Renminbi rising? The move to the status of global reserve currency is by no FOREIGN means guaranteed, writes Robert Cookson EXCHANGE Page 6 FINANCIAL TIMES SPECIAL REPORT | Thursday April 5 2012

www.ft.com/foreign-exchange-april2012 | www.twitter.com/ftreports

Trading game is less predictable

Alice Ross finds oreign exchange traders hit by the euro, which did not fall out. Some investors spent a lot of could see strategies become profit- strategists more hopeful are hoping 2012 will be a in value as much as many money pursuing this view only to able in the world’s largest market, better year. In 2011, many expected, leading those taking be disappointed in the outcome.” with $4tn traded each day. after having been investors and traders short bets on the currency to lose Jeff Feig, global head of G10 Popular ways of making money Ffound it hard to make money money. currencies at Citi, agrees: “For include the so-called carry trade, wrongfooted by central from foreign exchange, as the Troy Rohrbaugh, global head of most of our clients, it was a very where traders borrow in a lower- bank intervention eurozone crisis dominated mar- foreign exchange at JPMorgan, frustrating year.” yielding currency to invest in a kets and central banks unexpect- says: “During 2011, many clients This year, however, heads of higher-yielding one; momentum edly intervened to control the came to the market expecting to foreign exchange at investment or trend following, where traders value of their currencies. see a continuing decline in the banks and currency investors are Traders were particularly hard euro, but that’s not how it played cautiously optimistic that 2012 Continued on Page 2 2 FINANCIAL TIMES THURSDAY APRIL 5 2012 FINANCIAL TIMES THURSDAY APRIL 5 2012 3 Foreign Exchange Foreign Exchange

In This Issue Private Investors Traders gain from access to information Outlook Foreign exchange trading has long been the counterparts. “They misunderstand the preserve of institutional investors but the drivers of FX movement or have the wrong rise in affordable platforms, coupled with timeframe, or degree of leverage,” he says. wider access to the information used by “Their decision making tends to be event- sophisticated traders, has made currencies driven and retail investors as a whole try to an increasingly appealing asset class for pick obvious trades or reversals, rather than improves private investors too. jumping on longer-term trends.” Wealth managers say that clients who Michael Hewson, senior market analyst at previously organised their portfolios along CMC Markets, thinks retail investors can be the standard lines of equity, bonds and more susceptible to making mistakes when Greenback likely to stay in doldrums property are increasingly adding asset trading than institutional investors, and can US DOLLAR The past four years have taken for single classes such as private equity and end up quickly losing their capital. their toll and most strategists are wary of currencies. ““It is extremely important that when they Day-trading platforms and a new range of start out, they are educated about some of making bold statements about the dollar’s exchange traded funds have helped the the pitfalls that are to be found in FX future Pages 4 and 5 trend by competing on cost to offer retail markets,” he says. currency investors greater opportunities. “Within the Spread betting groups offer investors the past five years, retail forex trading has chance to set in place automated systems Revised policy prompts depreciation emerged from the wings to take a much to prevent heavy losses, but financial YEN In the past two years, it was easily the ing above the $1.315 mark. more prominent role on the global currency advisers say inexperienced investors best-performing G10 currency against the The euro The euro is gaining after stage,” says Andrei Dirgin, head of research interested in overseas currencies may be aggressive efforts by euro- at Forex Club. better off investing in a managed currency US dollar; in 2012, it is easily the worst Vivianne zone policy makers to stabi- Deutsche Bank’s retail foreign exchange fund than taking on the risk of direct Page 4 Rodrigues finds lise the European financial trading platform, dbFX, uses social media trading. system. They have not only websites to chat to its clients and has The speed with which currencies can spike analysts optimistic orchestrated two bailout uploaded a number of videos on to YouTube means that traders can incur heavy losses programmes for Greece, but offering tutorials. But external forces rather in a short space of time. But some also a co-ordinated action than marketing strategies, have been the platforms say that currencies are easier to hroughout 2011, as among the main central real spur, say advisers. the European debt banks to provide cheap Widespread coverage of the eurozone Michael Hewson, crisis worsened and emergency funding to the crisis and the volatility of world currencies senior market bond yields spiked region’s banks. have sparked increased interest from analyst at CMC Tin Italy, Spain and even The European Central investors using investment funds, day- Markets, thinks France, a central question Bank did it again in Febru- trading strategies via spread betting firms retail investors can was why the euro remained ary when it offered a second and ETFs to gain exposure. be more susceptible so resilient amid a barrage round of cheap loans, with The top trades picked by retail investors to making mistakes Little fatigue in defence of the real of bad news. eurozone banks taking tend to be currencies of large economies BRAZIL Latin America’s largest economy has Granted, the single cur- €530bn in funds, in a move that individuals in the US, Europe and UK renewed its rhetoric, prompting fears of rency ended 2011 lower that helped stabilise mar- are familiar with. trade than equities in many ways. Not only against the US dollar for a kets and pave the way for More than 85 per cent of all retail has the internet enabled better distribution another round of bruising currency controls second consecutive year. It risk-averse investors to Reserve have diminished Most analysts believe the HSBC the expectation is for ing the risk premium on On the rise: the euro is transactions involve the US dollar, the of information about the strategies that Pages 4 and 5 also fell below 100 yen for return to region’s assets, the returns of dollar- threat of an imminent euro the single currency to trade various European assets, gaining after aggressive Japanese yen, the euro, the UK pound, the professional traders use, but price the first time since 2001, analysts say. denominated assets. break-up has abated, in back at $1.44. which in turn helps the efforts by policymakers Swiss franc and Canadian and Australian movements tend to be influenced by publicly amid frantic speculation “I’ve never seen anything By contrast, at the start spite of lingering strains in David Bloom, global head euro. But it also expands its to stabilise the system dollars, according to the Forex Club. available macroeconomic data. Rocky ride ahead for hot asset class about a Greek default and like that,” says Scott Boyd, of 2011 the ECB had actu- the financial system and of FX strategy at HSBC, balance sheet tremendously These currencies tend to be extremely Dean Popplewell, chief currency strategist looming recession in the a currency analyst at ally increased benchmark worries over sovereign debt says: “On the other side of at a time when expectations this year, with countries liquid and linked to countries with low at Oanda, an internet-based currency trading LOCAL BONDS Returns have taken a eurozone. Oanda, an internet cur- rates, which raised returns management. Some are the euro is the dollar. And for further Fed easing are including Greece and Italy inflation and strong central banks. But company, argues that retail investors are hammering, but several global banks are But the declines were not rency trading company. “It on euro-denominated even revising their outlook as the year progresses and diminishing.” actually falling into reces- advisers say that currency trading is still certainly not the poorly informed, instinctive boosting local currency debt issuance that big – the euro ended was an unprecedented assets. The bank later for the single currency to a the focus switches back to The combination of a sion, according to econo- viewed by many private investors as too traders some believe. “Our last survey capability as they expect the asset class to the year 3.1 per cent lower amount of support to prop reversed that move. more bullish stance. the US with the presidential rebound in the US economy mist estimates compiled by complex. showed that 55 per cent of closed retail against the dollar, 2.8 per up the European financial As the first quarter comes Morgan Stanley said last elections, people will realise – which triggered this Bloomberg. In contrast, the Mark Thompson at Global Reach Partners, trades executed on our platform were continue to gain in prominence Page 6 cent down against the system, with two dedicated to a close, Greece has just month that the single cur- that its debt dynamics are year’s rally on Wall Street – US economy is expected to a foreign-exchange group, has found that profitable,” he says. Swiss franc – when com- bailouts and more recently managed to carry out a rency may trade at $1.34 by also out of control.” and lower market volatility expand by 2.2 per cent. the focus of retail investors on currencies What puts retail investors’ profits at risk is pared with double-digit a big bond swap. All that €206bn bond exchange, the end of the quarter, up Vassili Serebriakov, a cur- is encouraging investors to “The balance is tipping in that receive the most news coverage does the way they react to gains and losses. “It Central bank sticks to ceiling annual losses in currencies helped avoid a collapse in diminishing the probability from a previous estimate of rency strategist at Wells take on more risk. That favour of the dollar,” says them few favours. is the risk management of open positions SWISS FRANC Against many strategists’ such as the Brazilian real the currency.” of a disorderly default, and $1.27. Bank of America has Fargo Bank, says that, trend may favour higher- Chris Walker, a G10 FX “Rather than looking at the individual that puts downward pressure on our overall and the Mexican peso. Mr Boyd says those Germany’s economy is also changed its forecast, while he agrees the outlook yielding assets and growth strategist at UBS. “Even if merits of a trade from a technical customer profitability number,” he says. expectations, the SNB’s ceiling has held. Now, as the first quarter efforts coincided with long- showing signs that it may and now expects the cur- for the single currency has currencies other than the you view headline risks as perspective, he says, many private investors “They are far too quick to take relatively And it seems to have cost less than of 2012 is wrapping up, the term selling pressure on be able to avert a recession. rency to trade at $1.30 by improved, he still expects it euro, given the dim eco- having diminished, the ECB base their choices on familiarity with the small profits, but quite prepared to let expected Page 8 euro is once again on the the US currency. Local That has been pushing the end of June, up from to trade at $1.24 by the end nomic prospects for the will be expanding its bal- currency pair. losses run and run.” rise. As of March 19, it was benchmark rates are at European government bond $1.25. of the year. eurozone. ance sheet, while the likeli- As a result, they tend to be less up 10 per cent against the record lows and two rounds yields lower, and giving Analysts at Citi expect “The ECB policy-easing Growth in gross domestic hood of further easing in successful than their institutional Elaine Moore yen and 1.5 per cent higher of additional monetary the single currency another the euro to hit $1.40 by the works twofold: It helps product in the eurozone the US diminishes with Front Page Illustration David Bromley against the US dollar, trad- stimulus by the Federal respite. end of the year, and at financial markets by lower- may slow by 0.4 per cent every positive data release. Contributors

Alice Ross Rohit Jaggi with lower interest rates stability of the Swiss franc, are showing signs of life, foreign exchange at RBS, nies have seen less need to Currencies Correspondent Commissioning Editor Trading game becomes less predictable and the effect of the Euro- with the currency barely providing momentum says clients have been hedge their euro positions Vivianne Rodrigues Steven Bird pean Central Bank’s longer- moving against the euro at opportunities. The yen has spreading their bets among while the euro has been US Capital Markets Designer term refinancing operations the start of the year after been on a weakening trend different currency pairs this trading in a relatively tight Correspondent Continued from Page 1 behaved in unexpected trend also made value strat- That could lead investors to – widely interpreted as a the Swiss central bank set a since mid-February, when year. “The investment com- range against the dollar. Andy Mears Joseph Leahy Picture Editor ways. The Swiss National egies unprofitable, as cur- allocate more money to US form of quantitative easing ceiling for the value of the the Bank of Japan added munity has learnt from pre- That could ultimately Brazil Bureau Chief buy or sell currencies based Bank’s move to weaken the rencies were bought or sold assets, allowing the dollar – will lead the euro to franc in euro terms, makes further liquidity to the sys- vious mistakes,” he says. hurt profits among invest- For advertising details, on relatively short-term franc in September and the regardless of factors such as to strengthen. replace the dollar as the it a suitable funding cur- tem by expanding its bond- “We’re not seeing the same ment banks, where foreign Jennifer Hughes moves in one direction; and Bank of Japan’s interven- interest rates or the Such a move would funding currency of choice. rency for carry trades, mar- buying programme. crowded positioning we saw exchange is regarded as Lex writer, Asia contact: Brendan Spain value, where a view is tion to weaken the yen in strength of local economies. reverse a trading pattern Investment banks already ket participants believe. Citi says many of its cli- last year.” a low-margin but high- Ben McLannahan +44 (0)20 7873 6321 taken on the long-term fun- October led to sudden Emerging markets were seen last year, whereby the report huge interest from Mike Bagguley, head of ents profited from trading However, while corpo- volume business. Tokyo Correspondent Fax +44 (0)20 7873 4296 damental value of a cur- moves in the markets and particularly badly hit, with dollar rose when the mood clients to borrow in the sin- foreign exchange at Bar- the dollar against the yen, rates, investors and traders Some bankers believe this rency. caused a number of traders many of their currencies on global growth soured as gle currency to fund invest- clays Capital, says: “One of which had shown little may be finding the cur- will mean that smaller Elaine Moore [email protected] Personal Finance Writer or your usual All these strategies strug- to lose money. falling in August and Sep- traders who used the dollar ment elsewhere, particu- the big events last year was movement since the end of rency markets easier, the banks could struggle. representative gled last year. Momentum strategies tember, as fear gripped the to invest in riskier assets larly in higher yielding the euro-franc peg, which October when the BoJ inter- environment is less positive “I think 2012 will demon- Robert Cookson High levels of volatility, were also thwarted, as mar- markets, despite longer- closed their positions. emerging market currencies makes the Swiss currency vened in the foreign for market makers. strate there’s a consolida- Asia Markets ‘The trade that’s Correspondent All FT Reports are as traders reacted on a kets veered between risk-on term expectations that they Mr Feig says: “The sur- such as the Mexican peso an interesting alternative exchange market. Other Volumes were signifi- tion going on in the indus- available online at near-daily basis to fresh days, when optimism rose will appreciate over time. prise here could be a emerging for 2012 and the South African rand. short trade to the euro.” banks have also seen cantly lower in the first few try,” says Mr Amrolia at Haig Simonian FT.com. political headlines from and every currency except The first few months of stronger year in terms of “The trade that’s emerg- Mr Bagguley says clients renewed interest in the months of the year, as vola- Deutsche Bank. “In a low Switzerland & Austria Europe, bedevilled the carry the dollar was in demand, 2012 have seen new trends US growth and that could is using the euro as ing for 2012 is using the have been taking long dollar yen pair. tility between currencies volatility environment, the Correspondent Go to ft.com/reports trade, which thrives when and risk-off days, when fear emerge, however. change the dynamics in the a funding currency’ euro as a funding cur- South African rand versus For many traders, the yen fell. industry will have low vol- Robin Wigglesworth Follow us on twitter at volatility is low. Interven- levels were high and cur- Many believe the dollar is currency markets, seeing rency,” says Zar Amrolia, short franc positions this is replacing the euro as the Ironically, the relative umes and lower profits. I Capital Markets twitter.com/ft.reports tions from central banks rencies were sold off indis- the currency to watch. It people go long dollars.” Zar Amrolia, global head of foreign year, for example. most interesting currency stability of the euro has think you will see the Correspondent made it hard to follow criminately. has been strengthening in Many argue that stronger Deutsche Bank exchange at Deutsche Bank. Currency pairs that have to try to profit from. been one reason for the larger players increasing trends, as currencies That risk-on, risk-off line with better US data. prospects for the US, along The perceived relative been dormant for months Tim Carrington, head of drop in volumes, as compa- their market share.” 4 FINANCIAL TIMES THURSDAY APRIL 5 2012 FINANCIAL TIMES THURSDAY APRIL 5 2012 5 Foreign Exchange Foreign Exchange

stock rallies and dollar falls, break-up seemed increasingly strategy at JPMorgan, the think any of those are going During a US roadshow of for real, for now,” says as investors seeking better likely. By January this year, excitement around a potential to happen soon,” says Mr Nor- Nomura’s macroeconomic Ray Attrill, North American Greenback likely to remain in the doldrums returns leave the US for risk- however, worried investors return to cyclical, interest mand. views in early February, head of foreign exchange ier destinations. had pushed the euro to a 16- rate-driven economic analysis “For the time being, it is far nearly 80 per cent of investors strategy at BNP Paribas. Dealing in the dollar against month low against the green- was in always way overdone. more likely to continue mov- still expected QE3 during 2012, “If the market believes that, It has been extraordinary turn interest rate advantage and, to diverge this year, currency put paid to that, damping the euro alone accounts for back at $1.267. “The dollar really hasn’t ing inversely to global growth according to Jens Nordvig, then the dollar will weaken.” US dollar of events. for most developed markets, watchers were justifiably the sell-off in Treasuries and nearly 30 per cent of the aver- At about $1.327 now, the been a pro-cyclical asset in and stock markets.” head of fixed income research Fortunately for strategists Hold a mirror to a chart of that means their economic excited. the accompanying rise in mar- age $1.5bn a day conducted in still-intact single currency has nearly 15 years – at least, not Part of the reason for the at the bank. who are measured against Traders are waiting the S&P 500 and you will see a prospects. Could this be a return to the ket interest rates that had the “spot” markets, leaving recovered comfortably from for more than a couple of dollar’s sudden rise was also QE1 and QE2, which essen- their benchmark forecasts, for normal service to near-perfect inverse image of Since nothing matters to traditional economics they perked up the dollar. the euro the main beneficiary that nadir, although off a high months at a time – because it due to the scale of the sudden tially allowed the Fed to print the caution brought on by the the dollar’s performance foreign exchange markets like were brought up on, and Back to risk-on, risk-off for of the dollar’s haven status. of $1.345. has been so low yielding,” he reversal in expectations. money, had been a big factor extremes of the past four be resumed, says against the euro over the past the dollar – it is one side of a move away from the strange now, then. In a nutshell, this Ironically, this had meant The dollar, however, is says. Talk of better than expected weighing on the dollar, as years, with their entirely dif- Jennifer Hughes four years. nearly 90 per cent of all trans- and blunt “risk-on, risk-off” sees fear-driven days and that that, even as the euro- noticeably stronger than last “It will be pro-cyclical again economic growth was a far investors took the cheap cash ferent trading dynamics and The economic theory from actions – this more than justi- trading that has characterised months in which stocks fall zone crisis deepened last year. The euro’s average daily when it has high or rising cry from investors’ previous and sent it overseas to chase near-constant crisis in the which currency forecasting fies the endless fascination of the crisis-struck years? and the dollar gains, as inves- ‘Our view is still spring, still-bullish stock mar- rate last year was $1.393 but interest rates or a current expectations that the Federal higher returns. broader economy, had made emerged would not have it strategists and investors with The short answer is tors seek the safety of the that QE3 is more kets had supported the euro so far in 2012, it has averaged account surplus, or when Reserve would this year be “Our view is still that QE3 them cautious in changing this way. US economic data. no. More dovish remarks from world’s deepest financial trading less than 10 per cent about $1.31. it becomes the dominant forced to step in with a fur- is more likely than not, and their forecasts until the Fed’s Currencies’ values should So when the dollar and the Ben Bernanke, the Federal markets. likely than not’ below its record highs – even According to John Nor- cross-border mergers and ther round of quantitative that the Fed’s commitment to likely moves weres clearer. depend on their relative biggest US stock index began Reserve chairman, last week More bullish periods involve as the prospect of a eurozone mand, head of currency acquisitions target. I don’t easing, dubbed “QE3”. hold rates until 2014 is It seems for now, it is.

BoJ Revised policy behind falling currency The Japanese currency has taken a senior foreign-exchange strategist at steep fall against the dollar this Rabobank in London, says: “I can’t Few signs year, but few expect this pace remember so much evidence of depreciation to continue. In stacked together from [the 2010 and 2011, the yen was easily government] and the BoJ that they the best performing G10 currency really want the currency to weaken.” against the US dollar, up 15 per More fundamental pressures on cent and 6 per cent respectively. the yen remain, says Masafumi of fatigue So far in 2012, it is easily the Yamamoto of Barclays Capital in worst – down almost 7 per cent Tokyo, such as Japan’s enormous against the greenback, compared government debt burden and the with rises of between 1.5 per cent gradual erosion of the country’s and 4 per cent for the rest. current-account surplus. in defence Most currency strategists have He says that higher oil prices and called a decisive turn. They note increased liquefied natural gas that the catalyst for the yen’s fall imports after the Fukushima nuclear this year was the Bank of Japan’s crisis exacerbated the pace of surprise easing on Valentine’s day, current-account deterioration. In of the real amid falling expectations of another January, Japan reported a current- round of monetary stimulus in the account deficit more than three US. The yield gap between two-year times larger than during the 2008 dollar, threatening to reignite government debt in Japan and the Lehman crisis. Brazil the main theatre in the cur- US has more than tripled to 25 “The fear of twin fiscal and rency war – Washington’s dis- basis points, from 7.8 bps at the current account deficits, a theme for Joseph Leahy pute with Beijing over claims end of January. the US dollar in the 1980s, is now reports from the Asian giant is running an Sophia Drossos, currency fund applicable to the yen,” says Mr undervalued exchange rate. manager at Morgan Stanley Yamamoto. the currency Other emerging markets have Investment Management in New In the short term, analysts doubt war trenches stayed relatively quiet, how- York, says: “The market’s perception that this year’s rate of depreciation ever. that the [Federal Reserve] is less can be sustained. They say the yen Uncertainty over the econo- likely to adopt additional remains a counter-cyclical currency, uido Mantega, Bra- mies of Europe and China has quantitative-easing measures has rallying at times of market stress. zil’s finance minis- eased appreciation pressures been the great force behind the If the global backdrop deteriorates ter, does not mince on emerging market curren- move in the exchange rate.” and investor risk-aversion his words when it cies. “Emerging market The yen, which reached a postwar resurfaces, the yen could benefit. Gcomes to the topic of competi- growth conditions will con- record high of 75.35 against the US yields could also grind lower, as tive currency devaluations. tinue to look softer than had dollar last October, has slumped investors flocked to Treasuries, It was Mr Mantega who been hoped for in a cyclical more than 5 per cent since the BoJ increasing the yen’s relative appeal. coined the term “currency rebound,” says Nick Chamie, expanded its asset-purchasing Taisuke Tanaka, strategist at war” for the trend, under global head of emerging mar- programme – its main tool of Deutsche Bank, wrote in a recent which countries attempt to ket research at RBC Capital monetary policy with interest rates note to clients: “We do not see a gain a trade advantage over Markets in Toronto. “We are near zero – while adopting a firmer US economic recovery and dollar each other by lowering their seeing that coming through, “goal” of 1 per cent inflation. The strength against the yen moving exchange rates. “I consider particularly with the disap- yen touched 84.18 in mid-March, an steadily in one direction.” He says that a part of the advantage pointment around the Chi- 11-month low. that this time of year has often that other countries have nese data and that will con- In a rare commentary on the featured a dollar rebound against over Brazil is due to an artifi- tinue to keep the dollar rea- Guido Mantega, Brazil’s finance minister, rails against trend for lowering exchange rates to gain trade advantages Reuters exchange rate, Masaaki Shirakawa, the yen. cial exchange rate – without sonably well supported.” the BoJ governor, said recently that Further, if the BoJ is unable or this currency discrepancy, Brazil spoke of currency the second half of last year year. It has lost 14 per cent of depreciate much past R$1.90. yet hold some wild cards. the revised policy stance was “one unwilling to combat deflationary Brazil would be as competi- war 18 months ago, when a eased the appreciation pres- its value against the dollar This range is nominally After slowing sharply in the factor” behind the falling yen. pressures as vigorously as its public tive as them,” he says. surge of foreign money began sure on the real. But in Feb- from a 12-year high last July weaker than in September second half of 2011, Brazil is Analysts note that the further comments might suggest, the yen To the concern of market driving up the value of the ruary, when Europe took and is 5 per cent lower since 2010, when the government showing signs of recovery. If easing came after the ministry of could resume strengthening. analysts and investors, the real. International investors measures to shore up liquid- the intervention in the mar- was seeking to devalue the it heats up more rapidly than finance intervened Those uncertainties explain why, minister is showing no sign of were attracted by Brazil’s ity in its banks, Brazil ket in February. real whenever it approached expected and grows at close three times in despite its first-quarter plunge, the battle fatigue in a conflict lofty real rates of interest – returned to the trenches. Slower growth in emerging R$1.65-R$1.60. to 4 per cent this year, capital currency median forecast of 50 tracked by whose weapons are the seem- among the world’s highest – President Dilma Rousseff markets and Europe points to But in effective exchange could again start to flow into markets Bloomberg is for the yen to average ingly mundane tools of inter- and its 7.5 per cent growth vowed to do the “possible and an easing in commodity price rate terms, R$1.70 today is in the market in sufficient quan- last year 83 to the dollar in the fourth national finance – interest rate in 2010. the impossible” to ward off inflation, taking some fact a stronger level than the tities to force the government to sell quarter of 2012, little changed from rates, monetary policy and Mr Mantega blamed the US what she called an impending momentum from the real, government was tolerating 18 to take action on the the yen. now. exchange rates. for not following up quantita- “monetary tsunami” from economists say. months ago. exchange rate. Jane “External events could trigger a After a surge in the value of tive easing by the Federal rich countries and the gov- The government also seems Analysts say that, unless China could be another Foley, lurch back upwards,” says Ms Brazil’s currency, the real, Reserve with a fiscal stimulus ernment extended a tax on to have had some success in growth picks up markedly, unpredictable factor. Any Foley of Rabobank. “The yen is still against the US dollar earlier programme to soak up the foreign loans. “I was shocked scaring investors who lack investors will be channelling sharp weakening of the ren- Masaaki a haven currency.” this year, Latin America’s extra liquidity. Instead, he how fast it took off again,” the same conviction about a funds to emerging markets minbi would put pressure on Shirakawa, largest economy has renewed says, funds were channelled says Benoit Anne, head of strong real that they had in with less intensity. Yields on other emerging market cur- the BoJ Ben McLannahan its rhetoric, prompting fears into emerging markets. Brazil emerging market strategy at September 2010, when the local bonds in these markets rencies. But analysts do not governor of another round of bruising responded with a series of Société Générale, of the latest currency war began. are lower than they were dur- expect aggressive action from currency controls. controls – a system consisting round of hostilities. The government has sought ing the first round of the cur- the People’s Bank of China on Brazil is not the only one. mainly of taxes on financial But while policy makers this time to intervene as soon rency war, interest rates have this front. China has indicated it transactions – aimed at deter- continue to talk tough, econo- as the real strengthens to fallen and there are hopes “With China it’s not usually believes the renminbi has ring hot money inflows. mists say the real is already about R$1.70 to the dollar, that stocks will pick up. the blitzkrieg, more like the reached fair value against the The troubles in Europe in looking weaker than last while ensuring it does not The global economy could 100 years war,” says Mr Anne. 6 FINANCIAL TIMES THURSDAY APRIL 5 2012 FINANCIAL TIMES THURSDAY APRIL 5 2012 7 Foreign Exchange

Local currency bonds A rocky ride

For much of last year, local the US dollar this year, led currency-denominated by the Hungarian forint, the emerging market bonds Polish zloty, Mexico’s peso were one of the hottest and Russia’s rouble. asset classes, as investors Some strategists argue sought to benefit from high that the rouble market in yields and the strengthening particular has more room to currencies of robust rally, given the outlook for developing economies. oil prices, and the appetite This investment thesis for Russia’s nascent held up well during last offshore rouble-denominated summer’s turmoil, but by “OFZ” market for autumn many emerging government bonds. market currencies were in Several global banks are free-fall, hammering the beefing up their local overall returns of local currency debt issuance currency bonds. This stark capability, as they expect reminder of the risks of the asset class to continue locally denominated assets to gain in prominence. has soured some investors. The more muted investor Christian Keller, a senior interest this year “is more emerging market strategist of a pause than an at Barclays Capital, says: expression of bearishness”, “We’ve seen fund flows says Chris Jones, global return to emerging markets, head of local currency debt but mostly focused on hard- syndicate at HSBC. Renminbi centre: the UK Treasury wants to make London the leading international centre for trade in the Chinese currency currency funds. Investors Mr Keller agrees the are still cautious about local investment case is broadly currency bonds.” intact. “Local currency bond The currency side is fund flows stabilised quite integral to the returns of quickly after the pullback, Renminbi not yet ready local emerging market bonds. and there is a strong Bhanu Baweja, head of underlying shift under way,” emerging market fixed income he says. “International and currency strategy at UBS, institutions are likely to estimates that during the increase their allocations.” past 10 years, the currency Indeed, some investors to challenge the dollar component has contributed say local currency emerging on average 46 per cent of market debt will not remain its currency is about to some types of cross-border Even after sweeping total returns in the seven the preserve of smaller, Reserve currencies challenge the dollar or the flows of the renminbi in reforms, however, the ren- years when currency and specialist asset managers euro – or even the yen or recent years, the currency minbi’s ascendance would bond components have both for much longer. “Emerging Beijing has a long the pound – any time soon. is still a long way from not be guaranteed. been positive. markets countries have way to go, says For the renminbi to being fully convertible. Consider Japan, an econ- But in the two years when better fundamentals than become a reserve currency, There is no doubt reforms omy almost exactly the the total return was negative, developed countries,” Mr Robert Cookson one that is held by central can have big effects. Chi- same size as China. Unlike the currency component Carter says. banks as part of their for- nese companies now settle its neighbour, Japan has contributed 300-400 per Some investors argue, eign exchange reserves to about 10 per cent of their both an open capital cent of the loss. Only once however, that the volatility – t has become conven- guard against balance of international trade deals account and deep and liquid in the past decade, in 2004, and illiquidity in some local tional wisdom among payments crises, Beijing using the renminbi, just financial markets. Back in has the total return for local bond markets – mean the many prominent econ- will need to implement two years after they were the 1980s, the Japanese gov- emerging market bonds been returns aren’t always omists, bankers, and sweeping reforms. permitted to do so by main- ernment made it a stated positive despite the currencies commensurate with the risks. Ipoliticians that the Chinese At present, China retains land authorities. policy to “internationalise sliding, says Mr Baweja. Tony Adams, co-head of currency is on a path that strict controls on its capital But investment flows are the yen”, and many observ- Many remain convinced, global credit at First State will inevitably make it a account. Under current reg- still small because China’s ers expected the currency however, that aside from Investments, says: “Talk of global reserve currency to ulations, people and compa- financial markets are still to challenge the dollar as a the odd bout of volatility, the death of the US dollar rival the US dollar. nies can only move ren- nascent and foreigners have reserve currency. the vast majority of these has been premature, and So great is the excitement minbi in and out of the Chi- only limited access. In Over the past four dec- emerging market currencies people realise emerging around the future interna- nese mainland through a March, China gave Japan ades the Japanese yen has is set to strengthen market currencies are not a tional role of the renminbi limited number of channels, permission to buy up to taken on a bigger role in markedly against developed one-way train.” that George Osborne, UK such as trade deals, and Rmb65bn ($10bn) of Chinese global financial markets. ones in the long term. Chris Iggo, chief chancellor, in January investments that have been Nonetheless, compared with Bryan Carter, a fund investment officer for fixed launched an initiative to approved by the state. currencies of other devel- manager at Acadian Asset income at Axa Investment help London become a glo- By retaining these restric- You can only move oped countries, its interna- Management, says: “We Management, also favours bal hub for renminbi for- tions, the Communist Party renminbi in and out tional usage and acceptance believe that emerging hard currency emerging eign exchange trading. is able to exert control over is “rather low”, says Dick- market currencies will market bonds over those Writing in the Financial key aspects of the Chinese of the Chinese son Ho, an economist at the appreciate in the long run, denominated in local Times last September, economy, including the mainland through Hong Kong Trade Develop- as their countries grow currency. “People Arvind Subramanian, a sen- exchange rate, interest ment Council. faster than developed underestimate the illiquidity ior fellow at the Peterson rates, and the allocation of a limited number Only about 40 per cent of countries in per capita and volatility. If you can Institute for International capital through the state- Japan’s exports and 20 per terms.” handle these the returns Economics – in an article owned banking system. of channels cent of imports are settled Indeed, 21 of the 25 can be good, but it’s a titled “Coming soon: when Eswar Prasad and Lei Ye in yen. The yen now largest, most liquid rocky ride.” the renminbi rules the wrote in a recent report for government bonds, a sum accounts for less than 4 per emerging market currencies Polina Kurdyavko, a world” – declared: “interna- the Brookings Institution: that amounts to less than 1 cent of official global for- have rallied portfolio manager at tionalising the renminbi “The renminbi is unlikely per cent of Japan’s foreign eign exchange reserves, against BlueBay, a London-based has been set in irreversible to become a prominent exchange reserves, which according to the Interna- asset manager estimates motion”. reserve currency – let alone are mainly held in US tional Monetary Fund, the volatility of local However, contrary to pop- challenge the dollar’s domi- dollars. down from a peak of 8.5 per currency corporate debt is ular perception, the ren- nance – unless it can be If central banks are to cent in 1991. more than double that for minbi’s rise is by no means freely converted and China hold the renminbi as a By contrast, the US dollar “hard” currencies such as guaranteed and could take adopts an open capital significant part of their and the euro account for the dollar and euro, and decades, if it happens at all. account.” reserves, they will need about 62 per cent and 26 per that the liquidity is 10 times China is certainly big, The question is whether much greater access to Chi- cent of global reserves worse. “Given this, the representing about 10 per Beijing’s unelected policy nese assets. And for the respectively. returns aren’t always that cent of global gross domes- makers have the political renminbi to challenge the If Japan’s experience is attractive,” she says. tic product, and growing will to dismantle China’s dollar, China's financial any guide, it shows China fast. It will overtake the US capital controls, given that markets would need to has scope to expand global Robin Wigglesworth as the world’s biggest econ- doing so would remove become as broad, deep, and use of the renminbi for omy by 2027, according to much of their power over liquid as those of the US, a trade and investment. Christian Keller, a estimates by Jim O’Neill of the domestic economy. process that would require Challenging the dollar as senior strategist at Goldman Sachs. But While Beijing has both time and substantial a global reserve currency, Barclays Capital China’s size does not mean removed restrictions on reforms. however, is another matter. 8 FINANCIAL TIMES THURSDAY APRIL 5 2012 Foreign Exchange Strains ease as Swiss stick to ceiling

The SNB has held its posi- turned positive for the first monetary policy assessment, divided on how to proceed. reduced exchange rate vola- Intervention tion, mainly because traders time after six months of the SNB acknowledged that Broader macroeconomic tility and given business respect the bank’s determi- decline. Consumer prices “the minimum exchange factors appear to be going leaders a better basis for Weaker franc has nation and accept it could have also turned positive, rate is having an impact”. Switzerland’s way: exports planning,” said the latest reduced volatility in print money to finance end- with February showing the But many politicians have have been more robust than assessment. less intervention. While that first monthly gain in five called on the bank to expected, while the euro- But some believe further forex markets, says ought to stoke inflation, it months. weaken the franc further. zone crisis has eased. And, action will come. Mr Robin- Haig Simonian has been falling rather than The ceiling has eased Trade unionists and having successfully son at Barclays predicts: climbing prices that have Swiss exporters’ and econo- leftwingers have suggested enforced SFr1.20 without “Barring unexpected prob- been the SNB’s concern. mists’ fears of a collapse in SFr1.40 as a more appropri- provoking a speculative lems in the eurozone, ates are seldom Paul Robinson, head of foreign sales and recession – ate ceiling. onslaught, the SNB may be SFr1.25 is likely, and commemorated in forex research at Barclays concerns that appear exag- The SNB agrees the franc wary of pushing its luck. SFr1.30 is even possible in the rough-and- Capital, says: “The single gerated now. In its latest is still high, but opinion is “The minimum level has the longer term.” tumble foreign most important factor has Dexchange markets, let alone been the SNB’s strong, celebrated. But for the unambiguous language. Swiss National Bank, March That worked very well 6 2012 was a day to remem- indeed. The bank has put ber. its credibility at stake.” That marked six months The SNB’s achievement since the central bank’s has come in spite of the fact imposition of a SFr1.20 ceil- that Thomas Jordan, previ- ing for the franc against the ously vice-chairman and euro – an unconventional now interim chairman, has step taken after more timid yet to be confirmed perma- measures had failed to nently in the post. And the arrest what seemed to be a franc’s ceiling has with- one-way upward move for stood the huge strains in the Swiss currency. the eurozone. The SNB’s unprecedented The SNB’s financial action, backed by threats to results have demonstrated enforce its minimum level its success. Last month, it “with the utmost determina- reported a SFr13.5bn net tion”, including buying for- profit for 2011, compared eign currencies “in unlim- with a SFr19.2bn loss in ited quantities”, capped 2010. Earnings, as in previ- months of tension during ous years, were bolstered which the franc kept rising. by valuation gains on bul- The franc’s trajectory had lion but, in contrast to 2010, been boosted by investors’ the SNB also recorded a fears of a eurozone melt- positive return on its for- down amid spiralling eign exchange reserves. national debts and ever That may have been inev- shakier bank balance itable, given the successful sheets. In the US, confi- imposition of the ceiling dence was plunging as and the apparently limited political paralysis in Wash- need for enforcement. The ington failed to address pro- SNB’s foreign currency found economic and fiscal holdings rose in value in imbalances. Swiss franc terms as the To cap it all, the SNB had franc depreciated – prompt- earlier thrown in the towel ing friendly jibes of “insider after attempts to arrest the trading”, given the SNB’s franc by direct intervention foreknowledge of its inter- had lumbered the bank vention and that it bene- with billions of euros and fited significantly from its dollars whose value was impact. depreciating fast as the Where does Switzerland franc climbed. By August, go from here? Price data the Swiss currency briefly suggest the deflationary touched parity against the pressures officials cited as euro, while the dollar sank their motive for setting the to almost SFr0.70. ceiling have diminished. Against many forex strat- Producer and import egists’ expectations, the prices fell 1.9 per cent in SNB’s ceiling has held. February year-on-year, but Moreover, based on data rose 0.8 per cent month-on- available, it has cost less month. For import prices, than expected. More impres- the February increase con- sive still, much of this has tinued a trend that began happened during a rare last December, when internal crisis, with the res- month-on-month changes ignation in January of Philipp Hildebrand as SNB chairman and the continu- ing failure of the govern- ment to appoint a perma- nent successor.

Philipp Hildebrand, former president of Swiss National Bank