MIG Forex Research

The Chicago Mercantile Exchange, or CME have just announced it will allow members to use Gold as collateral against futures and options positions traded on their exchange. I expect this has come about due to member demand and folows the birth of some hedge funds during the year that have started products based in Gold.
With concern over the long-term validity and stability of FIAT currencies and bonds priced in same, I would expect other exchanges to follow suit over the months ahead.

In what is traditionally a busy week for data, we are a quarter of the way through the key central bank meetings that are forthcoming. After the RBA's decision to hike the Australian cash rate to 3.50% we now look towards this evening's FOMC decision ahead of both the Bank of England's MPC and ECB decisions tomorrow.

The rake hike from the RBA was well flagged, but disappointed a market set up for a potential 50bps and the subsequent noises from the RBA were much less hawkish is suggested by the Australian yield curve. This continues to weigh on the Aussie dollar in the short-term and, though further rises are expected during the period of rate normalisation, I remain concerned that the expected rate hikes won't be delivered as aggressively as the market believes. Whether this means we have already posted a medium-term high in AUDUSD remains to be seen and this will still be governed by the overall market risk appetite. In this instance it is interesting to see how stock markets have struggled over the last few sessions, though the key technical support from a DeMark aspect remains below here in the Dow at 9599. Until this level is broken, the risk trade remains on and pullbacks in the AUDUSD remains corrective rather than a change in trend.

For the FOMC tonight, there is an outside chance we will see alterations in the wording to suggest the end to easy policy will happen sooner rather than later. However, my view is such a change in the policy statement is very unlikely. The markets remain very edgy as was noticed when the cessation of parts of the under utilised TAF and TSLF policies was announced recently and I expect the FOMC members will view today as too early to attempt to rock the boat. I expect a very similar policy statement tonight to the last meeting which at the margin would be USD negative, but it will be worth focussing on the ability of the dollar to sustain recent gains should it suffer any post FOMC jitters. With the negative Dollar/Equity correlation remaining pretty much in place, the direction taken over the remainder of this week may wekk drive sentiment into the end of 2009. The key phrase to watch for regarding rates is 'exceptionally low for an extended period'.

The Bank of England remains caught between a rock and a hard place. Though there has been talk from certain MPC members of the end of the now spent QE program, the bare economic statistics suggest the market is right in looking for at least another £25bn expansion in this APF strategy. Credit passthrough remains minimal and I would actually err on a rise by £50bn, purely so they have enough leeway to keep the purchases ongoing until the next quarterly inflation report in February. Of all the meetings this looks to have the biggest binary risk in the currency space. GBP has been extremely volatile recently with money markets flying all over the place. Should QE not be expanded there is a risk that Sterling flies considerably higher - remember there are still some entrenched GBP shorts in the market even though the speculative shorts on the CMA have dropped from a all time high of 75,000 contracts to around 53,000 at the last report. Should my view of a £50bn QE extension be seen, sterling should remain under pressure on a braod basis. The UK remains the only G7 nation still in recession.

The ECB is likely to be the least interesting of the remaining meetings. I expect an unchanged policy decision. Of note would be any alterations to the wording regarding growth and lending. The former may be highlighted a little more favourably than the tentative comments from October but lending data remains unimpressive. Staff forecasts are not available until December, so the ECB meeting has, of the three, the lowest risk of casuing a significant market reaction.

Once again it is sounding like a broken record or the game ‘I can name that tune in ONE note’ as Russian banks are committing to funding costs so high they risk becoming unsustainable, a trend that constitutes a greater threat to the country’s financial industry than stalled credit flows, the central bank warned on Monday
Banks are offering returns higher than 15% to attract funding both in the form of wholesale financing and deposits as they try to offset inflation of 10.7% in September, albeit it was the lowest level in 2 years, and offer a premium above the central bank’s key refinancing rate of 9.5%, Bank Rossii First Deputy Chairman Gennady Melikyan said at a conference in Moscow today. “It would be very difficult to get the same returns after you raised money at rates of 18 to 20%,” Melikyan said. “This will be a problem for banks.”
As the market has witnessed for the past 6 months, lenders are struggling to remain profitable as they reduce loans to corporations and households on growing, and justifiable, concerns they will be unable to service their debt, cutting banks’ main income source to cover interest costs. The central bank has lowered its key rates eight times since April as policy makers try to avert an entrenched financial crisis that threatens to undermine the world’s biggest energy exporter’s fledgling recovery. Banks seeking to attract funding at these high rates are “potentially bankrupt,” Melikyan said. Some of the country’s top 30 banks offer returns ‘in excess’ of 17%, he added. Excluding short-term deposits, the average rate on deposits was 12.6% in September, central bank data show.
The central bank last week said it is reducing interest rates in part to stem RUB gains and prevent the accumulation of risk on the stock and currency markets as investor appetite for high yields starts to return. The RUB remains very attractive as a carry trade, but earning enough to cover the high financing costs is proving difficult for the banks, as the country’s biggest lenders post losses, or big declines in earnings. State-controlled OAO Sberbank’s 9-month net income plunged 91% from a year earlier to RUB 9.1 billion, the bank said on October 22nd. VTB Bank, also majority-owned by the government, posted a net loss of RUB 12.4 billion in Q2, compared with a profit a year earlier, the bank said on October 21st.
Lenders’ corporate loan books fell 0.7% from August after staying unchanged the previous month, the central bank said in a report on its Web site today. Consumer lending dropped 1.1% for an eighth consecutive monthly decline, and the financial industry’s total assets fell 0.5%, while total equity capital rose 6.5%. Last week Bank Rossii once again lowered its key interest rates to record lows, reducing the refinancing rate 50 bps to 9.5%, and said the move was aimed at “additionally stimulating lending activity of the banking sector.”
The ratio of non-performing consumer loans climbed to 6.4% from 6.2%, according to data posted on the central bank’s Web site. Household and business delinquent lending as a share of the total was unchanged in the month at 5.8%. Banks set aside RUB 1.82 trillion to cover overdue debt, an increase of 3.2%, compared with a month earlier. Overdue corporate loans fell to 5.6% of total lending in September from 5.7% a month earlier. The central bank estimates that bank provisions exceed bad debt by 70%, according to Melikyan. Provisions aren’t big enough to cover total bad debt, he added. Russian banks only book missed payments as non-performing loans, compared with international accounting standards, where the total loan is written off once debtors fail to make payments after 90 days.

So, there we have it. The Good Ol' US of A is out of recession. The first estimate of Q3 GDP saw a better than anticipated jump of 3.5% quarter on quarter. One of the main factors in the good outturn was the huge jump in Personal durable goods comsumption. This jumped from -5.6% in the second quarter to a mighty +22.3% in the third. One of the components of this sector is the purchase of new vehicles. This obviously raises a few points. Firstly, the Cash for Clunkers program 'worked' in that the boost to the auto sector of 660,000 new cars has had a positive effect on GDP growth. Secondly however, one wonders what ramifications this will have on future GDP numbers given it has brought such a large chunk of consumption forward and also lumbered the US consumer with more debt.

With the Obama administration running such a huge deficit the financing of future versions of the C4C program will become increasingly problematic. The continued retrenchment of the consumer sector, the continued failure of small US banks and the continuing restrictions in availability to small businesses will all weigh on GDP numbers heading into 2010. At a time when the Treasury buyback program has run out of funds the gradual creep higher in bond yields - US 10 years are up from 3.10 to 3.45 this month - may become a real concern over the next few months.

As noted in technical reports this week, stocks continue to hold in, and whilst the Dow holds 9599, the reent bounce in the USD remains corrective.

Worth bearing in mind that the QE arsenal of both the FED and the Bank of England has run dry. Today will see all $300bn of funds in the US Treasury buyback program exhausted just as yesterday saw the Bank of England hit it's cap of £175bn for its own Asset Purchase Facility. Much of the gyrations in Sterling in the currency market has been dominated by whether the BOE will need to again expand the APF program. Certain rhetoric from MPC members have been suggestive that they will not look for an expansion, whilst the initial Q3 GDP numbers showed all remains not well with UK Plc. UK 10yr yields spiked 42 basis points in the 2 weeks that followed the suggestion that the program has run its course but have since drifted back from 3.78 to 3.60. With currency direction still tied closely to respective intrest rates, the key focus for sterling traders is now on next Friday's MPC meeting. Around two thirds of analysts polled by the Times expect QE to be continued by between £25bn and £50bn. If the latter were to occur, I would be very concerned as to the pound's ability to hold onto the gains it has eeked out on a broad basis since early October.

The Bank of Canada left it's target overnight rate on hold at a record 0.25% today with a small downgrade for growth borne out of the persistent strength for the Canadian Dollar against it's more southerly neighbour the greenback.

They shifted out expectations of inflation returning to their 2% target to the 3rd quarter of 2011 and pulled 2009 growth expectations down a tenth of a percentage point to -2.4%. Though an economic recovery is 'underway' (they continue to expect at +3% GDP result for 2010) the recent strength of the Canadian dollar is expected to largely offset any positive signs that have been seen over recent months.

They remain committed to keeping rates on hold until June 2010 - the next meeting is in early December - but it is intersting to see the divergence between Canada and the other members of the Dollar Bloc in removing rates to more normalised levels.

Though all three have been helped by the commodity rebound, it is clear that Canada, who are much more reliant on the US than are Australia or New Zealand, is counting the cost of the post-Lehman Brothers shift in trade away from an impotent US consumer to a liquidity fuelled Chinese economy. Whilst Australia seems increasingly worried about letting the inflationary genie out of the bottle, Canada remains stuck in the mire. I continue to have doubts over whether the current Chinese support for the antipodean economies continues, but for the timebeing, being aligned with the new superpower seems better for one's health than being paired by the old guard.

Market News Services are reporting that a Chinese official has raised concerns about the current path of the US Dollar. With the dollar and Yuan been effectively fixed since the middle of last year around the 6.83 mark, the unnamed official with links to SAFE suggested the Chinese wanted a stronger dollar from here to help curtail heavy losses on existing USD demoniated reserve holdings and to nip in the bud potential inflation of even stagflation going forward.

The demise of the dollar and, with it, the cheapening of Chinese exports relative to many of it's trading partners risks putting us back exactly whence we came with widening and potentially unsustainable trade balances.