.

“By taking decisions today that lead to fiscal consolidation over a longer horizon, policymakers can avoid a sudden fiscal contraction that could put the recovery at risk,” he said.

All Tapped Out?

The central bank has already slashed overnight interest rates to zero and purchased more than $2 trillion in government bonds in an effort to pull the economy from a deep recession and spur a stronger recovery.

With the central bank’s balance sheet already bloated, officials have made clear the bar is high for any further easing of monetary policy. The Fed’s current $600 billion round of government bond buying, known as QE2, runs its course later this month.

Sharp criticism in the wake of QE2 is one factor likely to make policymakers reluctant to push the limits of unconventional policy. They also may have concerns that more stimulus would face diminishing economic returns, while potentially complicating their effort to return policy to a more normal footing.

But a further worsening of economic conditions, particularly one that is accompanied by a reversal of recent upward pressure on inflation, could change that outlook.

The government’s jobs report Friday was almost uniformly bleak. The pace of hiring was just over a third of what economists had expected and the unemployment rate rose to 9.1 percent, defying predictions for a slight drop.

In a Reuters poll of U.S. primary dealer banks conducted after the employment data, analysts saw only a 10 percent chance for another round of government bond purchases by the central bank over the next two years. Dealers also pushed back the timing of an eventual rate hike further into 2012.

The weakening in the U.S. recovery comes against a backdrop of uncertainty over the course of fiscal policy and bickering over the U.S. debt limit in Congress, with Republicans pushing hard for deep budget cuts.

Fragility is Global

Hurdles to better economic health have emerged from overseas as well. Europe is struggling with a debt crisis, while Japan is still reeling from the effects of a traumatic earthquake and tsunami.

In emerging markets, China is trying to rein in its red-hot growth to prevent inflation.

Fed policymakers have admitted to being surprised by how weak the economy appears, but none have yet called for more stimulus.

In an interview with the Wall Street Journal, Chicago Federal Reserve Bank President Charles Evans, a noted policy dove, said he was not yet ready to support a third round of so-called quantitative easing. His counterpart in Atlanta, Dennis Lockhart, also said the economy was not weak enough to warrant further support.

While Boston Fed President Eric Rosengren told CNBC Monday the economy’s weakness might delay the timing of an eventual monetary tightening, the head of the Dallas Federal Reserve Bank, Richard Fisher, said the Fed may have already done too much.

Evans and Fisher have a policy vote on the Fed this year while Rosengren and Lockhart do not.

Share

The people have spoken in Portugal

Posted on by

As previously discussed, it’s not obvious to voters that the currency itself is the problem.

Instead, what seems obvious is that the prior governments were at fault for their irresponsible fiscal policies for which the price is now being paid.

Coelho Told by Portugal’s Cavaco to Hurry Coalition Talks

By Joao Lima

June 7 (Bloomberg) — Pedro Passos Coelho, Portugal’s incoming prime minister, was told by President Anibal Cavaco Silva to start talks immediately on forging a coalition to ensure austerity measures mandated by a 78 billion-euro ($114 billion) bailout stay on track.

The order that Coelho move came in their meeting yesterday in Lisbon less than 24 hours after the Social Democrat unseated Socialist Jose Socrates, Jose Manuel Nunes Liberato, a presidential aide, told reporters.

Starting talks with the People’s Party before all the results are in underscores officials’ concerns over meeting deadlines prescribed in the bailout. Leaders of the third-place finishers meet today in Lisbon and may signal their demands to join as Coelho’s junior partner.

“There is a majority government and that is a necessary condition to implement the very difficult structural reforms and the challenging fiscal consolidation,” Antonio Garcia Pascual, chief southern European economist at Barclays Capital in London, said yesterday.

Coelho’s Social Democrats and the People’s Party, won a combined 129 seats in the 230-member parliament with four seats yet to be decided, according to official results.

While all three major parties committed to the bailout’s program of spending cuts and asset sales, a new majority taking over from Socrates’ minority administration gave bonds a boost. Yields on 10-year notes rose 8 basis points to 9.372 percent in Lisbon as of 10:16 a.m. today.

Opposition wins Portugal election. Portugal’s right-of-center Social Democrats have the dubious privilege of imposing massive budget cuts and risk further exacerbating the country’s economic woes after winning yesterday’s election with around 40% of the vote. The Social Democrats will probably form a coalition with the conservative Popular Party and so gain a majority in parliament. This will make it easier to implement austerity measures, such as welfare and pay cuts, and tax rises, as the government looks to comply with the terms of a €78B ($114B) bailout. The coalition takes office with unemployment at a record 12.6% and with the economy forecast to contract 4% over the next two years.

Share

Funds Boost Bullish Commodity Bets on Global Growth Prospects

Posted on by

Story behind prior post on China.

Not to forget that biofuels are burning up large % of our food as motor fuel.

Funds Boost Bullish Commodity Bets on Global Growth Prospects

By Yi Tian

June 6 (Bloomberg) — Funds boosted bets on rising commodity prices to the highest in four weeks, led by copper, amid signs that the global economic recovery will remain resilient and boost demand for raw materials.

Speculators raised their net-long positions in 18 commodities by 7.3 percent to 1.26 million futures and options contracts in the week ended May 31, government data compiled by Bloomberg show. That’s the highest since May 3. Copper holdings more than doubled. A measure of bullish agriculture bets also climbed as adverse global weather curbed crop production.

The Standard & Poor’s GSCI Spot Index rose for a fourth straight week as Chinese metal inventories plunged and droughts lingered in the Asian country and Europe, trimming prospects for wheat and cotton crops. The global recovery “is gaining strength,” the Group of Eight leaders said May 27 after a summit in Deauville, France. In the U.S., consumer sentiment rose to a three-month high in May, a private report showed last month.

“We are seeing a reasonable rate of growth in worldwide economic activity,” said Michael Cuggino, who helps manage $12 billion at Permanent Portfolio Funds in San Francisco. “The supply-demand associated with that growth, combined with a weaker dollar, probably explains the move into commodities.”

Copper prices have jumped 40 percent in the past year while wheat has surged 75 percent and corn has more than doubled amid increasing demand from China and other emerging economies. Raw materials have also gained as investors boosted holdings as an alternative to the dollar, which has slumped more than 6 percent this year against a six-currency basket.

$130 Million

Investors poured $130 million into commodity funds in the week ended June 1, the second straight increase, according to EPFR Global, a Cambridge, Massachusetts-based researcher. The previous week had inflows of $702.8 million.

Managed-money funds and other large speculators boosted bullish bets on New York copper prices by 4,604 contracts to 7,304. The jump was the biggest since October 2009. Stockpiles of the metal monitored by Shanghai Futures Exchange have plunged 51 percent since mid-March.

“Destocking cannot continue indefinitely, and market participants will have to return to the market at the latest in the fourth quarter, if not for re-stocking then at least for spot purchases,” Bank of America Merrill Lynch said in a report last week.

Agriculture Bets

Speculators raised their net-long positions in 11 U.S. farm goods by 4.6 percent to 756,629 contracts as of May 31, the second straight increase. Holdings of wheat jumped 14 percent, and bets on a cotton rally gained up 12 percent, the most since August.

“It has basically been a year of the wrong weather at the wrong time, starting with the Russian droughts and then most recently excessive rains in the U.S.,” said Nic Johnson, who helps manage about $24 billion in commodities at Pacific Investment Management Co. in Newport Beach, California. Agriculture “prices could move materially higher because of low inventories and if we have below-trend yields of crops like corn.”

Share

China Has Divested 97 Percent of Its Holdings in U.S. Treasury Bills

Posted on by

So it looks like QE2 indeed managed to scare China out of the dollar. This is the portfolio shifting previously discussed that’s been dragging down the dollar even though, fundamentally sound, as Fed Chairman Bernanke correctly stated.

And when China (and Japan) offered to buy Spanish and other euro zone national govt debt to ‘help out’, the euro zone fell for that one, watching their currency rise against their better judgement with regards to their euro wide exports.

And maybe Fed Chairman Bernanke is aware of this, and has assured China he does favor a strong dollar as per his latest public statements, and let them know that QE3 is unlikely, and has ‘won them back’? No way to tell except by watching the market prices.

And with most everyone out of paradigm with regards to monetary operations, there’s no telling what they all might actually do next.

What is known is that world fiscal balance is tight enough to be slowing things down, and looking to keep getting tighter.
And QE/lower overall term structure of rates removes interest income from the economy, and shifts income from savers to bank net interest margins.
And if China’s growth is going to slow dramatically, its most likely to happen the second half as they tend to front load their state lending and deficit spending each year.

And all the while our own pension funds continue to allocate to passive commodity strategies, distorting those markets and sending out price signals that continue to bring out increasing levels of supply that are filling up already overflowing storage bins.

Note in particular that reserve accumulation has been high and rising recently, though UST accumulation has been moderate.

China Has Divested 97 Percent of Its Holdings in U.S. Treasury Bills

By Terence P. Jeffrey

Jun 4 (CNSNews.com) — China has dropped 97 percent of its holdings in U.S. Treasury bills, decreasing its ownership of the short-term U.S. government securities from a peak of $210.4 billion in May 2009 to $5.69 billion in March 2011, the most recent month reported by the U.S. Treasury.
Treasury bills are securities that mature in one year or less that are sold by the U.S. Treasury Department to fund the nation’s debt.

Mainland Chinese holdings of U.S. Treasury bills are reported in column 9 of the Treasury report linked here.

Until October, the Chinese were generally making up for their decreasing holdings in Treasury bills by increasing their holdings of longer-term U.S. Treasury securities. Thus, until October, China’s overall holdings of U.S. debt continued to increase.

Since October, however, China has also started to divest from longer-term U.S. Treasury securities. Thus, as reported by the Treasury Department, China’s ownership of the U.S. national debt has decreased in each of the last five months on record, including November, December, January, February and March.

Prior to the fall of 2008, acccording to Treasury Department data, Chinese ownership of short-term Treasury bills was modest, standing at only $19.8 billion in August of that year. But when President George W. Bush signed legislation to authorize a $700-billion bailout of the U.S. financial industry in October 2008 and President Barack Obama signed a $787-billion economic stimulus law in February 2009, Chinese ownership of short-term U.S. Treasury bills skyrocketed.

By December 2008, China owned $165.2 billion in U.S. Treasury bills, according to the Treasury Department. By March 2009, Chinese Treasury bill holdings were at $191.1 billion. By May 2009, Chinese holdings of Treasury bills were peaking at $210.4 billion.

However, China’s overall appetite for U.S. debt increased over a longer span than did its appetite for short-term U.S. Treasury bills.
In August 2008, before the bank bailout and the stimulus law, overall Chinese holdings of U.S. debt stood at $573.7 billion. That number continued to escalate past May 2009– when China started to reduce its holdings in short-term Treasury bills–and ultimately peaked at $1.1753 trillion last October.

As of March 2011, overall Chinese holdings of U.S. debt had decreased to 1.1449 trillion.

Most of the U.S. national debt is made up of publicly marketable securities sold by the Treasury Department and I.O.U.s called “intragovernmental” bonds that the Treasury has given to so-called government trust funds—such as the Social Security trust funds—when it has spent the trust funds’ money on other government expenses.

The publicly marketable segment of the national debt includes Treasury bills, which (as defined by the Treasury) mature in terms of one-year or less; Treasury notes, which mature in terms of 2 to 10 years; Treasury Inflation-Protected Securities (TIPS), which mature in terms of 5, 10 and 30 years; and Treasury bonds, which mature in terms of 30 years.

At the end of August 2008, before the financial bailout and the stimulus, the publicly marketable segment of the U.S. national debt was 4.88 trillion. Of that, $2.56 trillion was in the intermediate-term Treasury notes, $1.22 trillion was in short-term Treasury bills, $582.8 billion was in long-term Treasury bonds, and $521.3 billion was in TIPS.

At the end of March 2011, by which time the Chinese had dropped their Treasury bill holdings 97 percent from their peak, the publicly marketable segment of the U.S. national debt had almost doubled from August 2008, hitting $9.11 trillion. Of that $9.11 trillion, $5.8 trillion was in intermediate-term Treasury notes, $1.7 trillion was in short-term Treasury bills; $931.5 billion was in long-term Treasury bonds, and $640.7 billion was in TIPS.

Before the end of March 2012, the Treasury must redeem all of the $1.7 trillion in Treasury bills that were extant as of March 2011 and find new or old buyers who will continue to invest in U.S. debt. But, for now, the Chinese at least do not appear to be bullish customers of short-term U.S. debt.

Treasury bills carry lower interest rates than longer-term Treasury notes and bonds, but the longer term notes and bonds are exposed to a greater risk of losing their value to inflation. To the degree that the $1.7 trillion in short-term U.S. Treasury bills extant as of March must be converted into longer-term U.S. Treasury securities, the U.S. government will be forced to pay a higher annual interest rate on the national debt.

As of the close of business on Thursday, the total U.S. debt was $14.34 trillion, according to the Daily Treasury Statement. Of that, approximately $9.74 trillion was debt held by the public and approximately $4.61 trillion was “intragovernmental” debt.

Share

China

Posted on by

RBS: China: Where is the slowdown?

Very good, tends to support some of my ongoing themes:

China will produce more of its own resources.

Higher rates don’t bring down demand, and probably increase it.
It’s the fiscal tightening, directly or indirectly, proactive or via auto stabilizers, that ultimately cause the tree to fall. (US budget went into small surplus in 1979, for example)

The inflation problem is severe enough for them to be using export unfriendly currency appreciation to fight it.

Hopefully it doesn’t all come apart in Q2!

Share

dollar short squeeze update

Posted on by

Looks like it’s happening as suggested if might just as crude started breaking down after the Ben Laden assassination.

And the Saudi investor prince’s proclamation that the Saudis thought $70-80 for crude was their target might at least indicate that they aren’t in price hiking mode.

Another point up in the dollar index might bring the beginning of short covering by trend followers.

But still looks to me like it’s only the beginning of what should trigger the end of the looming inflation that never was and a return to deflationary psychology in general.

The fallout of the dollar reversal will continue to be lower term rates, weaker stocks, weaker commodities, and in general a reversal of the ‘the fed’s printing money’ hysteria. And I also suspect Congress and the President will come through with a deficit reduction package that will further exacerbate the dollar shortage and add a bit of drag to the world economy.

Nor is any of this is good for the euro zone which continues to fight the fact that the only way it all works is if the ECB writes the check, provided, of course, they all recognize capital requirements for the ECB are nothing more than a self imposed constraint.
(And yes, I know that’s asking a lot.)

Share

Yuan Gains by Most in Three Weeks as Zhou Says Inflation High

Posted on by

This is an unsustainable paradigm but interesting while it lasts.
Actual inflation works to weaken a currency (it buys less in general, by definition). Under those circumstances, acting to keep your currency strong first causes the trade flows reverse, and then to continue to keep it strong market forces tend to eat up your fx reserves. All of them. And then some. To the point where the local currency can no longer be supported short of additional fiscal tightening sufficient to reduce ‘real’ wages vs your trading partners.

Yuan Gains by Most in Three Weeks as Zhou Says Inflation High

By Brian Parkin

May 20 (Bloomberg) &#8212 China’s yuan rose by the most in three weeks after People’s Bank of China Governor Zhou Xiaochuan said inflation remains “high,” fueling speculation further gains will be tolerated.

China needs to strike a balance between economic growth and consumer prices, Zhou said at the Lujiazui Forum in Shanghai today. Asia’s largest economy is “cautiously” promoting cross- border use of the yuan in financial transactions in addition to trade and investment, he said, adding that the onvertibility of the yuan should be a gradual, orderly, mid-to-long-term process.

“The official commentary has been leaning towards expounding the benefits of yuan flexibility,” said Emmanuel Ng, a currency strategist at Oversea-Chinese Banking Corp. in Singapore. “It has been mentioned as a bit of an inflation tool.”

The yuan rose 0.17 percent to 6.4926 per dollar as of 4:30 p.m. in Shanghai, resulting in a weekly gain of 0.08 percent, according to the China Foreign Exchange Trade System. The currency isn’t allowed to move more than 0.5 percent either side of the central bank’s daily fixing, which was raised 0.10 percent today to 6.4983. In Hong Kong’s offshore market, the yuan strengthened 0.08 percent to 6.4915.

Twelve-month non-deliverable forwards gained 0.05 percent to 6.3645 per dollar from yesterday, a 2 percent premium to the onshore spot rate, according to data compiled by Bloomberg. The contracts were little changed from last week.

A stronger currency helps tame inflation by reducing the cost of imports. Consumer prices rose 5.3 percent in April from a year earlier following a 5.4 percent increase in March that was the biggest since July 2008. The government aims to limit inflation to 4 percent this year.

Share