FX Markets
Summer 2015
Our only alpha choice?
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Regulatory driving change in market expectations
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Dodd Frank, EMIR, Volker, Basel III
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Collateral demand vs net Exposure
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Collateralization of OTCs effects on global rates
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Fed funds rate- “they will probably raise rates in the second half…”
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Lack of ‘reasonability’ in markets
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China, Greece, South America, Singapore….
Level Setting
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Can we make decent risk adjusted returns in this environment?
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Examples: “picking up pennies on the rail road tracks”
US Treasury market
– Global stock prices
– Lack of (adherence to) alternative investments
– China
– CDS index, IRS Swap
–
FX Opportunities
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The forces in the market has
left us with little investment
choices
FX markets – only trade with
correct risk reward ratio…
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Collateral demands (into 2030)
will stymie global markets
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Questions for audience: Are
market structure & regulatory
changes for the best?
Regulation
Sovereign
debt, &
bail in
provision
Funding
need
(collateral)
High valuations in
equity prices
Perfect storm for spot FX as an investment vehicle
The case for FX
1.
Extreme, historic, levels
2.
Trend is cleaner than other asset classes
3.
Gov’t supported markets are untradeable
4.
FX reacts to global macro economic data
5.
More predictable, achievable trades /
returns
6.
Leverage in FX markets constant
7.
Market players catching on: Exchanges
1.
2.
Deutsche Boerse AG $793 million purchase of
currency market 360T
Bats Global Markets Inc., $365 million on Hotspot
FX.
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Foreign-exchange trading declines amid speculation the Federal
Reserve will raise interest rates only gradually.
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Daily trading in the U.K., the largest currency market, fell 8 percent
to average $2.5 trillion, down from October’s record of $2.7 trillion
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In the U.S., volumes dropped about 20 percent from last October to
$881 billion
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pace of policy tightening will be dependent on an improvement in
the economy
FX market eyeing rate hike
Turnover in average daily trading in Japan’s capital declined 2.8 percent to $362.7
billion in April compared with October 2014, according to the Tokyo Foreign
Exchange Market Committee. In Singapore, volumes dropped 21 percent. The
Australian Foreign Exchange Committee said its nation’s volume dipped 4 percent
to $135.9 billion.
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Trading in the Chinese yuan versus the dollar bucked the general trend. Trading
in this exchange rate in London rose by 25 percent to a record $43 billion a day
in April, according to the BOE committee, making it the ninth-biggest currency
pair.
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Turnover in London in the yen versus the dollar fell 25 percent, the BOE said.
Trading in the pair also declined 1.4 percent in Tokyo, even as such trades
accounted for more than half of all transactions.
Japan Turnover
Euro-yen trading in Tokyo climbed 24 percent. Transactions for the Australian dollar versus the
greenback accounted for 44 percent of total average daily volumes in the South Pacific nation.
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The British pound strengthened 3.6 percent against the dollar in April and is the bestperforming major currency in the past six months, according to Bloomberg CorrelationWeighted Currency Indexes. Sterling has benefited as the BOE is widely seen as the next major
central bank to tighten policy after the Fed. The Aussie appreciated 3.9 percent in April, while
the yen strengthened 0.6 percent.
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Foreign-exchange trading in the U.S. and U.K. climbed to records in October, reports in January
from the nations’ central banks showed, as American monetary policy diverged from that in
Europe and Japan. The data showed average daily currency turnover in North America jumped
36 percent to $1.1 trillion, compared with April 2014, while U.K. volumes expanded 13 percent
to a record.
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Electronic trading in Japan dropped 19 percent to $161.9 billion a day, or just 45 percent of
transactions, after accounting for more than half in October.
Euro-Yen
Currencies of a number of major emerging economies
decline sharply against the dollar
The Thai baht, the Korean won, the Malaysian ringgit
vs. the dollar
South African rand, the Turkish lira, and the Brazilian real
year-to-date performance against the dollar. Take a look at the
real in particular
Keep in mind that Brazil has significant amounts of dollar
denominated debt which is growing in domestic currency
terms each day as the dollar strengthens.
JPMorgan Emerging Markets Currency Index hit a 13year low
China’s busting IPO market is issue # 1…Will
institutional investors ever come back?
China's markets are now completely dependent on
government stimulus of all types. There is no question the
government will be able to push this market higher
The trade-weighted US dollar index is now the
strongest in over a decade
G-10 weakness…
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renewed dollar will make it increasingly difficult for US exporters to
compete internationally
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particularly in selling into emerging economies
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US manufacturers will have to focus on domestic markets.
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commodity deflation is becoming quite broad in the US - from
coffee to copper.
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Will a potential boost from lower commodity/energy prices offset
the weakness in the manufacturing sector?
$USD Strength
This is a serious adjustment and will have implications for
trade and manufacturing. Here is the Chinese yuan vs. the
Mexican peso since 2010. Where do you want to build your
next factory?
The Turkish lira is down 24% vs the dollar, with the
uncertainties around security spooking investors
Indonesian rupiah and the Malaysian ringgit are back to the
late 90s currency crisis lows (charts show USD at the highs
relative to these currencies)
The Russian ruble gave up another 2%, approaching 60
to the dollar, as it trades in lockstep with crude oil.
WTI
Brent
Brent futures are now trading below $53/bbl and the NYMEX
crude (WTI) is now below $47/bbl. We are going to see all
sorts of knock-on effects of this correction.
US diesel prices are now the lowest since late 2009
Canadian stock market is now under pressure
Russian ruble is now down for the year vs. USD as it
follows crude oil lower.
The Venezuelan bolívar is collapsing in the "unofficial"
market; it now takes almost 700 bolívares to buy 1 US dollar.
This is not going to end well.
Global demand for commodities has fallen, take a look
at income growth in emerging markets.
US states most effected by commodity melt down
All this pummeling that commodities markets are taking is
not going unnoticed in the inflation markets, as inflation
expectations (from TIPS breakevens) are turning lower again.
The FOMC should be asking themselves: is this really the right
environment to begin raising rates?
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