Forex Investment and Currency Trading

Overnight we saw China stirring the pot again, renewing its call for the creation of a super-sovereign currency. In its annual financial stability report, the PBOC avoided mentioning the USD by name, but said that “An international monetary system dominated by a single sovereign currency has intensified the concentration of risk and the spread of the crisis.” The report advocated a bigger role for SDRs, and suggested that the IMF be entrusted with managing a portion of its member countries’ foreign currency reserves. The USD underperformed overnight, partly on an improvement in risk sentiment, but particularly after the Chinese comments, and most major currencies are back to where they were against the Dollar pre-FOMC. The New Zealand dollar has failed to make any headway though, after a softer than expected Q1 GDP report. Some remain convinced that the RBNZ can lower cash rates to shore up confidence that a recovery lies ahead, and to take some steam out of the NZD. Jawboning “lower rates for longer” is simply not good enough.

This week there has been some attention paid to the slew of US Treasury issuance (2-year, 5-year, and 7-year issuances on Tuesday, Wednesday, and Thursday, respectively), although admittedly the bigger test will come in two weeks when we get some longer-dated Treasury auctions.

Currency markets are watching these auctions more closely than usual, in order to gauge foreign demand for USDs. However, an article in yesterday’s WSJ highlighted the fact that it’s going to be more difficult going forward to gauge foreign demand due to changes in the definition of “indirect bidders.” In the past, indirect bidders had been composed largely (but not exclusively) of foreign central banks, so markets could watch the percentage of indirect bidders as a proxy for foreign demand. However, the Treasury changed the definition on June 1, so now all bidders outside of primary dealers are included in the indirect bidder bucket, meaning that the higher fraction of indirect bidders that we’ve seen in this week’s auctions (compared to the pre- June 1 auctions) doesn’t really tell us anything about the strength of foreign demand. For details, see “Is Foreign Demand as Solid as it Looks?”
http://online.wsj.com/article/SB124588934703850877.html