Capital Flow Portfolio Book
Thursday 5 February 2015
Tuesday 16 December 2014
December 2014
What is China's Banking System Telling Us?
The
more we look at the Chinese Renminbi the more convinced we become that the next
serious move will be to the upside and that this will more than likely occur
sooner rather than later.
Last
month I wrote an article "The
World's Biggest Asymmetric Trade Just Got Bigger". This is an update to that
article where I look at developments in interbank lending markets which will no
doubt set off alarm bells! Alarm bells if you haven't got any bearish exposure
to the renminbi and, if you already have an exposure, question whether or not
you have enough!
Before
I start talking about the interbank lending market in Chinese renminbi let me
talk a little about the interbank market. The interbank market is simply a
market at which banks can enter to borrow or lend US dollars to each other, it
is also known as the wholesale market.
The
interbank lending market is an integral part of any country's banking system as
it is where banks maintain their short-term liquidity requirements. Often a bank
will have a mismatch between between short-term assets and obligations and as
such they will have to enter the interbank lending market to maintain optimal
liquidity. If a bank has excess short-term reserves they may want to lend these
out to other banks who have a shortfall in short-term reserves. The opposite
also occurs where a bank, with a short-term funding deficit, will enter the
market to borrow funds to match short-term liabilities.
The
behavior of the interbank lending market can provide one with a good
appreciation for the liquidity of the banking system as a whole. If there is a
lot of liquidity in the system (more short term assets than liabilities) the
interbank rate will fall, if there is scarcity of short term assets relative to
liabilities then rates will rise. So a rising interbank rate is generally
associated with contracting liquidity conditions. Rapid rises in
interbank lending rates are often associated with banking or credit
crisis. This happened in the lead up to the GFC. What happened was that
as banks began to fear the ability of other banks, who are their
counter-parties, to make good on their obligations they demanded higher rates
especially from banks already facing liquidity problems which only compounded
their original the situation.
A
rapid rise in a country's interbank lending market is also a good predictor of
the direction of a country's currency, or at worst a confirming
indicator. Let's have a look at the interbank lending market of a few emerging
nations over the last 12-18 months and then look at what is happening with the
renminbi. I think it is instructive for what we have been positioning for in our
funds.
The
Malaysian Interbank rate (KLIBOR) has been rising consistently since late last
year and now the Malaysian ringgit is going parabolic (the ringgit is collapsing
against the USD).
The
Singapore 3-month SIBOR first jumped in over a year ago and as of the last few
months has started to rise in a parabolic fashion with the Singapore dollar in
tow. As with the ringgit above the Singapore dollar is falling against the
USD.
The
Russian ruble has been rising for the last couple of years but started to go
parabolic when the Moscow interbank lending rate (MIBOR) exploded to the upside,
or was that the other way around? It's difficult to identify what is cause and
effect, but one thing for sure - big blow out in currencies tend to occur when
the interbank lending rate is rising rapidly.
Now
this is the situation with the renminbi. The HIBOR (CNH) 3-month rate is going
parabolic, although the offshore renminbi (quoted USD/CNH) is only up marginally
since the HIBOR rate took off a few weeks ago, if the HIBOR rate continues to
climb then I think it is a "certainty" that the USD/CNH will play catch up -
i.e. get ready for a big move to the upside!
While
I am not 100% wedded to "technical" analysis, I know a bullish chart pattern
when I see one, or at least one in the making. If the USD/renminbi can register
a multi-month high, a very significant bullish signal will be generated. I am
confident that this will happen over the coming days.
So
we're expecting a big move to the upside in the USD/renminbi but option writers
don't appear to be. The cost of long-term options (implied volatility) on the
USD/CNH still appears to be very cheap, although the last few days has seen a
sharp jump higher. We think the best way to apply a bullish view on the USD/CNH
is via long-term calls.
Over
the last 6 months, we have been quietly gearing ourselves up for a dramatic move
to the upside in the USD/renminbi. As interbank lending rates in emerging
markets started to explode higher over the last 6 weeks we have picked up our
pace of buying long term FX call options on the USD/renminbi. 12 months from now
I suspect our only regret will be not being aggressive enough.
-
Brad
PS:
Brad has made it very very clear over the last few months that we're heading
directly into a USD bull market, this despite the atrocious finances of the US
Government. This trend is still in its infancy and Brad has agreed to put
together a concise alert on how to position oneself for maximum profit. We will
have this out to Capitalist Exploits subscribers early next week so stay
tuned.
Friday 31 October 2014
Tuesday 24 June 2014
CAN Test June 2014
June 25th
wed 25th usdcan showing daily target for rebalancing
thurs 26th usdcan pullback waiting for daily price above movment
- mega Capital flow is to can vs usd
- small scale book balancing on Thursday or Friday is to buy usd
wed 25th usdcan showing daily target for rebalancing
thurs 26th usdcan pullback waiting for daily price above movment
Articles June 2014
- Armstrong liquidity leading to collapse
- Australia current account deficit
- UBS..This helps to explain the Euro. The Euro area is a current account surplus area. The United States is a current-account deficit area. The interest rate differential argues for a weaker Euro. The current account position argues for a stronger Euro. These two forces battle it out in the foreign exchange markets, and the result is less Euro weakness than many had expected. This new model for foreign exchange has implications that reach far beyond the errors of Euro/dollar forecasting. Reduced capital flows means reduced capital inflows into Asian markets — something that has already slowed the pace of foreign exchange reserve accumulation. Reduced capital flow may mean a less efficient global allocation of capital resources. Global capital flows have been hidden from the headlines, but the collapse of globalization may turn out to be one of the most important economic changes of the past decade...
- Armstrong..As taxation rises, capital invests based entirely upon NET RETURN. The greater the tax increase the higher the gross interest rates will rise. The pension funds tend to be more conservative and as a result they will be the next great crisis as insolvency starts to rise as they have been unable to meet their obligations. Governments are going to find the traditional flight to quality reverse as more and more capital shifts to the private sector fearing even the economic data published by governments is not trustworthy for they will play with the numbers to support their position of control...
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