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BY SHAVASB BOHDJALIAN
Forex traders are for sure disappointed at the recent consolidation in the currency market and the narrowing of the ranges, but one of the reasons leading to such tight ranges is the undeclared war among the major pairs as to which currency will become the funding currency for the market.
Funding currency in layman’s terms means the currency in which people, businesses, speculators and traders wish to loan, sell or short to finance their transactions whether this is to secure a loan or use to purchase an asset in another currency. The more a currency is used as a “funding currency” the easier it will be for the Central Bank of that particular currency to drive its value lower and hence gain a competitive advantage for the country.
The major central banks attempting to drive the value of their currencies lower are the Fed, the ECB, Bank of Japan, the Swiss National Bank and the Bank of England.
Last week the Fed’s FOMC statement did not announce any change in monetary policy any time soon, despite the recent improvement in US economic data. In other words, the Fed intends to maintain interest rates at next to zero until the end of 2014 even though the US economy is now growing at more than 2.5% pace, unemployment is coming down steadily, factory output is at its highest pace in recent years, corporate balance sheets are at their best level in years and the housing market is showing signs of bottoming out and moving higher.
While the Fed is doing everything in its power not to allow the dollar to gain in value, the other central banks are also doing their part to force their currencies lower. Take for example the ECB, which at the end of February lent another EUR 500 bln in 3-year loans to eurozone banks at 1%. The ECB had loaned eurozone banks about EUR 500 bln at 1% in 3-year loans at the end of December. Essentially the ECB is printing money to loan to eurozone banks at 1% who are in turn are encouraged to purchase eurozone sovereign bonds such as those of Italy and Spain, yielding close to 5%. The ECB now stands to make EUR 10 bln interest income on EUR 1 trillion in loans, the banks will make 4% interest differential and the yield on government bonds will decline and save eurozone governments money on their borrowings.
This is similar to what the Fed has achieved by making $100 bln in annual profits and passing the money to the Treasury on its substantial bond holdings which saw the Fed’s balance sheet increase to $2.8 trillion.
Not to be left behind, the Bank of Japan recently announced yet another massive bond purchase programme amounting to $1 trillion, while the Swiss National Bank continues to make its pledge that it will sell unlimited amount of Swiss francs to weaken its currency against the euro and in effect other currencies. The Bank of England meanwhile, recently increased its gilt buying programme and its MPC is contemplating the start of new measures which officially are justified as economic simulative programmes, but in effect are an effective way to keep the value of the currency down.
The speculative community is adjusting accordingly and last week speculators added to short JPY positions with net short positions more than doubling from 19k to 42k contracts, according to research by BNP Paribas.
With Eurozone concerns abating, the market continues to unwind EUR short positions. Net EUR positions declined from 116k contracts to 99k contracts. Despite this, EUR underperformed most G10 currencies from March 6-13, the BNP Paribas analysis showed.
As the major currencies are kept weak, on the other side of the coin, the commodity currencies continue higher. The Australian, Canadian and New Zealand dollars in addition to the Norwegian krona as well as the Chinese yuan are some of the currencies that remain in an uptrend and despite the occasional hiccups continue to move higher.
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(Shavasb Bohdjalian is a certified Investment Advisor and CEO of Eurivex Ltd., a Cyprus Investment Firm, authorized and regulated by CySEC, license #114/10 offering forex solutions and approved by the Cyprus Stock Exchange to act as Nominated Advisor for listings on the Emerging Market. The views expressed above are personal and do not bind the company and are subject to change without notice)
