First Impressions

How Emerging Market FX Really Performed in 2013
Blu Putnam, Chief Economist, CME Group

The actual performance of key emerging market currencies was much more diverse in 2013 than is often assumed. Second quarter depreciation was the norm, and QE taper talk from Fed Chair Ben Bernanke got most of the blame. For the second half of 2013, emerging market currencies differentiated themselves, with relative stability for the Mexican peso contrasted against further weakness for the Brazilian real and Indian rupee.

For example, the Mexican peso lost a little less than 5 percent against the U.S. dollar in the second quarter, lost another 1 percent against USD in the third quarter, and gained a small fraction in the fourth quarter, despite the official QE taper decision. The Indian rupee lost much more in the second quarter, almost 9 percent against the U.S. dollar, and lost more again in the third quarter, down another 5 percent, yet also was just barely positive in the fourth quarter. While following the same pattern in the second quarter, losing about 9.5 percent versus the USD, the Brazilian real stabilized in the third quarter and then dropped another 6 percent in the fourth quarter. Putting the performance of these three currencies in the lens of the ranges through which they traded, the high-low range for the Mexican peso (against USD) was 12 percent in 2013, which was just barely 1 percent higher than the range for the British pound and the Swiss franc against the U.S. dollar. By sharp contrast, there was a very wide range for the Brazilian real of 26 percent, and for the Indian rupee of almost 30 percent, as these currencies faced much more severe risks and difficult long-term challenges.

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Quote of the Day

“It looks like senior staff at the Board will probably use Wednesday’s Senate hearing as another chance to hit the snooze button.”

Joshua Rosner, managing director at Graham Fisher & Co in the story, “Fed to Release Plan to Limit Banks’ Commodities Activities”.

Lead Stories

‘Timing is Crucial’ When Reining In a Credit Boom
Jason Douglas – MoneyBeat – WSJ
When is the best time for a central bank to step in to rein in a burgeoning credit boom? Sooner rather than later, suggests a Bank of England analysis.

***DA: The only problem is that it goes against human nature, especially that of the political persuasion.

Investors Return to Euro-Zone Bonds; Some Yields Fall to Precrisis Levels
A turnaround in economic fortunes of the euro zone and the fading of investment destinations elsewhere around the world have driven a surge in buying of the region’s government bonds.

***DA: Crisis? What crisis?

Fed to Release Plan to Limit Banks’ Commodities Activities
Cheyenne Hopkins – Bloomberg
The Federal Reserve is poised to take a preliminary step toward limiting banks’ involvement with physical commodities amid congressional scrutiny, according to three people briefed on the discussions.

***DA: Congress: time for a little “scrutiny” as there is an election this fall that must be underwritten by contributions.

How the crash of safe assets fueled the financial crisis
John Carney –
How was it that an uptick in mortgage defaults led to a situation where 12 of the 13 most important financial institutions in the U.S. were near failure, where millions of American were thrown out of their jobs, and from which the economy still apparently bears deep scars?

***DA: Answer: everyone piled into risky assets, either oblivious to the risk, or with too much faith in a Federal backstop. Sort of like the situation building today.

Rising short-term interest rates threaten fragile eurozone recovery
Christopher Thompson and Claire Jones – Financial Times
A sharp rise in short-term interest rates within the eurozone has stoked fears of the region’s fragile economic recovery stalling, as a rush by banks to repay loans from the European Central Bank drives up borrowing costs.

***DA: Nothing says “recession” quite like a flat-to-inverted yield curve. Is that where we are headed?

Whatever Happened to That Portugal Rating Review?
Serena Ruffoni – MoneyBeat – WSJ
S&P dutifully reaffirmed Germany’s long-held triple-A. Moody’s … said nothing.

Central Banks

ECB Sees Bad-Debt Rules as Threat to Credible Bank Review
Sonia Sirletti and Jeff Black – Bloomberg
The European Central Bank is concerned that national differences in how bad debt is classified could cripple its probe into the health of euro-area banks, according to an internal ECB document.

After Its Gold Debacle, SNB Has More Luck With U.S. Equities
Neil MacLucas – MoneyBeat – WSJ
The Swiss National Bank’s gold holdings haven’t fared well. But some of the Swiss central bank’s U.S. stockholdings likely helped offset the pain, at least a little.

***DA: How about that – most use gold to hedge equity risk. The Swiss went the other way.

Jobless drop forces Fed’s hand on forward guidance: Lockhart
The Federal Reserve should clarify its future plans for raising interest rates now that U.S. unemployment has dropped to 6.7 percent, close to the central bank’s stated threshold of 6.5 percent for considering tighter policy, a top Fed official said.

U.S. money funds put $72 billion into Fed’s reverse repos: J.P. Morgan
U.S. prime money market funds parked $72 billion with the Federal Reserve in December as the central bank ramped up its testing of a program aimed to help the central bank achieve its targeted interest rate when it eventually begins raising rates, a report by J.P. Morgan Securities released on Monday showed.

MCX-SX first to offer interest rate futures, starting January 20
The Economic Times
MUMBAI: The MCX Stock Exchange will be the first to offer live trading in new interest rate futures (IRF) in 10-year government bonds, starting on January 20.


Currency derivatives house of the year: Bank of America Merrill Lynch
Risk magazine staff
Bolstered by its US corporate client base, funds say the last year has seen Bank of America Merrill Lynch break into the top tier of dealers, consistently offering tight pricing and liquidity – especially during last year’s surge in Japanese yen trading

Rabobank Ex-Traders Charged With Yen Libor Rigging
Patricia Hurtado and Tom Schoenberg – Bloomberg
Three former Rabobank traders were charged by the U.S. with engaging in a five-year scheme to manipulate benchmark interest rates as international probes of rate rigging escalate.

FastMatch, A Forex ECN, Picks Caplin to Build Front End
Ivy Schmerken – Wall Street & Technology
FastMatch has retained Caplin Systems to build a front-end for its spot FX matching service.

China’s yuan touches another record high after midpoint guidance
The Economic Times
China’s yuan touched a record high for a second day on Tuesday after the central bank again set a stronger official midpoint, which prompted investors to increase their long bets on the Chinese currency.

Russia to halt targeted daily currency interventions
Delphine Strauss in London and Courtney Weaver in Moscow –
Russia’s central bank is to cease daily targeted interventions in foreign exchange markets, allowing for a more flexible exchange rate as the central bank moves towards a free float of the currency by the end of the year.

The Mexican Peso – Everyone’s Favorite Currency (Again)
Chiara Albanese – MoneyBeat – WSJ
The Mexican peso is enjoying one of its sporadic bursts as Everyone’s Favorite Currency, with investors and analysts lining up to sing its praises.

Bitcoin sees light at end of regulatory tunnel
Stephen Foley in New York, Josh Noble in Hong Kong, Avantika Chilkoti in Mumbai and Claire Jones in London –
A year ago, when the entire stock of Bitcoin was worth $150m, authorities were concerned most by the potential use of a new digital currency by drug dealers and petty criminals to hide their trades and launder profits. But now the Bitcoin system has swollen to $10bn, the world’s regulators are confronting additional and bigger headaches.

***JM: Oh, I think it’s really, REALLY, WAY too soon for that headline.

Indexes & Index Products

Exclusive: NASDAQ, S&P eye acquisitions to build index businesses
Jessica Toonkel – Reuters
Exchange operator Nasdaq OMX Group (NDAQ.O) and index provider S&P Dow Jones Indices (MHFI.N) said they are interested in acquisitions to grow their index businesses, in a sign the sector could see a wave of deals as investors pour tens of billions of dollars into portfolios that track benchmarks.


Gold fund managers, burned, seek miners ready for tough times
Gold stocks fund managers, who lost as much as two thirds of their clients’ money in 2013, pledge they can do better this year by picking the few gold mining firms that can weather sharply lower prices.

Gold Bulls Put Last Year’s Beating Behind Them
After a year of carnage in the gold market, some brave investors are betting on a comeback. Hedge funds including San Francisco’s $3 billion Passport Capital have been buying the metal, which plunged 28% in 2013. Vermillion Asset Management LLC, a commodity-focused hedge-fund firm majority-owned by Carlyle Group LP that manages almost $1 billion, expects next month to start its first dedicated metals fund

Gold’s set for a ‘Goldilocks’ year: Sharps Pixley
Myra P. Saefong and William L. Watts – MarketWatch
Gold futures climbed on Monday, with prices holding ground at their highest in a month after two-consecutive sessions of price gains and last week’s less-than-stellar U.S. monthly jobs data.
Analysts at Sharps Pixley said the metal’s poised to see a “Goldilocks” year, with prices scoring an average above the current level.

Morning Links: What’s Next for Gold Bugs?
Steven Russolillo – MoneyBeat – WSJ


Tech Upstarts Paying 17 Times Interest Upset China Banks
Rebecca Ning, along with 43 million other Chinese, has found a way to make about 6 percent annually, or 17 times her usual interest rate, by tapping her phone and using technology that’s disrupting China’s banking status quo.

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