Weekly review: I can see clearly now the US Treasury exemption is gone

By:
Russell J. Dinnage
Published on:

The US Treasury’s announcement after markets closed on Friday, November 16, that it will exempt FX swaps and forwards from regulation under the Dodd-Frank Act meant the market had something to be thankful for on Monday morning.

However, confirmation of the final exemption decision for the FX products by the US Treasury – which was held back for a variety of reasons, not least the US presidential election on November 6 – does not mean that the forex market is out of the regulatory woods just yet.

The looming issue for FX trading in the EU and US remains the eventual implementation of Basel III proposals from the Basel Committee on Banking Supervision that would impose margins on uncleared FX swaps and forwards.

The possibility remains that regulators could eventually indirectly incentivize clearing for swaps and forwards by agreeing to impose margin requirements on trades in the products that are so large there would be no alternative but to centrally clear them.

Clarity on the FX market’s regulatory outlook in the US comes as a long-term change in the status of the USD is under way.

This status of the USD is shifting from being a funding vehicle to an investment vehicle, according to Morgan Stanley’s outlook for the currency for 2013.

The bank predicts in the report that the changing status of currencies is going to be one of the main themes in the FX market next year, as cyclical factors erode the position of risk-on/risk-off as the dominant force in the market.

Even the EURCHF floor might not be sustainable long-term, according to BCA Research, one of the world’s leading providers of global investment analysis.

A report from BCA this week claims the Swiss National Bank (SNB) has engineered two of the "impossible trinity" for an economy; the trinity being: an open capital account, a fixed exchange rate and an independent monetary policy.

"In the case of Switzerland, it has an open capital account and the SNB has chosen to fix the exchange rate, at least on the upside, meaning that the central bank cannot pursue an independent monetary policy," says Harvinder Kalirai, chief strategist at BCA.

Elsewhere, one of the main talking points in the FX market this week was political events in Japan, where the dissolution of the lower house of the country’s parliament by prime minister Yoshihiko Noda last week saw USDJPY break out of the ¥77 to ¥80 range that it has held for the past six months.

Holding a long USDJPY position has been frustrating in recent months, as Japan’s trade position has deteriorated and tensions with China escalated. However, with the change in government, the time could finally be ripe for a push higher as Liberal Democratic Party leader Shinzo Abe is set to return to power after elections on December 16.

Abe’s threats to undermine the independence of the Bank of Japan (BoJ), calling on the central bank to undertake "unlimited" monetary easing until inflation reaches a target of up to 3%, would require drastic action from the bank.

Now, the key to whether the recent move up in USDJPY is sustainable is whether Abe and the BoJ deliver on the politician’s proposals.

In other news, Deutsche Bank this week announced that Zar Amrolia, who has led the bank’s FX division to the number-one position in the Euromoney FX survey for the past eight years, has been promoted to co-head the bank’s newly created fixed income and currencies group.

Amrolia will share the role with Wayne Felson, who is the bank’s global head of rates and flow credit trading, as Deutsche Bank seeks to broaden electronic trading across all asset classes.

London-based investment bank Daniel Stewart & Company and Swiss FX trading house and asset manager Mercury Forex are launching a new currency fund called the Daniel Stewart Mercury Forex Fund, a joint venture that is set to begin trading on January 1, 2013.

Jyske Bank, Denmark’s third-largest bank, has selected technology firms Progress Software Corporation and Caplin Systems to jointly develop its new single-dealer platform for FX.

And DealHub, a financial services technology company, has signed up eight banks –including a top-three FX market liquidity provider – to stream pricing to multi-dealer platforms and other trading venues.

EuromoneyFXNews managing editor Hamish Risk will be in New York next week to attend Euromoney’s annual FX market conference the Euromoney Forex Forum USA, at the Westin Hotel, on November 28. Risk will be moderating a panel at the conference and reporting news from the event.