The Federal Want To Pressure Down U.S Dollar Worldwide

 

 

The Federal Want To Pressure Down U.S Dollar Worldwide

There is a saying in the investment business, “don’t fight the Fed.”

Fed Swap Lines Purposely Keeping Dollar Weak

Central banks provided two pieces of market supportive news in the past 48 hours.

China announced its intent to buy Portuguese bonds, and the Federal Reserve extended its “swap lines” deep into 2011:

# China Ready to Buy Up to $6.6B in Portugal Debt (Reuters : http://www.reuters.com/article/idUSTRE6BL0Y220101222 )

# Fed Extends USD Swaps With Major Central Banks (Reuters : http://www.reuters.com/article/idUSTRE6BK3PS20101221 )

Via Reuters, the swap lines, at first set to expire next month, will now run til August 1st.

The lines were first opened to the ECB and SNB — the European and Swiss central banks respectively — and were later expanded to multiple additional central banks, including those of Sweden, Mexico and Brazil.

The August extension applies to the Fed’s counterparts in Europe, Japan, Canada, England and Switzerland.

So why is the Fed doing this? Straight from the horse’s mouth (official Fed statement):

“[The swap lines] are designed to improve liquidity conditions in global money markets and to minimize the risk that strains abroad could spread to U.S. markets.”

That’s the official justification. A between the lines reading is slightly more self serving: The Fed wants to keep the dollar weak — or otherwise keep it from rising too much.

As you can see, from 2002 onward the $USD had been declining — a trend perceived as good for everyone. As Americans gorged on “stuff,” the vendor finance arrangements put in place by China and Middle East oil exporters allowed the party to continue unabated.

Long term interest rates were kept low via the recycling of $USD back into treasury bonds, in turn keeping mortgage rates low and perpetuating the housing bubble. Meanwhile many emerging markets enjoyed rapid growth — courtesy of a binging U.S. consumer — as the leverage and credit boom radiated outward.

But then, as things fell apart in 2008, the $USD saw a dramatic surge. A wave of panic swept the globe as the supernova debt boom collapsed. Trillions of dollars in credit flows evaporated, and American investors effectively “short” dollars (via overseas investments and ‘carry trade” type arrangements) had to cover with a vengeance.

As the chart shows, the $USD saw another upward surge in early 2010, first on China fears, and then eurozone sovereign debt fears as the Greek situation ignited. (This is when the Economist’s Acropolis Now cover was published — a keepsake to be sure.)

So, as you can guess, one of the many fears keeping Ben Bernanke awake at night is the possibility of a surging $USD.

Not only is the dollar a “risk-off” fulcrum, balanced against “risk on” for all other paper asset classes, a rising buck is also a political headache for the Obama White House and other American interests seeking a U.S. export revival.

So, back to those swap lines. Why and how would they be an attempt to keep the dollar down?

Well, first consider what a swap line actually is. From the Federal Reserve website:

In general, these swaps involve two transactions. When a foreign central bank draws on its swap line with the Federal Reserve, the foreign central bank sells a specified amount of its currency to the Federal Reserve in exchange for dollars at the prevailing market exchange rate. The Federal Reserve holds the foreign currency in an account at the foreign central bank. The dollars that the Federal Reserve provides are deposited in an account that the foreign central bank maintains at the Federal Reserve Bank of New York. At the same time, the Federal Reserve and the foreign central bank enter into a binding agreement for a second transaction that obligates the foreign central bank to buy back its currency on a specified future date at the same exchange rate. The second transaction unwinds the first. At the conclusion of the second transaction, the foreign central bank pays interest, at a market-based rate, to the Federal Reserve. Dollar liquidity swaps have maturities ranging from overnight to three months.

In layman’s terms, we can think of a swap line as a standing guarantee of U.S. dollar liquidity. If you (as a central banker) ever need greenbacks in a pinch, you know you’ll be able to procure them instantly, no matter how “tight” the open market may be.

This standing guarantee reduces the odds of another violent $USD spike of the type we saw in late 2008. In a way, one can think of it as “short squeeze insurance.”

The many players around the world who are “short” U.S. dollars — by way of lending arrangements denominated in dollars and so on — have spiking dollar risk implicit in their positioning.

What the Fed has essentially said to these players is, “It’s okay for you to keep borrowing in dollars, because in the event of a new liquidity crisis we will create accessible dollars for you (via the channel of your local CB).”

Consider, too, the conditions under which all these central banks would be pushed to draw on their $USD swap lines at the same time.

By definition, these would be crisis conditions in which availability of $USD was scarce relative to near-term surging demand.

In such conditions, the Federal Reserve would have to create more dollars to meet existing outsized demand (as crisis-driven preferences for holding $USD, or covering short $USD obligations, would create a shortage).

So the liquidity promise is also a sort of printing-press promise: In the event of another crisis, the Fed will be on its toes and ready to “print” however much fresh $USD the world needs.

The really neat trick is, simply in making this promise, the Federal Reserve can achieve its aim of keeping the $USD down. This effect is produced even without the Fed doing anything.

How? Simple:

* The Fed has promised $USD liquidity will be there “if needed.”
* This promise can be “taken to the bank” — literally.
* Commercial institutions can thus rest easier with short-dollar liabilities.
* To wit, whether one is a bank, a commercial operator or a speculator, it’s very tempting to borrow in $USD these days — to leverage the greenback via some form of debt arrangement and participate in the “carry trade.”

But this move could also be considered risky due to the possibility of carry trade reversal and crisis-driven supply/demand crunch … and so, with the extension of the Fed swap lines, Uncle Ben has stepped up and said “Hey, no problem, carry trade away — we’ll be there in a tight spot (via printing press) to provide liquidity for you.”

And so the dollar stays suppressed, and everyone stays happy (apart from those pesky “non-core” inflation watchers, and anyone else feeling a cost of living crunch).

M&A tops $2.2 trillion in first yearly rise since 2007

M&A tops $2.2 trillion in first yearly rise since 2007

LONDON/HONG KONG (Reuters) – Mergers and acquisitions rose for the first year since 2007, potentially marking the start of a new, multiyear M&A cycle in which emerging economies account for a bigger share of global dealmaking.

Thomson Reuters data showed announced M&A grew nearly a fifth this year, to $2.25 trillion globally. The preliminary figures show emerging markets made up a record 17 percent of transactions, and energy was the busiest sector.

Next year could be busier still. Executives, bankers, big investors such as Schroders, and analysts at banks including Credit Suisse, Nomura, and Societe Generale are among those predicting a further rise.

Cheap debt, record cash piles, the need to outpace sluggish economic growth, and positive market reactions to many deals in 2010 should embolden companies to strike more deals, they say.

“We feel M&A volumes will improve next year, there’s certainly going to be more cross-border activity than ever, and Asia — again — will be a bigger part of the equation,” said Scott Matlock, chairman of international M&A at Morgan Stanley .

Deutsche Bank , the world’s fifth-busiest merger adviser, said next year could bring a bigger rise.

“The increase in M&A activity in 2011 should exceed that of 2010,” said Henrik Aslaksen, Deutsche’s global head of M&A.

“There’s more confidence, there’s ample liquidity, financing costs are attractive, and there’s an intense focus amongst corporates to identify growth opportunities,” he added. “The pipeline is very broad-based. It’s not just confined to one to two sectors.”

Senior executives on average expect $3 trillion of M&A next year, a recent Thomson Reuters/Freeman survey found.

GOLDMAN LEADS

That means 2011 could be the second of several years of rising deals — earlier this year Citi analysts said the world was “in the foothills” of a new M&A cycle. These cycles typically last years: the last peaks came in 2000 and 2007.

Bankers say a combination of cheap stocks, as measured by price-to-earnings ratios, and even cheaper debt means many deals would offer a big boost to earnings.

The optimism comes despite a slower fourth quarter and the worst spate of withdrawn deals since the height of the credit crisis: two collapsed BHP Billiton deals, in Canada and Australia, alone cut $100 billion from M&A volumes.

Jeffrey Kaplan, global head of M&A at Bank of America Merrill Lynch , said it was still “challenging to get deals done,” despite “good momentum going into 2011 for both corporate and private equity activity.”

With about a fortnight to go, Morgan Stanley is lagging archrival Goldman Sachs , after beating it to the No. 1 ranking last year for the first time in 13 years.

Goldman Sachs, under M&A head Gordon Dyal, has advised on $513.1 billion of deals to Morgan Stanley’s $499.5 billion.

‘LAND-GRAB’

Emerging markets deals hit a record $378 billion, while developed markets lagged. Global M&A increased 19 percent, while U.S. M&A rose 11 percent and activity in Europe climbed 5 percent.

Colin Banfield, Citigroup’s head of M&A for Asia-Pacific, said currency rates were aiding the region’s companies, which were growing “more ambitious” and contemplating bigger deals.

But aside from several major telecommunications tie-ups in the developing markets, and the odd banner deal such as Chinese carmaker Geely’s purchase of Volvo from Ford, many deals from newer markets were aimed at securing resources or technologies.

“We’re still in the early days of emerging markets M&A,” said Matlock at Morgan Stanley.

“When it gets really hot is when people decide they want to buy and build truly global multinational corporations, and we’re not there yet. It’s more focused on acquiring natural resources or on opportunistic deals.”

Energy and power was the year’s busiest sector, with a near-40 percent rise in announced deals to $482 billion, followed by the financial and basic materials sectors.

Asian companies including China’s Sinopec Corp and Thailand’s PTT Exploration and Production struck deals that ranged from buying stakes in oil fields to Korea National Oil Corp’s hostile takeover of Britain’s Dana Petroleum.

“Asian players, led by China, are making a land-grab for resources to fuel their economies for many years into the future,” said Jeremy Wilson, co-head of natural resources at JPMorgan .

HSBC Eyes Australian Expansion

HSBC Eyes Australian Expansion

SYDNEY—HSBC Holdings PLC, Europe’s biggest bank by stock-market value, will beef up its corporate-finance business in Australia, part of a strategy to increase its presence in an economy booming on the back of Asia’s demand for commodities, the lender’s local chief executive said.

“There’s a lot of interest in good corporate fundamentals coming out of Australia,” Paulo Maia, HSBC’s Australia head, said in an interview with The Wall Street Journal.

A greater emphasis in Australia comes as HSBC and other international lenders search for low-risk opportunities outside more traditional markets in the U.S. and Europe, which are recovering more slowly than Asia from the global financial crisis. Asia accounts for more than half the bank’s total earnings.

The bank plans to hire for its Australian debt capital markets team as well as expand its onshore leveraged acquisition and loan syndication operations, said Mr. Maia, who was previously deputy chief executive of the European bank’s Brazilian business.

HSBC particularly wants to tap into the growing market for leading local corporations and banks to borrow money offshore. Already this year, the volume of nonbank corporations issuing foreign-currency debt has grown by 35% to 13.97 billion Australian dollars (US$13.71 billion) split across 26 deals, according to Dealogic.

HSBC’s first-half pretax profits from Australia grew 28% compared with a year earlier to A$152 million. Still, that’s a slower rate of growth than seen at local rivals, including Commonwealth Bank of Australia, which in the same period recorded a 37% jump in pretax profits.

Compared with its Australia rivals, HSBC has a relatively small retail-branch network in the country. But Mr. Maia rulef out buying a smaller local bank to build its presence in big urban centers like Sydney, Melbourne and Brisbane.

“We haven’t been able to identify any bolt-on acquisitions that would make sense for us,” he said. “We want to play on the mass affluent; we don’t want to go too much downmarket.”

HSBC’s enthusiasm for Australia comes as the bank remains locked in a war of words with the British government over the rising cost of basing itself in Europe. The bank’s outgoing CEO, Michael Geoghegan, and his successor, Stuart Gulliver, have warned separately that new rules proposed to curb pay in the financial-services industry are putting it at a disadvantage to its U.S. rivals in international markets.

From The Wall Street Journal – WSJ.com

Top News: Wht Ireland’s Finance Minister Brian Lenihan said on Friday, Nov 12

Top News: Wht Ireland’s Finance Minister Brian Lenihan said on Friday, Nov 12

* Ireland Following Correct Path On Budget – via Radio

* Digesting Irish Measures Takes Time – via Radio

* Must Build Credibility With Markets Step by Step – via Radio

* Ireland Well Funded Until June 2011 – via Radio

* Market Turbulence Not Ireland’s Fault – via Radio

Dow Jones Newswires

November 12, 2010 08:14 ET (13:14 GMT)

Brian Lenihan, ireland, euro, debt

China’s President Visits Portugal, Eyes Investment

China’s President Visits Portugal, Eyes Investment

China will back Portugal’s efforts to deal with fallout from the world financial crisis, President Hu Jintao said on Sunday, but he stopped short of promising to buy Portuguese bonds as the debt-ridden country had hoped

“We are willing to take concrete measures to help Portugal cope with the global financial crisis,” he said after meeting Prime Minister Jose Socrates, without elaborating.

LISBON, Portugal – Chinese President Hu Jintao has started a two-day state visit to Portugal where officials are hoping investments by Beijing will help revive one of the European Union’s frailest economies.

China has been using its large foreign currency reserves to expand its economic presence in western Europe.

Hu traveled from France where companies won deals with China worth euro16 billion ($22.8 billion).

In Portugal, Hu is expected to preside over the signing of trade agreements and private sector investments.

Hu was meeting Saturday with Portuguese President Anibal Cavaco Silva. On Sunday, he was due to hold talks with Prime Minister Jose Socrates.

Hu is accompanied by a delegation of Chinese company executives.

Last month, Premier Wen Jiabao promised to buy Greek government bonds when Athens returns to markets, in a show of support for the country whose debt burden pushed the euro zone into crisis and required an international bailout.

Portugal, which unlike Greece still sells bonds on financial markets although at high cost, had hoped for a similar promise as it is trying to soothe investors’ concerns about its ability to cut a high budget deficit and rein in ballooning debt.

Deputy Foreign Minister Fu Ying, who is part of the Chinese delegation visiting Europe, told Reuters on Saturday that Beijing remained committed to investing in European bonds and was willing to lend Portugal a helping hand.

The Chinese government faces criticism at home over losses which state entities incurred during the global crisis. But Beijing may calculate that using part of its huge foreign currency reserves to support troubled European countries would help to deflect international criticism of its trade policies and its refusal to let its yuan currency appreciate sharply.

Portugal and China also signed several cooperation treaties in areas such as financial services, logistics, renewable energy and tourism, and agreed to work to double their bilateral trade by 2015.

Hu said he would encourage Chinese companies to invest in Portugal, while China also wanted Portuguese firms to sell more goods in the world’s most populous country.

HIGH DEBT PREMIUMS

A stern-looking Socrates thanked Hu for a “personal effort” to achieve not only the doubling of trade and more mutual investment, but also “a more balanced relationship so that both our peoples can benefit from this ambition.”

Portuguese imports from China in the January-August period jumped 47 percent to 1.03 billion euros ($1.45 billion) from last year, while exports to the world’s second largest economy in the first eight months of the year totaled just 149 million euros.

Investors’ concerns that Portugal may fail to rein in its budget deficit and debt have caused its debt premiums to soar this year, raising the risk of a Greek-style bailout.

But the minority Socialist government maintains it will meet the budget deficit target of 7.3 percent of GDP this year and 4.6 percent in 2011 year. It is betting on higher exports to avoid a new recession next year, when tough austerity measures such as higher taxes and wage cuts will start.

In an example of possible investment, Portugal’s largest company and utility EDP said China Power Holding International (CPI), with which it signed an agreement for a potential partnership, expressed interest in buying a stake in the Portuguese company.

“Given the strategic significance the cooperation partnership may have, CPI has manifested its interest in a potential entry into EDP’s capital,” EDP said in a statement.