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Fed Rates – Prospects of USD/INR Carry

| 09-09-2016 | Rahul Magan |

“Federal Reserve Rates and INR Reverse Carry”. As we understand that Federal Reserve Chairman Janet Yellen turning Hawkish and asking for 25 Bps increase in September 2016. If we look carefully then Fed vice Chair Fisher also suggested the same and at the same time most prominent Bond Trader – Bill Gross also suggested increase of 25 Bps in September and 25 Bps in December. If this would happen then Overnight Rates of USD would move to 1% and this would be closer to Australia which is 1.5% in $ terms.

We should also appreciate the fact that both Central Bank of Australia and Reserve Bank of India are moving towards Accommodative Monetary Policy. This way they would decrease the interest rates as to stimulate their economy. In that regards there are millions of thoughts but in my view Accommodative Monetary Policy is a big suicide as Japanese is a perfect example in that regards. They are doing QQE since last 2 decades but at the end need to depend upon Helicopter Money to stimulate their economy?? We all understand that Helicopter Money is nothing but Explicit Debt Monetization by BOJ for Govt of Japan.

There are multiple reports which suggest that Helicopter Money has already started in the form of Helicopter Drops by BOJ for Govt of Japan. This would surely create Reverse carry for USD/INR. We all understand that Indian Central Bank – Reserve Bank of India is now following Accommodative Monetary Policy henceforth there is a big pressure on RBI to cut present Repo Rates of 6.5% by at least 100 Bps to 5.5%. This would surely decrease the carry of INR for all Foreign Institutional Investors (FII), Foreign Portfolio Investors (FPI) to invest funds in India.

One more fact which matters is the growing relevance of Indonesia where in 10 Y G Sec is trading at 7.7% and Singapore who would like to increase overnight rate to 1.35 %. If this would happen then all the funds which are scheduled to India would invest in United States who is offering 1% , Australia 1.5% , Indonesia 7.7% and upcoming Carry Currencies like Singapore offering 1.34%.

We also need to appreciate the fact that Carry Traders needs big return and specially at that time when Japanese , Swiss , Europe is in negative and also big banks like Royal Bank of Scotland , Bank of Ireland and Deutsche is asking big clients to pay negative collateral. Sitting today we are having “Quest for Yield Hunt”.

Reserve Bank of India should be well aware of the fact that if they would reduce Repo Rate by 100 Bps to 5.5% then probability of having INR moving towards Reverse Carry is 100%. This won’t appreciate INR rather would depreciate the same as less $ would park in India. We also understand that this would also increase the reliance of Indian Corporates on External Commercial Borrowings (ECB) and there would be very less funding covering Foreign Currency Non Resident Bonds (FCNR) in India which would have reciprocal impact on both USD/INR Interest Rate Swaps (IRS) and Overnight Index Swaps (OIS)

On the 5th of September 2016 Bank of Japan Governor Kuroda said there is still a big for Qualitative Quantitative Easing (QQE) in Japanese Economy however this time Negative Interest Rates would play a very important role in that regards. Keeping all the aforesaid factors, Currency Traders are advised to take care of the same while making trading bets involving INR. Currency Traders are advised to have Options Structures to hedge their exposures.

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Rahul Magan – Chief Executive Officer Treasury Consulting LLP

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Foreign bank accounts, blessing or burden?

04-08-2016 | Jan Meulendijks |

SEPA reduced the necessity to maintain foreign bank accounts in Euro-countries to a great extent, but there can still be substantial advantages to operating such accounts; an overview.

There is a basic difference between handling your money flows and transactions in Euro and other currencies.

Handling money flows and transactions in Euros

SEPA has created a huge improvement in efficiency and cost reduction in standard (non-priority) transactions between Euro-countries. If your company has this type of standard receivables or payables there is no longer a need to have bank accounts in the countries involved. There is one exception: cross border priority payments. These are still subjected to substantial bank charges, so if you have a a lot of priority payables/receivables in an Euro-country it can still be a cost-saver to process these through a local bank account.

Handling money flows and transactions in USD, GBP and other currencies

Especially the Anglo-saxon countries still operate their local and international payments by using cheques. Your first goal should be to try to migrate this to transfers, but this will not always be feasible. If you process cheques through your Dutch bank account you will experience that this is a time-consuming and costly business. Charges of EUR 50 per item or more are very common, and the value date of a cheque credit will be approximately one week after it has been processed so there will always be an interest disadvantage. Local bank accounts can facilitate domestic cheque-collection and clearing systems resulting in much better time lines and local costs instead of cross border fees. As I explained in my previous article, foreign bank accounts these days can easily be managed information-wise and cash management-wise.

The advantage of a foreign bank account

To illustrate the difference in handling money flows and transactions with or without a foreign bank account an example:

Your company exports to USA, you receive 500 cheques per year that you process through your Dutch bank. Costs are app. EUR 25.000 + interest disadvantage over the turnover involved.
Processing through an US bank account: processing costs app. US 2.000,00, account maintenance fees US 1.000,00, cashpool costs EUR 1.000,00.
Result: cost reduction of app. EUR 21.000,00 + reduction of interest disadvantage.

Please consult your bank’s cash management consultant about your specific situation and how to proceed on opening foreign accounts and documentation required.

Jan Meulendijks – Cash management, transaction banking and trade professional

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Treasury ABC – part I

| 08-07-2016 | Jan Doosje |

For many people Treasury is, as they think, something that is not concerning. Because there are many items that could be mentioned and listed here, I chose to mention the items that have effect on our daily lives, even if we are not aware of the existence of the described item. I’ll call it the Treasury ABC for normal citizens.

A is for Asset management

Asset management is the management of, amongst others, supervision and investing of and in (mostly) big portfolios of shares, obligations and other financial instruments. The goal is to increase the invested funds by making a high return. Pension funds depend on their return of investment to fulfill their commitment to participants of the pension fund. Bad results can affect your monthly income when you are entitled to pension.

B is for Bond

This is not only for James and his family. Bonds are issued by national governments to satisfy their need for funds. Depending the grade of a country, the return on a bond can vary. Be sure, if the interest rate is high, risk will also be high. Don’t jump into “junk bonds” because it can cost you a lot of money.

C is for Currency rate

A currency rate is the conversion rate between one currency and another. For example: USD/EURO. When the currency rate is > 1, you will get more dollars for your euros. When the currency rate is <1, you will get less dollars for your euros. Suppose the currency rate USD/EURO is 1,11 and you go shopping in New York. If the price is $ 100, you will see on our bank account a withdrawel of € 90,01.

D is for Dollar

The US Dollar was born on September 8th, 1775. Some people believe that the name comes from the Dutch (daalder) or from the German “Taler”. However, the USD still is the most important currency in the world despite the Yen, Euro or Chinese Yuan.

The price of the dollar is influenced by :
* Supply and demand factors
* Sentiment and market psychology
* Technical factors

E is for Euro

The Euro is a new currency, which was born in Maastricht while the treaty of 1993 was signed. Virtual the Euro came into existence in 1999 while the notes and coins came into circulation as of January 1st 2002. Before the Euro, the European countries were divided in their currencies. “We” had Austrian Schilling, Belgian Franc, Cypriot Pound, Dutch Guilder, Estonian Kroon, Finnish Markka, French Franc, German Mark, Greek Drachma, Irish Pound, Italian Lira, Latvian Lats, Lithuanian Litas, Luxembourg Francs, Maltese Lira, Monegaque Franc, Portuguese escudo, Sammarinese Lira, Slovak Koruna, Slovenian Tolar, Spanish Peseta and Vatican Lira. Imagine the lack of transparency before the Euro existed.

Next week we’ll proceed with part II of the treasury ABC for normal citizens.

Talking to our readers and contributors we have noticed that there are treasury related words with many different understandings. We’ve asked Jan Doosje to kick off a treasury ABC. Of course this is not binding and there are letters which can be connected to several treasury related words We need your input to make a complete treasury ABC. Would you like to contribute to the treasury ABC? Please contact our community manager Stephanie Derkse.[social_links size=”normal” align=”” email=”[email protected]”]

Jan Doosje

Owner of Fimterim Advies & Consultancy