It was a wild day in the foreign exchange market
Really crazy.
Just read Macro man.
The kind of moves in the Brazilian real and Mexican peso that Macro man describes are not exactly normal.
But nothing much has been normal recently.
One last note: The demands on my time have increased recently, as the number of people looking for insights into what is going on has increased even as I struggle myself to try to understand all that is happening. I haven’t been able to respond to some calls and emails quite as promptly as I would like. My apologies.
Brazil and Argentina putting an end to US Dollar Hegemony in Latin America …
http://www.presstv.ir/detail.aspx?id…tionid=3510213
Brazil, Argentina abandon US dollar
Tue, 07 Oct 2008 08:03:52 GMT
Brazil’s President Lula da Silva (R) and Argentina’s President Fernandez de Kirchner
Brazil and Argentina have launched a new payment system in their bilateral trade, doing away with the US dollar as a medium of exchange.
The two Latin American nations started the Payment System on Local Currency (SML) on Monday following a last month agreement inked by their presidents to use local currencies in a bid to end transaction in dollars.
On Thursday, Argentine Central Bank President Martin Redrado and his Brazilian counterpart Henrique de Campos Meirelles signed the enforcement of the agreement for the SML, under which exports and imports between the two countries will take place with the Brazilian real (BRL) and the Argentine peso (ARS).
The new monetary system mainly favors small and medium industries in both countries because it will save them bank charges when averting their local currencies to dollars.
From Russian government RIA Novosti News Agency, US Dollar hegemony to blame for Global financial fiasco
http://en.rian.ru/analysis/20080924/117072937.html
In the light of the recent financial crisis in the USA, could the same thing happen now to the bonds issued by the American government, and could the country which has dominated the world for the last half century now enter history as a bankrupt state? And what can Russia do in the circumstances?
In America, this basic culture of debt is aggravated by the fact that other countries use the dollar itself as a reserve. This means that the United States can export dollars in order to pay for its imports without the dollar losing value. Other states also need dollars to buy key commodities like oil. The USA can therefore export paper currency almost indefinitely – the famous “deficit without tears” analysed by the great French economist, Jacques Rueff. Naturally, if the state itself encourages such a culture of debt by issuing unredeemable paper currency to pay for imports, and by accumulating such mountains of debt, then it is no surprise if the American financial markets themselves operate on the same basis. But the collapse of those markets is only a symptom of a much deeper problem, the basic insolvency of the American state itself.
What can Russia do about this? At first sight, Russia’s role in the international financial system does not seem very large. However, as a major exporter of hydrocarbons, her role in the world economy is actually very important. As the age of the dollar draws to a close, Russia will have to consider selling her oil and gas not in the devalued American currency, but instead in the euro used by most of her customers. It is surely unnatural for two geographical neighbours to do such large volumes of business using the currency of a distant and now ailing nation.
All I can say amongst this entire mess, is take a bow Mr. Roubini.
Oh my…dollar hegemony is that vulnerable?
Large companies can probably negotiate tiny exchange fees with their bank. Russia could write oil and natural contracts directly with euro companies denominated in euros, and if they need a quote on what the price of oil is, use the Brent exchange and then a forex quote to convert the amount to euros on shipment day.
Oh my, oh my…our stranglehold on the world is that weak?????
Also to have to chuckle over Brazil and Argentina refusing to do biz in dollars. Now that it looks like PBR has doubled its known oil reserves, Brazil thinks that’s too juicy for mere private investors, and is talking about nationalization. So any dollar FDI still there will quickly and willingly leave. Then there is the Argentina threat…..
Gillies:
From Macro Man:
“17.18 Let’s end on a lighter note. Apparently the Nigerian govt has warned its citizens that if they get any e-mails from Irish banks, promising govt-backed deposit security and seeking bank account details, that its a scam…”
Is this true?????
DJC: As the age of the dollar draws to a close, Russia will have to consider selling her oil and gas not in the devalued American currency, but instead in the euro used by most of her customers.
The problem with this strategy is that Europe is on fire too. One of the weird things is how the crisis has actually strengthened the US dollar.
Just a thought….
If everyone in the world is cutting interest rates and Japan can’t, then this really marks the end of the Yen carry trade. I wondering what that is going to look like when that unwinds…..
prolly a little something like AUD-JPY
http://www.aleablog.com/this-is-not-iceland/
btw! http://www.spectator.co.uk/coffeehouse/2203316/coffee-house-exclusive-what-the-russians-want-in-return-for-bailing-out-iceland.thtml
2fish:
Mrs Watanabe got the usd/yen down to 130. Now it’s up to 99. I think Brad or someone recently put private japan tic numbers at about half a trillion. I don’t think holding treasuries long term as they do really counts as hot money “carry”, but it is another thing bolstering the dollar over the years.
So it all depends if they believe the recent dollar rally is good to sell into, or if they buy more thinking they are getting US assets “cheap”. (another theory some furiengers have)
Brad! Greetings from Brazil.
The interesting thing about the currency movements here in Brazil is that most of the ‘action’ happenned in the futures market.
There has been a widespread version, coming from currency desks, that as a lot of companies made silly bets on structured products in the past few months (target forwards and double indexed contracts), banks and funds are behind the sudden moves (to make their side of the TARFs more profitable).
Aracruz and Sadia (both trade as ADR) took big hits (R$ 1,8 billion and R$ 700 million) on target forwards. Aracruz has still not closed or offset their exposure.
Hard to know, but in any case it has been the futures market impacting the spot market as far as currency is concerned.
Best,
Christian Bojlesen
Christian Bojlesen –
do you have any more details on “target forwards” — sounds interesting, but it isn’t something that i was tracking.
perhaps that is just another indicator of how hard it to understand all that impacts the market right now — as a lot of bets have turned bad across the globe at more or less the same time.
TARP could be a euphemism for takeover! From Krugman blog today.
But this makes me even more convinced we will have $35 oil in 2011. The only vehicles on
the road will be police cars and military. The government will have confiscated all private vehicles and sold them to China, who in turn melt them down and make them into toaster ovens and Transformer III toys to be recycled back to the US. 2011 IS 1984 !!!!
++++++++++++++++++++++++++++++++++++++++
Update:Starting already? Justin Fox catches something in Paulson’s press conference today:
Did anybody else notice that when Hank Paulson was describing in his press conference today what the Emergency Economic Stabilization Act enables Treasury to do, the first thing he listed was “to inject capital into financial institutions”?
That wasn’t how Treasury initially advertised its Troubled Asset Relief Program. It was sold as a way to get the market for mortgage securities moving (or, to use the jargon, liquid). Lots of academic economists objected that liquidity wasn’t the problem, it was insolvency. What Treasury needed to do was recapitalize financial institutions and take equity stakes in return.
…
None of the people asking questions at the press conference really seemed to pick up on this, of course (&%%$# Washington journalists!). Along with Paulson’s affirmation that the FDIC was going to use its “systemic risk” powers to protect depositors and unsecured creditors “as appropriate,” I take it as one more sign that we’re headed toward a Swedish solution of our banking crisis—recapitalization and temporary nationalization of much of the banking system.
As the Dutch found out this week, a temporary nationalization of a bank does not automatically restore professional flows. In the Dutch case, the fortunate thing is that the gvt bought a package of units of the now more or less defunct Belgian Fortis group, containing a share in the exceedingly well capitalized ABN AMRO bank (according to that bank’s own statements), an apparenly healthy local insurance business and the Dutch part of Fortis’ bank, which can easily be funded by the government. But the rating agencies seem to be unimpressed. Why? They consider this nationalization as temporary, which is true but it is hard o believe that a wealthy gvt like Holland would reprivatize something in a less than well-capitalized state. This demonstrates two things in my opinion:
(1) extreme care is necessary when banks are nationalized, espcilly in statements concerning professional investors (difficult because the public rationale tends to be populist (”protecting savers, families and similar garbage”) or meekly systemic risk oriented. Accepting that the gvt pays a ransom to market manipulators is not done, so they come back for more.
(2) macro/political economically this is all pretty dicy. First, even a very wealthy government (lowest level of net public sector debt (taking into account unfunded gvt pension liabilities and public sector financial assets) cannot impress the market. Top-class financial supervision does not matter. The public (and quite few on this blog too) look at financial institution balance sheet numbers and compare them to GDP or gvt debt etc. Nationalizing a bank has hardly any fiscal impact, unless you change the purpose of the bank and its allocation principles.
I just figured out that if they nationalize the banks, the taxpayer gets the suspect loan “assets” at the mark to market price. If we do it the original TARP way, we pay face value.
Then if they run the bank like a bank, the equity may be worth something someday.
So if all those ifs are met I would agree nationalization doesn’t cost anything.
Please read artical by Tom Szabo on the http://www.Kitco.com web site. ‘The Fed is bankrupt: Update on the Helecopter’
Quote of the Day from Doug Noland:
“The over-indebted US household, corporate and state sectors face a devastating liquidity crisis amid frozen lending markets, broken securitization markets and a panic of de-leveraging. It’s an absolute debacle, and US policymakers can do little about it other than try to slow the collapse.”
Regula: So if all those ifs are met I would agree nationalization doesn’t cost anything.
If it costs nothing, there is something wrong here. If the banks are insolvent (which I think they are) then someone has to absorb the loss. If people don’t stare at that fact and acknowledge it, they you’ll have all these hare-brained schemes to create something from nothing, which is sort of how we got into this mess in the first place.
If all we had was a liquidity problem this could be resolved with the Fed’s borrowing facilities. We don’t have a liquidity problem, we have a solvency problem, and any scheme that *DOESN’T* result in losses to the taxpayer needs to be looked at suspiciously.
http://globaleconomicanalysis.blogspot.com/
The Fed and Treasury are perplexed. Liquidity schemes like the TAF, PDCF, TSLF, TARP, ABCPMMMFLF, and the CFFF did not help stimulate bank lending.
Liquidity measures cannot solve the crisis or stimulate lending. It is pushing on a String in Bernanke’s Academic Wonderland.
Paulson is foolish enough to force the issue and is Threatening To Take Ownership Stake In Banks to do it. The problem is not uncertainty or liquidity. It is 100% certain that the entire US financial system is insolvent. The problem is insolvency.
“The core problem is that the smart people are realizing that the banking system is broken,” said Economist Carl B. Weinberg. The cancerous disease is fractional reserve lending, the very existence of the Fed, and an unsound monetary system. The only cure is to eliminate the Fed, abolish fractional reserve lending, and put in place a sound monetary system backed by hard assets.
Next on the Hank Paulson agenda… Force any still solvent citizens of America to take out high-interest bank loans at gunpoint. LOL.
Hi Brad,
I´m also from Brazil and I want to second what Christian Bojlesen has said. The great volatility in the real these days is due to companies (mainly exporters) that where selling calls options on dollars in order to reduce the cost of their hedge against real apreciation. When the strike price of this options was reached, they started to lose money and the market got the news that they were, in fact, speculating against the dollar. This, together with all the turmoil abroad, caused the possiblity of a huge “corner” on the FX market, a possibility that was promptly seized by others players. The BCB reaction was slow, but tey start selling reserves yesterday and, with that, the real is recovering today.
The problem is that the market suspects that many other companies have been doing the same thing (Cetip is registering more than R$ 58 billions in sold positions of no-financial companies). Needless to say that in the current circunstances, the exit door is very narrow.
Vlad and Christian Bojleson — thanks for your comments. I think I understand what happened now — some companies where selling insurance v big moves in the $/ real to offset the cost of their basic hedge v real appreciation and got burned. i enormously appreciate these comments; they really help me understand what is going on.
Calling Carl Weinberg an “economist” is a bit of a stretch.
The system isn’t structurally insolvent. Many institutions are insolvent by GAAP if they mark to market now. If we let the market correction in RRE complete, markets will clear and we’ll know who’s really underwater on a hold-to-maturity basis.
That said, I wouldn’t buy any banking stocks right now, although that’s as much fear of dilution-by-Treasury-fiat as anything.
Twofish,
You probably refer to Cedric’s response to my remarks on bank nationalization.
Absorbing losses: in my ideal bank nationalization shareholders and subordinated creditors are wiped out. That would take case of a fair bit of losses. Furthermore, nationalized banks would benefit from low funding costs and would not innovate or conduct expensive marketing. They would be utilities. Of course that would hurt development if it would take too long but I do not believe that the past ten years of private sector finance (I know the industry pretty well) have been entirely constructive either. Nationalization is the most advantageous of the current repertoire from a taxpayer’s perspective, if one assumes that both the cost of a major recession and a continued state of moral hazard are politically unacceptable. In an Arrow-Debreu world one would let banks go belly up of course. But then again such a world does not exist. And, in such a world ranks etc would be redundant..
yes, that story about nigerian investors being warned that the irish banks are a scam and to avoid them – is only a joke. but ireland is an open economy and an integrated part of the global financial system, which is also a joke. irish bank vaults contain more than their fair share of a toxic chocolate fudge called ‘negative equity’ and as soon as we know who is going to swallow it we will let you know . . .
but here is a bigger joke. at the moment, sanctions seem to be protecting the iranian economy from the worst of the contagion. how perfect can a perfect storm get ?