* Greenback has scope for losses, Citigroup’s Englander says
* Economists predict payrolls swelled by 200,000 in April
A day of reckoning looms for the dollar, according to Citigroup Inc., the biggest trader in the $5.3 trillion-a-day currency market.
The greenback gained a second day Wednesday, paring a recent selloff that saw the currency touch a one-year low. Traders are girding for a payrolls report that may dictate whether the Federal Reserve raises interest rates in June, according to Steven Englander, Citigroup’s global head of Group-of-10 currency strategy. A private report showed U.S. employers added fewer workers last month than forecast, muddying the outlook for benchmark borrowing costs.
The Fed is scrutinizing data before its June meeting for signs the U.S. economy is able to withstand tighter policy after the central bank lifted rates from near zero in December. As U.S. policy makers have reiterated that an interest-rate increase at their June meeting is “a real option,” the spotlight has swung to economic data. The Labor Department report due May 6 is forecast to show the third straight month with payroll gains of 200,000 or greater.
“This is like judgment day for the Fed, with respect to whether they really think there’s a chance that June is live,” New York-based Englander said by phone. “That makes the dollar very sensitive.”
The Bloomberg Dollar Spot Index, which tracks the greenback versus 10 peers, rose 0.5 percent on Wednesday in New York, after reaching an almost one-year low on Tuesday. The gauge was little changed as of 7:55 a.m. in Singapore. The U.S. currency retreated 0.1 percent to 106.94 yen and was at $1.1490 per euro.
The greenback’s retreat in 2016 has eroded more than half its 9 percent surge last year, roiling global markets and complicating the task of central banks around the world that need weaker currencies to boost their economies. The dollar fell for a third straight month in April, the longest stretch since before it embarked on a 20 percent rally in July 2014.
Figures from the ADP Research Institute on Wednesday showed U.S. companies added 156,000 workers in April, falling short of analyst estimates. Economists are predicting payrolls climbed by about 200,000 last month after a 215,000 increase in March. A figure below 130,000 would likely take a rate rise off the table, Englander wrote in a note to clients.
“On a bad number, we would see the dollar weaken,” Englander said. “The unwinding of the dollar strength is far from complete.”
The greenback slumped as much as 0.7 percent on Oct. 2 when payrolls fell 58,000 short of forecasts as traders scaled back expectations for Fed rates. Futures contracts show a 10 percent likelihood of an increase in June, and a 52 percent probability for December. The calculation assumes the effective fed funds rate will average 0.625 percent after the central bank’s next increase.
Hedge funds increased wagers on dollar weakness last week after turning net bearish on the currency versus eight peers for the first time since 2014 a week earlier.
Forecasters expect the dollar to strengthen to $1.10 per euro and 115 yen by year-end.
* After almost 4 years of negative rates, Danes invest less
* Pension funds say policy is distorting markets, asset prices
When interest rates are high, people borrow less and save more. When they’re low, savings go down and borrowing goes up. But what happens when rates stay negative?
In Denmark, where rates have been below zero longer than anywhere else on the planet, the private sector is saving more than it did when rates were positive (before 2012). Private investment is down and the economy is in a “low-growth crisis,” to quote Handelsbanken. The latest inflation data show prices have stagnated.
As the Danes head even further down their negative-rate tunnel, the experiences of the Scandinavian economy may provide a glimpse of what lies ahead for other countries choosing the lesser known side of zero.
Denmark has about $600 billion in pension and investment savings. The people who help oversee those funds say the logic of cheap money fueling investment doesn’t hold once rates drop below zero. That’s because consumers and businesses interpret such extreme policy as a sign of crisis with no predictable outcome.
“Negative rates are counter-productive,” said Kasper Ullegaard, head of fixed-income overseeing more than $15 billion at Sampension in Copenhagen. The policy “makes people save more to protect future purchasing power and even opt for less risky assets because there’s so little transparency on future returns and risks.”
The macro data bear out the theory. The Danish government estimates that investment in the private sector will be equivalent to 16.1 percent of gross domestic product this year, compared with 18.1 percent between 1990 and 2012. Meanwhile, the savings rate in the private sector will reach 26 percent of GDP this year, versus 21.3 percent in the roughly two decades until Danish rates went negative, Finance Ministry estimates show.
The numbers suggest that companies aren’t taking advantage of record-low rates to expand. Dong Energy A/S, a Danish utility preparing for an initial public offering, recently provided a concrete example of this. It is redeeming up to 650 million euros ($745 million) in senior debt in an effort to cut the cost of holding cash, said Allan Boedskov Andersen, head of group treasury and risk management. The decision comes as the company scales back investments in its oil unit.
Denmark’s central bank argues that negative rates have worked because its sole mandate is to keep the krone pegged to the euro in a 2.25 percent band. The currency regime came under attack at the beginning of last year when Switzerland’s failure to defend its euro cap fanned conjecture other central banks would also cave in to speculation.
In the event, the Danes prevailed but only after cutting their benchmark deposit rate to minus 0.75 percent. Sales of Denmark’s AAA-rated government bonds were halted and currency reserves were quickly built up to almost 40 percent of GDP. The measures saved Denmark’s euro peg, allowing central bank Governor Lars Rohde to declare victory.
But while the currency regime was upheld, the macro-economic fallout provides little reason for celebration. There are few signs the extreme monetary stimulus is aiding growth and the government last week slashed its GDP forecast for this year to 1.1 percent, from the 1.9 percent previously seen. March inflation data showed annual prices completely stagnated after about two years of readings well below 1 percent.
And Handelsbanken is warning that the central bank’s battle to defend its euro peg is also not yet over amid signs that policy makers are having to resume currency interventions for the first time in more than a year to weaken the krone.
Carsten Stendevad, the chief executive officer of Danish pension fund ATP, with about $115 billion in assets, says the policy is also proving problematic for markets.
“I’m very concerned about what these low, negative rates mean,” Stendevad said. “I’m concerned about what they mean for asset pricing. Clearly, they are driving asset prices. That’s the intention, but it’s always a cause for concern when asset pricing is driven more by central bank policy than cash flow generation.”
The fund is positioned for a return of inflation, not necessarily imminently, but at some point. Back in February, Stendevad noted that it would be an “anomaly” if very low interest rates didn’t result in “high inflation at some point.”
The only bright spot seems to be the success with which Denmark’s banks have withstood negative rates. Danske Bank A/S, the country’s largest lender, reported its biggest profit on record in 2015. Its first-quarter results exceeded analyst estimates in part as the bank wrote back impaired loans that Danes found easier to repay amid record-low rates.
The bank’s CEO, Thomas Borgen, says Danske is “preparing for these low rates for a prolonged period of time.” Most economists tracking Denmark don’t see a shift into positive rates until 2018 at the earliest.
Danske, like other banks trying to hold on to customers while operating in negative-rate environments, has so far promised retail clients they won’t be asked to absorb the cost of the policy via their deposits.
To make up for lost lending income, Danske and other Nordic banks are focusing more on investing the savings of wealthy Scandinavians in an effort to earn more fees. And with stricter capital requirements making traditional lending more costly, banking in the region may shift more toward wealth administration in the future.
Given the long-term outlook of extremely low rates, Ullegaard at Sampension says the upshot looks clear.
“Eventually, negative rates will have the opposite effect from the intended one,” he said. “They will curb lending rather than pushing borrowing.”
* Outbound deals top $97 billion this year, 80% of 2015’s total
* Citigroup sees yuan sinking 7 percent through end-2017
China Inc. can’t buy foreign companies fast enough, and the yuan’s trajectory helps explain why.
The Chinese currency will weaken 3.3 percent versus the dollar by year-end, a Bloomberg survey of strategists found, with the world’s largest foreign-exchange trader Citigroup Inc. forecasting a 7 percent slide through 2017. The projections show the potential cost of delaying instead of dealmaking, and China’s firms are getting the message. The value of their offshore acquisitions reached $97.4 billion this year, already 80 percent of 2015’s record, data compiled by Bloomberg show.
“A lot of people in China are saying the yuan is going to weaken against the dollar so they take it out and put money into U.S. dollar investments,” Mark Mobius, chairman at the Templeton Emerging Markets Group, said in an interview last week, forecasting “mild” depreciation of the currency. “There’s no question that Chinese companies want to become world class, which is why acquisitions make a lot of sense.”
China National Chemical Corp. and Qingdao Haier Co. are among corporations snapping up everything from appliance makers to film studios and chip technology. Even as China’s authorities seek to stem a mass exodus of capital, President Xi Jinping’s government is encouraging foreign dealmaking to win know-how and global market share.
“The yuan’s moves do act as a driver for Chinese acquirers,” said Samson Lo, head of Asian mergers and acquisitions at UBS Group AG. “That’s why they’re moving forward now, because they’re concerned about the longer term.”
The yuan stopped being a one-way bet in 2014 after the currency’s appreciation against the dollar in all but one year since a peg to the dollar ended in 2005 made it the world’s best-performer after the Swiss franc. The yuan lost 6.8 percent in the two years through December, encouraging companies to speed up overseas expansion as growth in the world’s second-largest economy slowed.
After the worst start to a year in two decades drove the yuan to a 2011 low this January, the currency has climbed 1.9 percent to 6.4699 a dollar. The exchange rate will decline to 6.7 per dollar by year-end, according to the median estimate of 43 strategists in a Bloomberg survey. Citigroup forecasts the yuan will weaken to 6.97 by the end of 2017.
For Chinese companies worried about devaluation, “the time to go global is right now,” said Zhao Longkai, an associate professor of finance at Peking University’s Guanghua School of Management. “Chinese firms will try to hedge the currency, and so it makes sense to diversify some assets abroad.”
ChemChina’s $43 billion purchase of Switzerland’s Syngenta AG tops the list of acquisitions this year, followed by the $6 billion buyout of Ingram Micro Inc. by an arm of HNA Group Co. and Haier’s $5.4 billion takeover of the appliances business of General Electric Co.
Cash held on Chinese corporate balance sheets increased 8 percent to $3.78 trillion in the past two years, according to Bloomberg-compiled data, and mainland-listed companies trade at a 7.7 percent premium to peers in other emerging markets.
“Assets are cheap abroad, borrowing costs are low globally, and expectations for further renminbi depreciation are probably encouraging more companies to buy foreign assets,” said Ken Hu, chief investment officer of Asia-Pacific fixed income at Invesco Hong Kong Ltd. Still, “the impact on capital outflows will be much smaller than the headline number shows” as foreign deals are often funded overseas.
ChemChina got $50 billion in financing for its purchase of Swiss pesticides producer Syngenta, including $35 billion that’s being or will be syndicated offshore, people familiar with the matter have said. Chinese offshore borrowers took out $17.3 billion of loans in the first quarter, accounting for about 37 percent of North Asia loan volume, according to Bloomberg-compiled data.
Even with some of the money coming from outside the nation’s borders, China Inc.’s shopping spree poses a dilemma for authorities trying to stem capital outflows while also making progress on a long-term goal of allowing businesses to go global and become international champions.
“The Chinese government will probably be reluctant to see too much of this happening because the amount is big, in billions of dollars,” Mobius said. “There’s a dilemma as on one hand, they want companies to become world class and on the other hand, they don’t want to see huge amounts of money flowing out of the country.” Mobius echoed Hu’s view, saying almost half of the investments will be funded overseas.
After the yuan’s first quarterly advance in a year, the case for depreciation hasn’t gone away. Chinese economic growth, which clocked in at 6.9 percent in 2015, the slowest in 25 years, will decelerate to 6.5 percent this year and 6.3 percent in 2017, according to forecasts compiled by Bloomberg.
A Bloomberg replica of the CFETS RMB Index, which the People’s Bank of China uses to track the yuan against 13 exchange rates, fell below 98 for the first time since 2014 last week. Governor Zhou Xiaochuan pledged in February to keep the yuan stable against its peers while increasing volatility versus the dollar.
“The overseas allocation of Chinese capital will continue, either from a currency diversification or a geographical diversification perspective,” said Hao Hong, chief China strategist at Bocom International Holdings Co. in Hong Kong. “It is consistent with the consensus expectation for a weaker yuan ahead.”
* Stronger jobs data last week made little impact on Fed outlook
* Yellen Fed focusing more on world growth than U.S.: Citigroup
Top Currency Trader Says Too Soon to Buy Dollars Despite Data – Bloomberg
Citigroup Inc., the world’s biggest currency trader, says it’s “too soon” to buy the U.S. dollar after it slumped to a nine-month low and economic data came in stronger than forecast.
A gauge of the dollar was little changed Monday after dropping 1.6 percent last week even after Labor Department data showed U.S. employers added more workers than projected in March and wages strengthened. Federal Reserve Chair Janet Yellen and fellow policy makers are changing how they decide on rates, putting more weight on global financial conditions, even as U.S. data improve, said Todd Elmer, a Singapore-based foreign-exchange strategist at Citigroup.
“The dollar is on a tenuous footing despite the fact that the data have been coming out stronger,” Elmer told Bloomberg News. “Until the market starts to seriously consider the prospect of a June hike from the Fed, the dollar weakness is going to be the trend.”
Traders pushed back expectations for the next Fed increase after Yellen in a March 29 speech cited slowing Chinese growth and the outlook for commodities prices as risks. It’s appropriate to “proceed cautiously” in raising rates, she said. The Bloomberg Dollar Spot Index, which tracks the greenback versus 10 peers, fell on March 31 to the lowest level since end-June. A Citigroup surprise gauge for U.S. data hit a four-month high March 18.
“Certainly the divergence trade, where the U.S. economy is leading and the Fed is tightening, could come back later this year,” Elmer said. “But for the time being, we just aren’t getting validation from the Fed in line with the pick up that we’ve seen in data.”
The dollar will likely weaken against the currencies of commodity producers and developing nations as investors seek high-yielding assets, Elmer said.
The greenback declined 4.9 percent versus the Australian dollar in the first quarter, its biggest drop since the final three months of 2011. Against its New Zealand counterpart, the U.S. currency weakened 1.1 percent, adding to a 6.3 percent drop in the fourth quarter. An index of emerging-market currencies advanced 4 percent in the three months ended March 31, its biggest quarterly gain since 2012.
Hedge funds and money managers cut net bullish positions on the dollar to the lowest level since 2014, according to data from the Commodity Futures Trading Commission. Bets that the dollar would rise outnumbered bearish positions by 66,441 contracts for the week ended March 29, down from 87,902 a week earlier.
“Until we see a shift and the market starts to price in risks for more Fed tightening, the dollar is going to be on the back foot,” Citigroup’s Elmer said.
* From discipline’s margins, new theory challenges deficit taboo
* Calls for fiscal help are growing as post-2008 recovery lags
Ignored for Years, a Radical Economic Theory Is Gaining Converts – Bloomberg Business
In an American election season that’s turned into a bonfire of the orthodoxies, one taboo survives pretty much intact: Budget deficits are dangerous.
A school of dissident economists wants to toss that one onto the flames, too.
It’s a propitious time to make the case, and not just in the U.S. Whether it’s negative interest rates, or helicopter money that delivers freshly minted cash direct to consumers, central banks are peering into their toolboxes to see what’s left. Despite all their innovations, economic recovery remains below par across the industrial world.
Calls for governments to take over the relief effort are growing louder. Plenty of economists have joined in, and so have top money managers. Bridgewater’s Ray Dalio, head of the world’s biggest hedge fund, and Janus Capital’s Bill Gross say policy makers are cornered and will have to resort to bigger deficits.
“There’s an acknowledgment, even in the investor community, that monetary policy is kind of running out of ammo,” said Thomas Costerg, economist at Standard Chartered Bank in New York. “The focus is now shifting to fiscal policy.”
That’s where it should have been all along, according to Modern Money Theory. The 20-something-year-old doctrine, on the fringes of economic thought, is getting a hearing with an unconventional take on government spending in nations with their own currency.
Such countries, the MMTers argue, face no risk of fiscal crisis. They may owe debts in, say, dollars or yen — but they’re also the monopoly creators of dollars or yen, so can always meet their obligations. For the same reason, they don’t need to finance spending by collecting taxes, or even selling bonds.
The long-run implication of that approach has many economists worried.
“I have no problem with deficit spending,” said Aneta Markowska, chief U.S. economist at Societe Generale in New York. “But this idea of the government printing money — unlimited amounts of money — and running unlimited, infinite deficits, that could become unhinged pretty quickly.”
To which MMT replies: No one’s saying there are no limits. Real resources can be a constraint — how much labor is available to build that road? Taxes are an essential tool, to ensure demand for the currency and cool the economy if it overheats. But the MMTers argue there’s plenty of room to spend without triggering inflation.
The U.S. did dramatically loosen the purse strings after the 2008 crisis, posting a deficit of more than 10 percent of gross domestic product the next year. That’s since been trimmed to 2.6 percent of GDP, or $439 billion, last year.
The Congressional Budget Office expects the gap to widen in the coming decade, as retiring baby-boomers saddle the government with higher social security and health-care costs. That’s the risk often cited by fiscal hawks.
Mainstream doves accept the long-term caveat. But they point to record-low bond yields and say investors aren’t worried about deficits right now, so why not spend?
MMT takes that argument even further. The question is: Who’s listening?
“They’re shut out of the central banks, the finance ministries, the Treasuries of the world,” said Joe Gagnon, a senior fellow at the Peterson Institute for International Economics in Washington and former Federal Reserve Board economist. Gagnon doesn’t subscribe to all MMT arguments, but thinks there’s enough slack in the global economy that “it’d be a good time for them to have influence.”
If MMT seems marginal now, Randy Wray, an economics professor at the University of Missouri-Kansas City and one of the doctrine’s founders, recalls a time when it barely registered at all.
Wray, who wrote “Understanding Modern Money” in 1998, says he used to meet with like-minded colleagues and count how many people understood the theory. “After 10 years, we had to go a little beyond two hands — we had to use a few toes,” he said.
Now, thanks to the blogosphere, he says there are thousands around the world, especially in struggling euro-area countries like Italy and Spain. MMT was among the early doomsayers on the single currency, arguing the lack of monetary sovereignty would render governments helpless in a crisis.
In the U.S., one presidential candidate is at least listening to MMT economists. Advisers to Bernie Sanders include some of the school’s leading advocates: Stephanie Kelton, a Sanders hire to the Senate Budget Committee, and James K. Galbraith, whose father helped shape President Lyndon Johnson’s “Great Society” programs.
The match makes sense. Sanders is promising massive investments in health, education and infrastructure. Economists who see more danger in fiscal austerity than looseness make natural allies.
Ask the campaign, though, and they’re quick to point out that the Vermont senator is a “deficit hawk” whose spending plans are matched dollar-for-dollar by tax increases.
“He’s not interested in theory,” said Warren Gunnels, Sanders’ policy director. “He’s interested in making sure that we rebuild the middle class, increase wages and make sure that we no longer have one of the highest poverty rates of any developed country.”
So even a left-leaning candidate with MMT economists on staff shies away from endorsing the doctrine — an indicator of what a hard sell it is.
Those who push back sometimes argue that money-printing puts countries on a path that eventually leads, in a worst-case scenario, to Zimbabwe — where money-printing debased the currency so badly that all the zeros could barely fit on banknotes. Or Venezuela, whose spending spree helped push inflation to 180 percent last year. Japan’s a more mixed picture: years of deficits haven’t scared off borrowers or unleashed inflation, but haven’t produced much growth, either.
There’s also a peculiarly American enthusiasm for balanced budgets, according to Jim Savage, a political science professor at the University of Virginia. He’s traced it to the earliest days of the U.S., rooted in a “longstanding fear of centralized political power, going back to England.”
Wray says there are episodes in American history when a different understanding prevailed. During World War II, he says, U.S. authorities learned a lesson that’s since been forgotten — that “we’ve always got unemployed resources, including labor, and so we can put them to work.”
Savage says Americans have historically tended to conflate household and government debts. That category error is alive and well.
“Small businesses and families are tightening their belts,” President Barack Obama said in 2010 as he announced a pay freeze for government workers. “Their government should, too.”
It’s not just MMT economists who winced at the comment. Many more agree that it’s precisely when households are cutting back that governments should do the opposite, to prevent a slump in demand.
That argument doesn’t carry much sway in Congress, though. That’s one reason the Fed has had to shoulder so much of the burden of keeping the recovery alive, Societe Generale’s Markowska says.
“When it comes to deciding on monetary easing, it’s a handful of people in the room,” she said. “It’s going to take more pain to build that political consensus around the fiscal stimulus.”
Wray says he’d expected attitudes to start shifting after the last downturn, just as the Great Depression gave rise to Keynesian economics and the New Deal, but “it really didn’t change anything, as far as the policy makers go.”
“I think it did change things as far as the population goes,” he said, citing the anti-establishment campaigns of Sanders and Republican Donald Trump. It might take another crash to change minds, Wray says.
Most economists don’t expect an imminent U.S. recession. But financial-market turmoil and America’s political upheaval have added to a sense that nobody has figured out a cure for the economy’s malaise.
Bill Hoagland, a Republican who’s vice president of the Bipartisan Policy Center, has helped shape U.S. fiscal policy over four decades at the Congressional Budget Office and Senate Budget Committee.
He says a farm upbringing in Indiana helped him understand why “it’s engrained in a number of Americans outside the Beltway that you equate your expenditures with your revenue.” He also acknowledges that government deficits are different, and could be larger now to support demand, so long as there’s balance in the longer term.
Most of all, Hoagland says he sees profound change under way. The “catastrophic event” of the 2008 crash may be reshaping American politics in a way that’s only happened a handful of times before. And economic orthodoxy has taken a hit too.
“We’re going through a very strange period where all economic theories are being tested,” he said.