Randomly Noted

In my travels around Asia the past couple of weeks, I’ve been meeting with various banks and investors to learn more about the FX market in connection with our big initiative there. Stopped in to see a decent sized U.S. hedge fund and was fascinated by the investment strategy.

Among other tings, these folks invest in convertible bonds issued in local currencies in home countries. They end up with three factors that can affect returns: credit exposure, changes in interest rates and changes in currency values. The manager relayed an interesting anecdote that explained the benefit of such a strategy: the bond and underlying stock hadn’t moved much in price but the currency had to the point it allowed him to convert the bonds into stock and then sell the stock, convert the currency to dollars and make a handsome return. In other words, currency fluctuations in transactions like this can help take an out-of-the-money convertible and all of a sudden bring it in the money.

Continue reading…

Retail investors are often looked on as the unsophisticated types who move slowly and late and rarely have a short-term affect on financial markets.  They broke from that mold in Japan, where retail FX traders  (known as Mrs. Watanabe) contributed to a surge in the Japanese yen this week when they began to unwind a popular strategy called the carry trade.  Many of these investors had shorted the yen and gone long currencies that offer higher yields (the so-called carry trade). Concerned about the effects of the horrible earthquake in Japan on its economy, these investors unwound these trades – meaning they bought the yen en masse and sold the other side of the trade, often the Australian dollar.

Is it possible that the retail investor could move the currency of the world’s third-largest economy this way? Sure thing, because Japanese retail trading of the yen can account for nearly 30% of all trading on any given day.

Continue reading…

Earlier this year, when the Banks for International Settlements came out with its triennial FX survey, we learned that 85% of the growth in the FX market over the past three years came in a category called “other institutions,” a group that includes funds of all stripes, including hedge funds, as well as small banks and insurance companies. In fact, for the first time, there was more trading in this category than among reporting dealers.

Now, we learn from the BIS Quarterly review what the BIS believes drove those increases. Number one on the list: High-frequency trading strategies grew. Followed by more trading among smaller banks. And finaly the emergence of retail (individuals as well as small institutions.)

Continue reading…

The FX market is hot. About $4 trillion of currencies are traded every day – a number seen hitting $10 trillion in 10 years. Banks around the world are bulking up their trading desks. And Mrs. Watanabe (the proverbial Japanese housewife who day trades while her husband is at work) continues to do more business than ever all over the world.

So, it is with that backdrop that two of the platforms that cater to the retail investor are looking to go public. Gain Capital, which runs the Forex.com website, is hoping to sell 11 million shares for a maximum $190 million, while FXCM is hoping to sell 15 million shares from $13 to $15.

And while there is no question that FX is hot, investors may approach these IPOs with a little caution.

Continue reading…

The most interesting phrase in the surprisingly combative speech delivered in Frankfurt by Federal Reserve Chairman Ben Bernanke is “incomplete adjustment.”

More fully, the overly polite but still stinging quote is this, from the text of his speech at a European Central Bank conference: “An important driver of the rapid capital inflows in some emerging markets is incomplete adjustment of exchange rates in these economies, which leads investors to anticipate additional returns arising from expexcted exchange rate appreciation.”

It’s all awfully important, but the back-and-forth between the Fed and its critics, domestic and international, of quantitative easing is starting to resmeble two children standing in front of a neighbor’s broken window.

Continue reading…

If you think the $4 trillion a day of trading in the FX market is huge, how about this: UBS strategists believe the market will grow to $10 trillion traded daily in 10 years. What UBS sees behind that growth is a bigger role by asset managers in the market – and in many cases, it’s more about diversifying portfolios. As more hedge funds, pension funds, mutual funds and insurance companies make investments around the world, the more need there is for them to have an FX hedging strategy.

It is a market that one would think could be vulnerable to disruptions. But the strategists at UBS don’t see much threat of that – they look back at the financial market “shocks” a couple of years ago and how well the currency markets rebounded. And they don’t see disruptions in international trade having much of an impact.

One interesting side effect – the bigger the market becomes, the more difficult it is for central banks to influence interest rates through intervention – because it would take more activity to have an effect on the markets.

It’s war!

War is a pretty strong word and one not often used in financial reporting. But there it is, over and over, the word war used in direct quotes and out of them. It’s the operative term to describe what is going on in currency markets.

We might be short of war, but clearly things have changed. Just today, the rhetorical level aimed at China’s mostly unchanging yuan is higher than before. And it’s been pretty high.

The U.S. Treasury Secretary, Timothy Geithner, still employs non-threatening words and won’t use China’s name. But, still… “When large economies with undervalued exchange rates act to keep the currency from appreciating, that encourages other countries to do the same, and this sets off a dangerous dynamic,” Geithner said.

A Dow Jones Newswires headline this afternoon reads, “EU President: Europe Demands China Budge On Currency,” implying the comments earlier today of Chinese Premier Wen Jiabao in Brussels, in which he implored Europe’s leaders not to “join the chorus pressing to revalue the yuan,” fell on deaf ears.

Japan has intervened and the country’s central bank will launch more quantitative easing. The currency is still strong against the dollar. Chile has publicly worried about its too-high currency, as has Brazil.

Meanwhile, in the U.S., markets are reacting as if it is a signed-and-delivered deal that the U.S. Federal Reserve will embark on more quantitative easing of its own, knocking more starch from the weakened dollar. A distressing September jobs report, due for release on Friday, might be the final catalyst.

The world’s major nations have done a solid job since the start of the credit crisis and subsequent broad and deep recession of avoiding significant protectionist trade measures. It would be disappointing indeed to mitigate that necessary success with a no-holds-barred fight to gain advantage through weaker exchange rates.

It might not be up to China to stop all this, but some real rather than apparent relaxation of controls on the yuan by the Chinese government surely would help calm things down.

For the U.S. Treasury Secretary, there are probably no fun days and less fun days. Maybe history will look more kindly, but it’s tough sledding right now.

Today was likely one of those less-fun days for Treasury Secretary Timothy Geithner. He had to appear before angry committees of the Senate and House of Representatives and tell them why retaliatory measures against China for controlling its currency are not the way to go.

Today must have been as much fun for Geithner as heading to Capitol Hill to defend the big bank bailouts. Actually today was probably less fun. Because there are defenses of bank and AIG bailouts, however unpopular they have become from a rear view mirror view.

Continue reading…

The recent Bank for International Settlements FX market survey unvelied a number of trends. One that didn’t get much coverage was some of the reordering of the top ten trading centers around the world. Not huge shifts but interesting nonetheless. For example, Switzerland – home of two of the largest FX trading banks in UBS and Credit Suisse dropped from the third largest trading center in 2007 to the 5th largest in 2010. Moving ahead and up a spot each was Japan (now 3rd) and Singapore (now 4th). The answer for the shift could be connected to the credit crisis of 2008 – Asia was touched but in a way much less then Europe and the U.S. Asian economies suffered through the recession but not as much as elsewhere.  And big banks were particularly hit hard through the crisis.

Another interesting tidbit – when you look at the top four trading centers in each of the three regions, you know that Europe will certainly be the largest, which it is with around 47% of the marketshare. But second place is Asia (20%) and the Americas are third (19.7%). The gap between numbers one and four in Asia is 4.4 percentage points. But it is 17.6 percentage points in the Americas. The U.S. is the second biggest player but it drops significantly after that – Canada comes in number two in the region with a 1.2% market share. Mexico and Brazil each have an 0.3% share.

The Bank for International Settlements released its triennial survey on the foreign exchange markets last night  and among the mounds of all of the interesting numbers (interesting to those of us who care about forex) were some trends worth noting. For starters, spot trading was up nearly 50% – and that was driven by the traditional trading between banks but even more so by trading by hedge funds, pension funds and mutual funds, among those characterized as “other financial institutions.”

So, proprietary trading was in full force at the banks – which we know has been a profit center in recent quarters for some firms. And we continue to see the larger role played by institutions like hedge funds.

Continue reading…