global fx summit 2013

The Changing FX Landscape

he Bank of Japans unprecedented stimulus plan announced in early April has raised concerns about currency wars, injecting the worlds largest and most liquid financial market with volatility. That has also triggered a surge in currency volumes across all trading platforms. At the same time, the crisis in Europe rages on, with political uncertainty gripping Italyeuro zones third largest economy--- and investors speculating which euro zone country would be the next to seek a bailout, leaving the region vulnerable to large capital outflows.

A man looks at stock index board showing various countries stock price index outside a brokerage in Tokyo November 22, 2012. REUTERS/
Kim Kyung-Hoon

Investors are also grappling with new regulations in Europe and the United States that are effectively changing forex trading practices while in Asia regulators are trying to inject more transparency in illiquid currency markets. The issues and challenges facing the $5 trillion-a-day foreign exchange market were explored at the first-ever Reuters Global FX Summit on April 22 when during closed sessions reporters and editors in London, New York, Singapore, Mumbai and Tokyo interviewed the industrys top newsmakers and movers.
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HSBC Global Head of FX and Precious Metals Derivatives, Vincent Craignou, speaks during the Reuters Global FX Summit in London April 22, 2013.
REUTERS/Benjamin Beavan

FX heads warn of EU trading tax risks

By Anirban Nag, Pratima Desai and Nia Williams LONDON, April 23, 2013

he European Unions proposed financial transaction tax (FTT) risks limiting companies and pension funds access to liquidity and funding, a senior HSBC official said on Monday. Speaking at the Reuters FX Summit, Vincent Craignou, global head of FX and precious metals derivatives, said a one basis point tax on short-dated currency swaps would be enormous and drive up the spread between the bid and offer by 15-20 times. If you would want to pass the FTT to the end-user, it would have unintended consequences in the ability of the players to access liquidity or funds, Craignou said. Although spot FX trades would not be subject to the proposed tax, derivatives such as swaps and forwards would. The tax will be imposed by 11 of the EUs 27 member countries. Belgium, Germany, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia and Slovakia have said they will levy 0.1 percent on stock and

bond trades and 0.01 percent on derivatives. Its advocates say the tax will ensure banks, which received taxpayers money during the financial crisis, contribute to the public coffers. Bankers say its impact will be felt far beyond the financial sector and some are campaigning to have it changed. Others describe it as simply unwieldy, particularly when taken in conjunction with the U.S. regulatory overhaul of financial markets known as Dodd-Frank. If everything that was talked about in the European Union parliament and elsewhere were to come to fruition, we would be overwhelmed, said Bob de Groot, global head of FX spot trading at BNP Paribas. A financial transaction tax would be difficult for the whole industry and have repercussions. Many companies use currency forwards to hedge against currency and interest rate risks. Pension funds widely use currency swaps to protect their foreign currency positions. In the latest Bank of England semiannual survey, outright forwards accounted in October 2012 for a daily average volume of $151 billion in London out of a total of

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nearly $2 trillion. For foreign exchange swaps, the daily turnover was $920 billion, more than the $678 billion of spot transactions. Craignou said that under various regulatory changes proposed worldwide since the global financial crisis, such as the DoddFrank reforms in the United States, foreign exchange swaps and forwards have so far been exempt. As an industry we will have to be involved in the consultation with the European Commission and parliament. We have to make sure the foreign exchange market doesnt get affected by the tax, he said. Luxembourg said on Monday it would support Britains legal challenge to the FTT. London is the worlds biggest centre for foreign exchange and bonds.
Additional reporting by Anooja Debnath, editing by Nigel Stephenson
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Expect yen volatility with more weakness ahead

NEW YORK, April 22, 2013

he yen has mostly lost its luster given recent changes in Japanese monetary policy, and even volatility in the near term will not detract from the currency continuing to lose ground in months ahead, market analysts and money managers said on Monday. Speaking at the Reuters FX Summit in New York, several market participants ranged from neutral at best to downright bearish on the Japanese unit. Japans yen is no longer the safe-haven it used to be, said Axel Merk, president of Palo Alto, California-based Merk Investments, who oversees about $750 million in assets. Earlier this month the Bank of Japan announced an aggressive plan to stimulate its economy, saying it will buy $1.4 trillion in bonds in less than two years. Bond buying, called quantitative easing (QE), is considered to be negative for a currency since it is tantamount to printing money and diluting its value. Merk has been very short the yen since November. To be short a currency is a bet on its decline while the opposite holds true for holding a long position. Vassilis Dagioglu, head of asset allocation portfolio management at Mellon Capital in San Francisco, which oversees $300 billion in assets, said hes been neutral on the yen since the fourth quarter of last year. But at this point, were not willing to speculate about the particular level where the yen may reach. At this point, its really very much politically decided, Dagioglu said. He added the yen still exhibits a negative correlation with risk, strengthening when there are shocks in financial markets, as Japanese investors repatriate money back home. That may also limit the downside move of the currency. And in the near term, worries about the

A man holds Japanese 10,000 Yen ($121) bank notes in front of a bank in Tokyo November 22, 2012.
REUTERS/Kim Kyung-Hoon

global economy could even give the yen some strength, said John Taylor, chairman of FX Concepts in New York, one of the largest currency hedge funds. Were forecasting that the yen is going to be strong between now and July, Taylor said. I think in the next quarter, well trade between 92 and 102, and Id be more inclined to think 92. The dollar rose to within striking distance of 100 yen on Monday, a level last breached in 2009, hurt by the BoJ plans to pump $1.4 trillion into its economy. It has risen around 14.3 percent this year. But Taylor said few Japanese-based investors have been selling the yen in favor of higher-yielding assets abroad, likely because they are worried about taking on risk at a time when global growth looks fragile. The Japanese, from what Ive seen, just dont buy this act yet, he said. That will leave the yen weakening again in the second half, with the Japanese currency falling to 105 to 110 per dollar by year end. The desire for a stronger path of growth helps explain why G20 and other officials,

even those in emerging markets, have had no serious opposition to Japans new plans to stimulate its economy by central bank bond-buying. While the exasperation of finance ministers and central bankers attending last weeks Group of 20 and International Monetary Fund meetings was palpable, economic growth is seen as key to ending the economic and financial crisis that has plagued the global economy since 2008. Alessio De Longis, a portfolio manager at Oppenheimer Funds believes the weakening of the exchange rate through monetary policy easing will be successful. Some 18 months ahead, De Longis sees the dollar trading in the 105 to 115 trading range. That is more like a fundamental projection, its not a trading forecast, rather a trading-range forecast, said De Longis.
Reporting By Nick Olivari, Wanfeng Zhou, Julie Haviv, Gertrude Chavez-Dreyfuss, Steven C. Johnson and Daniel Bases; Editing by Chris Reese

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Yuan options business picking up: FX heads

By Anirban Nag, Nia Williams and Jessica Mortimer LONDON, April 23, 2013

he options business in the Chinese offshore yuan market is picking up significantly as China lets its currency trade more freely, global heads of foreign exchange said on Monday. Speaking at the Reuters FX summit, Nomuras global head of foreign exchange, Jai Rajpal, and his counterpart at Deutsche Bank, Kevin Rodgers, identified the Chinese yuan options market as an area that would see sustained growth in coming years. Our Chinese options business ... (has) gone from being an insignificant part of our FX derivatives franchise seven or eight years ago to a significant part, said Rodgers. Deutsche is the market leader in global foreign exchange, with a 10.7 percent market

share, according to a survey released in March by research firm Greenwich Associates. Nomura, a leading Japanese investment bank, has also witnessed a pick-up in client interest in Chinese yuan options market. I think the vol (volatility) space in offshore yuan will be very active. Investors outside Asia have been keen to buy optionality in future strength in the yuan, Rajpal said. Bob De Groot, global head of FX spot trading at BNP Paribas, said there has been a lot of interest in yuan options against a range of currencies from the Group of 10 developed countries.

VOLUMES DOUBLE
Growing demand for option products in the offshore Chinese yuan market is a direct result of the currencys rising share in the global FX market. But at around $10

billion a day, it remains small in the $5 trillion-a-day currency market. But volumes have doubled since 2010 and the global head of FX trading at HSBC expects that trend to continue in 2013. The volume in FX spot, forwards and options has increased dramatically since the market was launched in 2010, said Vincent Craignou, global head of FX and precious metals derivatives at HSBC, adding more and more companies were settling their trade transactions in the yuan. HSBC, which is Europes largest bank and does a big part of its business in Asia, says it expects 30 percent of Chinas total trade flow to be settled in yuan within the next three years. That would make it one of the top three currencies used in global trade. According to global transaction services organization SWIFT, the yuan is ranked the 13th most widely used world payment currency after surpassing the Russian rouble in January with an all-time high market share of 0.63 percent. The rise in the yuans share is a result of Chinas effort to internationalize the currency. China has been developing an offshore market for it, as a precursor to allowing global firms, banks and asset managers access to its domestic market. It has also steadily eased capital controls for foreign investors seeking to ramp up exposure in its domestic securities market. That apart, the central bank, the Peoples Bank of China has been widening the trading band in which the yuan is allowed to move in the domestic onshore market. Internationalization of the renmenbi has been amazingly successful, said Craignou, adding he expected the yuan to be fully convertible in five years.
Editing by Nigel Stephenson

Nomura Global Head of Foreign Exchange, Jai Rajpal, speaks during the Reuters Global FX Summit in London April 22, 2013. REUTERS/Benjamin Beavan

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Slower Chinese growth poses uncertainty-fund managers

By Wanfeng Zhou NEW YORK, April 23, 2013

ears of a Chinese economic hardlanding have eased but recent disappointing data underscored risks of slower-than-expected growth in the worlds second largest economy, fund managers said at the Reuters FX Summit. A slowdown in China, combined with a deteriorating outlook for the euro zone economy and government belt-tightening in the United States could prompt investors to flee riskier investments and seek safety in the dollar and yen, they said. Growth in Chinas vast factory sector dipped in April as new export orders shrank, according to a survey released on Tuesday. It followed reports showing growth unexpectedly slowed in the first quarter to 7.7 percent and power generation grew at the weakest pace in six months in March. Although we believe that probably well be looking at 7-8 percent growth, theres a risk that China may be undershooting that level, Vassilis Dagioglu, head of asset allocation portfolio management at Mellon Capital, said at Mondays Reuters FX Summit. The World Bank cut its gross domestic product (GDP) growth projection for China by 0.1 percentage point to 8.3 percent for 2013. China, on the other hand, has set a 7.5 percent GDP growth target for this year. John Taylor, chairman of FX Concepts, with assets under management of about $2 billion, also said the low level of electricity consumption in China is further indication the Chinese economy is slowing.

The recent decline in prices of oil and copper -- commodities highly sensitive to economic growth -- is another indication of worries about the global economy, Taylor said. Copper hit an 18-month low and Brent crude oil fell below $100 a barrel on Tuesday.

YEN BENEFITS
Uncertainty about the global economy could benefit the yen. Mellon Capitals Dagioglu said the yen still exhibits a negative correlation with risk, strengthening when there are shocks in financial markets as Japanese investors repatriate money back home. Were forecasting that the yen is going to be strong between now and July, FX Concepts Taylor said. I think in the next quarter, well trade between 92 and 102, and Id be more inclined to think 92. Taylor expects the global economy to slow in the second quarter. The dollar rose to within striking distance of 100 yen on Monday, a level last breached in 2009. Despite a slowdown, fund managers said Chinas growth rate at 7.7 percent is still significantly above what other major economies are seeing. China is adjusting its economy to boost domestic consumption and the world economy is also less reliant on Chinese growth than in the past. Now were seeing a lower level of global growth but a rebalancing of global growth, said Alessio De Longis, senior portfolio manager at Oppenheimer Funds in New York. Oppenheimer has $208 billion in assets under management. Remember a few years ago when Chi-

na was growing at 12-14 percent, we still found ways to be negative about it. The Bank of Japans aggressive monetary easing has sparked concerns about the impact the yens sharp fall will have on exporters from South Korea to China and around Asia, a scenario which could trigger competitive devaluations across the region. The G20 major and developing countries avoided any direct criticism of Japans policies over the weekend and appeared to accept the need to reflate the worlds third largest economy as part of efforts to invigorate a shaky global economic recovery. But the group added it would be mindful of possible side effects from extended periods of monetary stimulus. The dollar has risen 15 percent against the yen so far this year, while the euro has risen 13 percent. De Longis said while the weakening of the yen is creating challenges for some economies like Korea and Taiwan, others such as Thailand and Malaysia, which provide intermediate goods to Japan, are well positioned to benefit from increasing demand for Japanese exports, as Japan will need more intermediate goods to build from. Theres clearly a major impact in Asia, but it doesnt have to be a unilaterally negative one, he said. Because at the end of the day, if we manage to reinvigorate the third largest economy in the world, somebody will clearly benefit from it.
Additional reporting by Steven C. Johnson; Editing by Chris Reese

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The realities of a currency war

By Gertrude Chavez-Dreyfuss NEW YORK, April 23, 2013

he worlds biggest developed nations, particularly Japan and the United States, have engaged in various efforts to lower interest rates to stimulate consumer demand that some investors have taken to calling a currency war. Even though central banks are not directly intervening in forex markets, what theyre doing amounts to a de facto forex war because the effect is the same - weaker currencies. Yes, we are in a currency war. The G20 now basically calls as it is - every country is free to run the monetary policy necessary for its own economic growth, said Alessio De Longis, senior currency portfolio manager, at Oppenheimer Funds in New York. He spoke at Mondays Reuters Global FX Summit in New York. Oppenheimer has $208 billion in assets under management. The Federal Reserve has been in quantitative easing mode since late 2008, but it was the Bank of Japans easing earlier this month that really shook the market. The BoJ rocked financial markets early, unleashing the worlds largest monetary stimulus in committing to inject $1.4 trillion into the economy in less than two years. That sent the yen reeling on April 4 after the BoJ announced the move, falling more than three percent in a single day. The yen has tumbled more than 14 percent so far this year against the dollar. The Group of 20 developed and emerging economies at a meeting over the weekend effectively affirmed its acceptance of the BoJs aggressive stimulus policies. The Bank of England and the European Central Bank, on the other hand, decided to hold off on further stimulus, but were downbeat on their economies, which should keep their currencies on the defensive as well. In

the case of the BoE, investors expect the bank will introduce more stimulus measures to resuscitate its flagging economy.

SHORTING THE YEN STILL THE TRADE DU JOUR

The most straightforward way to play the currency war is still to sell the yen. Thats still the most popular trade among asset managers interviewed at the summit. Axel Merk, president and chief investment officer at Merk Investments, said he has been short the yen since November last year primarily against the dollar. He has been selling short-term yen forward contracts, representing a significant proportion of his portfolio. Merk believes as the BoJ continues to ease, this may be the beginning of the end for the yen as a safe-haven currency. The yen is no longer the safe haven that it used to be because of its deteriorating current account balance. And with a debt to GDP ratio of 200 percent, the yen has no chance of surviving, said Merk. When you add to that Japans extremely aggressive fiscal and monetary approach, then you know that the yen is in deep trouble. Oppenheimers De Longis said the short yen position is also the funds highest conviction trade. He added that the BoJ would be successful in weakening the yen, but he wasnt sure whether the central bank would be able to boost inflation to its two percent target. The BoJ has put itself out on a limb by declaring the two percent inflation goal is achievable within two years, and is clearly ready to do whatever it takes to ensure that happens. Still many believe its a crowded trade. In the case of FX Concepts, a currency hedge fund with about $2 billion in assets under management, it has exited its short yen/long dollar position. In fact, the funds chairman and chief investment officer John Taylor said the firm is betting on the yen

strengthening in the near term due to expectations of a global slowdown in the second quarter. We dont see the second quarter as a very good quarter for global growth and the normal relationship of that is that money comes back to the yen, said Taylor. Were forecasting the yen to be strong between 92-100 to the dollar on the topside by July. The dollar rose to within striking distance of 100 yen on Monday, a level last breached in 2009.

JUST SHORT-TERM GAIN?

But in this day of free-floating exchange rates, deliberate currency debasements would reap just short-term benefits, said Ken Dickson, director of currencies at Standard Life Investments in an earlier interview. Standard manages $272.6 billion in assets. Governments like weaker currencies because they improve domestic demand by making imports more expensive and exports more competitive, which ultimately results in economic growth. However, Dickson said there is no real evidence of this, at least in the current environment. In addition, when a country subsidizes ones exports with an artificially weak currency, businesses lack an incentive to innovate. Japan is the best example. Merk of Merk Investments, thinks Japans problem is not a strong currency, but a lack of innovation. By weakening the yen, Japanese companies are given a free ride, taking the motivation away to create new products and undertake reforms.
Reporting by Gertrude Chavez-Dreyfuss; Editing by Chris Reese

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Thai central bank: no draconian measures to stop baht rise

By Orathai Sriring BANGKOK, April 22, 2013

hailands central bank is worried about the bahts rapid rise but is unlikely to impose draconian measures to rein it in, an assistant governor said on Monday, adding that Thailand should no longer be a low-wage, cheap-currency economy. Paiboon Kittisrikangwan also told Reuters that the baht has started to move close to a zone beyond the fundamentals and the central bank was ready to do something if it went way beyond that. Although we are worried about the baht, which sometimes maybe overshoots or rises beyond fundamentals, we have to consider how much we can do, he told Reuters in an interview. The central bank would try to keep stability and order in the market to ensure the real economy would not be affected, he said. But any measures it takes should be proportionate to the problem and not prevent the private sector from adjusting itself and enhancing efficiency. It should not be draconian measures for short-term comfort at the expense of necessary long-term adjustments ... The time when we could rely on cheap currency and wages is over. Paiboon said there was a high chance of a correction if the currency rose out of line with economic fundamentals. Chester Liaw, an economist at Forecast in Singapore, said: They probably do not want to stand in the way of real money inflows, particularly as the baht/yen rise is driving most of the dollar/baht fall. However, should the former inflows start to dry up, we would look for more concrete intervention should the dollar/

baht stay at low levels, he added. The baht traded around 28.67 per dollar on Monday and has risen 2 percent this month. So far this year it has gained 6.8 percent against the dollar because of sustained inflows, making it emerging Asias strongest currency.

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Global FX Summit: http://www.reuters.com/summit/FX13

INTEREST RATES SUPPORTIVE

Paiboon also said the current policy interest rate supported economic growth, which the central bank forecast to be 5.1 percent this year. He added that lowering the rate while the economy was strong could have a negative impact. Our interest rate is not high. With economic growth of 5 percent, the current interest rate is already accommodative. If we cut it just to slow capital inflows, there will be negative consequences. It may not be worth it, he said. We stand out in terms of the economy, not interest rates. After a surprise cut in October, the Bank of Thailands policy committee has left the benchmark rate at 2.75 percent. At the last meeting on April 3, it expressed concern about credit growth and potential asset price bubbles. It has resisted pressure from Finance Minister Kittirat Na Ranong, who has said the policy rate is high and should be cut to deter hot money inflows. Most economists expect no change in the policy rate all year but some think it could go higher due to inflation risks later in the year. The next policy meeting is on May 29. Kampon Adiraksombat, an economist at Tisco Securities, said he agreed that the central bank should not use interest rates to handle the inflows. Interest rates will have a wide impact

on the economy and they should fix the specific place where there is a problem. Paiboon said capital inflows into Thailand were normal, reflecting the countrys strong economic fundamentals. Its not a surprise that inflows are coming. Compared with others around us that have problems, we are the least ugly, he said. He added: But its fortunate that the Thai economy is still strong and can withstand the bahts strength, while exporters were also able to adjust to a certain extent to currency strength. Paiboon said the strong baht could be a good opportunity for businesses to bring in machinery and improve productivity. He said the economy probably grew 7-8 percent in the first quarter from a year earlier but quarter-on-quarter growth could be small, or even flat, after robust growth in the previous quarter. Southeast Asias second-largest economy grew a much higher-than-expected 3.6 percent in October-December 2012 from the previous three months thanks to strong domestic demand. It surged 18.9 percent from the same period in 2011, when floods caused massive damage. In 2012, the economy expanded 6.4 percent, after growth of just 0.1 percent in 2011 due to severe flooding in the final months of that year.
Additional reporting by Satawasin Staporncharnchai; Editing by Alan Raybould & Kim Coghill

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Deutsche sees FX arms race hotting up

By Nia Williams LONDON, April 23, 2013

he technological arms race in the foreign exchange market will escalate, Deutsche Banks (DBKGn. DE) global head of foreign exchange said. Speaking at the Reuters FX summit, Kevin Rodgers said more banks will be spending more money on technology this year as electronic trading platforms begin to be seen as essential tools of the business. If you are an FX bank and you do not have a well thought through electronic offering - you are not really an FX bank, he said. Its becoming a technological and client service arms race. This year will be a continuation of that process. Deutsche Bank has a 15 percent share of the $5 trillion-a-day currency market and was ranked top bank for foreign exchange transactions for the eighth year in a row in the 2012 Euromoney poll. Its single-dealer Autobahn trading platform has helped cement its dominance, with up to 90 percent of Deutsche Bank spot flows fully automated. Rodgers said the emphasis on electronic

trading was changing the type of people being recruited to work in the dealing room. From dozens and dozens of spot traders when he first started at the bank 14 years ago, Rodgers said the headcount in foreign exchange at Deutsche was lower than a few years ago, though not dramatically so. Instead, there were many more people working on the electronic side, including literally Russian rocket scientists. The skill types are moving away from the classic FX skills of making markets and becoming more technology-orientated. That balance drifts year after year and leads to a very different kind of FX staff, he added.

CYPRUS DISCOMFORT
Rodgers said although Deutsche Bank had mostly put in storage its contingency plans for a euro zone break-up, the financial crisis in Cyprus and subsequent bailout had revived concerns about such an event. The bank started preparatory work on planning how to deal with a country leaving the euro zone in early 2012, but stopped after the Drgahi put in July when the European Central Bank chief promised to do

whatever it takes to save the euro. Cyprus made us uncomfortable. It brought into operation some of the contingency planning we had thought about earlier. It was a small scale version of what might happen if a bigger country was in similar difficulties, Rodgers said. That planning included how to monitor parties affected, how to stop them trading, how to work internally with legal and compliance teams. Rodgers said in his view the consequences of a euro zone break up would be far worse than the fallout from the collapse of Lehman Brothers in 2008. Everything we did internally at Deutsche Bank looking at the consequences of a break-up suggested it would just be horrific, he said. We have to have contingency plans. Right now we have put them in a folder and hope we do not have to break them out any time soon. (For other news from Reuters Global FX Summit, click on www.reuters.com/ summit/FX13)
Editing by Nigel Stephenson

Deutsche Bank Global Head of Foreign Exchange Kevin Rodgers speaks during the Reuters Global FX Summit in London April 22, 2013. REUTERS/
Benjamin Beavan

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Yen unlikely to slide to 110 vs dollar: Fukokus Sakurai

By Sophie Knight TOKYO, April 22, 2013

he yen is unlikely to slide as far as 110 against the dollar as the outlook for the global economy remains uncertain and as exporters suffer from a weaker yen due to higher overseas manufacturing costs, a major Japanese fund manager said. Yuuki Sakurai, CEO and President of Fukoku Capital Management in Tokyo, which handles $16 billion in assets, said the yens status as a safe haven currency could even cause it to reverse its 20 percent tumble against the dollar if signs of stalling growth in China, a patchy U.S. recovery and euro zone turmoil persist. While Sakurai said he expects the Japanese currency to stick to around 97 to 98 yen against the dollar for now, he does not believe theres an ideal exchange rate that would be broadly advantageous for Japanese companies, which he says are more worried about volatility than the yens relative strength or weakness. The yen was quoted at 99.84 to the dollar, within striking distance of 100, on Monday morning. They like a stable currency so that they can make their strategies, he said in an interview for the Reuters FX Summit. Personally, I do doubt that the weak yen will become a strong (tail)wind for the Japanese economy, because so many Japanese manufacturers have sent their production overseas to cope with the strong yen. One positive effect of a softer yen could be psychological, Sakurai suggests, if investors and the public attribute it to Abenomics, an aggressive mix of monetary and fiscal policies touted by Prime Minister Shinzo Abe. I think (Abe) is trying to send a message to the Japanese, Sakurai said. Although he knows that the weak yen is not going to connect directly to the strength of the Japanese economy, he is go-

Yuuki Sakurai, Chief Executive Officer and President of Fukoku Capital Management, poses for a photo at Reuters Global FX Summit in Tokyo April 19, 2013. REUTERS/Yuya Shin

ing to send the message that we are going to revive again, that he could change things, that he can change the direction of the Japanese economy. Sakurai says that the Nikkei stock index .N225 will likely hold around its current level until July on expectations that Abe will achieve a landmark victory in upper house elections expected that month. The index climbed 1.9 percent to 13,574.71 to a near five-year high on Monday morning. But while investors into Japanese equities can continue to celebrate the benchmarks gain of more than 50 percent since last November, Sakurai said holders of Japanese government bonds were less than pleased with the monetary arm of Abenomics enacted by the Bank of Japan. The BOJ shocked financial markets on April 4, when new Governor Haruhiko Kuroda announced the plan to inject $1.4 trillion into the economy in less than two years, nearly doubling the monetary base to $2.9 trillion in that time. The Kuroda shock...was like shooting a sparrow with a cannon, Sakurai said, adding that smaller and more frequent interventions might be more effective. What puzzled me about (Kurodas) comment was that he said hed do nothing for the time being. That means hes showed every card he has. Thats not a very good policy from the central bank.

Kurodas radical rehaul of monetary policy created a dilemma for institutional investors, Sakurai said. The BOJ appeared to suggest that investors should switch their money to foreign bonds from Japanese debt, but that would leave them vulnerable to currency fluctuations, Sakurai said. Smaller local institutions and rural banks will also be stung by the illiquidity in the JGB market caused by the BOJs actions, Sakurai said, although investors willing to go abroad will likely find comfort in lowrisk government bonds from the United States, Canada and Germany. Sakurai also takes issue with the BOJs determination to achieve two percent inflation within two years, a goal that has become a constant refrain for both Kuroda and Abe. The target is to have a good economic recovery, not to have two percent inflation in two years...Look at the UK: you have two percent inflation and the economy is bad, he said. However, Sakurai believes the Japanese economy could improve merely on expectations of Abenomics, if skyrocketing Japanese stocks prompt companies to increase wages and lead consumers to part with more of their cash. There is a separation between the actual economy and the market at this moment, he says. Whether the real economy will catch up with the market, or the market is going to adjust to the real economy, we are not quite sure at this moment. If this continues, we may see a kind of mini-bubble in equities and a real estate bubble. If that continues, its a kind of disaster for the Japanese market.
Additional reporting by Hideyuki Sano, Lisa Twaronite and Dominic Lau in TOKYO; Editing by Jacqueline Wong
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Axel Merk, President and Chief Investment Officer of Merk Investments speak at the Reuters Global FX Summit in New York, April 22, 2013.
REUTERS/Mike Segar

Euro cursed to go higher: Merk Investments CIO

By Julie Haviv

ith the European Central Bank refraining from conducting a massive bond buying program as other central banks have done, the euro is cursed to go higher, Axel Merk, the president and CIO of Merk Investments said at a Reuters FX Summit on Monday. We think $1.40 is easily possible this year and over the next two years, over $1.50 is possible. And thats mostly based on the weakness of all the other currencies, said Merk, who is based in Palo Alto, California. The euro last traded at $1.3034, down 0.1 percent on the day. It has fallen about 1.2 percent this year. The euro is cursed to become very very strong in this sort of environment. Over the next one to three years, I think the euro has to be substantially stronger as people go

away from la-la land where they think the Fed will have a clean exit and then realize they cant, he said. The dollar last traded at 99.18 yen, down 0.3 percent on the day. It has risen around 14.3 percent this year. Japans yen is no longer the safe-haven it used to be, he added. Earlier this month the Bank of Japan announced an aggressive monetary stimulus plan to stimulate its economy, with plans to buy $1.4 trillion in bonds in less than two years. Bond buying, called quantitative easing (QE), is considered to be negative for a currency since it is tantamount to printing money and diluting its value. Merk, who oversees about $750 million in assets, said the policymakers in Japan do not understand the dynamics have changed. They think the only thing they have to

do is give the economy a good jolt and everything will be fine, he said. The Federal Reserve has its own asset purchase program, under which it is buying $85 billion a month of bonds. One of the reasons QE hasnt caused more damage is because it hasnt worked. But let it work. Then you are going to have a major problem, he said. Merk has been very short the yen since November and has held a considerable long in the euro since August. To be short a currency is a bet on its decline while the opposite holds true for holding a long position. The ECB is not going to pick a fight with Japan, which is on a mission to destroy their currency, he said.
Reporting By Julie Haviv; Editing by Chris Reese

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Yen may hit 105 vs dollar: Rhicon Currency Management

By Masayuki Kitano SINGAPORE, April 22, 2013

he yen looks set to fall further and could hit 105 versus the dollar, although it is unlikely to drop as smoothly as it has done so far, a portfolio manager for FX trading fund Rhicon Currency Management said. A move to say, sort of 105 or thereabouts, is very much on the cards, said Christopher Brandon, managing director for Rhicon Currency Management, a Singapore-based fund with about $350 million in assets under management. However, I think it would probably entail a broader dollar appreciation across the board to see dollar/yen go higher than that, Brandon told Reuters in an interview for the Reuters FX Summit, when asked about the dollars outlook versus the yen this year. The dollar scaled a four-year high of 99.95 yen this month, after the Bank of Japan unveiled drastic monetary stimulus and pledged to pump $1.4 trillion into the economy in less than two years. That marked a dollar rise of roughly 25 percent versus the yen compared with midNovember, when yen bears began ramping up bets for the yen to weaken, mainly on expectations for aggressive monetary easing by the BOJ. A trend toward a weaker yen now seems firmly entrenched, and the chances of the dollar dropping back to levels below 83 yen seen late last year appears extremely unlikely, Brandon said. Still the yens declines from here on are unlikely to occur in as straight forward a manner as has been the case until now, said Brandon, a co-founder of Rhicon. The market is getting slightly ahead of itself in terms of anticipating the flows out of Japan, Brandon said.

Analysts say the BOJs sweeping stimulus is likely to eventually prompt Japanese investors such as life insurers to step up investment in higher-yielding assets overseas. Japanese capital flows data, however, contains no sign so far that the BOJs drastic stimulus has triggered any Japanese investor rush into overseas assets. Instead, they have repatriated money back home in the first two weeks of April.

PRESSURE ON THE YEN

If you look at how the investment decisions are made with lifers and so on, it moves a lot slower, Brandon said, adding that Rhicon has tried going long the yen in the past few weeks. I think that while we will see continued pressure on the yen, I dont think its going to be as straight line as it has been, said Brandon, a short-term trader who holds positions for up to a week. Rhicon, which also has an intraday trader and another trader whose trades last for as long as a month, may see opportunities in different directions depending on the time frame, he added. Brandon said Rhicon put on bearish bets versus the yen starting around October to November of last year but exited all of them by mid-January, after achieving its profit targets for the trades and also based on technical signals. From October-November onwards, we were quite early into the yen weakening trade, he said. While a focus on technical analysis allows Rhicon to spot trading opportunities early on, it can also lead to frustration when the market moves on policy decisions, Brandon said. One such example was the yens tumble after the BOJ unleashed its aggressive monetary easing on April 4, he added. Because its not breaking or triggered by any technical points, we tend to miss

A man is reflected on an electronic board displaying exchange rates outside a brokerage in Tokyo October 31, 2011. REUTERS/Issei Kato

some of those, Brandon said. And its frustrating. Youre on the sidelines waiting for patterns to develop or signals to come and the market runs away before youve been able to get involved, he said. Brandon said Rhicon achieved a return of roughly 7 percent in 2012, owing to successful trades in the second half. Those included bullish bets on the euro against currencies such as the Australian dollar and the New Zealand dollar, in addition to its bets that the yen would weaken. More recently, Brandon said he has tried putting on bearish bets against commodity currencies. Ive actually been trying to express Aussie and kiwi shorts, but actually against the euro, and against sterling. But with mixed success, he said.
Additional reporting by Vidya Ranganathan; Editing by Jacqueline Wong
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global fx summit 2013

Summit Speakers
Alessio De Longis Portfolio Manager Oppenheimer Funds Axel Merk President, Chief Investment Officer Merk Investments Christopher Brandon Managing Director Rhicon Currency Management Bob de Groot Global Head of FX Spot Trading BNP Paribas Derek Sammann Global Head of FX and Rates Products CME Jai Rajpal Global Head of Foreign Exchange Nomura

James Wood-Collins CEO Record Currency Management

John Taylor Chairman and Chief Investment Officer FX Concepts

Kevin Rodgers Global Head of Foreign Exchange Deutsche Bank

Michael Syn Head of Derivatives SGX Singapore Exchange

Paiboon Kittisrikan Assistant Governor Bank of Thailand

Ramin Toloui Portfolio Manager PIMCO

Robert Celsing Global Head of FX Trading SEB

Sanjit Prasad Director - Marketing and Business Development MCX Stock Exchange

Vassukis Dagioglu Head of Asset Allocation Portfolio Management Mellon Capital

Vincent Craignou Global Head of FX and Precious Metals Derivatives HSBC

Yuki Sakurai CEO Fukoku Capital Management

FOR MORE INFORMATION: Swaha Pattanaik swaha.pattanaik@thomsonreuters.com Gertrude Chavez gertrude.chavez@thomsonreuters.com Vidya Ranganathan vidya.ranganathan@thomsonreuters.com Michael Peacock michael.peacock@thomsonreuters.com Benjamin Beavan benjamin.beavan@thomsonreuters.com Nina Andrikian nina.andrikian@thomsonreuters.com
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