The euro slipped versus the majority of its 16 main peers as German industrial production fell the most since 2009, underscoring the risk of a slowdown that may pressure the European Central Bank to expand stimulus.
The shared currency weakened as the International Monetary Fund cut it global growth forecast for 2015 and lowered its outlook for the euro-area economy. The yen strengthened a second day against the U.S. dollar on speculation officials are growing uncomfortable with the pace of its depreciation. Australia’s currency rose after the central bank held interest rates unchanged. Brazil’s real advanced.
“After a while, the weakness that you see in Spain, in France and elsewhere around Europe, it’s going to seep in toward Germany,” Douglas Borthwick, head of foreign exchange at New York brokerage Chapdelaine & Co., said by phone. “Germany’s been the unaffected patient and, sort of like Ebola, once it starts to cross borders everyone gets infected, regardless of what’s happening with the currency rate.”
The euro fell as much as 0.6 percent before trading 0.1 percent lower at $1.2642 as of 1:59 p.m. New York time. It slumped 0.6 percent to 136.91 yen. The Japanese currency advanced 0.5 percent to 108.30 per dollar after gaining 0.9 percent yesterday. It reached 110.09 per dollar on Oct. 1, the weakest level in six years. The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major currencies, slipped 0.1 percent to 1,067.94 after dropping 0.9 percent yesterday, the most since Sept. 18, 2013.
Real, Aussie
Brazil’s real was the biggest gainer of the U.S. currency’s 16 major peers on speculation presidential candidate Aecio Neves will receive the endorsement of a former rival in this month’s runoff election against incumbent Dilma Rousseff. The currency gained a third day, adding 1.3 percent to 2.3942.
Australia’s dollar appreciated a second day as the Reserve Bank pointed to an improvement in private demand after keeping policy settings steady. The RBA left the benchmark interest rate at a record-low 2.5 percent today, where it’s been since August 2013, and reiterated it sees a likely period of interest-rate stability. The currency advanced 0.5 percent to 88.08 U.S cents. It rallied 1 percent yesterday, the most since March 6, rising from a more than four-year low set last week.
Canada’s dollar led major currencies lower, losing 0.4 percent, as a report showed Canadian building permits plunged 27.3 percent from a record in August. The currency slid to C$1.1179.
IMF Forecast
The dollar trimmed losses after the IMF called the U.S. a bright spot in the global economy, forecasting it to grow 2.2 percent this year, revised up from 1.7 percent in July.
U.S. job vacancies rose more than forecast, a report from the Bureau of Labor Statistics showed today, as employers gained confidence about the outlook for demand in the world’s biggest economy. The world economy will grow 3.8 percent next year, compared with a July forecast for 4 percent expansion, the IMF said. The euro area will grow 1.3 percent next year, slower than the 1.5 percent pace predicted in July.
Japan’s currency rose for the first time in three days against the euro as Bank of Japan Governor Haruhiko Kuroda said the central bank will closely monitor the exchange rate and Prime Minister Shinzo Abe said its weakness is hurting small companies and households.
BOJ Meeting
“Official comments have voiced some sympathy towards importers and smaller companies having to pay a higher price for overseas materials and energy,” said Neil Jones, head of hedge-fund sales at Mizuho Bank Ltd. in London. “This is causing investors to liquidate short yen positions.” A short position is a bet an asset’s price will decline.
The BOJ, which buys about 7 trillion yen ($64.4 billion) of government bonds a month, kept its asset-purchase stimulus program unchanged after a meeting today. The decision was predicted by all 33 economists surveyed by Bloomberg News between Sept. 26 and Oct. 2. Four of them expect the central bank to announce additional stimulus on Oct. 31.
The yen climbed 1.4 percent in the past week, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes, as investors bet officials were seeking to talk down the pace of recent declines. The euro rose 0.1 percent and the dollar was little changed.
Euro Declines
The euro slumped toward a more-than-two-year low against the dollar after industrial production in Germany dropped 4 percent in August from the previous month, when it increased a revised 1.6 percent. A report yesterday showed German factory orders also plunged the most since 2009.
“Any time Germany even sneezes the rest of the euro zone catches a cold, so that’s the primary reason why the euro is certainly being a bit more flaky,” said Kathleen Brooks, European research director at Forex.com in London. “If it doesn’t dip into recession, it could probably register a quarter of negative growth.” Data due Oct. 9 will show German shipments slid the most since January 2009 in August, according to the median forecast of 11 analysts polled by Bloomberg News. Exports gained the most in more than two years in July from a month earlier.
Royal Bank of Canada revised its forecasts for the euro lower, predicting it will end the year at $1.23, from a previous estimate of $1.30. The common currency will drop to $1.17 by the end of 2015, from an earlier forecast of $1.25, strategists led by Adam Cole, the head of global foreign-exchange strategy in London, wrote in an e-mailed report dated yesterday.
Russia Spends Up to $1.75 Billion in Two Days to Buoy Ruble
Russia’s central bank spent as much as $1.75 billion to prop up the ruble over the last two trading days, its biggest market intervention since President Vladimir Putin’s incursion into Ukraine in March.
Russia’s central bank spent the equivalent of $980 million to shore up the ruble on Oct. 3, the latest data on the authority’s website showed today. The bank also said it shifted the upper boundary of the currency’s trading band by 10 kopeks yesterday, a move that may have involved spending between $420 million and $769 million that day. The exchange rate weakened 0.3 percent to 44.6234 versus the basket by 5:12 p.m. in Moscow, set for a record low for the fourth time this month.
Putin is suffering the consequences for shaking up the post-Cold War order in eastern Europe as the U.S. and European Union impose sanctions on his economy and investors pull money out of the country. Demand for dollars and euros is growing among Russian companies locked out of western debt markets as they contend with $54.7 billion of debt repayments in the next three months, according to central bank data. The ruble is under “permanent pressure” from lingering demand for foreign currency for debt payments, Vladimir Evstifeev, a Moscow-based analyst at OAO Bank Zenit, said in an e-mailed note. The “collapsing truce” in Ukraine is also leveling pressure on the exchange rate, he said.
Fighting continued today in eastern Ukraine amid moves to establish a buffer zone to help cement a cease-fire that went into effect a little more than a month ago between government forces and pro-Russian separatists.
New Boundary
The Bank of Russia ended a five-month pause of selling foreign currency after the ruble’s world-beating slide in the past three months sent it through the upper boundary of the authority’s target dollar-ruble basket. The central bank set the ruble’s upper band limit at 44.60 against the basket. When the currency crosses the upper trading band, the central bank sells $350 million before shifting the boundary by 5 kopeks, according to official guidelines. Russia spent $40 billion in the currency market this year through May, excluding the latest interventions.
The resumption is putting additional pressure on Russia’s international reserves, which have fallen for six straight weeks to $456.8 billion on Sept. 26, marking an 11 percent decline since the end of 2013. Revenue for the world’s largest energy exporter is taking a hit as Brent crude slides to the weakest level in more than two years, reaching as low as $92.01 per barrel in London today.
‘Further Weakness’
The central bank’s latest action “does not mean that further weakness is ruled out,” Vladimir Osakovskiy, a Moscow-based economist at Bank of America Corp., said in e-mailed comments today.
The ruble weakened 0.5 percent to 39.9155 per dollar today, bringing its retreat in the past three months to 14 percent. Russian bonds due in February 2027 fell for a third day, sending the yield one basis point higher to 9.57 percent, as the government announced it will offer 10 billion rubles ($251 million) at a bond auction tomorrow. The yield is up 1.21 percentage points since Putin’s incursion into Ukraine.
The rate on a three-year ruble-dollar basis swap reached 290 basis points today, the least since at least 2006, when Bloomberg began compiling the data. Negative rates signal traders will pay a premium to obtain dollars and the central bank said last week it will start offering foreign-currency swaps to ease the pressure in “several weeks.”
“We expect the central bank to keep close watch, being wary of a potential spike in retail foreign-exchange purchases,” Sberbank CIB analysts said in an e-mailed note.
Brazil’s Real Leads Global Currency Advances on Election Outlook
Brazil’s real climbed the most among major currencies on speculation opposition candidate Aecio Neves will receive the endorsement of Marina Silva against President Dilma Rousseff in this month’s runoff election. The real rose 1.3 percent to 2.3953 per dollar at 3:04 p.m. in Sao Paulo, the biggest increase among 31 currencies tracked by Bloomberg. Swap rates, a gauge of expectations for changes in borrowing costs, fell 0.05 percentage point to 11.79 percent on the contract due in January 2016.
“Elections keep driving the real, which is benefiting from news that Silva will make official her support for Neves on Thursday, when fresh polls are due,” Joao Paulo de Gracia Correa, a currency trader at Correparti Corretora de Cambio in Curitiba, Brazil, said in a telephone interview.
The real extended its three-day rally to 4.1 percent, the biggest since September 2013, amid revived speculation that a new government will restore growth and curb inflation. Projected swings between currency gains and losses climbed, with one-month implied volatility on options for the real increasing to 20 percent, the highest among developing nations.
Silva, who finished third in the Oct. 5 vote, plans to back Neves against Rousseff in the Oct. 26 runoff, Folha de S.Paulo and O Estado de S. Paulo reported. Valor Economico reported that Silva has agreed to support Neves only if he would end the ability of a candidate to be re-elected. Neves told reporters in Brasilia that he favors five years without re-election for all public offices. “It’s a question to be discussed,” he said when asked if he would be willing to serve only five years.
Voter Tally
Rousseff had 42 percent of the first-round vote, followed by Neves with 34 percent and Silva 21 percent. Neves received more support from voters than the 26 percent backing he garnered in a Datafolha poll published Oct. 4. Rousseff had 44 percent in the survey, which had a margin of error of plus or minus two percentage points. New voter polls by Ibope and Datafolha may be published as soon as Oct. 9.
Rousseff is seeking a second four-year term as her administration contends with the nation’s first recession since 2009 and above-target inflation.
Gross domestic product shrank by 0.6 percent in the second quarter from the previous three months after contracting a revised 0.2 percent from January through March. Consumer prices increased 6.65 percent in the 12 months through September, according to the median forecast of economists surveyed by Bloomberg before tomorrow’s report from the national statistics agency. The official target range is 4.5 percent plus or minus two percentage points.
IMF Outlook
Brazil suffered today the biggest cut to its International Monetary Fund growth outlook among emerging markets. The economy is expected to grow 0.3 percent in 2014, down from the forecast of 1.3 percent in July.
To support the currency, Brazil sold today $197.3 million of foreign-exchange swaps as part of an intervention program and rolled over contracts worth $393.6 million. Mark Kiesel, the chief investment officer for global credit at Pacific Investment Management Co., wrote on Twitter that Mexico’s and Brazil’s inflation-adjusted rates “are an opportunity as potential for economic reform increases.”
The central bank raised the target lending rate by 3.75 percentage points in the year through April to a two-year high of 11 percent in an effort to curb inflation before holding borrowing costs steady for the past three meetings.
U.S. CFTC Clearing Rules Eyed for Some Currency Derivatives
Foreign-exchange traders, already subject to a global probe over alleged manipulation, may face U.S. restrictions on derivatives contracts for some currencies.
Commodity Futures Trading Commission members and staff are weighing whether to require that contracts for non-deliverable forwards be guaranteed at clearinghouses that accept collateral from buyers and sellers. The regulation would apply the clearing rule to contracts for a dozen currencies, including China’s yuan, South Korea’s won and Brazil’s real.
The CFTC’s global markets advisory committee, led by Commissioner Mark P. Wetjen, plans to discuss the matter at an Oct. 9 meeting that is scheduled to include agency staff and David Bailey, director of financial markets infrastructure supervision at the Bank of England. A new rule would expand on CFTC mandates that require clearing for interest-rate and credit-default swaps.
“There appears to be a consensus view based on what I’ve heard and learned over the last number of months that a clearing mandate for the NDF asset class would lead to an improved market structure,” Wetjen said in a telephone interview yesterday. “But there are a number of lingering questions around readiness and other market structure issues that we hope to learn more about.”
Non-deliverable forwards are contracts to buy or sell a currency in the future that are settled with cash rather than delivery of the currency. The contracts, typically settled in U.S. dollars, are used to hedge or speculate on the future price of a currency facing capital controls or restrictions that make delivery outside of its country difficult.
Electronic Trading
A requirement to guarantee them at clearinghouses owned by LCH.Clearnet Group Ltd., CME Group Inc. (CME), Intercontinental Exchange Inc. (ICE) and Singapore Exchange Ltd. (SGX) could accelerate electronic trading of the contracts on CFTC-regulated platforms and threaten profits in the $5.3 trillion daily market.
There were $7.4 trillion in contracts between October 2013 and April in the dozen currencies the agency is weighing for the requirement, according to a CFTC document prepared for this week’s discussion. Ninety-nine percent of the $7.4 trillion wasn’t guaranteed at a clearinghouse, according to the document.
“The division of clearing and risk is confident those uncleared NDFs are of the type that” the four registered clearinghouses “are capable of clearing,” the document said.
Treasury Exemption
The CFTC has adopted rules under the 2010 Dodd-Frank Act to reduce risk and boost transparency in the $700 trillion derivatives market after largely unregulated credit-default swaps helped fuel the 2008 credit crisis. While the Treasury Department exempted foreign exchange swaps and forwards from the agency’s clearing requirements, the exclusion doesn’t apply to non-deliverable forwards.
The Investment Company Institute, which represents mutual funds, and the American Bankers Association have pressed regulators and lawmakers to keep the non-deliverable contracts outside of the new requirements. Treating non-deliverable contracts differently than the exempt forwards may confuse the market and increase U.S. investors’ costs, the groups have said.
“Any of these clearing mandate decisions have to take into account both the downstream implications linking into any trading requirement as well as the international coordination needed to avoid fragmentation,” James Kemp, managing director of the Global Financial Markets Association’s foreign-exchange division, said yesterday in a telephone interview.
Trading Growth
A study by the Bank for International Settlements said non-deliverable forwards represent $127 billion of the $5.3 trillion daily currency markets. The study of 2013 data showed trading in the contracts has grown, with turnover in some Asian contracts at least 10 times turnover from about a decade ago.
The European Securities and Markets Authority on Oct. 1 sought comment from the public on a possible clearing obligation for the contracts. “We are encouraged that regulators on both sides of the Atlantic are engaging with market participants on the important issue of NDF clearing on a similar timeframe and look forward to regular efforts at harmonization,” the Foreign Exchange Professionals Association, a trade group that includes LCH.Clearnet, CME Group, Citadel LLC and Virtu Financial Inc. among its members, said yesterday in a statement.
A proposal to require clearing would come amid a global probe, by agencies including the CFTC, into alleged rigging of currency benchmarks.
The world’s biggest banks are changing how they trade currencies after authorities on three continents opened probes of claims that dealers leaked confidential client information to counterparts at other firms and colluded to rig currency benchmarks used by money managers. U.S. and U.K. regulators are in talks to settle some of the probes as soon as November.
The CFTC meeting this week is also scheduled to include a discussion of derivatives tied to Bitcoin, a software protocol created anonymously in 2009 under the name Satoshi Nakamoto.
source: Bloomberg
The shared currency weakened as the International Monetary Fund cut it global growth forecast for 2015 and lowered its outlook for the euro-area economy. The yen strengthened a second day against the U.S. dollar on speculation officials are growing uncomfortable with the pace of its depreciation. Australia’s currency rose after the central bank held interest rates unchanged. Brazil’s real advanced.
“After a while, the weakness that you see in Spain, in France and elsewhere around Europe, it’s going to seep in toward Germany,” Douglas Borthwick, head of foreign exchange at New York brokerage Chapdelaine & Co., said by phone. “Germany’s been the unaffected patient and, sort of like Ebola, once it starts to cross borders everyone gets infected, regardless of what’s happening with the currency rate.”
The euro fell as much as 0.6 percent before trading 0.1 percent lower at $1.2642 as of 1:59 p.m. New York time. It slumped 0.6 percent to 136.91 yen. The Japanese currency advanced 0.5 percent to 108.30 per dollar after gaining 0.9 percent yesterday. It reached 110.09 per dollar on Oct. 1, the weakest level in six years. The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major currencies, slipped 0.1 percent to 1,067.94 after dropping 0.9 percent yesterday, the most since Sept. 18, 2013.
Real, Aussie
Brazil’s real was the biggest gainer of the U.S. currency’s 16 major peers on speculation presidential candidate Aecio Neves will receive the endorsement of a former rival in this month’s runoff election against incumbent Dilma Rousseff. The currency gained a third day, adding 1.3 percent to 2.3942.
Australia’s dollar appreciated a second day as the Reserve Bank pointed to an improvement in private demand after keeping policy settings steady. The RBA left the benchmark interest rate at a record-low 2.5 percent today, where it’s been since August 2013, and reiterated it sees a likely period of interest-rate stability. The currency advanced 0.5 percent to 88.08 U.S cents. It rallied 1 percent yesterday, the most since March 6, rising from a more than four-year low set last week.
Canada’s dollar led major currencies lower, losing 0.4 percent, as a report showed Canadian building permits plunged 27.3 percent from a record in August. The currency slid to C$1.1179.
IMF Forecast
The dollar trimmed losses after the IMF called the U.S. a bright spot in the global economy, forecasting it to grow 2.2 percent this year, revised up from 1.7 percent in July.
U.S. job vacancies rose more than forecast, a report from the Bureau of Labor Statistics showed today, as employers gained confidence about the outlook for demand in the world’s biggest economy. The world economy will grow 3.8 percent next year, compared with a July forecast for 4 percent expansion, the IMF said. The euro area will grow 1.3 percent next year, slower than the 1.5 percent pace predicted in July.
Japan’s currency rose for the first time in three days against the euro as Bank of Japan Governor Haruhiko Kuroda said the central bank will closely monitor the exchange rate and Prime Minister Shinzo Abe said its weakness is hurting small companies and households.
BOJ Meeting
“Official comments have voiced some sympathy towards importers and smaller companies having to pay a higher price for overseas materials and energy,” said Neil Jones, head of hedge-fund sales at Mizuho Bank Ltd. in London. “This is causing investors to liquidate short yen positions.” A short position is a bet an asset’s price will decline.
The BOJ, which buys about 7 trillion yen ($64.4 billion) of government bonds a month, kept its asset-purchase stimulus program unchanged after a meeting today. The decision was predicted by all 33 economists surveyed by Bloomberg News between Sept. 26 and Oct. 2. Four of them expect the central bank to announce additional stimulus on Oct. 31.
The yen climbed 1.4 percent in the past week, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes, as investors bet officials were seeking to talk down the pace of recent declines. The euro rose 0.1 percent and the dollar was little changed.
Euro Declines
The euro slumped toward a more-than-two-year low against the dollar after industrial production in Germany dropped 4 percent in August from the previous month, when it increased a revised 1.6 percent. A report yesterday showed German factory orders also plunged the most since 2009.
“Any time Germany even sneezes the rest of the euro zone catches a cold, so that’s the primary reason why the euro is certainly being a bit more flaky,” said Kathleen Brooks, European research director at Forex.com in London. “If it doesn’t dip into recession, it could probably register a quarter of negative growth.” Data due Oct. 9 will show German shipments slid the most since January 2009 in August, according to the median forecast of 11 analysts polled by Bloomberg News. Exports gained the most in more than two years in July from a month earlier.
Royal Bank of Canada revised its forecasts for the euro lower, predicting it will end the year at $1.23, from a previous estimate of $1.30. The common currency will drop to $1.17 by the end of 2015, from an earlier forecast of $1.25, strategists led by Adam Cole, the head of global foreign-exchange strategy in London, wrote in an e-mailed report dated yesterday.
Russia Spends Up to $1.75 Billion in Two Days to Buoy Ruble
Russia’s central bank spent as much as $1.75 billion to prop up the ruble over the last two trading days, its biggest market intervention since President Vladimir Putin’s incursion into Ukraine in March.
Russia’s central bank spent the equivalent of $980 million to shore up the ruble on Oct. 3, the latest data on the authority’s website showed today. The bank also said it shifted the upper boundary of the currency’s trading band by 10 kopeks yesterday, a move that may have involved spending between $420 million and $769 million that day. The exchange rate weakened 0.3 percent to 44.6234 versus the basket by 5:12 p.m. in Moscow, set for a record low for the fourth time this month.
Putin is suffering the consequences for shaking up the post-Cold War order in eastern Europe as the U.S. and European Union impose sanctions on his economy and investors pull money out of the country. Demand for dollars and euros is growing among Russian companies locked out of western debt markets as they contend with $54.7 billion of debt repayments in the next three months, according to central bank data. The ruble is under “permanent pressure” from lingering demand for foreign currency for debt payments, Vladimir Evstifeev, a Moscow-based analyst at OAO Bank Zenit, said in an e-mailed note. The “collapsing truce” in Ukraine is also leveling pressure on the exchange rate, he said.
Fighting continued today in eastern Ukraine amid moves to establish a buffer zone to help cement a cease-fire that went into effect a little more than a month ago between government forces and pro-Russian separatists.
New Boundary
The Bank of Russia ended a five-month pause of selling foreign currency after the ruble’s world-beating slide in the past three months sent it through the upper boundary of the authority’s target dollar-ruble basket. The central bank set the ruble’s upper band limit at 44.60 against the basket. When the currency crosses the upper trading band, the central bank sells $350 million before shifting the boundary by 5 kopeks, according to official guidelines. Russia spent $40 billion in the currency market this year through May, excluding the latest interventions.
The resumption is putting additional pressure on Russia’s international reserves, which have fallen for six straight weeks to $456.8 billion on Sept. 26, marking an 11 percent decline since the end of 2013. Revenue for the world’s largest energy exporter is taking a hit as Brent crude slides to the weakest level in more than two years, reaching as low as $92.01 per barrel in London today.
‘Further Weakness’
The central bank’s latest action “does not mean that further weakness is ruled out,” Vladimir Osakovskiy, a Moscow-based economist at Bank of America Corp., said in e-mailed comments today.
The ruble weakened 0.5 percent to 39.9155 per dollar today, bringing its retreat in the past three months to 14 percent. Russian bonds due in February 2027 fell for a third day, sending the yield one basis point higher to 9.57 percent, as the government announced it will offer 10 billion rubles ($251 million) at a bond auction tomorrow. The yield is up 1.21 percentage points since Putin’s incursion into Ukraine.
The rate on a three-year ruble-dollar basis swap reached 290 basis points today, the least since at least 2006, when Bloomberg began compiling the data. Negative rates signal traders will pay a premium to obtain dollars and the central bank said last week it will start offering foreign-currency swaps to ease the pressure in “several weeks.”
“We expect the central bank to keep close watch, being wary of a potential spike in retail foreign-exchange purchases,” Sberbank CIB analysts said in an e-mailed note.
Brazil’s Real Leads Global Currency Advances on Election Outlook
Brazil’s real climbed the most among major currencies on speculation opposition candidate Aecio Neves will receive the endorsement of Marina Silva against President Dilma Rousseff in this month’s runoff election. The real rose 1.3 percent to 2.3953 per dollar at 3:04 p.m. in Sao Paulo, the biggest increase among 31 currencies tracked by Bloomberg. Swap rates, a gauge of expectations for changes in borrowing costs, fell 0.05 percentage point to 11.79 percent on the contract due in January 2016.
“Elections keep driving the real, which is benefiting from news that Silva will make official her support for Neves on Thursday, when fresh polls are due,” Joao Paulo de Gracia Correa, a currency trader at Correparti Corretora de Cambio in Curitiba, Brazil, said in a telephone interview.
The real extended its three-day rally to 4.1 percent, the biggest since September 2013, amid revived speculation that a new government will restore growth and curb inflation. Projected swings between currency gains and losses climbed, with one-month implied volatility on options for the real increasing to 20 percent, the highest among developing nations.
Silva, who finished third in the Oct. 5 vote, plans to back Neves against Rousseff in the Oct. 26 runoff, Folha de S.Paulo and O Estado de S. Paulo reported. Valor Economico reported that Silva has agreed to support Neves only if he would end the ability of a candidate to be re-elected. Neves told reporters in Brasilia that he favors five years without re-election for all public offices. “It’s a question to be discussed,” he said when asked if he would be willing to serve only five years.
Voter Tally
Rousseff had 42 percent of the first-round vote, followed by Neves with 34 percent and Silva 21 percent. Neves received more support from voters than the 26 percent backing he garnered in a Datafolha poll published Oct. 4. Rousseff had 44 percent in the survey, which had a margin of error of plus or minus two percentage points. New voter polls by Ibope and Datafolha may be published as soon as Oct. 9.
Rousseff is seeking a second four-year term as her administration contends with the nation’s first recession since 2009 and above-target inflation.
Gross domestic product shrank by 0.6 percent in the second quarter from the previous three months after contracting a revised 0.2 percent from January through March. Consumer prices increased 6.65 percent in the 12 months through September, according to the median forecast of economists surveyed by Bloomberg before tomorrow’s report from the national statistics agency. The official target range is 4.5 percent plus or minus two percentage points.
IMF Outlook
Brazil suffered today the biggest cut to its International Monetary Fund growth outlook among emerging markets. The economy is expected to grow 0.3 percent in 2014, down from the forecast of 1.3 percent in July.
To support the currency, Brazil sold today $197.3 million of foreign-exchange swaps as part of an intervention program and rolled over contracts worth $393.6 million. Mark Kiesel, the chief investment officer for global credit at Pacific Investment Management Co., wrote on Twitter that Mexico’s and Brazil’s inflation-adjusted rates “are an opportunity as potential for economic reform increases.”
The central bank raised the target lending rate by 3.75 percentage points in the year through April to a two-year high of 11 percent in an effort to curb inflation before holding borrowing costs steady for the past three meetings.
U.S. CFTC Clearing Rules Eyed for Some Currency Derivatives
Foreign-exchange traders, already subject to a global probe over alleged manipulation, may face U.S. restrictions on derivatives contracts for some currencies.
Commodity Futures Trading Commission members and staff are weighing whether to require that contracts for non-deliverable forwards be guaranteed at clearinghouses that accept collateral from buyers and sellers. The regulation would apply the clearing rule to contracts for a dozen currencies, including China’s yuan, South Korea’s won and Brazil’s real.
The CFTC’s global markets advisory committee, led by Commissioner Mark P. Wetjen, plans to discuss the matter at an Oct. 9 meeting that is scheduled to include agency staff and David Bailey, director of financial markets infrastructure supervision at the Bank of England. A new rule would expand on CFTC mandates that require clearing for interest-rate and credit-default swaps.
“There appears to be a consensus view based on what I’ve heard and learned over the last number of months that a clearing mandate for the NDF asset class would lead to an improved market structure,” Wetjen said in a telephone interview yesterday. “But there are a number of lingering questions around readiness and other market structure issues that we hope to learn more about.”
Non-deliverable forwards are contracts to buy or sell a currency in the future that are settled with cash rather than delivery of the currency. The contracts, typically settled in U.S. dollars, are used to hedge or speculate on the future price of a currency facing capital controls or restrictions that make delivery outside of its country difficult.
Electronic Trading
A requirement to guarantee them at clearinghouses owned by LCH.Clearnet Group Ltd., CME Group Inc. (CME), Intercontinental Exchange Inc. (ICE) and Singapore Exchange Ltd. (SGX) could accelerate electronic trading of the contracts on CFTC-regulated platforms and threaten profits in the $5.3 trillion daily market.
There were $7.4 trillion in contracts between October 2013 and April in the dozen currencies the agency is weighing for the requirement, according to a CFTC document prepared for this week’s discussion. Ninety-nine percent of the $7.4 trillion wasn’t guaranteed at a clearinghouse, according to the document.
“The division of clearing and risk is confident those uncleared NDFs are of the type that” the four registered clearinghouses “are capable of clearing,” the document said.
Treasury Exemption
The CFTC has adopted rules under the 2010 Dodd-Frank Act to reduce risk and boost transparency in the $700 trillion derivatives market after largely unregulated credit-default swaps helped fuel the 2008 credit crisis. While the Treasury Department exempted foreign exchange swaps and forwards from the agency’s clearing requirements, the exclusion doesn’t apply to non-deliverable forwards.
The Investment Company Institute, which represents mutual funds, and the American Bankers Association have pressed regulators and lawmakers to keep the non-deliverable contracts outside of the new requirements. Treating non-deliverable contracts differently than the exempt forwards may confuse the market and increase U.S. investors’ costs, the groups have said.
“Any of these clearing mandate decisions have to take into account both the downstream implications linking into any trading requirement as well as the international coordination needed to avoid fragmentation,” James Kemp, managing director of the Global Financial Markets Association’s foreign-exchange division, said yesterday in a telephone interview.
Trading Growth
A study by the Bank for International Settlements said non-deliverable forwards represent $127 billion of the $5.3 trillion daily currency markets. The study of 2013 data showed trading in the contracts has grown, with turnover in some Asian contracts at least 10 times turnover from about a decade ago.
The European Securities and Markets Authority on Oct. 1 sought comment from the public on a possible clearing obligation for the contracts. “We are encouraged that regulators on both sides of the Atlantic are engaging with market participants on the important issue of NDF clearing on a similar timeframe and look forward to regular efforts at harmonization,” the Foreign Exchange Professionals Association, a trade group that includes LCH.Clearnet, CME Group, Citadel LLC and Virtu Financial Inc. among its members, said yesterday in a statement.
A proposal to require clearing would come amid a global probe, by agencies including the CFTC, into alleged rigging of currency benchmarks.
The world’s biggest banks are changing how they trade currencies after authorities on three continents opened probes of claims that dealers leaked confidential client information to counterparts at other firms and colluded to rig currency benchmarks used by money managers. U.S. and U.K. regulators are in talks to settle some of the probes as soon as November.
The CFTC meeting this week is also scheduled to include a discussion of derivatives tied to Bitcoin, a software protocol created anonymously in 2009 under the name Satoshi Nakamoto.
source: Bloomberg