What a Year it was and Will be

‘Twas the hike before Christmas and all over the shop Short end traders were waiting for prices to drop. Bloomberg and Reuters, the FT all there To capture the moment – if Yellen would dare. (ZeroHedge)

Aside from Martin Shkreli and Star Wars, our watercooler chat was centered on the Fed’s decision to raise
key interest rates for the first time since 2006 to a range of ¼ to ½%, up from the previous 0 to ¼%. The decision to increase rates came as no surprise, as Fed Chair Janet Yellen had alluded to the desire to raise rates for some time in order align rates with that of a healthy economy, and more importantly, give the Fed some room to maneuver in case of another recession. It is suggested that at least 3% is needed in order to give the Fed the ammunition to combat another recession, but the Fed has already told us that they expect to raise rates in a very passive and predictable way so it shouldn’t generate a huge amount of volatility or uncertainty among financial markets.

The Greenback appreciated against the Canadian Loonie, British Pound, Japanese Yen, Australian Dollar and Euro Another conversation gaining more attention is that of the dropping price of crude. Due to this fact, the second biggest loser after the Pound last week was the Loonie. Relying heavily on the price of oil to maintain its value, the Canadian Dollar declined as its largest export devalued by over 7% last week. Western Canada Select was already well below $30/barrel.

The reasons for the change in the cost of crude are twofold – weak demand in many countries due to insipid economic growth, and second, surging U.S. production. United States domestic production has nearly doubled over the last six years, pushing out oil imports that need to find another home. Saudi, Nigerian and Algerian oil that once was sold in the U.S. is suddenly competing for Asian markets, and producers are forced to drop prices. Canadian and Iraqi oil production and exports are rising year after year and even the Russians, with all their economic problems, manage to keep pumping.

Goldman Sachs sees further weakness for oil due to the worsening of already weak fundamentals after oil cartel, OPEC, held back from cutting production at its recent meeting. The group of 13 oil-producing countries has kept its production ceiling around 30 million barrels a day for years, with kingpin Saudi Arabia standing firm against an output cut in order to maintain market share and drive higher cost producers out.

In addition to this, in a move considered unthinkable a few months ago, Congress agreed on Friday to lift the US’s 40-year ban on oil exports. This is an historic action that reflects political and economic shifts driven by the boom in U.S. oil drilling. U.S. oil producers will now be able to sell crude to the already saturated international market further driving down the cost.

There was positive news out of New Zealand, as the GDP Price Index posted a gain of 1.9%, a second straight gain for the key indicator, breaking a nasty streak of three consecutive declines. Positive GDP and Business Confidence also supported the currency’s 0.42% gain last week, but that’s hardly what anyone is talking about today.

The U.K. Pound was the big bear of the week having been previously immune to USD strength. Deutsche Bank has now revised their forecasts for 2016-17 suggesting we’ll see levels as low as 1.35-1.40 for the GBP/USD pair. In response to the FED rate hike the Bank of England is expected to raise rates in the New Year and all eyes will be on their next meeting on Jan 14th to see if they increase rates, but also if their statement is as dovish as the Feds.

Lastly, even with its most recent gains, Deutsche Bank and ABN Amro remain extremely bearish on the euro both predicting parity with the US Dollar in 2016 while others, including HSBC, are a little more optimistic predicting a high of 1.20 in Q4 2016. Although French, German and Eurozone manufacturing PMIs all beat expectation last week, when it comes to the euro in 2016, all eyes are on the Fed and a potential slowdown in China as possible indicators of future euro performance.

Three Currency Predictions for 2016

In the past few weeks, we’ve focused on the ever-growing influence of the Chinese Yuan in global financial markets. This has led us into our last Dispatch of the year, and some predictions for 2016. These predictions are not ours, but are reliably put together by the well-respected, Wolfgang Koester of FiREapps.

The biggest currency story in 2016 will be the Chinese yuan becoming more closely tied to world currencies other than the U.S. dollar, and the very significant business risk that represents for multinational companies. But there will be other significant stories as well.

We are now in an environment where CFO’s can no longer manage currency and the associated business risks by a version of the old “80/20 rule” (in this context, having a good [80%] understanding of the currencies impacting a financial statement). CFO’s are awakening to the fact that the less-understood 20% may present very material risks.

Given that environment, corporate boards, CFO’s, and CEO’s will be seeking greater insight into how currency could impact business operations. In 2016, more than ever, corporate executives will need to know “what it means for [this element of our business] if [this currency rises/falls].”

Here are three currency predictions for 2016:

1. Volatility will no longer be a “new normal,” but rather just “normal.” Currency-driven business risks are a fact of life for multinational companies. In this year’s third quarter, for the fourth quarter in a row, negative currency impacts to corporate earnings were magnitudes above previous years’ averages, according to an analysis by FiREapps. Contrast this sustained volatility with 2012’s euro-driven currency crisis, which lasted two quarters and caused more than $40 billion of negative impacts to U.S. corporate earnings, according to research by FiREapps. It’s a different world now, and all indications point to this trend continuing into 2016.

In 2016 hot spots might include the eurozone, Russia, Japan, and Latin America.

The eurozone: Since mid-2014, U.S. multinationals have cited the euro as an impactful currency as often as they’ve cited all other currencies combined. The euro hit historic lows in 2015 as concerns about the eurozone economies persisted, new geopolitical risks arose, and the monetary policies of the eurozone and the United States continued to diverge (the European Central Bank continued its pursuit of quantitative easing, and the U.S. Federal Reserve tightened policy with an interest rate hike). Expect uncertainty, volatility, and a weaker euro to continue.

Russia: The ruble was incredibly volatile in 2015, rising 42% from a late-January low to a late-May high, then falling 25% by late August. Early in the year, we saw multinationals like General Motors go so far as to temporarily suspend operations in Russia, citing accelerated volatility. In 2016, Russia will continue to be a big question mark.

Japan: Though not nearly as much as the ruble, the yen exchange rate was also marked by volatility in 2015. The yen isn’t in position to strengthen next year; the Japanese economy fell back into recession, and most analysts predict the Bank of Japan will respond as it has been responding: with more monetary stimulus that subsequently drives down the value of the yen. A weak yen has significantly weakened corporate revenue, and multinationals should prepare for more of that in 2016.

Relative to those currencies and others, the U.S. dollar is likely to continue to strengthen in 2016. Given the economic and geopolitical turmoil elsewhere in the world, the U.S. dollar will continue to be a safe haven and sustain an environment in which companies have to operate under a mandate to innovate and focus on quality, rather than produce the cheapest export/product possible. For U.S. multinationals, this means more business risk.

2. China will further loosen its grip on the yuan. Many multinationals are highly exposed to China’s yuan (the basic unit of the renminbi, or RMB, the country’s official currency, in much the same way that the British pound is the basic unit of pound sterling). But many haven’t been actively managing the currency and its associated risks. That was because of its close peg to the U.S. dollar, which meant there was little exchange-rate volatility for companies to worry about.

That changed on Aug. 11 of this year, when China surprised markets by allowing the yuan to fall by nearly 2% against the dollar. The decline continued in the following days, hitting a four-year low against the dollar. This led to volatility for many Asia-Pacific currencies as countries took action aimed at maintaining parity against the yuan. This tracks with what we’ve seen as the euro has weakened against the dollar. Volatility in a major currency creates a ripple effect around the world.

China is poised to further widen the yuan trading band in 2016, in large part because the RMB will become the fifth currency in the International Monetary Fund’s “basket of reserve currencies,” known as Special Drawing Rights (SDR) currencies. As China moves to a freely floating trading band (an expectation of the SDR currencies), the yuan will likely experience unprecedented volatility. In fact, the volatility we’ve seen in 2015 — and the associated business risk to corporates — will pale in comparison. In 2016, for the first time, the yuan will be a risk that many multinationals will actively manage. While Morgan Stanley is calling 2016 “Yen Year,” We think “Yuan Year” will turn out to be a much more apt characterization.

3. Boards, CFO’s, and CEO’s will look to FP&A for insights Corporate financial planning and analysis (FP&A) teams will need to be prepared to answer tougher questions about how currency volatility will impact business operations. The questions will require granular, often time-sensitive currency data. Such questions may include:

 What does it mean for the supply chain if the Brazilian real has another big first-quarter fall?
 What does it mean for expenses if China widens the yuan trading band by another 2%?
 What does the hike in U.S. interest rates mean for net income?
 What does it mean for the cost of goods sold in Japan if Japan resumes active devaluation of the yen?
 What does it mean for revenue if the euro falls to parity with USD?

Many CFO’s have been asking these questions for the last six months. Until this point, FP&A had not had to be particularly involved with currencies, nor had they been asked to take a specific look at them, at least not to the level that they have to now. These kinds of questions are getting vastly more complex, and they surely will be harder to answer in 2016.

U.S. Interest rate hike finally has "Lift-Off"

Yesterday, The U.S. Federal Reserve raised the fed funds rate by 0.25% to 0.25% – 0.50%. The zero interest rate policy had been in effect for 7 years, ever since the Fed slashed its key rate by 0.75% back on Dec. 16, 2008. The immediate reaction to the announcement saw a quick burst of USD strength taking USDCAD from 1.3780 up to 1.3847 – the highest level since 2004. The move was short-lived and the USD saw some broad-based weakness after the press conference taking USDCAD down to 1.3740 before rebounding towards 1.3780. Although Federal Reserve Chair Janet Yellen is confident in the U.S. economic outlook, she emphasized that subsequent rate hikes would be gradual and data dependent. Looking at the Fed “Dot Plot”  there are some changes from the previous meeting:

2016 = 1.375% unchanged

2017 = 2.375% down from 2.625%

2018 = 3.25% down from 3.375%

Longer run = 3.5% unchanged

The USD has been rising steadily over the past 2 years in anticipation of interest rate “lift-off”. The divergence in central bank policies is expected to be a shorter-term trend as other central banks have recently switched from a dovish to a neutral stance. It will only be a matter of time before global interest rates follow the Fed’s lead. For this reason alone, yesterday’s rate hike and subsequent rate hikes may already  be priced into the market. Significant further gains in the USD may be limited. A recent foreign exchange poll from the major Canadian banks suggest that the USDCAD rate will peak in Q1 2016 and then trend lower over the balance of the year.

A quick snapshot of where we’ve been and where we are today:

Dec. 2005

Bank of Canada overnight target rate was 3.25%

U.S. Fed funds rate was 4.25%

WTI oil was trading at $59/ barrel

USDCAD held a 1.1425 – 1.1750 range

Dec. 2015

Bank of Canada overnight target rate is 0.50%

U.S. Fed funds rate is 0.25% - 0.50%

WTI oil trading at $35/ barrel

USDCAD trading in a 1.3280 – 1.3971 range

Steve Brown

Senior Corporate FX Trader

stevebrown@vbce.ca

Loonie Down! The Canadian dollar is down more than 15% in 2015

The Japanese yen was the top performing currency of the week, spurred on by safe-haven moves by the unwinding of carry trades ahead of next week’s FOMC decision and due to falling equity markets. The big loser last week was the CAD as it nearly shed 3%. It was the second biggest down week for the CAD this year – the other occurring after the surprise January rate cut by the Bank of Canada. The big fall in crude was last week’s culprit. The Canadian dollar is down more than 15% in 2015, and next year doesn’t look promising considering that Bank of Canada Governor Stephen Poloz has suggested that further drops in oil prices may encourage more monetary easing. Furthermore, last Tuesday the BOC unveiled the bank’s new “Framework for Conducting Monetary Policy at Low Interest Rates”, which included tools such as quantitative easing and negative interest rates.

US Federal Reserve Chair Janet Yellen

With interest rate futures pricing in an 80% chance that the Fed will raise interest rates at December 16th FOMC meeting and 96% of the economist polled by Bloomberg expecting a rate rise, let us assume for now that it happens. At this point, Fed inaction could trigger a market meltdown, revealing fears over the health of the U.S.and global economy and, after having talked up the
prospects of tighter monetary policy for months, severely damaging the Fed’s hard-won credibility. Judging by our conversations with clients this week, they also expect the Fed to raise rates and for the USD to rally on this news. However, the price action in the currency markets last week suggest that the market has already priced in this event and has now shifted its focus to what follows after the hike.

The current economic backdrop in the U.S. doesn’t exactly scream “rate hike.” Equity markets are facing an earnings recession due to price pressure on crude and USD appreciation. The Nov ISM manufacturing index fell below 50 to the lowest since 2009, dragged down by high dollar and weak global demand. The Nov ISM non-manufacturing survey fell to 55.9, its lowest level since May. Inflation reading and consumer spending are running at very lackluster levels. Even the most recent supposedly good jobs report, that showed 211,000 jobs created in November, included a huge jump in the number of people (319,000) taking part-time jobs because they couldn't find full-time work. You might be asking yourself, ‘Why is the Fed raising the rate now?’, which is a valid question. If the current interest rate was at, say 4%, would the Fed by hiking rates then? Probably not, but the Fed wants to move off the zero interest rates in order to give themselves some room to move in cutting rates in the future, if the economy or markets need it.

The good news is that because of the current economic back-drop, the pace of interest rate hikes will probably be the slowest in history. The Fed will go out of its way to paint this interest rate hike as the most dovish hike of our time.

China Begins G-20 Leadership with Ideas to Reduce US Dollar’s Role

This week, we continue our coverage of China and its yuan as it enters a critical year of influence and inclusion in the global markets. The following is an excerpt from an excellent essay written by Enda Curran of Bloomberg Business.

As China takes the reins of the Group of 20 for the coming year, the first indications are emerging of its agenda. Among the priorities: making the global system more resilient to shocks and, perhaps, less reliant on the U.S. dollar. China is setting up a working group led by South Korea and France to develop proposals, including on ways to strengthen the role of the International Monetary Fund’s reserve-currency unit, which is set to incorporate China’s yuan as a component next year.

China also wants a discussion around whether some commodities should be priced in the IMF’s reserve currency, known as Special Drawing Right or SDR, according to a European official involved in the G-20 talks. Notably absent from a senior role so far is the U.S., owner of what’s still the world’s dominant currency. China’s leadership has for years sought to strengthen the international use of the yuan, and encourage debate about lessening reliance on the dollar.

A surge in demand for dollars as a haven during the 2007-2009 global financial crisis first spurred China’s calls. As chair of the G-20 in 2010, South Korea attempted to lead an effort to widen the international financial safety net, urging the adoption of permanent currency swap lines. The U.S. nixed the idea, withthen-Federal Reserve Chairman Ben S. Bernanke saying officials shouldn’t provide a "permanent service" to financial markets.

Half a decade later, Chinese President Xi Jinping has the chance to put his imprint on a forum first set up during the Asian financial crisis of the late 1990s as a grouping of the largest emerging and developed markets to address systemic risks. "We have seen China grasping every multilateral occasion to enhance its image and leadership role, be it regionally or globally," said Yun Sun, a senior associate with the East Asia Program at the Stimson Center in Washington. "There is little reason for China not to fully exploit the G-20 chairmanship."

China has an ever bigger stake in global financial stability as it endeavors to reduce its own limits on cross-border capital flows, part of a broader plan to give markets a more prominent role in the Communist-run country. Among the challenges for the coming year will be weathering the Fed’s shift to monetary tightening, potentially sending emerging market currencies lower as money heads into higher-yielding dollars.

The G-20 under China’s presidency will also need to consider whether to let expire $250 billion worth of its reserve unit issued in 2009 to boost liquidity during the global financial crisis. China’s G-20 chairmanship began at the start of the month, a day after the IMF said the yuan met the requirements for joining the dollar, euro, yen and pound as one of the currencies backing the SDR, a sort of overdraft account for IMF members. China central bank Governor Zhou Xiaochuan in 2009 advocated expanding the use of the SDR unit in calling for a "super-sovereign reserve currency."
Nothing came of Zhou’s call six years ago, and changing the global financial architecture now remains difficult, analysts say. "We will need another global crisis, and one whose roots can be clearly identified in the shortcomings of the current non-system, for this to happen," said William White, an adviser to the Organization for Economic Cooperation and Development. The G-20’s agenda can also become dominated by pressing issues of the moment. "I suspect that geopolitical issues will trump economic ones," White said.

Whatever else, China’s leadership of the group offers Xi a vehicle to promote his country’s rising global role. The last time China hosted the G-20, in 2005, it was the world’s fifth-largest economy. It’s now No. 2, having surpassed the U.K., Germany and Japan. Its Asian rival will be chairing the Group of Seven developed nations next year. G-20 members are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the U.S., the U.K. and the EU.

"China can and should look to be ambitious, and aim for actions that demonstrate global leadership," said Tristram Sainsbury, a research fellow at the G-20 Studies Center at the Lowy Institute for International Policy in Sydney. "But China needs to be realistic of the limitations of the G-20 forum -- it is consensus based, and has several design flaws, such as a rotating presidency and a lack of focus stemming from an inability to drop items off the agenda."

Don't say we didn't warn you...

Over Promised and Under -Delivered

Sometimes our crystal ball is a little less murky. In last week's blog post, we essentially laid it all out for you. We stated: "One has to wonder if this week's ECB meeting will be the catalyst for the change in trend. With the market currently priced for perfection, i.e. an ECB move, there is scope for disappointment. "That is exactly what transpired - in the lead up to the ECB policy meeting ECB President, Mario Draghi, went out of his way to express his sense of urgency to do something big. Trial balloons were even launched about a two-tier deposit rate scheme, but it was not to be. Draghi simply overpromised and under-delivered, causing a massive short squeeze in the Euro. Was this his intention? Probably not. According to a Reuters article, Draghi's public stance of urgency ahead of the meeting was his way of trying to pressure the more conservative members of Governing Council to take bigger action. In the end, he was rebuffed. Hence, you see the under-delivery.

 In last weeks blog we stated: "our Spidey senses tingle when everything seems to be a foregone conclusion... with the majority of the market leaning the same way, it is entirely possible for a correction to ensue resulting from either disappointing ECB action or Fed hike uncertainty due to Friday's U.S. jobs report" And what a correction it induced! The Euro squeezed higher by 4 big figures moving from around the 1.0550 level ahead of the ECB announcement to over the 1.0950 level by the end of the trading day. That was the biggest gain in the Euro in more than six years.

Please don't mistake the market's reaction to the ECB move - the move was a reaction due to market positioning  not to the ECB move itself. The bottom line is that the ECB did make a move to ease monetary policy once more. Specifically, they made four moves. First, they cut the deposit rate by 10 basis points from -.0.20 to -0.30. Second, they extended by six months the end date of the current QE program from September 2016 to March 2017. Next, they broadened the range of securities that can be bought to include regional bonds. Finally, they stated that they intended to reinvest maturing bonds similar to the Bank of England and the Fed. Needless to say, policy divergence between the ECB and the rest of the central banks is alive and well.

The market was so convinced of an ECB move that the Swiss franc ended up the big loser in pre-ECB trading. CHF was sold aggressively in anticipation of matching move by the Swiss National Bank (SNB), whose next meeting is scheduled for December 10. Since the ECB didn't go full throttle, the pressure is off the SNB at this week's policy meeting. This has allowed the CHF to be last week's best performing currency with a gain of 3.37%. Meanwhile, the yen squeaked by the USD to finish in last place last week as the ECB disappointment led to a correction as market players shed the safety of the USD and yen. With the holiday season upon us and a light calendar for the U.S. in the week ahead, we suspect the correction will endure at least until the Fed meeting on December 16th.

IMF Adds China’s Yuan to World’s Top Currencies

In our blog post from November 16, we discussed the possibility of the IMF including the Chinese Yuan into the IMF's Special Drawing Rights (SDR) basket of currencies, which includes the USD, GBP, EUR and JOY. On November 30th, the IMF made their decision and the CNY is officially in.

Mover over euro! The CNY is mainly replacing part of the euro's role in the SDR. This is an important milestone in the integration of the Chinese economy into the global financial system. With this, China becomes more exposed to the risks associated with capital flows - particularly those flows associated with money leaving the country, but the following benefits will remain:

1. Increase in trade settlement in Chinese Yuan
2. Global Central Bank will increase their exposure in Yuan.
3. Reconfirm the importance of Chinese economy in context to world trade.
4. Strengthening the political prowess of China on world stage.

   




 




 

 

 





 


  

USD Continues to Shine

The USD continued to shine during the American Thanksgiving holiday-thinned week. The market continued to bid the USD higher driving home the notion of monetary policy divergence between the U.S. Federal Reserve and other central banks. It appears that the market is fully pricing in the Fed’s first interest rate hike in nine years on December 16th. The divergence theme is set to be reinforced this week with the European Central Bank policy meeting on Thursday, where expectations are very high that the ECB is ready to act.

And this brings us to the reason why the Swiss franc was the weakest of the major currencies last week. The market is so convinced of an ECB move that it has sold off the CHF in anticipation that the Swiss National Bank will quickly follow any ECB action with one of its own at its next scheduled meeting is December 10. We don’t know about you, but our Spidey senses tingle when everything seems to be a foregone conclusion. As it stands right now, the market appears to be fully pricing in an ECB move and a Fed hike. In marketspeak – these are expectations that have been discounted by the market. Thus, with the majority of the market leaning the same way, it is entirely possible for a correction to ensue resulting from either disappointing ECB action or Fed hike uncertainty due to Friday’s U.S. jobs report.

One has to wonder if this week’s ECB meeting will be the catalyst for the change in trend. With the market currently priced for perfection, i.e. an ECB move, there is scope for disappointment. If ECB President Mario Draghi underwhelms expectations then a short squeeze will ensue. The question then becomes is this a shakeout that provides investors with a better position, or a swan song for the USD and the monetary divergence theme?

This coming week is one of the most important weeks of the year, which could set the stage for 2016. It’s a big week data-wise with the IMF’s approval of CNY inclusion in the SDR earlier today (see our blog post from Nov. 16, 2015) ISM manufacturing report on Tuesday, ISM service report on Wednesday, ECB decision on Thursday, and the jobs report on Friday. Let’s see where the price
action takes us.

United Nations of Debt

(From World Economic Forum)

For much of the year, investors have been fixated on when the Fed will achieve “liftoff” – that is, when it will raise interest rates by 25 basis points, or 0.25%, as a first step toward normalizing monetary conditions. Markets have soared and plummeted in response to small changes in Fed statements perceived as affecting the likelihood that liftoff is imminent.
But, in seeking to gauge changes in US monetary conditions, investors have been looking in the wrong place. Since mid-August, when Chinese policymakers startled the markets by devaluing the renminbi by 2%, China’s official intervention in foreign-exchange markets has continued, in order to prevent the currency from falling further. The Chinese authorities have been selling foreign securities, mainly United States Treasury bonds, and buying up renminbi.
This is the opposite of what China did when the renminbi was strong. Back then, China bought US Treasury bonds to keep the currency from rising and eroding the competitiveness of Chinese exporters. As a result, it accumulated an astounding $4 trillion of foreign reserves.

The effects of these purchases attracted considerable attention. In 2005, US Federal Reserve Chair Alan Greenspan pointed to the phenomenon as an explanation for his famous “conundrum”: interest rates on Treasury bonds were lower than market conditions appeared to warrant. His successor, Ben Bernanke, similarly pointed to purchases of US debt by foreign central banks and governments as a reason why American interest rates were so low.

Now this process has gone into reverse. Although no one outside official Chinese circles knows the exact magnitude of China’s foreign-exchange intervention, informed guesses suggest that it has been running at roughly $100 billion a month since mid-August. Observers believe that roughly 60% of China’s liquid reserves are in US Treasury bills. Given that reserve managers prefer to avoid unbalancing their carefully composed portfolios, they probably have been selling Treasuries at a rate of roughly $60 billion a month.

The effects are analogous – but opposite – to those of quantitative easing. Recall that the Fed began its third round of quantitative easing (QE3) by purchasing $40 billion of securities a month, before boosting the volume to $85 billion. Monthly sales of $60 billion by China’s government would lie squarely in the middle. Estimates of the effects of QE3 differ. But the weight of the evidence is that QE3 had a modest but significant downward impact on Treasury yields and a positive effect on demand for riskier assets.

Menzie Chinn of the University of Wisconsin has examined the impact of foreign purchases and sales of US government securities on ten-year Treasury yields. His estimates imply that foreign sales at a rate of $60 billion per month raise yields by ten basis points. Given that China has been at it for 2.5 months, this implies that the equivalent of a 25-basis-point increase in interest rates has already been injected into the market.

Some would object that the renminbi is weak because China is experiencing capital outflows by private investors, and that some of this private money also flows into US financial markets. This is technically correct, but it is already factored into the changes in interest rates described above. Recall that capital also flowed out of the US when the Fed was engaged in QE, without vitiating the effects. That was what the earlier debate over “currency wars” – when emerging markets complained about being inundated by financial inflows from the US – was all about.

Another objection is that QE operates not just through the so-called portfolio channel – by changing the mix of securities in the market – but also through the expectations channel. It signals that the authorities are seriously committed to making the future different from the past. But if Chinese intervention is just a one-off event, and there are no expectations of it continuing, then this second channel shouldn’t be operative, and the impact will be smaller than that of QE.

The problem is that no one knows how long capital outflows from China will persist or how long the Chinese authorities will continue to intervene. From this standpoint, the Fed’s decision to wait to begin liftoff is eminently sensible. And, given that China holds (and is therefore now selling) euros as well, the European Central Bank also should bear this in mind when it decides in December whether to ramp up its own program of quantitative easing.

Word Play

The two key events last week were the release of the Federal Open Market Committee (FOMC) Minutes from the October meeting and a speech by European Central Bank (ECB) President, Mario Draghi. Trading during the first two days of the week was rather lackluster. That changed on Wednesday as the USD climbed against all the major currencies, as traders bid up the USD on hopes that the 2pm release of the FOMC Minutes would cement the view that the Fed was finally ready to pull the trigger on an interest rate hike at its December meeting. After the release the USD sold off as the Minutes failed to deliver the market’s conclusion. Art Cashin, UBS Director of Floor Operations, beautifully put the minutes into perspective. He outlined the word play in the key paragraph:

During their discussion of economic conditions and monetary policy, participants focused on a number of issues associated with the timing and pace of policy normalization. Some participants thought that the conditions for beginning the policy normalization process had already been met. Most participants anticipated that based on their assessment of the current economic situation and their outlook for economic activity, the labor market, and inflation. These conditions could well be met by the time of the next meeting. Nonetheless, they emphasized that the actual decision would depend on the implications for the medium-term economic outlook of the data received over the upcoming intermeeting period. Some others, however, judged it unlikely that the information available by the December meeting would warrant raising the target range for the federal funds rate at that meeting.

If we analyze the words in the paragraph we can draw a proper conclusion. We see that “some” (a minority not a majority) of the Fed members think the conditions are “already” strong enough to call for a rate hike. We also see the “some” members don’t feel that they will have enough data by the December meeting for a rate hike. Finally, and most importantly, we see that “most” (a majority) believe that conditions “could” improve enough by the next meeting to allow for a hike. Thus, it still looks like the Fed is data-dependent. Talk about markets hanging on every word.

The AUD was the best performer last week, putting in its largest five-day advance in six weeks as it broke out of its downward slump dating back to early October. There was no change on the domestic side of the equation for the Aussie, so the breakout was due the Fed Minutes as explained above. The AUD has declined about 11.5% YTD, so it’s only logical that on a week where the USD corrects that the AUD bounced back the most on short covering flows. The AUD extended its gains on the Friday after head of economic analysis for the Reserve Bank of Australia, Alexandra Heath, stated that the Australian economy was withstanding the slump in trade following the end of the mining boom.

The Swiss franc was the worst performer on the week, and the reason it was down was due to ECB President, Mario Draghi. In a speech in Frankfurt on Friday, Draghi said that ECB policymakers would, “do what we must to raise inflation as quickly as possible”. This was reminiscent of his other famous declaration during the Eurozone’s debt crisis in 2012 when he stated that he would do, “whatever it takes” to save the single currency. He went on to reiterate that he and the ECB Governing Council are fully ready to act on December 3rd to rapidly deploy a range of monetary policy measures designed to lift the inflation rate within the single currency region from the level of 0.1% recorded in October. So again, it was a play on words that single handily moved the euro once again. Ironically, back in 2012 his word play was the catalyst to arrest a fall in the euro while Friday’s words were used to derail the euro. Thus, with the Paris attacks and Draghi’s comments, more monetary stimulus is a certainty next month.

And this brings us to the reason why the CHF was the worst performer last week – when the ECB moves in early December it will kick off another round of central bank stimulus by those countries that would see their currencies move up from incoming flows from the Eurozone. Those countries would be Sweden, Denmark, and Switzerland. Incidentally, those three countries currently employ negative rates to deter euro flows. If you recall, Switzerland broke its three year euro peg in January just before the ECB started its QE program. Thus, the pressure will be on the Swiss National Bank to deter more euro flows due to the ECB’s next move.

With holidays in Japan and the U.S. in the week ahead, liquidity in the markets will be the less than ideal for trading activity. Having said that this, Fed policy speculation will likely continue to preoccupy traders. Preliminary PMIs in Europe, revised Q3 U.S. GDP figures, as well as improvements in measures of consumer confidence and durable goods orders are expected in the week ahead. All of this will likely offer additional fodder for December rate hike bets, amplifying the projected policy divergence between the Fed and its G10 counterparts.

Australia reports strong jobs numbers!

After finishing in second place last week the AUD was able to supplant the USD, as it failed to maintain its lead in the week after the exceptionally strong U.S. jobs report which had helped fan expectations of a December Fed rate hike. Similar to last week, it was the jobs report that helped power up the performance of the domestic currency. Australia recorded the largest payroll increase since early 2012 as the economy added 59K jobs in October, beating expectations of 15K and a -1K decline in September. The unemployment rate dropped to 5.9% from 6.2% a month ago, marking the lowest level since May 2014, while the participation rate picked up to 65% from 64.9% in the prior month. The internals were also stellar as both full-time and part-time jobs rose last month with the former gaining 40K (following September upwardly revised 10K decline) and the latter adding 19K (compared with September's 10K increase). Just to put these numbers into perspective, the 59K October jobs gain would equate to over 800K new jobs in the U.S.; and just last week the market was cheering about the 271K increase.

Surprisingly, the GBP was able to match the AUD’s gain after last week’s disastrous Super Thursday performance which was outlined in detail in last week’s Dispatch. The labor market also played a role in relation to the domestic currency 1.21% gain as the unemployment rate fell unexpectedly to a fresh seven-year low of 5.3%. Meanwhile, employment rose by 177,000 over the quarter, meaning there are now 31.2m people in work, according to the Office for National Statistics. Comments made by Bank of England Governor Mark Carney encouraged speculation that the central bank could move on interest rates sooner than previously suggested. Carney told Bloomberg he believes the U.K. economy, which is forecast to grow at 2.7% this year, may soon have the right conditions for a rate rise.

The odd person out last week belonged to the CAD with a weekly decline of 0.15%. The main culprit was the 8% drop in the price of crude as prices fell toward the $40 handle. The decline this week came from fresh signs of increasing supply due to abundant supplies and slackening demand, especially in China. The IEA said global oil-demand growth will slow to 1.2 million barrels a day in 2016, after surging to 1.8 million barrels a day this year, a five-year high. Having said this, Friday’s tragic terrorist attack on Paris could further slow the global economy and demand for oil. Thus, weakening oil prices may exert even more downside pressure on the CAD to start the week on top of key reports due this week on inflation and retail sales.

Last Thursday, no less than six Federal Reserve policy members spoke. We won’t bore you with the details of each speech – the common take away was that the Fed is ready to raise interest rate if the data supports the move.

IMF Will Decide the Near-Term Future of the Yuan

Most market analysts have little doubt the that Chinese yuan will one day be part of the International Monetary Fund’s special drawing rights (SDR) at some point in the future, but very few believe that it will happen by the end of this month. On November 30th the IMF Managing Director Christin Lagarde will make a decision about the CNY becoming part of the SDR, which is a multilateral institution basket of currencies that include the USD, EUR, GBP and JPY. However, if the IMF surprises us all, the inclusion of the CNY into the SDR could be the spark that fires the yuan rocket in the years ahead as a global reserve currency, likely replacing the Japanese yen and Great Britain pound in the currency hungry emerging market central banks.
It was only a few months ago that several media outlet reports suggested that people inside the IMF were saying that the yuan was not yet equipped for prime time. However, more recently Ms. Lagarde stated, “The IMF staff assessed that the RMB [CNY] meets the requirements to be a ‘freely usable’ currency and…proposes that the Executive Board determine the RMB to be included in the SDR basket as a fifth currency, along with the British pound, euro, Japanese yen, and the U.S. dollar.” She added that the staff also found that Chinese authorities have addressed “all remaining operational issues identified in an initial staff analysis submitted to the Executive Board in July. I support the staff’s findings.” This is big news.

The decision to include the CNY into the SDR will not rest entirely on Ms. Lagarde. The market at large will have a say as well. Meanwhile, China is busy building up its local bond market with the hope that it will be seen by Asian institutional investors, emerging market central banks and big sovereign wealth funds as a safe haven alternative to U.S. Treasury bonds at some point in the near future.

In August, the Peoples Bank of China (PBoC) allowed the CNY to trade within a wider band, which resulted in a weaker yuan. The result was furious push-back from Western economies because they felt that it was a protectionist measure to manipulate its currency in order to save its export
manufacturers at a time when the economy is growing slower than it has in years. However, it’s important to keep in mind that the yuan at the time was the strongest in the region – stronger than the likes of South Korea, Taiwan and the Singapore Dollar. Moreover, the trading band actually gave the market more say to sell the CNY short and weaken it against the USD and EUR. In its history, this is the closest China has come to free-float the CNY. China still has a long road ahead, but its goal to become a reserve currency has gain momentum. However, the PBoC’s strict control on the flow of the yuan will continue to impede its progress and restrict it from becoming a basket currency, as all other currencies in the IMF’s SDR are determined by the market.

5 Things to Know about Canada's Economy

5 Things to Know about Canada’s Economy
From the World Economic Forum

The sweeping election victory of Justin Trudeau’s Liberal Party has thrust Canada’s economic woes into the global spotlight.

The commodity-based economy is technically in a recession, owing in part to this year’s fall in oil prices. But the country is also suffering from deeper structural problems. Addressing these challenges and building an economy for the 21st century are among the key challenges facing Canada’s new prime minister.

Reliance on crude oil
Canada’s economy, ranked 11th in the world by GDP, has focused on resource extraction in recent years. While crude oil, Canada’s big commodity export, helped the country get through the global financial crisis relatively unscathed, the low oil price is now putting the economy under severe strain. This year, Canada’s economic performance has been the worst among a small group of developed economies that depend heavily on resources, such as Norway and Australia. Between June 2014 and July 2015, revenue from Canadian energy exports decreased 34.6%, forcing producers to cut back on jobs and investments.


Structural problems

The drop in global energy prices is not the only reason for Canada’s sluggish economy. There is much hand-wringing over Canada’s lack of innovative, globally competitive companies at a time when its traditional manufacturing industries are being eroded. Canada trails other developed economies in areas including corporate research and development, information technology investments, patents and productivity.

Debt and overvalued housing
There are concerns that ultra-low interest rates, currently at 0.5%, have been driving unsustainable housing booms, particularly in Toronto and Vancouver. Consumer debt is at a record 165% of disposable income, with most of the borrowing going into buying houses. Bank of Canada Governor Stephen Poloz said that increasing levels of household debt represent “a key vulnerability for the financial system”.



Budget deficits and spending
Canada’s recession made stimulating economic growth a key topic in the election. Conservative leader Stephen Harper, who stepped down after almost a decade in power, pledged to run a balanced budget. In contrast, Trudeau said he would tackle the economic downturn by running budget deficits of $25 billion over the next three years to fund infrastructure. The incoming prime minister has also pledged to cut income taxes for middle-class Canadians while increasing them for the wealthy.

The Keystone oil pipeline
Mr. Trudeau plans to address environmental concerns over proposals for the controversial Keystone oil pipeline, which has put relations between the US and Canada under strain. Mr. Harper had hoped the pipeline, which would carry crude from Alberta to Texas, would create jobs, but President Obama rejected the plan late last week. Essentially, the President was doing Hillary Clinton a favor in her run for the White House, but inadvertently did Mr. Trudeau a favor as well.









The USD was the undisputed winner on the week, easily outpacing its nearest competitor by a margin of 1.31%. The USD surged higher on the back of a very strong labor report that smashed expectations. The U.S. economy created 271K jobs for the month of October, which was the strongest monthly increase in payrolls this year. The unemployment rate also dropped to 5%, the lowest level since 2008. And for good measure, average hourly earnings rose 0.4%, which was the largest increase since July 2009. These strong numbers allowed the market to recalibrate the odds of December interest rate hike by the Fed from 56% to 72%. Meanwhile, the worst performing currency was the NZD after the latest Global Dairy Trade auction revealed that prices fell by 7.4%, the biggest drop in 3 months.

The Bank of England’s second Super Thursday triggered a selloff of 2.44% in sterling last week, its worst performance in eight months. Super Thursday occurs when the BOE releases its latest policy decision, the minutes of their deliberations and their quarterly forecasts for growth and inflation. The BOE left rates unchanged at 0.5% as expected with an 8-1 vote. However, it was the bank’s Quarterly Inflation Report that really tarnished sterling. The bank slashed inflation targets and GDP growth for 2016 to 1% and 2.5% respectively due to its concerns about global growth and the impact of commodity prices on inflation. Adding to the dovish tone, the central bank said that asset purchases (QE) would only be unwound when the key rate reaches 2%. Even though BoE Governor Mark Carney said in the press conference that it is “reasonably prudent to think BoE rates will rise in 2016”, the market pushed out the timing of its first interest rate hike due to the dovish Quarterly report. Thus, the BOE is still expected to be the second major central bank to hike rates after the Federal Reserve, however, the gap between the Fed's move and the BOE's move has widened causing the GBP to selloff.

Last week’s price action saw the pound hold support above the 1.50 level. If supports breaks that would open up a decline to the next support level just about the 1.48 level. Furthermore, the weekly close of the pound has bearish implications as it recorded an outside down week. Unfortunately, the pound could face more pressure this coming week as Premier David Cameron writes a letter to the EU setting out the UK’s conditions to remain in the EU, or said in a negative way, Britain’s EU exit warning.

Backchannel chatter

The CAD, which had been down every day since the federal election, managed to close out the week on firmer ground, led by a rebound in oil prices. U.S. government data revealed a weekly increase in crude supplies that was smaller than forecast while distillate stockpiles fell more than expected. However, caution is warranted for the longer term once sanctions are lifted on Iran, which holds 13% of the world’s oil reserves. The USD took a breather last week after sprinting to the top of the leader board at the previous weeks’ close. More stimuli by China and a promise of more stimuli by the ECB proved to be the enablers. Last week’s out performer was the GBP, even though it lacked a clear catalyst. The pound essentially reversed its decline following last week’s FOMC policy meeting and may trade higher before squaring up ahead of the Bank of England interest rate decision on November 3rd. The Aussie was the biggest under performer of the week, as softer than expected Q2 inflation data spurred expectations of an interest rate cut at this week’s Reserve Bank of Australia policy meeting November 3rd.

The FOMC decision was the main event of last week. With everyone and their grandmother expecting a dovish statement the market was caught leaning the wrong way when the decision was announced. All it took were four little words buried in the opening sentence of the third paragraph of the FOMC statement to cause a violent surge in the USD – “at its next meeting” US policymakers may consider a rate hike. The Fed also decided to remove the paragraph worrying about global headwinds, which added to the more hawkish tone of the statement. The reason for the retracement was due to backchannel chatter and weak U.S. economic data. According to Matthew Saltmarsh of MNI (Market News International), the U.S. asked the ECB to refrain from talking down the euro, which can be found here. This would indicate that the strength in the USD is indeed a concern to U.S. policymakers and it may very well cause them to delay an interest rate hike. The other backchannel chatter revolved around the aforementioned sentence. According to Art Cashin, Director of Floor Operations at UBS, that sentence has the markings of Vice Chair Stanley Fischer. Since his appointment to the Fed, Fischer has repeatedly and consistently pushed to have the FOMC drive the idea that a liftoff in 2015 was not only possible but maybe even likely. Thus, the chatter was that the sentence was only seen as an appeasement to Fischer’s posture rather than a clear intent to raise rates. The weak and lackluster U.S. economic data continues to cloud interest rate policy. Last week it was a steep fall in September U.S. new home sales, a soft durable goods orders report, and disappointing U.S. Q3 GDP of 1.5% (which is likely to be revised lower). With Q1 GDP coming in at 0.6% and 3.9% in Q2, that puts the U.S. economy at about 2%. This is hardly an economy that policymakers around the world would classify has having “escape velocity” worthy of an interest rate hike. All in all, the economic data is not good and the real economy shows signs of slipping into recession. Heck, the U.S. may already be in a recession if we cut through the spin of some of the data but it could take more than a year for the National Bureau of Economic Research to officially call one.

Welcome Prime Minister Trudeau! Canadian voters have decided he is ready to run this country!

Last week Canadians voted in a new federal government, led by Justin Trudeau, the son of former Prime Minister Pierre Elliot Trudeau. The fact that the CAD was down almost 2% on the week has more to do with the low inflation readings and soft oil prices than the rise in power of the traditional centrist Liberals. Canadians were able to cut through the negative ads by the ruling Conservatives portraying Trudeau as a good looking guy with “nice hair” that simply wasn’t ready to run a country. Trudeau made a point of pledging to run modest budget deficits for three years to kick-start the economy through investment in public transport, building affordable housing, and other infrastructure projects. Trudeau’s win may be a sign that the anti-austerity regime in Western governments is about to turn, especially since it’s becoming more and more obvious that central bank stimulus is running out of gas. All eyes will be on him and his government because if he can pull this off, it will be a road map for other governments to follow.

The US dollar index was on the cusp of breaking down from its recent ranges. However, it was not to be as a combination of rate cuts by the central bank of China and dovish jawboning by ECB President Mario Draghi help the USD bounce off support and surge higher to outperform the rest of the major currencies. The People’s Bank of China on Friday cut interest rates for a sixth time in a year after data last week showed that GDP grew 6.9% in the third quarter from a year earlier, the slowest pace in more than six years. China's central bank cut the benchmark rate by 25 bps on a one-year loan to 4.35%. The PBOC also increased the amount of money available for lending by reducing the level of reserves banks are required to hold. This was the latest signal of a major central bank's commitment to unusually low rates to try to spur economic growth.
Meanwhile on Thursday, ECB President Draghi sent his own strong signal that the bank is prepared to expand its stimulus program, which sent the euro down 2.96% on the week. Draghi outlined the options available: extend the end-date for QE purchases beyond the end of September 2016, increase the size of the QE program, broaden the types of bonds purchased, and/or lower the deposit beyond its current level of minus 0.2%. Like all global central banks, the ECB is worried about too-low inflation – inflation rates are barely above zero and far below the 2% rate that most consider optimal. Expectations are now set for more easing at its December policy meeting.

What War Hath Wrought

Currency wars are a zero-sum game. Who is eating whose lunch is an interesting question, but a more important query is whether the pie itself is growing. The ‘pie’ in this instance is essentially global GDP. Everyone would agree that the global economy moving forward is considerably diminished because the rate of global trade and integration is shrinking, which has been a key driver over the past 60 or so years. Growth has indeed slowed, but the only bump in the road we see in our rear-view mirror was the financial crisis of 2008/09. So, who is winning the currency war post-2009? Like we said above, currency wars are a zero-sum game, so nobody is winning. However, there has been a huge change in the currency landscape because earlier this month China’s yuan overtook Japan’s yen to become the fourth most used currency for global payments, brushing off a surprise devaluation in CNY to rise to its uppermost ranking ever and advancing its assertion for reserve status.

According to a report published in early October, the Society of World Interbank Financial Telecommunications (SWIFT), the proportion of international transactions denominated in yuan climbed to a record 2.79% in August compared to 2.34% in July. The icing on the cake for the CNY would be inclusion into the IMF’s twice-a-decade review of its Special Drawing Rights (SDR) basket, which is currently comprised of the USD, EUR, JPY and GBP. If the yuan does get included into the basket, it could mean as much as $1 trillion of inflows into the currency. Inclusion into the SDR would also likely promote more reform in China, and it is widely known that the People’s Bank of China Governor Zhou Xiaochuan is keen to liberalize the markets. Fingers crossed!

The only obstruction left to overcome to even loftier heights for the CNY is removing the barriers of foreign access to mainland China’s markets. According to Economists Tom Orlik and Fielding Chen of Bloomberg Intelligence:

The People’s Bank of China continues to come up with ingenious workarounds to promote yuan internationalization without capital-account opening. Rapid growth of the dim sum bond market means international investors don’t need to bring funds into China to buy yuan assets. Offshore yuan bond issuance rocketed to $270 billion in 2014, up 153 percent from $107 billion in 2013.

Swap agreements totaling 3.5 trillion yuan have now been signed between the PBOC and more than 30 other central banks. Currency swaps can be used by trade partners to cushion against a balance of payment crisis. As such, they reduce other central banks’ need for dollars and mean the yuan is already playing a role as a de facto reserve currency.

The start of Mutual Market Access between Shanghai and Hong Kong equity markets last year represented a step toward market opening. So far, its reception has been lukewarm, with more than 50 percent of the inbound quota and 70 percent of the outbound still unused.

The yuan’s astonishing progress into global markets validates President Xi Jinping’s determination to

test the supremacy of the dollar and a global economic order, which has been long dominated by Europe and the United States. China’s greatest incentive to pick up the pace of reform is to remove the hegemony of Western economies. The U.S. is very confident that it will never be dethroned has reprimanded China on and off for decades for keeping the yuan weak to boost exports, says it hasn’t done enough to dismantle controls. A more widely used currency would raise China’s influence in setting prices of commodities from oil to orange juice and give individuals and companies on the mainland more choice with what to do with their savings – not to mention her influence in global geopolitics. As the CNY makes its lengthy march to convertibility, China becomes susceptible to swings in the currency and money flows that could exacerbate its economic slowdown.

Ok CAD!

The CAD turned in another strong performance after leading the pack the previous week, however, caution is warranted after last Friday’s employment report. Like all currencies, the CAD has benefited from the US Fed’s dovish September hold. Another driver of the CAD’s advance has been the rebound in the economy. Back-to-back monthly GDP growth in June and July after five sequential months of negative or zero growth has help to cement expectations that the economy may have turned the corner and would not need any additional easing by the Bank of Canada. Of course, a discussion on the performance of the CAD would not be complete without any mention of the price of crude. Crude oil has managed to rally about 34% of its recent low in August and also managed to rise over the $50 level this past week before giving up some of its gains. Having said this, the way forward for Canada remains bumpy as evidenced by Friday’s jobs data. Canada added 12.1k jobs in the month of September, which was slightly better than expected. However, all of those gains were in part-time jobs since there was a loss of 61.9k full-time jobs, the largest amount since October 2011. That brings the loss in full-time jobs to 25K for Q3 alone. In addition, the unemployment rate rose to 7.1%, a 2-year high. This type of data warns that the rally in the CAD may sputter soon.

For the second consecutive week the USD has been the underperformer against the majors as the release of the FOMC minutes from the September meeting reinforced the dovish impression. The leaders of the pack, AUD and NZD, each managed to turn in a 4% increase on the week, powered by its own unique driver. The AUD surged higher after the Reserve Bank of Australia kept rates on hold as expected but it suggested that the bar was high for another rate cut this year. For the NZD, the story continued to be milk. Milk prices increased for the fourth auction in a row, fanning expectations that prices for New Zealand’s most important export have bottomed, which in turn takes the pressure off the Reserve Bank of New Zealand to ease again.

We had no less than six FOMC members speaking last week and even though all 6 members are considered doves, they all went out of their way to impress upon us that an interest rate hike is coming soon and that they really, really, really mean it this time. Oh really?! They’re not the only ones trying to sell us this line. Apparently 64% of the economists surveyed by the Wall Street Journal expect a hike in December. To be a little fair, some of these economists have wavered from their original position because back in August, 82% expected a hike in September. The survey also found that 23% expect the first hike will be delivered in March 2016; do we hear anyone for 2017? We wonder if any of these economists are also employed at the IMF because they just downgraded global growth to 3.1% this year from its previous forecast of 3.3%. By the way, it was the fourth time this year that they changed their forecast. Are you kidding me? Why do we even listen to these people? Apparently, we are not the only ones with this opinion. Joris Luyendijk of the Guardian wrote an eloquent piece on the science of economics, or rather the lack thereof, this weekend titled, “Don’t let the Nobel prize fool you, Economics is not a science.”

We have our doubts. We don’t see a hike at all this year or next, which falls in line with many forecasters and analysts. But hey… what do we know? We’re not going to let the fact that for the first time since 2009, all six major Fed regional activity surveys are in contraction territory. We’re also going to ignore the fact that 3-month bills sold at a yield of zero for the first time in history. That’s right, at last Monday’s Treasury auction investors decided to buy $21 billion in 3-month Treasury bills at a yield of zero. If that didn’t astonish you, demand was the strongest in over three months, as the bid-to-cover ratio, which is a widely used measure of demand, was the highest since late June, according to data from Jefferies. Don’t worry folks, interest rates can’t go much lower than zero, or can they?

The USD has been the worst performing currency since the Fed decided to leave interest rate on hold at its September policy meeting. This weakening in the USD combined with the global slowdown in growth and lower inflation due to lower commodity prices is starting to undermine the current quantitative easing (QE) programs of the ECB and the BOJ. What we mean by undermine is that the euro and yen are rising against the USD. This may cause these central banks along with other foreign central banks to ease policy even further causing the USD to rise again. If this transpires, then the Fed may have to respond in kind in order to keep the USD in check (The ECB and BOJ can’t have this, there is a currency war going on after all). Many of the bloggers in cyberspace that are calling for QE4 have it all wrong. The fact that we have had more than one QE program from the Fed only tells us that they have all failed. We think the Fed’s next move will be not a hike in rates or another QE program, but a cut in interest rates to negative. Don’t think it’s possible? Well, let’s consider that the Swiss national bank is at negative 0.75%, the ECB is at negative 0.20%, and Sweden and Denmark are also in negative territory. Also, remember the September dot plot, which showed that one FOMC member wanted negative rates at the end of 2015 and 2016. We’re guessing that was Minneapolis Fed chief Narayana Kocherlakota because in a speech last Thursday he made these following points that were summarized by Bloomberg:

 KOCHERLAKOTA SAYS FED SHOULD CONSIDER NEGATIVE RATES
 KOCHERLAKOTA: TAPERING ASSET PURCHASES LED TO SLOWER JOB GAINS
 KOCHERLAKOTA SAYS JOBS SLOWDOWN 'NOT SURPRISING' GIVEN POLICY
 KOCHERLAKOTA: TAPERING ASSET PURCHASES LED TO SLOWER JOB GAINS

We would be remised if we didn’t mention the China factor in all of this. China’s foreign exchange reserves fell another $43bn last month, suggesting continued intervention in the forex markets to support the renminbi. This was down from the $94bn they spent in August trying to shore up the renminbi after the August 11 devaluation. Should we expect the Chinese to continue to spend their reserves on stopping their currency from falling while their economy continues to sputter? Wouldn’t it help China’s economy if they allowed the currency to fall? We suspect that if the Chinese renminbi does fall it will force the Fed to react and that reaction may very well be in the form of negative interest rates.

Meet Your CSR: Q&A with David T.

You might recognize David from VBCE. Perhaps you've had the pleasure of having him serve you right before you took off for one of your eagerly anticipated vacations. Or maybe he provided you advice on how to help you save more money for your business. What you may not know are all the tiny details of what makes David so special to all of his co-workers here at VBCE.  In this month's post of 'Meet Your CSR' we asked David a few questions to help you get to know him better!

Tell us a little bit about yourself

I'm a senior CSR here at VBCE and been with the company for 7 years.  I have a wife whom I've been with for 5 years and we have a lovely daughter which is a year and a half years old. 

What thoughts come to mind when you tell people you work at VBCE?

I enjoy telling people that I work at VBCE especially when I hear that they are going on a vacation.  I tell them to come in and purchase FX from us because we have the best rates in town!

What is your dream destination for a vacation?

Bora Bora

Favorite song you would listen to on your dream vacation?

Run Away With Me - Carly Rae Jepsen

www.youtube.com/watch?v=TeccAtqd5K8

If you could take one person on a dream vacation with you, who would it be?

My Wife

Tell us about a stand out customer that you have previously helped out

I had a customer who was selling a couple of 100 oz Silver bars to purchase an old Mongolian ring.  He said it was owned by Kubla Khan and he would bring it in and show me once he got it.  So a few weeks past by and he kept his promise and came all the way downtown just to show me the Kubla Khan ring that he had just bought.  I was pretty fascinated with everything he told me about the ring.  He mentioned that its had a 3 dimensional drawing with a story behind the ring which I found very interesting.  I also showed the ring to my fellow Mongolian co-worker who was very impressed!

Give us a forex tip every savvy customer should know

I would suggest customers to do some research before they head on their trip so they know who much currency to bring on their trip. Example: How much is the average breakfast, lunch and dinner? Budget to spend per day? How much is cab/bus/train fare?

What is your favorite piece of bullion that you have ever come across?

My favorite bullion that I've came across is this year of the Dragon Lunar silver coin.