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Central Trading of OTC Derivatives Stabilizes the Real Economy

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Central Trading of OTC Derivatives Stabilizes the Real Economy

In order to improve market liquidity and financial stability, the G20 countries decided in 2009 that over-the-counter (OTC) products should be centrally traded on electronic platforms. The research results of Swiss Finance Institute Professor Harald Hau from the University of Geneva, Peter Hoffmann, and Sam Langfield from the European Central Bank, and Yannick Timmer from Trinity College Dublin confirm that such a move will reduce the costs of hedging currency risks for non-financial companies and therefore make an important contribution to risk reduction in the real economy.

Harald Hau

Harald Hau

The decision of the G20 countries to trade all standardized OTC derivatives via central electronic platforms will, in particular, affect the foreign exchange market. With a worldwide daily turnover of USD 5.1 trillion, it is the world’s largest financial market. Under the current system, dealer-banks are not obliged to publicly disclose quotes and prices. Correspondingly, low market transparency results in less sophisticated non-financial clients having to pay significantly higher prices for currency hedging.

The trading of foreign exchange derivatives on electronic platforms, on which a large number of dealer-banks are active, counteracts this state of affairs. As the research results show, less sophisticated non-financial clients can benefit from price competition among dealer-banks. This makes the current markup disappear and results in uniform pricing across all clients. For SMEs, in particular, this simplifies access to the OTC market and makes it easier to hedge currency risks. This, in turn, makes an important contribution to the stability of the real economy.

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Dollar dips, Aussie gains on improving risk sentiment

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Dollar dips, Aussie gains on improving risk sentiment 1

By Karen Brettell

NEW YORK (Reuters) – The dollar dipped on Tuesday and riskier currencies including the Australian dollar gained as U.S. stocks were stable, reflecting improving risk appetite.

The greenback has been a beneficiary from recent volatility in stocks, which were roiled last week by a dramatic jump in U.S. government debt yields.

Treasuries have stabilized this week, with benchmark yields holding below last week’s highs, helping to restore some market calm.

On Tuesday, “Wall Street largely retained Monday’s sharp gains,” which helped the U.S. currency “ease lower through the N.Y. session,” Ronald Simpson, managing director, global currency analysis at Action Economics, said in a report.

The dollar index fell 0.31% to 90.731, after earlier reaching a three-week high of 91.396.

The euro gained 0.36% to $1.2092.

Rising yields came as participants worried that an economic recovery from the impact of the COVID-19 pandemic, combined with fiscal stimulus, will cause a jump in inflation and potentially faster tightening from the Federal Reserve.

The volatility also boosted the greenback as investors unwound short positions in the currency.

“If you do see volatility, the natural inclination is to take risk off the table; in this case it just basically means getting out of existing positions, and the dollar shorts are extremely elevated at this point” said Bipan Rai, North American head of FX strategy at CIBC Capital Markets in Toronto.

Short U.S. dollar positions were $29.33 billion in the week ended Feb. 23, according to data from the Commodity Futures Trading Commission.

Riskier currencies including the Australian dollar continued to rebound from last week’s sell-off, with the Aussie also gaining after the Reserve Bank of Australia recommitted to keeping interest rates at historic lows.

The currency was last up 0.77% at $0.7831, though it remains below the three-year high of $0.8007 reached on Thursday.

Karen Jones, a technical analyst at Commerzbank, said that the Aussie and other risky currencies including the Norwegian krone appeared to be reversing from interim tops, which will likely be positive for the U.S. dollar near-term.

The “U.S. dollar bear trend is probably over” for now, Jones said in a report.

The greenback was last down 1.09% at 8.466 krone, but is holding above the 8.313 krone per dollar level reached last week, the weakest for the dollar in more than two years.

Safe-haven currencies including the Swiss franc and Japanese yen, meanwhile, ended slightly stronger, reversing earlier weakness.

The Swiss franc earlier hit its lowest since November 2020 against the dollar at 0.9193 while the yen was the weakest since August at 106.95.

Bitcoin fell to a session low after Gary Gensler, President Joe Biden’s nominee to chair the U.S. Securities and Exchange Commission, said that cryptocurrency has raised new investor protection concerns.

It was last down 4.11% at $47,609.

Citi said in a report that the popular cryptocurrency was at a “tipping point” and could become the preferred currency for international trade or face a “speculative implosion.”

(Additional reporting by Elizabeth Howcroft in London; Editing by Bernadette Baum and Jonathan Oatis)

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Sterling slips to 2-1/2 week low against dollar, eyes turn to UK budget

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Sterling slips to 2-1/2 week low against dollar, eyes turn to UK budget 2

By Ritvik Carvalho

LONDON (Reuters) – Sterling eased to its lowest level against the dollar in 2-1/2 weeks on Tuesday, as the strengthening U.S. currency put a brake on gains that had taken the pound to 2-1/2-year highs last week.

The pound has so far been the best performing G10 currency in 2021, up 1.65% against the dollar, although its lead over other currencies is diminishing.

Bets that Britain’s rapid vaccine rollout would underpin an economic rebound boosted sterling as far as 4.2% above its year-end price to the dollar as recently as last week.

However, expectations of a faster U.S. economic recovery and for the Federal Reserve to show greater tolerance to higher bond yields than other central banks have boosted the greenback in recent days.

By 1500 GMT, sterling was flat at $1.3931, earlier hitting a 2-1/2 week low of $1.3867. It was flat to the euro at 86.42 pence.

“Sterling lost further ground overnight ahead of tomorrow’s budget announcement on the back of the spike in risk aversion during the Asian session in a context of generalized USD strength,” said Roberto Cobo Garcia, FX strategist at BBVA.

“The prolongation of the recent correction in cable could be due to some profit taking after February’s gains, as the latest macro data appeared too uninspiring to explain the move.”

Garcia said he remains neutral on the pound’s current levels, as both the euro-sterling and sterling-dollar rate have gone a bit “far too fast, given the underlying cycle uncertainties.”

Sterling slips to 2-1/2 week low against dollar, eyes turn to UK budget 3

(Graphic: Reflation trade’s big FX winner: GBP, https://fingfx.thomsonreuters.com/gfx/mkt/yxmvjxwmgvr/Pasted%20image%201614674900217.png)

EYES ON UK BUDGET

British house price growth picked up unexpectedly last month, mortgage lender Nationwide said on Tuesday, defying expectations of a slowdown as finance minister Rishi Sunak prepares new budget measures to boost the market.

House prices rose 6.9% in annual terms in February from 6.4% in January, Nationwide said, above all forecasts in a Reuters poll of economists that had pointed to a slowdown to 5.6%.

Sunak said on Sunday he would not rush to fix the public finances as he readied a budget plan which will pile more borrowing on top of almost 300 billion pounds ($418 billion) of COVID-19 spending and tax cuts.

“We’re not expecting too many surprises when the chancellor takes to his feet to deliver one of the most widely leaked budgets in history,” said Robert Alster, chief investment officer at wealth manager Close Brothers Asset Management.

“The key focus will clearly be continued support for the economy, as we navigate our way out of lockdown,” Alster said.

“As things stand, the budget isn’t expected to have a particularly notable effect on the markets, but investors will be keeping a watchful eye on how Rishi Sunak chooses to steer the nation’s finances in the coming months.”

(Reporting by Ritvik Carvalho; editing by Jonathan Oatis)

 

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A rare sight? UK blue chips, sterling rise in tandem

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A rare sight? UK blue chips, sterling rise in tandem 4

By Joice Alves and Ritvik Carvalho

LONDON (Reuters) – A surging pound is failing to hold back Britain’s exporter-heavy blue-chip FTSE 100 in 2021, as its impact is outweighed by expectations vaccine rollouts will boost global economic growth and commodity prices will rise.

Sterling, the best performing G10 currency in 2021, has risen to near its highest in three years as global investors chase assets in countries whose vaccine programmes are ahead, and on some relief that a Brexit deal was agreed.

Reflation trade’s big FX winner: GBP

The British currency and the FTSE 100 tend to move in opposite directions. Almost 80% of UK blue-chip firms’ revenues come from abroad and a stronger pound makes them less competitive, while their stocks become pricier for overseas investors.

But the FTSE 100 is the best-performing equity market in 2021 even as sterling rallies, which would usually hit company earnings projections.

Analysts say both sterling and the FTSE are poised for growth, as an economic boost from vaccination rollouts and a rebound in commodity prices, which particularly helps the resource-heavy FTSE, outweigh the impact of a strong pound on stocks.

FTSE 100 outperforms in 2021

A rare sight? UK blue chips, sterling rise in tandem 5

“If a really strong recovery takes hold, with commodities prices in the vanguard, the pound’s influence could prove to be less powerful than the earnings and dividend streams of the big miners and oil producers,” said Russ Mould, investment director at AJ Bell.

Goldman Sachs analysts, bullish on oil and copper prices, see further FTSE support from rising commodity prices.

Expecting a potentially expansionary UK budget on Wednesday and seeing a very slim chance that the Bank of England will cut interest rates, the U.S. bank sees sterling outperforming.

This isn’t the first time the negative correlation between sterling and the FTSE has broken down — during the March 2020 COVID-19 market crash both tumbled.

Past breakdowns of sterling/FTSE inverse correlation A rare sight? UK blue chips, sterling rise in tandem 6

Sterling and UK stocks remain at the mercy of global investor sentiment. When broader markets slide, British assets suffer, especially given the UK’s sizeable current account deficit, so the twin rebound may rely on a benign market backdrop.

But valuations look attractive for British blue-chip stocks, which trade at 14.6 times 12-month forward earnings, a far cry from the MSCI all-country world stocks index’s 20x, according to Refinitiv data.

“The UK market has been a serial underperformer for some time,” Mould said. “If we get an inflationary recovery, then the UK could be just what investors are looking for: plenty of exposure to a cyclical upturn, especially via commodities; cheap, after its underperformance.”

UK stocks are one of the cheapest

A rare sight? UK blue chips, sterling rise in tandem 7

(Reporting by Joice Alves and Ritvik Carvalho; Editing by Tommy Wilkes and Jan Harvey)

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