Monday, September 28, 2015

US Federal Reserve Interest Rate Talk Again...



Honestly, after last week’s anticlimactic FOMC decision we thought
that we would get off this topic of interest rate hikes and move on to
other market drivers. Unfortunately, we demur as the issue has
come back, front and center, and is vying for top spot in the news
cycle along with the VW’s exhaust issues (food for thought: Chinese,
Indian or Korean automaker to buy Porsche from VW?). The USD was
able to pick itself up off the mat and finish at the top of the currency
heap last week. The week prior, the USD was down and out due to
the market’s perception of a dovish hold after the FOMC meeting.
Sound bites from several Fed officials and a speech by Chairperson
Yellen were able to transform the market’s perception from a dovish
hold to a hawkish hold. This policy stance is grounded in the fact that
most Committee members continue to project a policy rate increase
later this year, even though the conditions that led to a delay in a
September rate hike are likely to persist in the months ahead. Thus,
as long as U.S. policy normalisation remains on the table, the
divergence between the Fed and the continued monetary easing of
other central banks, especially the ECB and the BOJ, should continue
to cause the USD to trade with a strengthening bias.

The worst performers last week were the GBP and AUD. The GBP has
plainly run out of gas. The Bank of England is the only other central
bank besides the US Federal Reserve that is close to raising interest rates. There
wasn’t any key market moving data releases last week but there was
conflicting central bank commentary. Sir Jon Cunliffe asserted that
the UK’s economic outlook was ‘pretty strong’ and that the next interest rate related movement was likely to be an increase, however, fellow Monetary Policy Committee member Ben Broadbent stated that he wouldn’t be voting for higher borrowing costs anytime soon. Since the UK economy appears to have slowed in Q3, Broadbent’s comments carried more weight and helped the GBP fall by 2.5% last week. The focus for next week will be revisions to Q3 GDP and the PMI manufacturing report.
The other poor performer last week was the AUD. The AUD dropped below 70 cents intraday last week and is down about 20% over the last year primarily due to the China slowdown story and the slump in commodity prices. China is Australia’s biggest trading partner so any negative news about China’s economy tends to weigh on the AUD. Last week’s negative China news was the Caixin PMI, which showed that manufacturing activity contracting at the fastest pace since March 2009. The other driver of Aussie weakness last week was a report by ANZ Bank that suggested that the Reserve Bank of Australia may cut rates twice in 2016 taking the benchmark rate to 1.50%. If this were to happen, the next likely target on the monthly price chart would be around the 0.60 level last seen in late 2008.


Monday, September 21, 2015

The Big Tickle


All currencies rallied to the upside against the USD last week except for the euro after the Federal Reserve switched gears. The best performs were the commodity cousins, the aussie and kiwi, in the wake of the Fed’s indecision on an interest rate hike. The euro unwound its post-Fed rally the following day after European Central Bank policy makers noted risks to the global economy. Benoit Coeure, an ECB Executive Board member, said the Fed’s decision vindicates the ECB’s assessment of the uncertainties surrounding the global growth outlook while his colleague on the ECB board, Peter Praet, said in an interview with the NZZ newspaper that the ECB should be ready to act if economic shocks turn out to be long-lasting.

The big tickle for the week was the Fed’s policy shift. Most were probably not surprised that the Fed left rates unchanged at their FOMC meeting last week. That makes it 55 straight meetings without a change in interest rates. The surprise came in the Fed’s reasoning for its inaction – its concerns that developments in the global economy and markets could “restrain US economic activity somewhat”. This change emphasizes that global growth concerns are a real concern, which may cause a risk off environment to develop.

We guess we can call this move a “dovish hold”.


The Fed also released its dot plot plan after the meeting. The plot shows the projections of the 16 members of the Federal Open Market Committee (the rate-setting body within the Fed). Each dot represents a member’s view on where the fed funds rate should be at the end of the various calendar years shown. The latest plot reveals the number of policy makers who do not expect lift-off to happen in 2015 has risen from two to four. Thus, 13 of 17 Fed officials still expect a rate hike this year, which is down from 15 in the June plot. This is surprising considering the new wrinkle towards global growth uncertainty – if the Fed is now “officially” worried about the recent global growth uncertainty is it logical that two months of global data will be enough to alleviate that uncertainty so that they can raise interest rates at their December meeting?

There was yet another shocker in the dot plot. For the first time ever, one Fed policy maker is forecasting negative rates for this year and next (highlighted in red on the dot plot). During the post meeting press conference, Chair Yellen was asked about negative rates and she said that negative rates were not "something we seriously considered" at the current juncture. However, she didn't rule it out – “I don’t expect that we’re going to be in a path of providing additional accommodation. But if the outlook were to change in a way that most of my colleagues and I do not expect, and we found ourselves with a weak economy that needed additional stimulus, we would look at all of our available tools. And that would be something that we would evaluate in that kind of context.”

The implications from all of this are that other foreign central bankers may be forced into further action. With the Fed on hold, dovish central banks may want to ensure that the Fed’s inaction doesn't jeopardize their own domestic inflation targets – thereby setting off another round of monetary easing in the ongoing currency wars.

Why the Fed HAS to Consider the Global Economy

From CNBC found here.

Operating within an economic system where the foreign trade sector represents nearly one-third of demand and output, the Fed must carefully consider price and activity effects coming from the rest of the world. This year, for example, an estimated foreign trade deficit of more than $500 billion is expected to reduce America's economic growth by an entire percentage point. That is because the strong domestic demand – consisting of private consumption, residential investments, business capital outlays and public spending - is stimulating the purchases of foreign goods and services, while the weak economies in the rest of the world, and a strong dollar, are holding back American export sales.

External price effects on American inflation developments are equally strong and straightforward. Driven by a 13.3 percent decline in fuel costs, import prices in the year to August fell 11.4 percent. The non-fuel prices also declined 3 percent, marking their largest drop since October 2009. As a result of that, the headline index of consumer prices (CPI) rose only 0.2 percent in the twelve months to August. But, over the same period, price gains in sectors sheltered from international competition – approximated by the core CPI - edged up 1.8 percent, maintaining the rate of increase observed since the middle of last year.

That enormous difference between the headline and the core rates of inflation shows the strength of externally-induced effects on American costs and prices. And the U.S. inflation story does not end there. What was discussed so far are just the first-round external effects on the domestic price formation process. The second-round effects are arguably even stronger and more pervasive, because an open trading system and declining import prices exercise a vigorous restraint on the pricing power in a broad range of American industries. All this shows how America's foreign trade transactions directly impact the Fed's ability to fulfil its mandate of full employment and price stability.

Employment, in particular, is a difficult part of the mandate. Monetarists have often objected to that. They argue that the monetary policy can only provide an environment of price stability in which demand, output and employment creation can take place. But the mandate is still there, and employment is always a politically-charged issue. Consider, for example, the fact that the current labor market numbers are not as good as implied by the reported 5.1 percent unemployment rate.
Adding 6.5 million involuntary part-time workers (people working part-time because they cannot get a full-time job) and 1.8 million people who are marginally attached to the labor force (mainly people who quit looking for a job because they could not find one), gives an actual unemployment rate that is more than double the official 5.1 percent rate. That also means that the actual number of unemployed is 16.3 million, rather than the reported 8 million. The high numbers of America's long-term unemployed (people out of work for 27 months and over) are reflecting current labor market difficulties as well. These numbers have been increasing since last June to reach 2.2 million at the end of August, accounting for nearly one-third of the reported unemployment.

A similar note about America's soft labor markets is sounded by average hourly earnings; they were roughly unchanged over the three months to August. Now, let's bring back into discussion that 1 percentage point that our foreign trade deficit will knock off the growth of our domestic demand. Even the convinced free traders – of which I am one – have to admit that the immediate effect of that will be job losses in our import-competing industries. The long-term dynamic effects of free trade may well be positive for the world economy as a whole, but that is of little consolation to retrenched workers and bankrupt companies.

The Fed's critics, and American bankers threatening to begin laying people off if the Fed does not promptly oblige with higher interest rates, should understand that there is nothing the U.S. monetary authorities can do about Asians' unrelenting quest for export-led growth, and the European chaos of mean fiscal austerity policies and biblical refugee crises. There is also nothing the Fed can do about structural problems in U.S. labor markets. Only broad and active structural policies – e.g., better and more affordable education, labor force retraining and relocation – could make more people employable in an economy which, thanks to the Fed, is already pushing well above its physical limits to growth.

Foreign trade and labor market policies are the responsibilities of the federal government.
It is not up to the Fed to negotiate better market access to American companies in foreign countries, or to make sure through various G forums (G7, G20, etc.) and multilateral organizations, such as the IMF and the OECD, that economic policies are properly coordinated in order to ensure a fair and a more balanced international trade. And neither is it the Fed's fault that East Asia and the euro area are currently running trade surpluses of $700 billion and $320 billion, respectively, and acting as a huge drag on world economy – extracting that 1 percentage-point gift from the growth of the U.S. domestic demand.

The Fed just has to compose with all that, and to calibrate its policy in order to minimize the negative
effects on U.S. growth and employment of this extremely unbalanced situation in global trade flows. The sad part is that none of these vitally important issues for American economy and security are even mentioned, let alone debated, in the presidential primaries of either party – except for some rather folkloric utterances by Donald Trump, who keeps screaming "they are robbing us blind," and who would treat the Chinese president to a Big Mac instead of a glittering state dinner at the White House.

Somebody has to mind the store. It is easy to criticize the Fed for everything, especially if the Dow does not keep soaring. But the Fed's critics have to understand that economic growth, employment creation and a sound investment environment are a result of an entire policy mix - monetary, fiscal and structural (or regulatory) policies – that is supposed to guide an open economy toward an optimal utilization of its (physical) capital and labor resources.

Having missed the September deadline for the Fed's interest rate increase, the wise-guys are now taking what they call "a December liftoff" as an obvious certainty. Investors, as opposed to traders, should pay no attention to that. People confidently predicting a September rate hike have shown that they can't even read an open book that is called the Fed. The Fed will exercise its mandate as a function of events whose outcome is unknowable ex-ante. The Fed is watching these events like the rest of us. When the data begin signaling the desirability of a policy change, the Fed will adjust its instruments in a manner that will carefully prepare its next move.

So far, the Fed sees nothing that would warrant that kind of action.

Monday, September 14, 2015

Enough already - Get on with it!



The stabilization of Chinese markets during this last week has helped to lower volatility and ease safe haven flows into the USD and Japanese yen. The AUD was the best performing currency last week powered higher by better than expected employment data. The month of August saw 17K new jobs created, the unemployment rate easing to 6.2% from 6.3%, and with July job growth revised up. The Aussie also received some help from higher copper and iron ore prices. Surprisingly, the NZD was able to eke out a gain of 0.58% on the week despite a cut in interest rates of a quarter point to 2.75% by the central bank. The yen was the worst performer thanks to China’s stabilization, poor data, and political jawboning. Japan’s machine tool orders fell 3.6% on the month and producer prices fell by 3.6%. Prime Minister Abe’s economic advisor, Kozo Yamamoto, created a firestorm when he said that the Bank of Japan should expand its monetary easing program by at least 10 trillion yen at its October 30th policy meeting. Yamamoto said reaching the bank’s 2% inflation target in the first half of the fiscal year beginning April 2016 is an "absolute imperative".

All eyes will be on the Federal Reserve this week as they decide whether to increase interest rates for the first time in 9 years at its September 17th policy meeting. Last week, Fed Chair Yellen’s favorite jobs indicator, the US JOLTS data, showed a large jump in total job opening though hires lagged behind (for sixth month). However, the state of the U.S. economy hasn’t been the focal point for a rate hike since early August. The Fed was edging closer towards a hike at their September meeting before China devalued their currency, which caused equity markets around the world to destabilize spurring wild volatility and tightening of financial market conditions.

Well, we’re finally here. The stage has been set. The issues for and against a rate hike have been debated ad nauseam. The uncertainty of all of this has become unbearable – enough already and get on with it! Whatever the decision is, it will most certainly cause volatility to ramp up. A hike will deepen the fear of a global deflationary spiral caused by a stronger USD and/or a Chinese hard landing. Standing pat will keep the threat of such a hike ongoing into each subsequent meeting in October and December.

The U.S. dollar index has limped into the end of the week. Its technical condition is tenuous at best with the momentum indicators all pointing lower while it sits just about its 200-day moving average. It looks set to continue its sell off until the FOMC decision.

You’ve probably asked yourself what’s the big deal about a quarter point hike in interest rates when the fed funds rate is near between 0 and 25 bps. Well, if the Fed hikes by 25 bps then interest rates have effectively gone up by 100%. This alone has the ability to cause ripple effects across the derivative world of interest rate contracts which in turn has the ability to cause interbank credit risk. This is why the TED (TED spread definition) spread has been moving higher since China's devaluation. According to Head of Global Investment Research for Alhambra Investment Partners, Jeffrey Snider, the TED spread is now where it was in the weeks just following the flash crash of May 2010 and equal to October 2011, after the SNB pegged the CHF to the euro and the Fed reproduced dollar swaps globally.

Friday, September 11, 2015

5- Bank C$ Forecast


And we're off to the races


We want to bring to your attention something we believe has yet to be priced into the markets regarding the Canadian dollar. The CAD was able to claw back most of last week’s losses on the back of a rise in non-energy exports and pretty healthy jobs report. However, the market has been complacent about the possibility of a change in government on the October 19th federal election. Current poles show that it is a three way race with the left-leaning New Democratic Party (NDP) enjoying a narrow lead. The NDP’s platform includes an extensive social agenda and the imposition of a cap-and-trade system for carbon emissions, which could endanger the drive to a balanced budget and a potential threat to energy investment, at a time when the sector is already under tremendous pressure.

Thus, if the NDP continues to rise in the polls then international investors could start to worry, which could weigh heavily on the CAD. Furthermore, this past Wednesday the Bank of Canada decided to stand pat at the policy meeting in order to stay politically neutral ahead of the federal election. However, the BOC may be forced to cut the benchmark interest rate at the October policy meeting after the election if oil prices are below the BOC’s own forecast and if domestic data continues to weaken.

The key event next week is Thursday's U.S. Fed interest rate announcement. There is about a 30% probability of the first Fed rate hike since June of 2006. Stay tuned for both Canadian and U.S. retail sales and inflation data reports which will be announced before the FOMC committee meeting.

Wednesday, September 2, 2015

Meet Your CSR: Q&A with Madi A.


You might recognize Madi from VBCE. Perhaps you've had the pleasure of having her serve you right before you took off for one of your eagerly anticipated vacations. Or maybe she 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 Madi so special to all of her co-workers here at VBCE.  In this month's post of 'Meet Your CSR' we asked Madi a few questions to help you get to know her better!


Tell us a little bit about yourself.


I was born and raised in Beijing, China and moved to Vancouver in 2009 for University.

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

It is a great company that not only offers very competitive rates, but is also dedicated to providing customers with the best possible service!

What is your dream destination for a vacation?

Barcelona, Spain!














Favorite song you would listen to on your dream vacation.

Hysteria - Muse

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

My mom

Tell us about a stand out customer that you have previously serviced.

I was helping a lady exchange US Dollars to Canadian Dollars. She was coming in almost every month because her salary was in US Dollars and she wanted to convert it for her living expenditures. I let her know that we offer an online service that can make the exchange very convenient as she can do it from home whenever she would like. She was very happy this service was offered and available to her use.

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

Royal Canadian Mint 1oz Gold Maple Leaf coin. It is great for any special gift giving occasion as it also marks the memorable year it was given in! 



Tuesday, September 1, 2015

The Greatest Show on Earth


Wow, what a volatile week in the markets! Black Monday 2015 kicked off violent moves in stocks and currencies. Stock markets managed to recover all of its losses and even finished the week higher in some cases. Unfortunately, that can’t be said about the currency markets as the yen and the USD outperformed the rest of the field as panic caused wild swings in currencies. The Americans pointed the figure at the Chinese for the cause of the sell off – the Chinese government failed attempt to support their equity markets followed by an unexpected devaluation of their currency. The Chinese retort was that stocks have moved sideways since the US Fed stopped QE in November and that the speculation around the Fed’s next move finally hit caused a panic. Who’s right? We happen to think that both sides are correct. Volatility always occurs at the end of a trend and the beginning of a new one. Market participants are nervous because of the two powerful and opposing threats to growth and stability – the risk of a deflationary slump if China buckles and the emerging market crisis turns systemic; versus the risk that central banks could fall behind the curve and leave too much stimulus in their own economies.

We think that most of you are by now familiar with the market turbulence caused by the threat of an interest rate hike by the U.S. Federal Reserve. The prospect of the Fed’s first rate hike since 2006 has fuelled growing fear of renewed volatility in emerging economies’ currency, bond, and stock markets. The concern is that rising interest rates will lead to a rising USD which will wreak havoc among emerging markets’ governments, financial institutions, corporations, and even households because they all have borrowed trillions of USDs and rising interest rates and a rising USD will cause debt servicing costs to rise.

Now imagine the pressure on currencies of oil producing countries. Most of these countries peg their local currency to the USD and plummeting oil prices are straining government budgets. Earlier this month, Kazakhstan decided to give up its peg and switched to a free float. This move caused Kazakhstan’s tenge to plunge a record 23% in one day, but it freed it from burning through its reserves in order to prop up its currency. Kazakhstan’s Prime Minister Karim Massimov told Bloomberg that in the new era of low oil prices “most of the oil-producing countries will go into the free-floating regime, including Saudi Arabia and the United Arab Emirates.” Indeed, expectations have grown after Fitch cut Saudi Arabia’s outlook to negative from stable last Friday. Fitch noted that the twin fiscal shocks of lower oil prices and increased spending under new Saudi King Salman bin Abdulaziz al-Saud will cause the budget deficit to widen to 14.4% of GDP this year. The budget is sure to rise on news that Saudi Arabia invaded Yemen on Friday.

With government budgets of emerging markets and oil producers under stress, these countries have had to rely on the selling of their reserves mainly by way of selling US Treasury’s. Speaking of selling Treasury’s, according to Societé Generale SA, the central bank of China has likely sold somewhere on the order of $100 billion in US Treasury’s in the past two weeks alone in open FX operations in order to slow down the fall of the yuan after it devalued its currency earlier in the month.

On the surface, this seems harmless. But in reality, it is a major headache for the USD and the U.S. with multiple ramifications. First, if these countries are selling US Treasury’s then they are not buying. This begs the question of who will step in to fund U.S. deficits? Second, the selling alone could cause yields to increase. If yields break above the trend line on the chart of 10-Year US Treasury yield it would signal that major central bank selling is overwhelming the buyers. This would cause the Fed to ease. Ironic isn’t it? A Fed rate hike would increase the stress on emerging market and oil producing countries, which in turn would cause them to tap their reserves by selling US Treasury’s, causing bond yields to rise and triggering a monetary policy reversal by the Fed, possibly in the form of QE4.

We Are Asking Too Much of the Federal Reserve

A well written article is making the rounds in the blogosphere of financial and political pages alike by Robert Kuttner who is co-founder and co-editor of ‘The American Prospect'. It’s worth a read and re-printed below.

There has been obsessive chatter about whether the Federal Reserve will, or should, raise interest rates this fall. At the Fed's annual end-of-summer gabfest at Jackson Hole, Wyoming, the issue was topic A. Advocates of a rate hike make the following claims:
Very low rates were necessary when the economy was deep in recession. Now, with growth up and unemployment down, the near-zero rates are creating speculative bubbles. They are not really stimulating the economy much, as corporations put cash into stock buybacks and bankers park spare money at the Fed itself. So, let's get on with a more normal borrowing rate.

Opponents of a rate hike counter that the economy is a lot weaker than it looks. Wages are going nowhere. A lot of the jobs that have pushed down the nominal employment rate are lousy jobs. China's economy has just hit a big wall, which will slow down global growth.

Raising rates will increase consumer and business costs across the economy – everything from home mortgages to credit cards to construction loans. There will come a time to raise rates, but we are not there yet. If anything, the Fed should find new ways to get money out into the real economy.

The Fed is famous for raising rates prematurely, seeing ghosts of inflation. But there is no inflation on the horizon -- the bigger worry is deflation. In fact, the inflation rate is well below the Fed's own target of two percent. And the Fed is the only game in town. On balance, I think the opponents of a rate hike have the better argument. But consider for a moment that last assumption -- that the Fed is the only game in town.

The larger issue, which is getting submerged in the great debate about raising rates, is that the Fed should not be the only game in town.

Normally, in a soft economy, the government would be using fiscal as well as monetary policy. But because of the obsession with deficit reduction -- unfortunately shared by the Obama Administration (remember the Bowles-Simpson Commission?) – fiscal stimulus today is off the table; worse, deficit-reduction is contractionary. In plain English, prolonged deficit-cutting slows down growth.