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Fed Rates – Prospects of USD/INR Carry
| 09-09-2016 | Rahul Magan |
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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How long can interest rates stay so low?
| 08-09-2016 | Lionel Pavey |
How long can interest rates stay so low? When we talk about interest rates, it is helpful if we know the basic theory of how the level of an interest rate is determined.Classical thinking states that there are 5 components in interest rates (x).
5 Components in interest rates:
These, together, are called the nominal interest rate
A review of various data providers show that the “indicative rate” for a bullet loan with a maturity of 5 years for a Dutch local authority would be 0.06% per annum. Let us look as this rate compared to the 5 components already mentioned.
C, D and E are all premia and would, therefore, have a positive value. Even if their collective value was zero, it would imply that “nominal” 5 year interest rate would be 0.06%. This nominal rate, as previously stated, comprises both the risk free rate and the expected inflation.This leads to the presumption that either risk free rates are zero or that future expectations of inflation are negative.
According to the ECB inflation (HICP) index in July 2016 prices rose by 0.2% as an annual percentage change. The target inflation rate for the ECB is below, but close to, 2% over the medium term. Central banks set interest rates whilst keeping a watchful eye on headline and expected future inflation (it is a lagging indicator). Many studies claim that inflation indices overstate the true inflation figure, which would imply that the true inflation change would be zero or slightly negative.
If we were to enter a recession now there would be no room to use monetary policy as done previously as there is no space to lower rates any further. This would then only leave fiscal policy, but there is no unity within the Euro zone on fiscal policy.
It would appear that the present policy of quantitive easing (QE) has lead us to very low interest rates coupled with minimal inflation and no significant growth in GDP. Therefore, it is not improbable to envisage the current period of very low interest rates being maintained for quite some time in the future.
Furthermore, when QE stops, the ECB will eventually have to sell the bonds they are holding. Such an action could, conceivably, lead to a large rise in interest rates causing disruptions in the economic cycle. In the current environment, monetary policy can not revive the economy.
Lionel Pavey
Cash Management and Treasury Specialist – Flex Treasurer
Instant Payments: major innovation ahead! How fast is “the new normal”?
| 07-09-2016 | Boudewijn Schenkels |
After the introduction of SEPA the market is ready for further innovation. New payment laws (PSD2) make the payment market more competitive and new payment providing parties are anxious to participate. The continuous development of the ‘always on’ economy drives the need for faster and 24/7 payment execution.
According to the European Retail Payment Board (ERPB), an instant or immediate payment is an electronic (retail) payment solution, available 24/7/365 and resulting in immediate interbank clearing of the transaction and crediting of the payee’s account with confirmation to the payer within seconds of payment initiation, irrespective of the underlying payment instrument used and arrangements for clearing. Basically: sending and receiving payments 24/7 within seconds. National instant payment solutions have already been successfully launched in a number of European countries, such as Denmark, Poland, Sweden and the UK.
The SEPA Instant Payment, based on the SEPA Credit Transfer, can be offered in SEPA by November 2017; with the Rulebooks for this so called SCT Inst scheme becoming available in November this year. Some communities will offer Instant Payments from the start, others will follow later, but not offering Instant Payments doesn’t seem to be an option. Various other countries, including The Netherlands, Belgium, Spain and Italy, are running programmes to deliver Instant Payments to their communities in the coming years. The major Dutch banks have committed themselves to deliver Instant Payments, or what they call: “the new normal”, by May 2019.
Instant Payments in itself will offer new interesting payments use cases, but it will certainly serve as a platform to support many new innovative payments services.
Impact for Treasurers and Cash managers
For treasurers and cash managers there will be large changes as well as opportunities. For a long time banks have provided cash pooling solutions to their customers, but Instant Payments will allow to sweep accounts at any time to enable efficient cash pooling and distribution eventually throughout Europe.
Another few examples of these “future” use cases are:
You will say, “too good to be true”, but they are all in scope for “the new normal”. I would like to say: be aware of all the changes and business opportunities for your organization and prepare yourself!
Boudewijn Schenkels
Senior Consultant Payments @ Payments Advisory Group