Archive for the ‘markets’ Category

The Convertibility of the Renminbi

Sunday, August 17th, 2014

The Renminbi (RMB), is the original name of currency introduced by the Communist People’s Republic of China during it’s creation in 1949. As of late a popular topic among economist has been, “when will the Renminbi become fully convertible and freely tradable”, however, academics, politicians in China, and foreign exchange markets have all failed to give a clearly defined answer to these questions.

At best guess the RMB (also known as the Yuan) will become fully convertible within the next few years. During this time frame the RMB is also expected to become a base currency for commodities. While all signs point to the RMB completing this trend in the next few years, the excitement over this news only exist within certain caveats.

One of the powerhouse global banks (HSBC), in 2013, issued a report indicating that the RBM would enter the top three list of global currency for trade settlement by 2015, and become fully convertible in five years.

If the RMB meets the expectations of HSBC it could equal the status of the US dollar and the euro as one of the world’s most traded currencies. Analysts point to the fact of the RMB in 2012, accounting for 12% of China’s total trade, (a 9% jump from the previous year), as an example of the growth of the RMB.

One reason given as to why the RMB has not yet been made fully convertible in the world market, is the fact that this is not the first time that China has attempted to do this with the RMB. In the late 80’s and early 90’s China tried to make the currency fully convertible. It was due to an Asian financial crisis that the plans to make the currency fully convertible had to be delayed in 1996. Some speculate that fears from the last attempt to make the currency fully convertible has caused Chinese policy makers to move cautiously now.

Chinese officials fear that a laxation of government currency control will create an economic environment that encourages cash to leave China when the 44% of Chinese individuals holding over RMB10m, (that have plans to emigrate), do so. Another concern is that hot money flows will be created where money is invested only to reap the short-term benefits of favorable interest rates between countries. If this happens it would be similar to the “balloon” housing market that was the cause of America’s economic crises.

While being impressed with the RMB’s rapid relevance internationally over the last 2-3 years, HSBC is quick to admit that China is quite a ways off from fully liberalizing the currency and having it compete as a world currency.

Although cautious, China may be feeling pressure by the RBM’s faster than expected internationalization. To date the RMB is transacted in excess of 10,000 financial institutions (in 2011, that number was 900), according to HSBC. During this same time the RMB monthly average trade volume skyrocketed 40% in 2012, to RMB 245 billion, up from RMB 173 billion in 2011.

The situation is further complicated by Chinese national, who are attempting to illegally use underground banks to take money out of the country, and Chinese official fear liberalization of the currency would further encourage capital to leave the country.

Nonetheless Chinese official are seeking to further expand offshore markets that utilize the RMB before it is fully convertible. Chinese officials are creating a Pilot Free Trade Zone (PFTZ) in Shanghai where the RMB is fully convertible on a small scale with Tianjin and Guangdong actively seeking to establish special trade zones as well.

So with everything that is said there is no sure schedule as to when the RMB will be fully convertible, and traded on the world market. At close guess between 2015 and 2018 the RMB to make a move towards world currency.

More money for Greece

Friday, March 16th, 2012


When will the Greek crisis be over? Who knows? The IMF just agreed to lend 28 billion euros to Greece, approving yesterday a loan of 28 billion euros to Greece. This is a longer credit refundable to longer term, better adapted to the Greek situation.

The Board of Directors of the International Monetary Fund (IMF) agreed yesterday to a proposal from the Executive Director, Christine Lagarde, to consent to a loan of about 28 billion euros, 1.65 billion paid immediately. Of these 28 billion euros, 10 billion are from a first aid program to Athens in May 2010 which was not used and the other 18 billion are new money.

As a result, the IMF contribution to the second program for Greece (EUR 130 billion) is significantly reduced compared to the foreground of 110 billion euros. At the time, the Washington institution’s committed to provide about one-third of the agreed amount. Approximately 20 billion euros that the IMF has already lent must be repaid by Athens between 2013 and 2015. The decline in the Fund’s contribution under the new aid plan is explained perhaps by the reluctance of emerging countries to further support the rich countries of the Old Continent.

Emerging countries, particularly China, have seen a larger role and an increased weight in the decisions of the IMF since the appointment of Christine Lagarde. The new capital will be filled under the Extended Fund Facility (EFF) which agrees to funding plans for a maximum period of four years. Greece will therefore receive funding from the IMF until 2015, while loans from Europe are planned until 2014.

The repayment period of the IMF loans has also been extended to suit the Greek case, and is between four and a half and ten years. “We realized that this country needed time to complete its reforms,” recently ??confided a senior IMF official. The European Commission, meanwhile, announced yesterday in Brussels that it would soon present a growth strategy for Greece.

Horst Reichenbach, who heads the task force appointed by the Commission last July, presented in Athens the significant progress being made to help Greece modernize its public administration. Nine areas have been defined with the use of experts from all Member States. The changes are fast. Horst Reichenbach welcomed the harvest of 946 million euros in back taxes, double the expected amount and a 15% drop in the number of outstanding tax disputes in courts over the last four months.

Let’s hope that the worse is now behind us and that such a small stops to have such an extraordinarily large negative effect of global financial markets.

How to Rate the Top Spread Betting Firms

Sunday, June 19th, 2011

If you’re at all interested in financial trading (also known as spread betting or spread trading), then there are a number of options you have in terms of finding and opening an account trading on financial markets.

In terms of its position in the investment community, spread betting is still technically classified as gambling because the odds (or the “spread”) is set in the house ‘s favour. However, spread betting is extremely similar to other forms of financial derivative trading such as CFDs and Forex which use spreads to charge commission. Thus, the “gambling” definition of spread betting really is a loose one and people should actively be referring to it as “spread trading” rather than betting which is giving it less respect than it deserves among professional traders in the UK.

Factors for Choosing a Spread Betting Site Tailored to You

With such a large choice of spread betting sites – some with a UK focus and others with a more global touch, you can take certain liberties when choosing a broker which meets you needs.

The most important factor of all is the reputation and history of the site of course. Don’t bother signing up to a broker that isn’t regulated by the FSA (Financial Services Authority). All of the top firms such as Capital Spreads, Tradefair, ProSpreads and CMC Markets will of course be fully regulated. They may even be arms of banks or financial organisations that are also listed on the LSE or AIM (such as the London Capital Group which owns Tradefair Spreads and Capital Spreads).

Other companies, such as IG Index and City Index, have been around for more than 35 years and have offered excellent customer support and garnered recognition in the industry. CityIndex.co.uk for example has constantly added new technology and features to its platform, and even won the “Best Mobile Trading Platform” award at MoneyAM in 2010.

Spreads, Margin Requirements and Range of Markets

The second most important thing will probably be the size of the spreads and the range/competitiveness of markets offered. An experienced trader should want a large selection of financial instrument to trade on. In that case I would recommend CityIndex.co.uk which offers more than 7,000 markets to traders compared to Tradefair which only offers around 2,000.

The size of the spread differs between different markets and platforms, however all that’s important to you is that the tighter the spread the more profitable it is. For example, if you’re trading a commodity such as Gold bullion, then a 4 point spread at IG Index will be much more profitable and give you higher return on your income than a 5 point spread at Capital Spreads.

WorldSpreads actually offers a special “Zero Spreads” promotion to active traders with a Platinum Account. This means that if you deposit more than £5,000 (minimum amount required to open a Platinum Account) then you can open zero point spreads on markets such as the UK 100, DAX, USD/EUR, GPB/JPY and a few others.

Low Margin Requirements (IMR) will also benefit both experience and beginner traders by allowing you to open positions with lower deposits, e.g. having only 10% of your position in your balance.

Education Tools and Technical Charts for Trading and Beginners

The final most important element of choosing a spread betting site is its range of online tools, technical charts and guides for new traders. Each spread betting platform has its own range of online seminars, news alerts, training guides and risk management tools. Your job is to compare what exactly you’ll require in your trading platform and spread betting future and make a choice based on this.

Is Quantitative Easing working?

Sunday, August 30th, 2009

The US Government has embarked in unfamiliar territory in order to end the financial crisis: quantitative easing.

“Easing” just stands for making life easy for the banks, and indirectly for everyone, from an economic standpoint. “Quantitative” stands for quantity.

Ok, let us stop the bullshit for a minute. I find that one of the miracles of this new millennium is that a new widespread trend has emerged. The skill to rename old things with new names so that they seem to be completely novel and modern technologies, whereas there are simply rehashed old techniques. So to put it in plain English, quantitative easing simply means to print money.

This is certainly not new, and monarchs and emperors have used it since ancient time, any time they lacked the means to conduct the policies they wished to follow. Remember that Napoleon sold Louisiana (which was about one third of the United States by then) for a meager twenty million. So at least he had something to sell to finance his wars.

Earlier French Kings who did not have this luxury would routinely burn their Jewish bankers in the public square in order to cancel the royal debts and to get free assets in the process. Even earlier, since Antiquity the Royal Mint was the ideal medium to secretly change the composition of coins, hence creating many new coins from fewer old ones. When note bills became in use, it was much easier (literally and figuratively), as Government just had to go to the printing machine to get money.

Technically it is done differently nowadays thanks to the use of the digital money market and of sophisticated Central Bank operations. It is all a matter of orchestrating complicated monetary transactions through computers, networks and data center. Money is simply equivalent to how some bits are organized on some magnetic disks at some obscure data center.

Joke aside, financial markets have recovered nicely all over the World, not in small part because of the quantitative easing engineered from the United States. So far it seems to work.

Even though many non-believers doubt that this policy can work in the long term, it is clear that the recent economic maelstrom has lost is intensity and that a gentle global recovery is under way.

Following the Asian crisis in the late 1990s, a similar policy of quantitative easing was conducted by the Japanese Central Bank until 2006, adopting a zero interest rate policy, expanding banks’ balance sheets and purchasing long-term bonds. But this stimulus failed to materialize into any visible economic benefit, as banks continued to refuse to lend money even though that where overwhelmed with it.

This is what Keynes calls the liquidity trap, i.e. when interest rates are near zero, no more impetus can be gained from such monetary policy because interest rate cannot go below zero (usually). Fortunately the American and Japanese economies and cultures are radically different, so there is no need to believe that what occurred in the Land of the Rising Sun will repeat in America.

In particular their size and global economic importance differ, and one is a major exporting country whereas the other a major importing country. Also the US Government has adopted a wider policy than their Japanese counterparts.

It seems to work for now, but it is too early to tell the long-term consequence of financial easing in the USA. As his leading advocate, it is certainly one of the main arguments on how president Obama will be judged in the history books.

Regulating financial markets based on human nature

Tuesday, July 14th, 2009

Our new President Barack Obama is a man of action and reform.

After the blood bath taken by investors in nearly all market segments in recent history, one of Barack Obama’s efforts focusing on financial markets centers on his proposed “Consumer Financial Protection Agency”.

Interestingly the idea of this project is to apply the findings of behavioral finance to ensure transparency, simplicity and fairness to all market participants. The recent financial meltdown has demonstrated that some of our traditional human biases have exacerbated the risks taken by many individuals, leading to disastrous live-changing experiences for the most unfortunate.

Behavioral finance is a rather new field in finance. It was started as an independent methodology within finance about twenty years ago, even though some of its findings were known much earlier. But it took a long time for this “science of human behavior applied to finance” to become accepted amid academic circles. President Obama’s endorsement is a testimony of how much this modern approach has become mainstream.

This program falls under the nominee for heading the White House’s Office of Information and Regulatory Affairs, University of Chicago Professor Cass R. Sunstein. Professor Sunstein published “Nudge” last year with co-author Professor Richard H. Thaler, one of the leading scholars of behavioral finance. This very well received book describes how human behavior sometimes leads to suboptimal decisions in investing, health care, education and most venues of modern live.

This is a well known fact to all sales people who tend, consciously or not, to exploit these patterns in order to trigger a sale, sometimes using unfair or misleading tactics. For example risks that are hard to understand seem unlikely to occur (ask any mortgage-backed securities investor). Or it is believed that people providing more details tend to be honest (ask any Madoff investor).

Another hilarious example of how we human are dominated by such behavioral biases is that the same individuals who will omit investing in a 401k plan if they must opt in, will participate in it if they must opt out in order to cancel it. Even though the end result is the same, people behave differently if they need to act or not to act to achieve the identical final result.

It remains to be seen how effective this new regulatory approach will be. Wall Street is known to adjust to new rules faster than they get printed. But at least there is a general awareness of the issue of small biases leading to big losses in the Government, and maybe at some point in the public.

Status quo on rates in the euro zone

Thursday, June 4th, 2009

The European Central Bank (ECB) has not changed its interest rates today, resisting pressure for a monetary gesture to stimulate a European economy that shows some early signs of recovering from the recession.

The ECB also said that it will make bond repurchase directly from the market from July to June 2010. The Bank of England is also observing a similar monetary status quo, keeping its intervention rate to 0.5%. Denmark announced a symbolic rate cut of 10 basis points to 1.55%.

The Bank of England said that it is continuing its program of acquisition of £125 billion ($143 billion) in Bonds to stem the recession.  ECB’s Chairman Jean-Claude Trichet announced Thursday the operating procedures of the operation for the European Union. The purchases, totaling €60 billion euros will be distributed throughout the euro area and it will be direct repurchases.

Considering that the risks to the economic outlook are broadly balanced, Trichet also believe that after a very weak first quarter, the economic contraction for the remainder of the year will be probably at less severe rates.

The Federal Reserve which, as the BoE and the Bank of Japan has cut rates below the threshold of 1% corresponding to the refinancing rate of the ECB is already examining the possibility of increasing rates to curb the enormous impact of its massive easing of the recent months.

The average interest rate on the planet in general has never been so low, and Central Banks will soon have to face the difficult issue of how to absorb the massive liquidity that has flown into the markets during the past year.

Today’s signs of slowing of the recession included unemployment numbers in the U.S. that fell for the third week in a row and retail sales in the euro zone that rose in April for the first time in five months, which bodes well for consumer spending despite the recession, even if this recovery is slow.

These good news led to today’s rally on Wall Street ( the Dow Jones was up 0.86%). The bull market continues, with its corollary of greenback weakness (EUR/USD=141.82).

Other good macroeconomic news were that housing  prices rose in May in Great Britain at their most sustained pace in six and a half years.

Long bond yields rose as the markets must absorb large offers of sovereign debt related to the various economic plans put in place around the world. This could later lead to fear that the rise in long rates may stifle the beginnings of the recovery.