For over a year, Russian bankers have looked to the rouble bond market as their personal risk-free Vegas.
Too scared to lend directly to corporates, Russian banks have found they don’t have to – thanks to central bank stimulus measures that allow them to reap risk-free returns of 130 – 170 basis points on rouble paper, simply by borrowing money on the market and buying up central bank bonds.
While the system has functioned well for Russian corporates which have been able to issue $23.1bn in rouble debt this year thanks to falling borrowing costs, economists at Troika Dialog, the Moscow investment bank, warn the situation will soon take its toll on Russia’s financial system.
Russia’s broad monetary base has already grown 46 per cent year-on-year in the first six months of 2010, and the central bank has done nothing to help matters by expanding its bond offerings, they say.
The central bank’s “nice, risk-free” bond offerings give banks ample returns “for doing nothing but simply borrowing on the market [and] inflating [their] balance sheet”, they say. Banks will buy the central bank bonds but use them as collateral simply to borrow more on the market the next day. Read more
The central bank of China and monetary authority of Singapore have agreed a three-year currency swap valued at 150 billion yuan ($22.1bn), the People’s Bank of China announced today:
“In order to promote bilateral trade and direct investments, Bank of China and the Monetary Authority of Singapore on July 23, 2010 in Beijing signed a bilateral currency swap agreements. The size of the swap agreement for the 150 billion yuan / about 30 billion Singapore dollars. Agreement has a term of 3 years may be extended by mutual agreement.” (translated from the original using Google translate, h/t Bloomberg)
Today, for the first time, the midpoint set by Safe exceeded the 0.5 per cent tolerance bands set around the original exchange rate of 6.8275 – by half a basis point.
Not as historic as many expected at the start of the week. But then ‘flexibility’ does not mean ‘strength’: a flexible exchange rate can go up or down. Geoff Dyer, the FT’s China bureau chief, points out that domestic and international takes on the new policy differ greatly – principally because their desires differ greatly. Internationally, a stronger yuan is wanted. Domestically, the “export lobby is welcoming [flexibility] as a way of protecting itself from a weaker euro.”
China’s new policy has not completely ruled out the prospects of a political showdown. The obvious flashpoint is if the euro does weaken substantially again.
Having strengthened yesterday, the renminbi has opened sharply down against the dollar – indeed by the largest weakening since December 2008.
Market talk suggests Chinese state-owned banks bought dollars to save the central bank from having to intervene. If the currency is seen as a one-way bet, ‘hot money’ will likely flow into China – potentially interrupting monetary policy transmission and causing inflation. Read more
Expect a stronger Swiss franc: the central bank has dropped a key phrase about countering “excessive appreciation” of its currency after several hints (see 1,2). Forex interventions by the SNB are rumoured to have been numerous (see 1,2,3 to name but a few) – but with the euro falling, the franc has been rising in spite of them.
The table below compares today’s monetary policy assessment with its immediate predecessor in March, highlighting key differences. In a nutshell; the franc reference has gone; growth and inflation forecasts are up; as are ‘downside risks’ following the shenanigans in the eurozone. Table after the jump: Read more
Two points stand out from the latest BIS quarterly review.
First, a warning on mismatched maturities. Ingo Fender and Patrick McGuire, of BIS, point out the continued reliance of European banks on wholesale* instruments and FX swaps. Banks forced to roll over short maturity debt risk agreeing new debt on worse terms. The authors point out that if conditions worsen, maturities will become even shorter, exacerbating the problem (p63):
Such funding patterns put a premium on contingency funding arrangements for international banks and underline the need for further diversification in banks’ funding profiles … In particular, they point to potential benefits from improvements to FX swap market infrastructure, such as the use of central counterparties to allow multilateral netting and more efficient collateral management
Second, Naohiko Baba (BoJ) and Ilhyock Shim (BIS) find Read more
Amid great confusion, the suspended Venezuelan forex market will reopen today, under far greater control from the central bank. Quite how the trading band will be determined and defended is not known.
The unofficial “parallel” forex market was suspended on May 19, with authorities blaming speculators and enemies of Hugo Chavez for the depreciating bolivar and rising inflation. This has left importers struggling for a fortnight. As the FT’s Benedict Mander put it: “One is left wondering why they couldn’t have decided how the new system was going to work before casting out the old.”
The market is expected to work as follows: Read more