Marc Chandler - Seeking Alpha 'Marc Chandler' Tag RSS Syndication from SeekingAlpha.com SeekingAlpha.com http://seekingalpha.com/author/marc-chandler Euro Options and the Spot Market http://seekingalpha.com/article/172809-euro-options-and-the-spot-market?source=feed 172809 The options market can often shed light on spot market activity. Indicative pricing in the options market suggests that while the euro is nearing the highs for the year, many participants seem unusually nervous. Often the options market moves in tandem with spot, so in a rising market the demand for calls is greater. However, this is not the case presently.
Option theory, put/call parity posits that puts and calls equally distant from the forward strike should be priced similarly. To the extent they are not, it reveals a skew or bias in the market. Currently, looking at the benchmark 3-month (25 delta) risk reversal shows an almost 1.2% premium for euro puts over euro calls. This is among the largest skews of the year and is at levels not seen since last year's Q4 chaos.
Looking at implied volatility itself shows that as the euro has recovered from the $1.4625 low at the start of the month, volatility (3-month) has eased from almost 13.5% to below 12% as of Wednesday. Implied volatility was lower at the end of last week, though the euro is higher Wednesday. What seems to be happening is that, with the euro posed to make new highs for the year, (recently) unchartered waters will be entered and implied volatility may actually remain firm. Here participants may be concerned about a tipping point for the dollar, where up until now the decline has been orderly.
Lastly, we looked at the vol curve (from one month through one year) and it is relatively steep at about 2.5 percentage points. This would seem to be consistent with a market seeking protection from the risk of significant moves. At the start of the North American session, the euro is encountering offers in front of the $1.5050 area, where option structures are thought to lie. Pullbacks have been generally short and shallow, and initial support is seen in the $1.4980-$1.5000 area. The momentum and the conviction that the Fed will not raise rates any time soon, coupled with the fact that the major central banks continue to provide liquidity liberally, mean that the fundamental force weighing on the dollar persists.
At the same time, China's reluctance to move on its currency in any meaningful way will encourage market participants to continue to believe the euro will absorb much of the pressure.
Disclosure: No positions
]]> Wed, 11 Nov 2009 13:13:19 -0500 Marc Chandler Marc Chandler submits:
The options market can often shed light on spot market activity. Indicative pricing in the options market suggests that while the euro is nearing the highs for the year, many participants seem unusually nervous. Often the options market moves in tandem with spot, so in a rising market the demand for calls is greater. However, this is not the case presently.
Option theory, put/call parity posits that puts and calls equally distant from the forward strike should be priced similarly. To the extent they are not, it reveals a skew or bias in the market. Currently, looking at the benchmark 3-month (25 delta) risk reversal shows an almost 1.2% premium for euro puts over euro calls. This is among the largest skews of the year and is at levels not seen since last year's Q4 chaos.
Looking at implied volatility itself shows that as the euro has recovered from the $1.4625 low at the start of the month, volatility (3-month) has eased from almost 13.5% to below 12% as of Wednesday. Implied volatility was lower at the end of last week, though the euro is higher Wednesday. What seems to be happening is that, with the euro posed to make new highs for the year, (recently) unchartered waters will be entered and implied volatility may actually remain firm. Here participants may be concerned about a tipping point for the dollar, where up until now the decline has been orderly.
Lastly, we looked at the vol curve (from one month through one year) and it is relatively steep at about 2.5 percentage points. This would seem to be consistent with a market seeking protection from the risk of significant moves. At the start of the North American session, the euro is encountering offers in front of the $1.5050 area, where option structures are thought to lie. Pullbacks have been generally short and shallow, and initial support is seen in the $1.4980-$1.5000 area. The momentum and the conviction that the Fed will not raise rates any time soon, coupled with the fact that the major central banks continue to provide liquidity liberally, mean that the fundamental force weighing on the dollar persists.
At the same time, China's reluctance to move on its currency in any meaningful way will encourage market participants to continue to believe the euro will absorb much of the pressure.
Disclosure: No positions

Complete Story »]]> ERO Marc Chandler Poland and Israel: We Want in on the Global Recovery, Too http://seekingalpha.com/article/172805-poland-and-israel-we-want-in-on-the-global-recovery-too?source=feed 172805 While the Asian recovery story is front and center Wednesday with the slew of Chinese data, including the nearly doubling of its monthly trade surplus, and Japanese machinery orders showing more than twice the expected rise, trade data from Poland and Israel provides additional evidence of the synchronized global recovery.
The Polish zloty is among the best performing emerging market currencies Wednesday, though local participation has been limited by the Polish public holiday. Its 1.5% rise against the US dollar was helped not only by the greenback's weakness, but also by news late Tuesday that Poland's current account deficit in September was 1/10 of the market forecast and half of the August shortfall. The September deficit came in at 57 million euros, from 124 million euros in August and a news wire consensus of a 565 million euro deficit. The trade deficit itself narrowed to a mere 4 million euros from a revised 348 million euro deficit in August (initially reported at -481 million euros).
At the end of the week, Poland reports October CPI figures. A 0.2% rise is expected after a flat reading in September, but due to the base effect (last October CPI rose 0.4%), the year-over-year rate may ease to 3.2% from 3.4%.
The euro may be near the highs for the year against the dollar, but it is approach the year's low against the zloty. As of Wednesday, the euro is at its lowest level since mid-September. We look for the euro to move toward the August low below PLN6.07 in the coming weeks.
The dollar recorded new lows against the zloty Wednesday. A break of PLN2.74 opens may be significant as the next important chart points aren't seen until closet to PLN2.50.
For its part, Israel reported its first trade surplus since at least 2005. Exports rose a seasonally adjusted 6.8% in the month of October, while seasonally adjusted imports fell 4.8%. Details are not immediately available, but the Israeli shekel is strengthened about 0.6%, with the dollar testing the 20-day moving average near ILS3.74. A break of ILS3.73 would raise the prospect of a return to the low of the year set in mid-October near ILS3.68.
Disclosure: No positions
]]> Wed, 11 Nov 2009 13:08:28 -0500 Marc Chandler Marc Chandler submits:
While the Asian recovery story is front and center Wednesday with the slew of Chinese data, including the nearly doubling of its monthly trade surplus, and Japanese machinery orders showing more than twice the expected rise, trade data from Poland and Israel provides additional evidence of the synchronized global recovery.
The Polish zloty is among the best performing emerging market currencies Wednesday, though local participation has been limited by the Polish public holiday. Its 1.5% rise against the US dollar was helped not only by the greenback's weakness, but also by news late Tuesday that Poland's current account deficit in September was 1/10 of the market forecast and half of the August shortfall. The September deficit came in at 57 million euros, from 124 million euros in August and a news wire consensus of a 565 million euro deficit. The trade deficit itself narrowed to a mere 4 million euros from a revised 348 million euro deficit in August (initially reported at -481 million euros).
At the end of the week, Poland reports October CPI figures. A 0.2% rise is expected after a flat reading in September, but due to the base effect (last October CPI rose 0.4%), the year-over-year rate may ease to 3.2% from 3.4%.
The euro may be near the highs for the year against the dollar, but it is approach the year's low against the zloty. As of Wednesday, the euro is at its lowest level since mid-September. We look for the euro to move toward the August low below PLN6.07 in the coming weeks.
The dollar recorded new lows against the zloty Wednesday. A break of PLN2.74 opens may be significant as the next important chart points aren't seen until closet to PLN2.50.
For its part, Israel reported its first trade surplus since at least 2005. Exports rose a seasonally adjusted 6.8% in the month of October, while seasonally adjusted imports fell 4.8%. Details are not immediately available, but the Israeli shekel is strengthened about 0.6%, with the dollar testing the 20-day moving average near ILS3.74. A break of ILS3.73 would raise the prospect of a return to the low of the year set in mid-October near ILS3.68.
Disclosure: No positions

Complete Story »]]> ERO Marc Chandler Taiwan: Wrestling with the Flood of Portfolio Capital Inflows http://seekingalpha.com/article/172764-taiwan-wrestling-with-the-flood-of-portfolio-capital-inflows?source=feed 172764 Taiwan's decision to ban foreign investors from parking funds in time deposits is having little market effect, as there does not seem to be any unusual movement.

While the stock market was up 1%, it seemed largely in line with most of the regional equity markets and not a flight from the time deposits. Bonds were firm as well, but again, nothing unusual.

]]> Wed, 11 Nov 2009 10:32:46 -0500 Marc Chandler Marc Chandler submits:

Taiwan's decision to ban foreign investors from parking funds in time deposits is having little market effect, as there does not seem to be any unusual movement.

While the stock market was up 1%, it seemed largely in line with most of the regional equity markets and not a flight from the time deposits. Bonds were firm as well, but again, nothing unusual.


Complete Story »]]> Marc Chandler The Bearish Case for the British Pound http://seekingalpha.com/article/172522-the-bearish-case-for-the-british-pound?source=feed 172522 Sterling has been resilient Tuesday in the face of the Fitch warnings of the UK's rating vulnerability and the deterioration on the trade front. Supporting it has been reports suggesting that Norway's petroleum fund is looking favorable at some UK property investments, and M&A related activity. There are, of course, some large investment houses that have identified sterling as a beneficiary of the generalized recovery.
We are more comfortable with the sterling bears. The bearish case is well known, underscored by Fitch's comments and last week's indication that of the major central banks the BOE is the only one to extend QE, whereas others are talking in varying degrees the conditions of exits.
One interesting development relates to positioning. As of the middle of October, noncommercial (speculators) had a record short sterling position of 65.3k contracts. As of last Tuesday, the bulk of the positions had been covered and the next short position was just shy of 19k, smaller than the 26-week average (-20k) and 52-week average (-26.3k). The price action since last Tuesday, lower volume in the front month contract and open interest appears to be increasing (+5%), suggesting the while there is some churning, it is possible the bears are trying to re-establish shorts.
A consideration that seems to be lost on many is that the total dollar value of the assets at the top five banks stood around $4.8 trillion at the end of Q1. The UK's GDP is only $2.6 trillion. To put this in perspective, consider that the assets of the top 5 US banks was valued at about $5.3 trillion with US GDP of $14.2 trillion. This is another way to illustrate how much more vulnerable the UK is to a draw down in asset values.
UK survey data has been reported more favorably than the contraction of Q3 GDP reflected. Ideas that Q3 GDP could be revised higher were dealt a blow by Tuesday's wider than expected September trade deficit.
On Wednesday, the UK reports their latest labor market data and further deterioration is expected. This is likely to be reflected in weak employee earnings data. However, the BOE's quarterly inflation report may receive greater attention.
The BOE is required to base its projections on the government's fiscal policies, which currently call for halving the deficit to 6.2%. While this seems difficult to achieve, the rating agencies seem to be demanding even more dramatic action. Fitch affirmed its ratings despite Tuesday's warning, while S&P has the outlook negative. It appears next year's election is the key event for the rating agencies.
If fiscal policy is to be less supportive than the current government is projecting, then its forecasts on Wednesday may be for greater inflation and more growth than what may actually materialize. In addition, dramatic tightening of fiscal policy will likely force the BOE to be more accommodative. That policy mix of tighter fiscal policy and loose monetary policy tends to be associated with a weakening currency.
Disclosure: No positions
]]> Tue, 10 Nov 2009 12:01:21 -0500 Marc Chandler Marc Chandler submits:
Sterling has been resilient Tuesday in the face of the Fitch warnings of the UK's rating vulnerability and the deterioration on the trade front. Supporting it has been reports suggesting that Norway's petroleum fund is looking favorable at some UK property investments, and M&A related activity. There are, of course, some large investment houses that have identified sterling as a beneficiary of the generalized recovery.
We are more comfortable with the sterling bears. The bearish case is well known, underscored by Fitch's comments and last week's indication that of the major central banks the BOE is the only one to extend QE, whereas others are talking in varying degrees the conditions of exits.
One interesting development relates to positioning. As of the middle of October, noncommercial (speculators) had a record short sterling position of 65.3k contracts. As of last Tuesday, the bulk of the positions had been covered and the next short position was just shy of 19k, smaller than the 26-week average (-20k) and 52-week average (-26.3k). The price action since last Tuesday, lower volume in the front month contract and open interest appears to be increasing (+5%), suggesting the while there is some churning, it is possible the bears are trying to re-establish shorts.
A consideration that seems to be lost on many is that the total dollar value of the assets at the top five banks stood around $4.8 trillion at the end of Q1. The UK's GDP is only $2.6 trillion. To put this in perspective, consider that the assets of the top 5 US banks was valued at about $5.3 trillion with US GDP of $14.2 trillion. This is another way to illustrate how much more vulnerable the UK is to a draw down in asset values.
UK survey data has been reported more favorably than the contraction of Q3 GDP reflected. Ideas that Q3 GDP could be revised higher were dealt a blow by Tuesday's wider than expected September trade deficit.
On Wednesday, the UK reports their latest labor market data and further deterioration is expected. This is likely to be reflected in weak employee earnings data. However, the BOE's quarterly inflation report may receive greater attention.
The BOE is required to base its projections on the government's fiscal policies, which currently call for halving the deficit to 6.2%. While this seems difficult to achieve, the rating agencies seem to be demanding even more dramatic action. Fitch affirmed its ratings despite Tuesday's warning, while S&P has the outlook negative. It appears next year's election is the key event for the rating agencies.
If fiscal policy is to be less supportive than the current government is projecting, then its forecasts on Wednesday may be for greater inflation and more growth than what may actually materialize. In addition, dramatic tightening of fiscal policy will likely force the BOE to be more accommodative. That policy mix of tighter fiscal policy and loose monetary policy tends to be associated with a weakening currency.
Disclosure: No positions

Complete Story »]]> GBB Marc Chandler Taiwan Pulls a Brazil http://seekingalpha.com/article/172520-taiwan-pulls-a-brazil?source=feed 172520 Taiwan's Financial Supervisory Commission on Tuesday announced that, effective immediately, foreign investors were banned from parking funds in time deposits. Moreover, foreign investors cannot extend their existing time deposits when they mature.
The ostensible reason for the ban is to curb currency speculation, according to officials. As of the end of October, there was an estimated NT$500 billion of foreign investment in time deposits, something on the magnitude of five times more than officials would be comfortable with.
Among Asian countries, foreign investors have been among the most aggressive in buying Taiwanese shares. According to the local stock exchange, foreign inflows into equities is running almost 173% above the same year ago period. Tuesday's curb is not aimed at discouraging this but purer currency speculation.
The Taiwanese dollar has not appreciated much this year, with its 1.4% rise against the US dollar making it among the worst performers in emerging Asia. The Philippine peso is up 1.3% and is the only floating currency that has under-performed Taiwan in the region.
This makes the ban on foreign investment in time deposits to curb currency speculation a bit of an exaggerated response. On the other hand, the fact that reserves have increased by almost 23% this year suggests that the muted currency rise may also be reflective of the success of intervention and currency management.
Nevertheless, first Brazil and now Taiwan are moving up the escalation ladder trying to curb the undesirable impact of hot money. With the new found love affair with emerging markets, too much of a good thing is dangerous. Many developing countries do not have the capacity to absorb the deluge of foreign investment.
There is a prisoners dilemma of sorts at work. Successful implementation of capital controls may deflect the hot money flows other countries and exacerbate their challenges. At the same time, it is not clear how effective Brazil and Taiwan's measures will be. Brazil's stock market is up 3.27% over the past month, outperforming most equity markets but China. And net-net the currency is little changed, though perhaps a bit more volatile. Given the muted gains in the Taiwanese dollar, it will be difficult to measure the effectiveness of the measure, even if foreigners can no long place funds in time deposits.
That said, other candidates for capital controls would seem to be in Asia, though from time to time there has been speculation that South Africa would consider such measures if the rand were to continue to appreciate.
Disclosure: No positions
]]> Tue, 10 Nov 2009 11:53:14 -0500 Marc Chandler Marc Chandler submits:
Taiwan's Financial Supervisory Commission on Tuesday announced that, effective immediately, foreign investors were banned from parking funds in time deposits. Moreover, foreign investors cannot extend their existing time deposits when they mature.
The ostensible reason for the ban is to curb currency speculation, according to officials. As of the end of October, there was an estimated NT$500 billion of foreign investment in time deposits, something on the magnitude of five times more than officials would be comfortable with.
Among Asian countries, foreign investors have been among the most aggressive in buying Taiwanese shares. According to the local stock exchange, foreign inflows into equities is running almost 173% above the same year ago period. Tuesday's curb is not aimed at discouraging this but purer currency speculation.
The Taiwanese dollar has not appreciated much this year, with its 1.4% rise against the US dollar making it among the worst performers in emerging Asia. The Philippine peso is up 1.3% and is the only floating currency that has under-performed Taiwan in the region.
This makes the ban on foreign investment in time deposits to curb currency speculation a bit of an exaggerated response. On the other hand, the fact that reserves have increased by almost 23% this year suggests that the muted currency rise may also be reflective of the success of intervention and currency management.
Nevertheless, first Brazil and now Taiwan are moving up the escalation ladder trying to curb the undesirable impact of hot money. With the new found love affair with emerging markets, too much of a good thing is dangerous. Many developing countries do not have the capacity to absorb the deluge of foreign investment.
There is a prisoners dilemma of sorts at work. Successful implementation of capital controls may deflect the hot money flows other countries and exacerbate their challenges. At the same time, it is not clear how effective Brazil and Taiwan's measures will be. Brazil's stock market is up 3.27% over the past month, outperforming most equity markets but China. And net-net the currency is little changed, though perhaps a bit more volatile. Given the muted gains in the Taiwanese dollar, it will be difficult to measure the effectiveness of the measure, even if foreigners can no long place funds in time deposits.
That said, other candidates for capital controls would seem to be in Asia, though from time to time there has been speculation that South Africa would consider such measures if the rand were to continue to appreciate.
Disclosure: No positions

Complete Story »]]> EWT Marc Chandler Despite Low Yields, Demand for U.S. Treasuries Remains High http://seekingalpha.com/article/172519-despite-low-yields-demand-for-u-s-treasuries-remains-high?source=feed 172519 It is difficult to envision Tuesday's $25 billion 10-year Treasury note sale to be as well received as Monday's 3-year offering.

Indirect bidders, which include but are not limited to, foreign central banks, took down 68.5% on Monday compared with an average of 45.3% over the past ten auctions. The bid-cover, which is a metric of demand, was 3.33. Demand for this record sized issue was the strongest since 1993, with the average for the past ten auctions at 2.63.

]]> Tue, 10 Nov 2009 11:49:30 -0500 Marc Chandler Marc Chandler submits:

It is difficult to envision Tuesday's $25 billion 10-year Treasury note sale to be as well received as Monday's 3-year offering.

Indirect bidders, which include but are not limited to, foreign central banks, took down 68.5% on Monday compared with an average of 45.3% over the past ten auctions. The bid-cover, which is a metric of demand, was 3.33. Demand for this record sized issue was the strongest since 1993, with the average for the past ten auctions at 2.63.


Complete Story »]]> Marc Chandler Inflation Expectations: Exaggerated or On Track? http://seekingalpha.com/article/172265-inflation-expectations-exaggerated-or-on-track?source=feed 172265 There was much talk Monday about what appears to be rising inflation expectations in the U.S., with several market indicators capturing people's attention.
First, the yield curve, measured by the difference between the 2-year yield and the 10-year yields, stands near 262 basis points, having risen now 21 bp over the past month. Second, the five-year/five-year forward, which some Fed officials have cited in the past, is at 288 bp Monday, its highest level in over a year. This is also reflected in the 10-year breakevens (10-year TIPS vs the conventional note yield). Third, some observers are also emphasizing the new record high price of gold. Fourth, the dollar remains offered with the much watched dollar index making a new low for the year.
Just last week, the FOMC statement identified that "subdued inflation trends, and stable inflation expectations". Could it be wrong so soon?
Perhaps there is something else going on. Like what? Like a record quarterly refunding this week. Each leg, $40 billion of the 3-year note, $25 billion of the 10-year note and $16 billion of the 30-year bond, is a record.
In addition, over the weekend, Obama signed on to a further extension of unemployment benefits, an extension of the home buyers' tax break and an extension of businesses' ability to deduct 2008 (and now 2009) losses from profits over the past five years (not just two).
The US does not report its October inflation readings until next week, and both the PPI and CPI are expected to remain in negative territory. In September, PPI stood 4.8% below year-ago levels, while the consensus is for the October reading to be around -2%. But this likely reflects energy prices and core PPI is likely to ease toward 1.4-1.5% from 1.8% in September. Headline consumer prices are expected to have risen by 0.3%, but this too is likely a reflection of food and energy prices. Core prices are expected to have risen by 0.1%. The year-over-year headline rate may moderate to -0.2% from -1.3% owing largely to base effects, while core CPI is expected to be little changed at 1.5%.
It seems too early to conclude that inflation expectations have broken out to the upside. It would be significant development if they did and, therefore, it requires convincing evidence to draw that conclusion. A clearer picture should emerge on the other side of this week's refunding and next week's inflation report.
That said, over time inflation expectations likely will rise as the US economy continues what we expect to be a moderate recovery with the next several quarters averaging above trend growth. The high levels of unemployment, which still appears to be rising even though the pace of initial jobless claim filing and non-farm payroll cuts seem to be moderating, relatively low level of industrial capacity utilization and low unit labor costs, suggest some observers may be exaggerating the near-term inflation outlook.
Disclosure: No positions
]]> Mon, 09 Nov 2009 13:41:11 -0500 Marc Chandler Marc Chandler submits:
There was much talk Monday about what appears to be rising inflation expectations in the U.S., with several market indicators capturing people's attention.
First, the yield curve, measured by the difference between the 2-year yield and the 10-year yields, stands near 262 basis points, having risen now 21 bp over the past month. Second, the five-year/five-year forward, which some Fed officials have cited in the past, is at 288 bp Monday, its highest level in over a year. This is also reflected in the 10-year breakevens (10-year TIPS vs the conventional note yield). Third, some observers are also emphasizing the new record high price of gold. Fourth, the dollar remains offered with the much watched dollar index making a new low for the year.
Just last week, the FOMC statement identified that "subdued inflation trends, and stable inflation expectations". Could it be wrong so soon?
Perhaps there is something else going on. Like what? Like a record quarterly refunding this week. Each leg, $40 billion of the 3-year note, $25 billion of the 10-year note and $16 billion of the 30-year bond, is a record.
In addition, over the weekend, Obama signed on to a further extension of unemployment benefits, an extension of the home buyers' tax break and an extension of businesses' ability to deduct 2008 (and now 2009) losses from profits over the past five years (not just two).
The US does not report its October inflation readings until next week, and both the PPI and CPI are expected to remain in negative territory. In September, PPI stood 4.8% below year-ago levels, while the consensus is for the October reading to be around -2%. But this likely reflects energy prices and core PPI is likely to ease toward 1.4-1.5% from 1.8% in September. Headline consumer prices are expected to have risen by 0.3%, but this too is likely a reflection of food and energy prices. Core prices are expected to have risen by 0.1%. The year-over-year headline rate may moderate to -0.2% from -1.3% owing largely to base effects, while core CPI is expected to be little changed at 1.5%.
It seems too early to conclude that inflation expectations have broken out to the upside. It would be significant development if they did and, therefore, it requires convincing evidence to draw that conclusion. A clearer picture should emerge on the other side of this week's refunding and next week's inflation report.
That said, over time inflation expectations likely will rise as the US economy continues what we expect to be a moderate recovery with the next several quarters averaging above trend growth. The high levels of unemployment, which still appears to be rising even though the pace of initial jobless claim filing and non-farm payroll cuts seem to be moderating, relatively low level of industrial capacity utilization and low unit labor costs, suggest some observers may be exaggerating the near-term inflation outlook.
Disclosure: No positions

Complete Story »]]> UDN UUP Marc Chandler Czech Reports This Week Could Spur Euro Rally http://seekingalpha.com/article/172264-czech-reports-this-week-could-spur-euro-rally?source=feed 172264 The euro has slumped around 4% against the Czech koruna since November 2nd, and the news stream from Czech Republic has not been that supportive, giving the impression that koruna is being lifted by generalized factors.
This has been a particularly difficult year for Czech politics. Recall that the country's government collapsed while holding the rotating EU presidency, and jockeying for advantage had it challenging the Lisbon Treaty. Now, Prime Minister Fischer has nominated the central bank governor Tuma as the country's next EU commissioner, and domestic political considerations seem to be behind the nomination. Fischer was previously under pressure to take the post himself but now may see this as an opportunity to deal with a political adversary and give him the ability to name a new central bank governor. On the other hand, some opposition parties insist that Fischer takes the commissioner post and that would necessitate a caretaker government until elections can held next May-June period.
The country will report a series of economic data in the coming days, kicking off Monday with October unemployment (8.5% vs 8.6% September) and October CPI (-0.2% month-over-month and year-over-year vs -0.4% and 0 respectively in September). September data (industrial production, construction output and retail sales) are due out in the next few days, but the highlight will be the preliminary Q3 GDP report on Friday. The early consensus expects a 4.7% contraction (seasonally adjusted year-over-year) compared with the 5.5% contraction in Q2 and 4.5% contraction in Q1. It will be the third consecutive quarterly contraction.
The euro has fallen through the pre-weekend lows seen near CZK25.63 near the retracement objective of the euro's rally since mid-September. The next level of support is seen in the CZK25.50 area. The hourly momentum indicators are showing bullish euro divergence, suggesting a low may be in place. The first test on the upside comes in back at Friday's low and then CZK25.70. Look for a near-term bounce in the euro. The structure of the bounce will indicate whether it is simply a correction or the beginning of a new rally in the euro.
Disclosure: No positions
]]> Mon, 09 Nov 2009 13:34:14 -0500 Marc Chandler Marc Chandler submits:
The euro has slumped around 4% against the Czech koruna since November 2nd, and the news stream from Czech Republic has not been that supportive, giving the impression that koruna is being lifted by generalized factors.
This has been a particularly difficult year for Czech politics. Recall that the country's government collapsed while holding the rotating EU presidency, and jockeying for advantage had it challenging the Lisbon Treaty. Now, Prime Minister Fischer has nominated the central bank governor Tuma as the country's next EU commissioner, and domestic political considerations seem to be behind the nomination. Fischer was previously under pressure to take the post himself but now may see this as an opportunity to deal with a political adversary and give him the ability to name a new central bank governor. On the other hand, some opposition parties insist that Fischer takes the commissioner post and that would necessitate a caretaker government until elections can held next May-June period.
The country will report a series of economic data in the coming days, kicking off Monday with October unemployment (8.5% vs 8.6% September) and October CPI (-0.2% month-over-month and year-over-year vs -0.4% and 0 respectively in September). September data (industrial production, construction output and retail sales) are due out in the next few days, but the highlight will be the preliminary Q3 GDP report on Friday. The early consensus expects a 4.7% contraction (seasonally adjusted year-over-year) compared with the 5.5% contraction in Q2 and 4.5% contraction in Q1. It will be the third consecutive quarterly contraction.
The euro has fallen through the pre-weekend lows seen near CZK25.63 near the retracement objective of the euro's rally since mid-September. The next level of support is seen in the CZK25.50 area. The hourly momentum indicators are showing bullish euro divergence, suggesting a low may be in place. The first test on the upside comes in back at Friday's low and then CZK25.70. Look for a near-term bounce in the euro. The structure of the bounce will indicate whether it is simply a correction or the beginning of a new rally in the euro.
Disclosure: No positions

Complete Story »]]> ERO Marc Chandler Reinstituting Glass-Steagall: Not as Easy as It Sounds http://seekingalpha.com/article/172240-reinstituting-glass-steagall-not-as-easy-as-it-sounds?source=feed 172240 The financial crisis is usually dated as of mid-2007, but officials did not appear to coordinate an international response until Lehman’s failure sent shock waves through the global financial system a little more than a year later. And even then it seemed like officials acted in concert, slashing interest rates rather than pursuing a coordinated path. In fact, the failure of the UK government to support Barclays' attempt to purchase Lehman appears to have estranged the Anglo-American relationship.
The lack of coordination is particularly evident in dealing with the too big to fail doctrine, or what the British refer to as too important to fail. In Europe, the policy response that has emerged over the last couple of weeks is that such financial institutions need to be downsized.
Power
European and British regulators appear to be trying to create a more competitive banking system with smaller players. The EU insisted on the break-up of Dutch-based ING (ING), while the UK government is forcing the dismemberment of its three largest banks. Swiss officials seem sympathetic to the proposition that too big to fail means too big.
Lord Acton is famous for his assessment that “power corrupts and absolute power corrupts absolutely.” In some respects, European banks operated in a stricter regulatory environment than U.S. banks (though on the whole, were more leveraged). Since oversight did not work, the next option appears to be to break-up these large banks. The economies of scale that are achieved are more than offset by the inability to manage risk.
The U.S. attitude toward power is different than Europe’s. The policy implication that is drawn from Lord Acton’s maxim is that power needs to be checked and balanced. It needs to be transparent, but it does not need to be dissolved. To be sure there are some vocal proponents of breaking up U.S. banks. Ironically, there are both those on the political right and left which advocate precisely the same course. However, on balance, the Obama Administration appears to be more inclined to tighten the regulatory regime considerably rather than breaking up the banks, though the situation may be more fluid.
Banks and the Dollar
The performance of U.S. bank shares has been highly correlated with the dollar. We looked at the Financial Select Sector Index (IXM). It is a modified cap-weighted index of financial service companies in the S&P 500. There are 79 companies in the index, which serves as the benchmark for the Financial Select Sector SPDR exchange traded fund XLF.
The correlation between the IXM and S&P 500 (based on percentage change of daily data) is strong at 89% this year. What is noteworthy about this is that strong correlation between the financials and the overall market has not been impacted by the horrible financial crisis.
Looking at weekly data for the 2003-2006 pre-crisis period, the IXM and the S&P 500 were correlated 89.7%. Since 2007, the correlation has been almost 88%.
What has changed has been the correlation of the euro and yen with IXM. The euro and IXM are 42% correlated this year using daily data. In the pre-crisis period, the correlation was less than a tenth of this (using weekly data). Since 2007, the correlation has been 20%.
In the pre-crisis period (2003-2006), the yen and IXM had a negative correlation of about 9%. Since 2007, the correlation has been a positive 34%, well above the euro’s correlation. Using daily data for the year to date calculations the correlation is almost 29%.
What Happened To Glass-Steagall?
A fifth of U.S. banks failed after the stock market crash of 1929. The Banking Act of 1933, popularly known as Glass-Steagall after the senators that drafted the legislation, established the Federal Deposit Insurance Corp. and insisted on the clear division between commercial and investment banks. This division has become known in the vernacular as the separation of the utility function of banks from the casino (risk-taking) function.
This seemed to be effective for about thirty years and, as the personal links to that time faded, the prohibitions of Glass-Steagall were gradually diluted. In the 1960s, commercial banks began re-entering the municipal bond market. In the 1970s brokerage firms began encroaching on commercial banks turf by offering money market accounts, paying interest, allowing check writing privileges and issuing credit and debit cards.
In the second half of the 1980s, the Federal Reserve began re-interpreting Section 20 of Glass Steagall that prevented commercial banks from “engaging principally” in the securities market to mean less than 5% of a bank’s gross revenue. In the late 1980s this was redefined as 10%, and about seven years later it was again redefined as 25%. In 1997, Bankers Trust became the first bank to buy a securities firm (Alex Brown).
Following the Citibank-Travelers insurance merger in 1998, there was strong pressure to formally repeal Glass-Steagall and this was achieved in the Financial Services Modernization Act of 1999. It enjoyed broad bipartisan support, passing the Senate by a 90-8 margin and the House of Representatives by a 343-86 margin.
It is Political Economy
Adam Smith, David Riccardo and Alfred Marshall did not think they were studying economics but political economy. To understand what happened to Glass-Steagall requires anchoring our understanding of economics in its political context. Banks seeking to respond to competitive pressures coupled with policy makers that believed in a minimal role for the state in the economy, joined forces to dilute the government imposed restrictions.
The calls for repealing the repeal of Glass-Steagall seem to ignore the political history of this economic regulation. Would not a new Glass-Steagall share the same fate?
Some observers note that there is precedent for breaking up large combines. Standard Oil is the favorite example, but Standard Oil of New York (Exxon Mobil (XOM)) is presently the fourth largest company globally, while Standard Oil of California (Chevron (CVX)) is the ninth largest. Similarly, AT&T (T) was broken up in the 1980s, but today is the seventh largest company in the world, according to Forbes. E.F. Schumacher’s best selling book, Small is Beautiful (1973) made for a nice treatise, but competitive pressures and the logic of the market provides powerful incentives for consolidation and concentration. It simply may be too late to try to freeze capitalism at the small proprietary stage.
Just like special investment vehicles (SIVs) seem to be an evolutionary dead-end, the financial crisis demonstrated a fundamental weakness of the investment bank model. Traditionally investment banks do not take deposits. They depend on markets for short-term capital. While this may be a strength in good times, it proved fatal, or nearly so, when the capital markets froze up. They are left high and dry.
Lastly, consider the competitive climate. Several European banks are being broken up. By market capitalization, Chinese banks hold the top three places globally. In 2006, China did not have a single bank in the top 20 while the U.S. had 7, including the top 2 spots. Today, the U.S. has just three spots in the top 20 with the highest of these ranked at fifth place.
Europe may be unilaterally disarming in the financial battlefield just as Chinese banks begin to flex their muscles. Breaking up U.S. banks now would risk eviscerating them at an important competitive moment vis a vis both Europe and China. Some observers already see the demise of U.S. banks and the rise of Chinese banks as yet another sign of the decline of America and the rise of China. It is precisely this sentiment that contributes to the undermining of the dollar.
At the G20 meeting, the moral hazards of too big to fail likely will be discussed. If for the sake of coordination the U.S. bows to pressure to break up its largest banks, look for the dollar to sell off, potentially in a destabilizing fashion, as it may very well be understood by friend and foe alike as an abdication of global leadership.
Disclosure: No positions
]]> Mon, 09 Nov 2009 12:02:51 -0500 Marc Chandler Marc Chandler submits:
The financial crisis is usually dated as of mid-2007, but officials did not appear to coordinate an international response until Lehman’s failure sent shock waves through the global financial system a little more than a year later. And even then it seemed like officials acted in concert, slashing interest rates rather than pursuing a coordinated path. In fact, the failure of the UK government to support Barclays' attempt to purchase Lehman appears to have estranged the Anglo-American relationship.
The lack of coordination is particularly evident in dealing with the too big to fail doctrine, or what the British refer to as too important to fail. In Europe, the policy response that has emerged over the last couple of weeks is that such financial institutions need to be downsized.
Power
European and British regulators appear to be trying to create a more competitive banking system with smaller players. The EU insisted on the break-up of Dutch-based ING (ING), while the UK government is forcing the dismemberment of its three largest banks. Swiss officials seem sympathetic to the proposition that too big to fail means too big.
Lord Acton is famous for his assessment that “power corrupts and absolute power corrupts absolutely.” In some respects, European banks operated in a stricter regulatory environment than U.S. banks (though on the whole, were more leveraged). Since oversight did not work, the next option appears to be to break-up these large banks. The economies of scale that are achieved are more than offset by the inability to manage risk.
The U.S. attitude toward power is different than Europe’s. The policy implication that is drawn from Lord Acton’s maxim is that power needs to be checked and balanced. It needs to be transparent, but it does not need to be dissolved. To be sure there are some vocal proponents of breaking up U.S. banks. Ironically, there are both those on the political right and left which advocate precisely the same course. However, on balance, the Obama Administration appears to be more inclined to tighten the regulatory regime considerably rather than breaking up the banks, though the situation may be more fluid.
Banks and the Dollar
The performance of U.S. bank shares has been highly correlated with the dollar. We looked at the Financial Select Sector Index (IXM). It is a modified cap-weighted index of financial service companies in the S&P 500. There are 79 companies in the index, which serves as the benchmark for the Financial Select Sector SPDR exchange traded fund XLF.
The correlation between the IXM and S&P 500 (based on percentage change of daily data) is strong at 89% this year. What is noteworthy about this is that strong correlation between the financials and the overall market has not been impacted by the horrible financial crisis.
Looking at weekly data for the 2003-2006 pre-crisis period, the IXM and the S&P 500 were correlated 89.7%. Since 2007, the correlation has been almost 88%.
What has changed has been the correlation of the euro and yen with IXM. The euro and IXM are 42% correlated this year using daily data. In the pre-crisis period, the correlation was less than a tenth of this (using weekly data). Since 2007, the correlation has been 20%.
In the pre-crisis period (2003-2006), the yen and IXM had a negative correlation of about 9%. Since 2007, the correlation has been a positive 34%, well above the euro’s correlation. Using daily data for the year to date calculations the correlation is almost 29%.
What Happened To Glass-Steagall?
A fifth of U.S. banks failed after the stock market crash of 1929. The Banking Act of 1933, popularly known as Glass-Steagall after the senators that drafted the legislation, established the Federal Deposit Insurance Corp. and insisted on the clear division between commercial and investment banks. This division has become known in the vernacular as the separation of the utility function of banks from the casino (risk-taking) function.
This seemed to be effective for about thirty years and, as the personal links to that time faded, the prohibitions of Glass-Steagall were gradually diluted. In the 1960s, commercial banks began re-entering the municipal bond market. In the 1970s brokerage firms began encroaching on commercial banks turf by offering money market accounts, paying interest, allowing check writing privileges and issuing credit and debit cards.
In the second half of the 1980s, the Federal Reserve began re-interpreting Section 20 of Glass Steagall that prevented commercial banks from “engaging principally” in the securities market to mean less than 5% of a bank’s gross revenue. In the late 1980s this was redefined as 10%, and about seven years later it was again redefined as 25%. In 1997, Bankers Trust became the first bank to buy a securities firm (Alex Brown).
Following the Citibank-Travelers insurance merger in 1998, there was strong pressure to formally repeal Glass-Steagall and this was achieved in the Financial Services Modernization Act of 1999. It enjoyed broad bipartisan support, passing the Senate by a 90-8 margin and the House of Representatives by a 343-86 margin.
It is Political Economy
Adam Smith, David Riccardo and Alfred Marshall did not think they were studying economics but political economy. To understand what happened to Glass-Steagall requires anchoring our understanding of economics in its political context. Banks seeking to respond to competitive pressures coupled with policy makers that believed in a minimal role for the state in the economy, joined forces to dilute the government imposed restrictions.
The calls for repealing the repeal of Glass-Steagall seem to ignore the political history of this economic regulation. Would not a new Glass-Steagall share the same fate?
Some observers note that there is precedent for breaking up large combines. Standard Oil is the favorite example, but Standard Oil of New York (Exxon Mobil (XOM)) is presently the fourth largest company globally, while Standard Oil of California (Chevron (CVX)) is the ninth largest. Similarly, AT&T (T) was broken up in the 1980s, but today is the seventh largest company in the world, according to Forbes. E.F. Schumacher’s best selling book, Small is Beautiful (1973) made for a nice treatise, but competitive pressures and the logic of the market provides powerful incentives for consolidation and concentration. It simply may be too late to try to freeze capitalism at the small proprietary stage.
Just like special investment vehicles (SIVs) seem to be an evolutionary dead-end, the financial crisis demonstrated a fundamental weakness of the investment bank model. Traditionally investment banks do not take deposits. They depend on markets for short-term capital. While this may be a strength in good times, it proved fatal, or nearly so, when the capital markets froze up. They are left high and dry.
Lastly, consider the competitive climate. Several European banks are being broken up. By market capitalization, Chinese banks hold the top three places globally. In 2006, China did not have a single bank in the top 20 while the U.S. had 7, including the top 2 spots. Today, the U.S. has just three spots in the top 20 with the highest of these ranked at fifth place.
Europe may be unilaterally disarming in the financial battlefield just as Chinese banks begin to flex their muscles. Breaking up U.S. banks now would risk eviscerating them at an important competitive moment vis a vis both Europe and China. Some observers already see the demise of U.S. banks and the rise of Chinese banks as yet another sign of the decline of America and the rise of China. It is precisely this sentiment that contributes to the undermining of the dollar.
At the G20 meeting, the moral hazards of too big to fail likely will be discussed. If for the sake of coordination the U.S. bows to pressure to break up its largest banks, look for the dollar to sell off, potentially in a destabilizing fashion, as it may very well be understood by friend and foe alike as an abdication of global leadership.
Disclosure: No positions

Complete Story »]]> CVX ING T XLF XOM Marc Chandler All Signs Point to Recovery in China http://seekingalpha.com/article/172228-all-signs-point-to-recovery-in-china?source=feed 172228 A flurry of Chinese data will be reported in the next 12-24 hours. The general picture that will be depicted by the data is of an economy that continues to recover from the global financial and economic shock of last year. There are three elements that will command the market's attention: inflation data, exports and new yuan loans.
China is still experiencing deflation, as both consumer and producer price inflation were still well below zero in September (-0.8% and -7.0% respectively), but deflationary forces are easing. The pace of decline of consumer prices is expected to be halved and a positive reading is likely before year end. The combination of a weak yuan, which has depreciated in tandem with the dollar, sharp prices in money supply (M2 29.3% year-over-year) and some increases in administered prices seem to be responsible. New money supply figures will also be released this week.
China's trade surplus has been recovering since bottoming in June at $8.34 billion. The October surplus is expected to be almost $19 billion, which would be its highest level since January. Exports look to have continued their recovery as the pace of decline subsides. The 13% decline expected year-over-year in October would be the smallest decline of the year. Chinese exports peaked in July 2008 at about $136.7 billion and bottomed in February near $65 billion. In September they stood at $116 billion. Partly due to the base effect, Chinese export growth will likely turn positive on a year-over-year basis as early as November. We note that exports for the region are likely to be particular robust in the coming months.
New Chinese loans are being monitored by investors after the surge in the first half. The pace of new yuan loans is expected to have slowed to CNY370 billion from CNY516.7 billion in September. The 5-year average is near CNY385 billion. This seems to be consistent with what Chinese officials call 'appropriately easy' monetary policy. In recent months Chinese officials, through moral suasion, are believed to have encouraged banks to reduce but in no way cease new lending, and specific industries were targeted which are believed to be experiencing excess investment of speculation.
China will release other data, including fixed investment, industrial output and retail sales, this week. The reports are expected to be consistent with a further acceleration of Chinese growth. If the data is reported in line with expectations, it may support regional equity markets and currencies.
The combination of expectations for Chinese data and the broad based dollar decline has seen the 12-month non-deliverable forward yuan contracts price in about a 3.3% appreciation over the next 12 months. This has been slowly creeping up in recent weeks as the market begin anticipating a de-pegging of the yuan next year, although Chinese officials continue to stress the importance of currency stability.
At the end of last week, the PBOC governor played down the international pressure for yuan appreciation. And the G20 and IMF did not appear to escalate the pressure over the weekend.
Disclosure: No positions
]]> Mon, 09 Nov 2009 10:55:05 -0500 Marc Chandler Marc Chandler submits:
A flurry of Chinese data will be reported in the next 12-24 hours. The general picture that will be depicted by the data is of an economy that continues to recover from the global financial and economic shock of last year. There are three elements that will command the market's attention: inflation data, exports and new yuan loans.
China is still experiencing deflation, as both consumer and producer price inflation were still well below zero in September (-0.8% and -7.0% respectively), but deflationary forces are easing. The pace of decline of consumer prices is expected to be halved and a positive reading is likely before year end. The combination of a weak yuan, which has depreciated in tandem with the dollar, sharp prices in money supply (M2 29.3% year-over-year) and some increases in administered prices seem to be responsible. New money supply figures will also be released this week.
China's trade surplus has been recovering since bottoming in June at $8.34 billion. The October surplus is expected to be almost $19 billion, which would be its highest level since January. Exports look to have continued their recovery as the pace of decline subsides. The 13% decline expected year-over-year in October would be the smallest decline of the year. Chinese exports peaked in July 2008 at about $136.7 billion and bottomed in February near $65 billion. In September they stood at $116 billion. Partly due to the base effect, Chinese export growth will likely turn positive on a year-over-year basis as early as November. We note that exports for the region are likely to be particular robust in the coming months.
New Chinese loans are being monitored by investors after the surge in the first half. The pace of new yuan loans is expected to have slowed to CNY370 billion from CNY516.7 billion in September. The 5-year average is near CNY385 billion. This seems to be consistent with what Chinese officials call 'appropriately easy' monetary policy. In recent months Chinese officials, through moral suasion, are believed to have encouraged banks to reduce but in no way cease new lending, and specific industries were targeted which are believed to be experiencing excess investment of speculation.
China will release other data, including fixed investment, industrial output and retail sales, this week. The reports are expected to be consistent with a further acceleration of Chinese growth. If the data is reported in line with expectations, it may support regional equity markets and currencies.
The combination of expectations for Chinese data and the broad based dollar decline has seen the 12-month non-deliverable forward yuan contracts price in about a 3.3% appreciation over the next 12 months. This has been slowly creeping up in recent weeks as the market begin anticipating a de-pegging of the yuan next year, although Chinese officials continue to stress the importance of currency stability.
At the end of last week, the PBOC governor played down the international pressure for yuan appreciation. And the G20 and IMF did not appear to escalate the pressure over the weekend.
Disclosure: No positions

Complete Story »]]> CAF Marc Chandler Japan Increasing Its Foreign Reserve Holdings http://seekingalpha.com/article/172226-japan-increasing-its-foreign-reserve-holdings?source=feed 172226 Japan's foreign reserves stood above $1 trillion in October for the 12th consecutive month after reserves rose a little more than $4 billion over the course of the month. This largely reflected valuation adjustments.

The euro rose roughly a cent against the dollar, and this is partially offset by the decline in asset (bond) prices. Also in terms of valuation, the price of gold appreciated from $995.75 to $1040, an increase that was worth about $1 billion to Japan's reserves. These was also a modest increase in Japan's SDR holdings.

]]> Mon, 09 Nov 2009 10:49:24 -0500 Marc Chandler Marc Chandler submits:

Japan's foreign reserves stood above $1 trillion in October for the 12th consecutive month after reserves rose a little more than $4 billion over the course of the month. This largely reflected valuation adjustments.

The euro rose roughly a cent against the dollar, and this is partially offset by the decline in asset (bond) prices. Also in terms of valuation, the price of gold appreciated from $995.75 to $1040, an increase that was worth about $1 billion to Japan's reserves. These was also a modest increase in Japan's SDR holdings.


Complete Story »]]> FXY JYN UDN UUP Marc Chandler Liquidity Is Ample, But Risk Remains http://seekingalpha.com/article/171623-liquidity-is-ample-but-risk-remains?source=feed 171623 This week's rash of central bank meetings has concluded, and the take away message is that the major central banks have not begun to remove the extraordinary liquidity provisions. Even Australia, which hiked rates for the second time recently, seems to be signalling a gradual approach.
The Federal Reserve Wednesday did not change the substance of its message that, despite stronger growth, it is in no hurry to raise rates. The slack in the factor markets, (unutilized industrial capacity and elevated unemployment), the subdued inflation readings and the stable inflation expectations measures were the explicit factors cited.
The ECB's Trichet hinted that the mid-December 12-month fixed rate funding operation will be the last one. Reading between the lines, a shorter dated operation, say six months, seems more likely than a variable rate tender. Short term euro money rates are trading above the overnight deposit rate but below the 1% weekly repo rate -- even 1-year money in the interbank market is quoted at 95 basis points.
The Bank of England is the only major central bank to extend its QE program. While the GBP25 billion is at the low end of expectations, in this context, the key point is that liquidity, which we believe is a critical driver, remains ample.
That ample liquidity in turn means that the fundamental fuel for the risk on trades, and in the current context, that is a weight on the US dollar. The liquidity assessment would also seem positive for equities in general and emerging markets. It is also likely consistent with curve steepening in the fixed income markets.
Disclosure: No positions
]]> Thu, 05 Nov 2009 16:06:34 -0500 Marc Chandler Marc Chandler submits:
This week's rash of central bank meetings has concluded, and the take away message is that the major central banks have not begun to remove the extraordinary liquidity provisions. Even Australia, which hiked rates for the second time recently, seems to be signalling a gradual approach.
The Federal Reserve Wednesday did not change the substance of its message that, despite stronger growth, it is in no hurry to raise rates. The slack in the factor markets, (unutilized industrial capacity and elevated unemployment), the subdued inflation readings and the stable inflation expectations measures were the explicit factors cited.
The ECB's Trichet hinted that the mid-December 12-month fixed rate funding operation will be the last one. Reading between the lines, a shorter dated operation, say six months, seems more likely than a variable rate tender. Short term euro money rates are trading above the overnight deposit rate but below the 1% weekly repo rate -- even 1-year money in the interbank market is quoted at 95 basis points.
The Bank of England is the only major central bank to extend its QE program. While the GBP25 billion is at the low end of expectations, in this context, the key point is that liquidity, which we believe is a critical driver, remains ample.
That ample liquidity in turn means that the fundamental fuel for the risk on trades, and in the current context, that is a weight on the US dollar. The liquidity assessment would also seem positive for equities in general and emerging markets. It is also likely consistent with curve steepening in the fixed income markets.
Disclosure: No positions

Complete Story »]]> Marc Chandler Brazil Mulling Increased Currency Intervention? http://seekingalpha.com/article/171485-brazil-mulling-increased-currency-intervention?source=feed 171485 Media reports are playing up local press stories that Brazil officials are evaluating additional measures to slow capital inflows which are driving the Brazilian real higher. The 2% tax may have led to some greater volatility in the currency, but net-net the currency remains firm. Other ideas being considered include the government selling a BRL denominated bond issue overseas, though perhaps most important for foreign investors is the talk that officials may change the rules and allow investors to deposit guarantees overseas.
That said, the authenticity of the local press report is not clear and was said not to cite sources. Moreover, on Wednesday Finance Minister Mantega was quoted indicating that the government was not looking at additional measures to curb the real's strength.
The BRL is up about 34% against the US dollar this year, while the Bovespa is up 70% in local terms. Officials are wrestling with a significant challenge--absorbing the capital inflows. Figures from the central bank indicate there was a net $14.6 billion foreign exchange inflow in the month of October, the bulk of which was net investment inflows (~$13.1 billion) and a bit from net trade flows (~$1.5 billion).
Two points to make about the net investment inflows. First the net reflects incoming investment of almost $40 billion, and about $26.6 billion in outflows. This suggests another way Brazil and other countries experiencing strong inflows can mitigate the impact--encourage capital outflows.
Second, year-to-date Brazil reports a net foreign exchange inflow of almost $23 billion. The same year ago period saw a net inflow of $12.5 billion. The October inflow was flattered by a Spanish bank's IPO that raised more than $6 billion and overseas debt sales by Brazilian companies (who then apparently repatriated the proceeds).
One consequence of Brazil's 2% tax and some of the other measures that it is reportedly considering could be a slowing of the development of local capital market capacity. This is to say its tactical measures may undermine its strategic goals. And, even if it slows the development of its local capital markets, neither its daily intervention nor the tax is seeming to deter upward pressure on the currency.
Brazil is not alone in wrestling with this problem. The challenge in East Asia is also acute. The Hong Kong Monetary Authority is defending its peg by buying US dollars, which has seen its money supply (M1) rise 55% above year ago levels (in September). In South Korea, to cite another example, foreign currency reserves have grown among the fastest in the world, rising roughly $63 billion this year so far.
Lastly, the challenge countries like Brazil face in absorbing capital inflows may put greater pressure on recycling some of those funds and that in turn may point to a source of demand for US Treasuries.

Disclosure: No positions

]]> Thu, 05 Nov 2009 10:19:46 -0500 Marc Chandler Marc Chandler submits:
Media reports are playing up local press stories that Brazil officials are evaluating additional measures to slow capital inflows which are driving the Brazilian real higher. The 2% tax may have led to some greater volatility in the currency, but net-net the currency remains firm. Other ideas being considered include the government selling a BRL denominated bond issue overseas, though perhaps most important for foreign investors is the talk that officials may change the rules and allow investors to deposit guarantees overseas.
That said, the authenticity of the local press report is not clear and was said not to cite sources. Moreover, on Wednesday Finance Minister Mantega was quoted indicating that the government was not looking at additional measures to curb the real's strength.
The BRL is up about 34% against the US dollar this year, while the Bovespa is up 70% in local terms. Officials are wrestling with a significant challenge--absorbing the capital inflows. Figures from the central bank indicate there was a net $14.6 billion foreign exchange inflow in the month of October, the bulk of which was net investment inflows (~$13.1 billion) and a bit from net trade flows (~$1.5 billion).
Two points to make about the net investment inflows. First the net reflects incoming investment of almost $40 billion, and about $26.6 billion in outflows. This suggests another way Brazil and other countries experiencing strong inflows can mitigate the impact--encourage capital outflows.
Second, year-to-date Brazil reports a net foreign exchange inflow of almost $23 billion. The same year ago period saw a net inflow of $12.5 billion. The October inflow was flattered by a Spanish bank's IPO that raised more than $6 billion and overseas debt sales by Brazilian companies (who then apparently repatriated the proceeds).
One consequence of Brazil's 2% tax and some of the other measures that it is reportedly considering could be a slowing of the development of local capital market capacity. This is to say its tactical measures may undermine its strategic goals. And, even if it slows the development of its local capital markets, neither its daily intervention nor the tax is seeming to deter upward pressure on the currency.
Brazil is not alone in wrestling with this problem. The challenge in East Asia is also acute. The Hong Kong Monetary Authority is defending its peg by buying US dollars, which has seen its money supply (M1) rise 55% above year ago levels (in September). In South Korea, to cite another example, foreign currency reserves have grown among the fastest in the world, rising roughly $63 billion this year so far.
Lastly, the challenge countries like Brazil face in absorbing capital inflows may put greater pressure on recycling some of those funds and that in turn may point to a source of demand for US Treasuries.

Disclosure: No positions


Complete Story »]]> EWZ Marc Chandler Brazil's New Real Tax: Minimizing Exposure Through ADRs http://seekingalpha.com/article/171273-brazil-s-new-real-tax-minimizing-exposure-through-adrs?source=feed 171273 Investors continue to grapple with the 2% front-end tax on Brazilian Real purchases for bond and equity investments. One might expect that the efficiency of the market is such that arbitrage will keep the ADR in line with what one would pay for the local shares, but this does not seem to be the case, making the ADR a potentially viable alternative to the local shares. Here is our work, using Petrobras (PBR) as an example.

  1. Each U.S. ADR is worth two local shares. The local shares are trading around BRL41.4. Using an exchange rate of BRL1.7285 = $1, that means that each local share is worth about $23.95. If a foreign investor wanted to buy it, they would pay $23.95 plus 2% or $24.43.
  2. The ADR should trade for twice that or $48.86. But the ADR is trading around $47.91. Excluding the 2% tax, fair value would be $47.90.

Although analysis needs to be done on the stock-specific level, Petrobras ADRs look cheap relative to the local shares. This is not meant to be the final word, however. Rather, the point of the exercise is to see if the ADR can be a viable alternative to the local shares in minimizing the exposure to the new tax.

]]> Wed, 04 Nov 2009 15:59:23 -0500 Marc Chandler Marc Chandler submits:

Investors continue to grapple with the 2% front-end tax on Brazilian Real purchases for bond and equity investments. One might expect that the efficiency of the market is such that arbitrage will keep the ADR in line with what one would pay for the local shares, but this does not seem to be the case, making the ADR a potentially viable alternative to the local shares. Here is our work, using Petrobras (PBR) as an example.

  1. Each U.S. ADR is worth two local shares. The local shares are trading around BRL41.4. Using an exchange rate of BRL1.7285 = $1, that means that each local share is worth about $23.95. If a foreign investor wanted to buy it, they would pay $23.95 plus 2% or $24.43.
  2. The ADR should trade for twice that or $48.86. But the ADR is trading around $47.91. Excluding the 2% tax, fair value would be $47.90.

Although analysis needs to be done on the stock-specific level, Petrobras ADRs look cheap relative to the local shares. This is not meant to be the final word, however. Rather, the point of the exercise is to see if the ADR can be a viable alternative to the local shares in minimizing the exposure to the new tax.


Complete Story »]]> PBR Marc Chandler Three European Bond Storylines to Watch http://seekingalpha.com/article/171267-three-european-bond-storylines-to-watch?source=feed 171267 There are three main stories to be aware of in the European bond market Wednesday.
First, Fitch cut its Irish bond rating of AA+ to AA-, citing widening fiscal shortfall and the rising cost of the financial support programs. S&P and Moody's (MCO) had reduced Ireland's sovereign rating earlier this year, but the Fitch move puts its rating one notch below S&P and two below Moodys. Our sovereign rating model had Ireland at the bottom of the developed country universe and, although Fitch says the outlook is stable, our work warns that Ireland's macro situation could yet justify another downgrade. Irish bonds weakened on the news, but net-net on the day the spread over bunds is 1 basis point narrower. At the 2-year sector, the spread has widened a couple of basis points.
Second, Spanish authorities released their latest Financial Stability Report and noted that the central bank is closely monitoring the 90 billion euro bad loan portfolio of Spanish banks (~2.4% of the bank's 3.75 billion euro assets) which have been officially acknowledged. The central bank indicated that it expects the government to establish a fund to finance the restructuring of the country's banking system in the coming months. Our sovereign rating model warns that the rating agencies may be too optimistic on Spain's rating. Our assessment our the macro situation puts Spain at AA rather than the AA+ by S&P, and triple A by Moody's and Fitch.
Third, Polish bonds are among the strongest in the region. However, the news stream is anything but supportive. News that the government is considering to mandate a cut in employee contributions to private pension funds (to 3% from 7.3%) and divert the rest to state-controlled funds, which ostensibly would buy government bonds. The Finance Minister was quoted on the news wires projecting that this would reduce the deficit by PLN13 billion and reduce the debt by 1%. It was emphasized that this is just a proposal at this point and not a draft law.
The EU projects that Poland's debt will exceed 55% of GDP next year and move above 60% in 2011. This may complicate the adoption of joining EMU.
If the scheme is adopted it would reduce the government bond sales which would be a positive, but investors would prefer a more substantive effort of fiscal reform, rather than what some would call creative accounting. There appear to be ramifications for Polish equities as well. Private pension funds reportedly have little less than a third of the AUM in equities. If less money is going into the private pension funds, then this reduces one source of demand for Polish equities.

Disclosure: No positions

]]> Wed, 04 Nov 2009 15:45:05 -0500 Marc Chandler Marc Chandler submits:
There are three main stories to be aware of in the European bond market Wednesday.
First, Fitch cut its Irish bond rating of AA+ to AA-, citing widening fiscal shortfall and the rising cost of the financial support programs. S&P and Moody's (MCO) had reduced Ireland's sovereign rating earlier this year, but the Fitch move puts its rating one notch below S&P and two below Moodys. Our sovereign rating model had Ireland at the bottom of the developed country universe and, although Fitch says the outlook is stable, our work warns that Ireland's macro situation could yet justify another downgrade. Irish bonds weakened on the news, but net-net on the day the spread over bunds is 1 basis point narrower. At the 2-year sector, the spread has widened a couple of basis points.
Second, Spanish authorities released their latest Financial Stability Report and noted that the central bank is closely monitoring the 90 billion euro bad loan portfolio of Spanish banks (~2.4% of the bank's 3.75 billion euro assets) which have been officially acknowledged. The central bank indicated that it expects the government to establish a fund to finance the restructuring of the country's banking system in the coming months. Our sovereign rating model warns that the rating agencies may be too optimistic on Spain's rating. Our assessment our the macro situation puts Spain at AA rather than the AA+ by S&P, and triple A by Moody's and Fitch.
Third, Polish bonds are among the strongest in the region. However, the news stream is anything but supportive. News that the government is considering to mandate a cut in employee contributions to private pension funds (to 3% from 7.3%) and divert the rest to state-controlled funds, which ostensibly would buy government bonds. The Finance Minister was quoted on the news wires projecting that this would reduce the deficit by PLN13 billion and reduce the debt by 1%. It was emphasized that this is just a proposal at this point and not a draft law.
The EU projects that Poland's debt will exceed 55% of GDP next year and move above 60% in 2011. This may complicate the adoption of joining EMU.
If the scheme is adopted it would reduce the government bond sales which would be a positive, but investors would prefer a more substantive effort of fiscal reform, rather than what some would call creative accounting. There appear to be ramifications for Polish equities as well. Private pension funds reportedly have little less than a third of the AUM in equities. If less money is going into the private pension funds, then this reduces one source of demand for Polish equities.

Disclosure: No positions


Complete Story »]]> Marc Chandler European Commission Upbeat About 2010 http://seekingalpha.com/article/170870-european-commission-upbeat-about-2010?source=feed 170870 The European Commission released new forecasts Tuesday that generally upgraded its outlook for the first time in two years. On Thursday, the ECB staff will provide updated forecasts, as well.
The EC now expects the euro zone economy to expand by 0.7% next year. Previously it thought the region's economy would contract by 0.1%. The IMF is less sanguine and forecasts a 0.3% expansion next year, half of what the EC envisions. The EC places this year's contraction at 4%, while the IMF sees it a tad deeper at -4.2%. The EC sees unemployment rising to 10.7% in 2010 and the 10.9% in 2011. Here too, the IMF is less confident and has forecast unemployment to rise toward 11.7% in 2011.
The EC forecasts inflation to rise from 0.3% this year to 1.1% next year, and 1.5% in 2011. The ECB had seen inflation at 0.4% this year and 1.2% next.
All euro zone members are expected to run budget deficits in excess of the 3% cap, with the deficit for the area averaging just shy of 7%. The EC wants countries to introduce fiscal consolidation measures in 2011.
Separately, some observers are highlighting the fact that there is a shift taking place in the sovereign credit default swap space where cost of insurance against an Irish default has fallen below Greece. The Irish government is talking about cutting spending next year by four billion euros and trying to keep the deficit below 12% of GDP. The EC does not expect that. Next year's Irish budget is expected to be unveiled on Dec 9. Meanwhile the new government in Greece is projecting this year's deficit to be twice what the outgoing government claimed and this has spurred concern from at least one rating agency.
In the past month, benchmark 10-year Greek bond yields have risen 15 basis points while the 10-year Irish bond yield has fallen 8 basis points. Nevertheless Irish 10-year yields are still about 7 basis points above Greece.
Disclosure: No positions
]]> Tue, 03 Nov 2009 11:18:15 -0500 Marc Chandler Marc Chandler submits:
The European Commission released new forecasts Tuesday that generally upgraded its outlook for the first time in two years. On Thursday, the ECB staff will provide updated forecasts, as well.
The EC now expects the euro zone economy to expand by 0.7% next year. Previously it thought the region's economy would contract by 0.1%. The IMF is less sanguine and forecasts a 0.3% expansion next year, half of what the EC envisions. The EC places this year's contraction at 4%, while the IMF sees it a tad deeper at -4.2%. The EC sees unemployment rising to 10.7% in 2010 and the 10.9% in 2011. Here too, the IMF is less confident and has forecast unemployment to rise toward 11.7% in 2011.
The EC forecasts inflation to rise from 0.3% this year to 1.1% next year, and 1.5% in 2011. The ECB had seen inflation at 0.4% this year and 1.2% next.
All euro zone members are expected to run budget deficits in excess of the 3% cap, with the deficit for the area averaging just shy of 7%. The EC wants countries to introduce fiscal consolidation measures in 2011.
Separately, some observers are highlighting the fact that there is a shift taking place in the sovereign credit default swap space where cost of insurance against an Irish default has fallen below Greece. The Irish government is talking about cutting spending next year by four billion euros and trying to keep the deficit below 12% of GDP. The EC does not expect that. Next year's Irish budget is expected to be unveiled on Dec 9. Meanwhile the new government in Greece is projecting this year's deficit to be twice what the outgoing government claimed and this has spurred concern from at least one rating agency.
In the past month, benchmark 10-year Greek bond yields have risen 15 basis points while the 10-year Irish bond yield has fallen 8 basis points. Nevertheless Irish 10-year yields are still about 7 basis points above Greece.
Disclosure: No positions

Complete Story »]]> Marc Chandler Treasury Slashes Q4 Borrowing Plans http://seekingalpha.com/article/170863-treasury-slashes-q4-borrowing-plans?source=feed 170863 Late Monday, the US Treasury announced a dramatic cut in its anticipated borrowing requirements for this quarter. The net borrowing is expected to now be near $276 billion, down by almost half (43%) from the previous estimate of $486 billion.
The reprieve is largely technical in nature and a net $478 billion is projected to be borrowed in Q1 2010. In Q3 '09, the US Treasury borrowed a net $393 billion. The smaller borrowing requirement in this quarter is a consequence of the Treasury's decision to cut back its Supplementary Financing Program (SFP), under which it sold bills for the Federal Reserve. However, the Treasury's debt sales are capped by the congressionally imposed debt ceiling. The SFP was cut to $15 billion from $200 billion.
However, while the Treasury's borrowing needs may be less, it means the Fed's reserve creation will be greater.
Wednesday the US Treasury will announce its quarterly refunding needs. The market is anticipating the sale of some $80-$85 billion of notes and bonds (3 year, 10 year and 30 year).
Contacts report US Treasury officials have been discussing changing the inflation protected securities (TIPS) to include a 30-year instrument, which may be introduced at the expense of the 20-year.
Disclosure: No positions
]]> Tue, 03 Nov 2009 11:03:45 -0500 Marc Chandler Marc Chandler submits:
Late Monday, the US Treasury announced a dramatic cut in its anticipated borrowing requirements for this quarter. The net borrowing is expected to now be near $276 billion, down by almost half (43%) from the previous estimate of $486 billion.
The reprieve is largely technical in nature and a net $478 billion is projected to be borrowed in Q1 2010. In Q3 '09, the US Treasury borrowed a net $393 billion. The smaller borrowing requirement in this quarter is a consequence of the Treasury's decision to cut back its Supplementary Financing Program (SFP), under which it sold bills for the Federal Reserve. However, the Treasury's debt sales are capped by the congressionally imposed debt ceiling. The SFP was cut to $15 billion from $200 billion.
However, while the Treasury's borrowing needs may be less, it means the Fed's reserve creation will be greater.
Wednesday the US Treasury will announce its quarterly refunding needs. The market is anticipating the sale of some $80-$85 billion of notes and bonds (3 year, 10 year and 30 year).
Contacts report US Treasury officials have been discussing changing the inflation protected securities (TIPS) to include a 30-year instrument, which may be introduced at the expense of the 20-year.
Disclosure: No positions

Complete Story »]]> Marc Chandler Mexico: A Move to Broaden the Country's Tax Base http://seekingalpha.com/article/170609-mexico-a-move-to-broaden-the-country-s-tax-base?source=feed 170609 At the end of last week, Mexico's lower house gave final approval for the to the revenue components of the FY2010 budget. There were some doubts whether the lower house would balk at raising taxes during the recession.
The revenue plans include raising the income tax rate to 30% for business and high income individuals. The tax rate will fall to 29% in 2013, and back to 28% in 2014. There is also a higher duty on cash deposits. Previously, the tax was 2% on cash deposits in excess of 25k pesos. The new tax is 3% on cash deposits above 15k peso. There is also a new telecom tax that will be implemented. Lastly the sales tax hike of 1% to 16% is permanent, though there had been some talk that it could have been a temporary increase. Congress rejected Calderon's proposal of a new 2% consumption tax.
Broadening the country's tax base is important, especially given that oil output has fallen. Oil funds almost 40% of Mexico's budget. Ironically, anticipated revenues were boosted by raising the forecast for oil to $59 from $53.90. President Calderon anticipated a 0.5% budget deficit in 2010 and now, despite the tax increases, the deficit looks closer to 0.75%.
The next step in the budget process now that the revenues have been agreed upon is in terms of expenditures. The spending plans need to be approved by Nov 15th.
The Mexican peso has strengthened today and this seems to be partly a function of some ideas that maybe the risk of downgrade (S&P and Fitch have Mexico on negative watch) have eased a bit. However, the bulk of the peso's gains Monday appear to be a reflection of US dollar weakness. In the second half of last week, the dollar found support just below MXN13.00. It tested MXN13.30 today before slumping to almost MXN13.06. However, the dollar's downside momentum is fading. Look for a near-term move back toward MXN13.15-18. Note that Mexican markets are closed Monday so the price action reflects primarily trading in the US.
In the futures market, the noncommercials extended net long positions to 66.7k from 55.1k. The noncommercials were net short peso in the first part of October. From Oct. 2 thru Oct. 20, the dollar slumped almost 7.4% against the peso.

Disclosure: No positions

]]> Mon, 02 Nov 2009 13:47:41 -0500 Marc Chandler Marc Chandler submits:
At the end of last week, Mexico's lower house gave final approval for the to the revenue components of the FY2010 budget. There were some doubts whether the lower house would balk at raising taxes during the recession.
The revenue plans include raising the income tax rate to 30% for business and high income individuals. The tax rate will fall to 29% in 2013, and back to 28% in 2014. There is also a higher duty on cash deposits. Previously, the tax was 2% on cash deposits in excess of 25k pesos. The new tax is 3% on cash deposits above 15k peso. There is also a new telecom tax that will be implemented. Lastly the sales tax hike of 1% to 16% is permanent, though there had been some talk that it could have been a temporary increase. Congress rejected Calderon's proposal of a new 2% consumption tax.
Broadening the country's tax base is important, especially given that oil output has fallen. Oil funds almost 40% of Mexico's budget. Ironically, anticipated revenues were boosted by raising the forecast for oil to $59 from $53.90. President Calderon anticipated a 0.5% budget deficit in 2010 and now, despite the tax increases, the deficit looks closer to 0.75%.
The next step in the budget process now that the revenues have been agreed upon is in terms of expenditures. The spending plans need to be approved by Nov 15th.
The Mexican peso has strengthened today and this seems to be partly a function of some ideas that maybe the risk of downgrade (S&P and Fitch have Mexico on negative watch) have eased a bit. However, the bulk of the peso's gains Monday appear to be a reflection of US dollar weakness. In the second half of last week, the dollar found support just below MXN13.00. It tested MXN13.30 today before slumping to almost MXN13.06. However, the dollar's downside momentum is fading. Look for a near-term move back toward MXN13.15-18. Note that Mexican markets are closed Monday so the price action reflects primarily trading in the US.
In the futures market, the noncommercials extended net long positions to 66.7k from 55.1k. The noncommercials were net short peso in the first part of October. From Oct. 2 thru Oct. 20, the dollar slumped almost 7.4% against the peso.

Disclosure: No positions


Complete Story »]]> Marc Chandler Reserve Bank of Australia: More Moves Expected http://seekingalpha.com/article/170603-reserve-bank-of-australia-more-moves-expected?source=feed 170603 The Reserve Bank of Australia is widely expected to hike rates early Tuesday, which would be the second move in the cycle. A Bloomberg survey found 18 of 22 expect a 25 basis point hike, while the remaining four expect a 50 bp move.
We are inclined to be part of the majority here, believing that fragility of the global recovery and strength of the Australian dollar favor an incremental approach. The swaps market looks for another 200 bp of tightening over the next 12 months.
The RBA will also unveil new growth and unemployment forecasts. The former is likely to be revised higher and the latter is likely to be revised lower. Inflation pressures are building and in its statement the RBA may address it, even if to note that the currency strength will help temper it. In Q3 the weighted median core CPI rose 3.8% year-over-year, while the RBA tolerance range is 2-3%.
Australia's links with Asia in general and China in particular are important, as well, as Emerging Asia expanded at a 10% annual clip in Q3 and the demand for Australia's iron ore, wool and coal remains strong. Australia exports about 20% of GDP.
In addition to the RBA meeting this week, Australia reports September retail sales and building approvals Tuesday. Both should advance. On the other hand, the trade balance on Wednesday should show serious deterioration from the A$1.524 billion deficit in August. The consensus is for an A$2.15 billion deficit.
The statement following the RBA meeting is likely to steal much of the thunder from Thursday's quarterly monetary policy statement.
The Australian dollar fell to its lowest level since early October on Monday (~$0.8906) bringing the decline since the October 21 high of $0.9329 to 4.6%. The Australian dollar has rallied strongly off the low and a move back above $0.9070-80 would strengthen conviction that the correction is over. The pullback in spot was not sufficient to wash out the noncommercial position at the IMM as of last Tuesday. The net long position was trimmed back by a meager 1000 contracts to stand just below 53k.
Disclosure: No positions
]]> Mon, 02 Nov 2009 13:24:09 -0500 Marc Chandler Marc Chandler submits:
The Reserve Bank of Australia is widely expected to hike rates early Tuesday, which would be the second move in the cycle. A Bloomberg survey found 18 of 22 expect a 25 basis point hike, while the remaining four expect a 50 bp move.
We are inclined to be part of the majority here, believing that fragility of the global recovery and strength of the Australian dollar favor an incremental approach. The swaps market looks for another 200 bp of tightening over the next 12 months.
The RBA will also unveil new growth and unemployment forecasts. The former is likely to be revised higher and the latter is likely to be revised lower. Inflation pressures are building and in its statement the RBA may address it, even if to note that the currency strength will help temper it. In Q3 the weighted median core CPI rose 3.8% year-over-year, while the RBA tolerance range is 2-3%.
Australia's links with Asia in general and China in particular are important, as well, as Emerging Asia expanded at a 10% annual clip in Q3 and the demand for Australia's iron ore, wool and coal remains strong. Australia exports about 20% of GDP.
In addition to the RBA meeting this week, Australia reports September retail sales and building approvals Tuesday. Both should advance. On the other hand, the trade balance on Wednesday should show serious deterioration from the A$1.524 billion deficit in August. The consensus is for an A$2.15 billion deficit.
The statement following the RBA meeting is likely to steal much of the thunder from Thursday's quarterly monetary policy statement.
The Australian dollar fell to its lowest level since early October on Monday (~$0.8906) bringing the decline since the October 21 high of $0.9329 to 4.6%. The Australian dollar has rallied strongly off the low and a move back above $0.9070-80 would strengthen conviction that the correction is over. The pullback in spot was not sufficient to wash out the noncommercial position at the IMM as of last Tuesday. The net long position was trimmed back by a meager 1000 contracts to stand just below 53k.
Disclosure: No positions

Complete Story »]]> Marc Chandler Iceland's Krona Continues to Struggle Against the Euro http://seekingalpha.com/article/170577-iceland-s-krona-continues-to-struggle-against-the-euro?source=feed 170577 Effective Monday, Iceland lifted its restrictions on capital outflows. New investors can now exchange their holdings for foreign currencies, provided the transactions are duly registered.
Capital controls were imposed late last year following the collapse of Iceland's largest banks. The krona has been unable to keep pace with the euro's recovery since March and has lost more than 15% against the euro since April 1. Iceland has been dependent on a $4.6 billion package from the IMF, which had withheld payment until now until creditor claims were resolved. Last week, the IMF released about $167.5 million, according to reports, the first tranche this year. The Icelandic government indicates those funds will be used to bolster reserves.
Further unwinding of the capital controls are unlikely to be imminent, but could take place over the next several quarters, if the economic and financial environment is conducive.
The major rating agencies appear to want to wait until the next IMF review to review their ratings. S&P and Fitch rate Iceland long-term foreign exchange debt as BBB-, with negative outlooks. This is one step above junk, while Moody's is a bit more optimistic with a Baa1 rating, three steps above junk.
The euro hit a peak of ISK187.76 early last December. The euro slipped to almost ISK140 by late March and has been grinding higher since. Earlier today the euro made a new high for the year against ISK, moving above the 185 level. However, the gains were not sustained and a break of ISK184 now warns of a move back toward ISK180.
Disclosure: No positions
]]> Mon, 02 Nov 2009 11:50:25 -0500 Marc Chandler Marc Chandler submits:
Effective Monday, Iceland lifted its restrictions on capital outflows. New investors can now exchange their holdings for foreign currencies, provided the transactions are duly registered.
Capital controls were imposed late last year following the collapse of Iceland's largest banks. The krona has been unable to keep pace with the euro's recovery since March and has lost more than 15% against the euro since April 1. Iceland has been dependent on a $4.6 billion package from the IMF, which had withheld payment until now until creditor claims were resolved. Last week, the IMF released about $167.5 million, according to reports, the first tranche this year. The Icelandic government indicates those funds will be used to bolster reserves.
Further unwinding of the capital controls are unlikely to be imminent, but could take place over the next several quarters, if the economic and financial environment is conducive.
The major rating agencies appear to want to wait until the next IMF review to review their ratings. S&P and Fitch rate Iceland long-term foreign exchange debt as BBB-, with negative outlooks. This is one step above junk, while Moody's is a bit more optimistic with a Baa1 rating, three steps above junk.
The euro hit a peak of ISK187.76 early last December. The euro slipped to almost ISK140 by late March and has been grinding higher since. Earlier today the euro made a new high for the year against ISK, moving above the 185 level. However, the gains were not sustained and a break of ISK184 now warns of a move back toward ISK180.
Disclosure: No positions

Complete Story »]]> ERO Marc Chandler