Add a resurgent carry trade to the list of things keeping Reserve Bank Governor Glenn Stevens from getting a weaker Aussie dollar.

A widening yield advantage on the nation’s debt amid a drop in currency volatility is luring investors back to the strategy. Borrowing equally in yen and euros to buy Aussie earned 1.6 per cent this month, after the same trade lost money in the first quarter. Expectations for swings in the Aussie are approaching the lowest levels this year as there is some speculation of the timing of any US or Australian rate changes.

“In a world of zero and negative yields, Aussie stands out as king — or if not king, certainly a member of the royal family,” said Robert Rennie, Westpac’s global head of currency and commodity strategy. “Carry is here to stay for the foreseeable future.”

Finance companies get paid to borrow money for a month in euros and yen in international markets and can use that cash to buy 10-year Aussie sovereign debt yielding 2.35 per cent. The RBA has raised concerns that central bank bond-buying will prop up the Aussie at a time when the local exporters need depreciation to cope with slumping prices of iron ore, the country’s biggest export earner. The local dollar headed for its strongest two- week gain in a year as Germany’s average yields dropped below zero for the first time.

Japanese investors bought a net 345 billion yen ($3.7 billion) of Australian sovereign debt in February, the most since August 2011, Japan’s Finance Ministry said.

Excluding debt held by the RBA, central banks owned 29 per cent of Australia’s public debt as of December 31, according to the International Monetary Fund. Overall, foreign investors owned 67 per cent of the total, a level Barclays calls “very high.”

“Japanese and European investors still stand out,” said Kieran Davies, Barclays’s Sydney-based senior economist. “Relative to other currencies, our interest rates are quite attractive.”

The premium offered by Aussie debt over its triple A-rated peers rose to 1.59 percentage points last week, the most in five weeks, and was headed for its biggest monthly increase since November 2013.

Global demand for Aussie assets is a problem for Stevens as he continues the call for a weaker currency in the midst of a buoyant property market. Swaps traders lay 67 per cent odds of a quarter percentage point cut to a record low 2 per cent at the RBA’s meeting on May 5. The RBA made its first move in 18 months in February by cutting the key benchmark rate a quarter point to 2.25 per cent.

Stevens identified US75¢ as his preferred exchange rate at the end of last year, before an additional 30 per cent plunge in iron ore to below $US50 per ton. The currency fell as low as 75.33¢ on April 2 before rebounding to as high as US78.22¢ last week. At 7:30am, the Aussie traded at US78.07¢.

“Stevens will have a lot to consider in May, and if the Aussie isn’t falling, that’s one one more problem for him,” said Stan Shamu, a markets strategist at IG. “With the Aussie yielding at these levels, there’s still that opportunity for people to benefit.”

Beyond Australia, the US Federal Reserve’s caution over raising US rates for the first time since 2006 is also supporting the Aussie, and not simply because the greenback’s rally has stalled.

Société Générale analysts argue the Fed’s message has calmed currency markets, giving investors confidence that currency swings won’t upend their carry trades.

A gauge of implied volatility in the Aussie-yen rate over the coming 12 months slid to 10.55 percentage points Friday, the least since Jan. 14. The equivalent measure for the euro- Aussie dipped to 10.06 on April 9, the lowest since Jan. 16.

“The Fed frankly does not want to rock the boat too much,” said Alvin éan, a foreign-exchange strategist at Société Générale in London. “Anything with yield is a winner.”

afr.com

From time to time we perform BER Rate Checks to ensure the advertised rates for Banks and Brokers are accurate.

The below check was run for ANZ Internet Banking International Money Transfers (IMT) Rates (fx rates advertised at anz.com) on 28/04/2015 and 4/5/2015 (AUD exchange rates).

The rates on both dates and for all currencies were worse than those advertised by ANZ for IMT.
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EUR/USD
Extended its gains last week as the European Commission upwardly revised EZ economic forecasts and optimism over the situation in Greece supported the rate with both countries reporting mixed economic data. The week began with the pair consolidating on Monday after Spanish Manufacturing PMI printed at 54.2 versus 54.6 expected, while German Final Manufacturing PMI printed at 52.1, in line with expectations. The rate then lost ground on Tuesday despite an upward revision from the European Commission on EZ GDP growth. The agency revised GDP growth for 2015 from +1.3% to +1.5%. Continue reading

USDCAD Overnight Range 1.2048-1.2142

The highly anticipated US (and Canadian) employment reports were greeted with a resounding “meh”. NFP was right on consensus and the unemployment rate is 5.4%. EURUSD rose and fell and is currently back to its pre-release level. The Canadian report was worse than expected, which was actually expected, shedding 19,700 jobs. The details revealed that the data isn’t as bad as it looks with full-time gaining 46,900 jobs. All the losses were part-time. USDCAD trading was erratic but has settled close to where it was before the news.
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Here at BER we are very keen on promoting Exchange Rate Margin and Fee transparency. Where possible we publish the publicly available bank and fx vendor exchange rates advertised on their publicly accessible websites and any incorrect rates would affect the vendor’s positions in the BER comparison table.

Some customers have been reporting that the exchange rates for International Money Transfers published by their Financial Institutions on their websites are better than those available to their customers via Internet Banking.
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EUR/USD
Continued its rally last week as both economies reported mixed economic numbers. The rate was supported by a neutral FOMC Statement and confidence that Greece was nearing an agreement with creditors. The week began with the pair making its weekly low of 1.0818 on Monday in the absence of any significant data out of either economy. The pair extended its gains on Tuesday after Greek Prime Minister Alexis Tsirpas expressed confidence that Greece would reach an outline deal with creditors before EZ finance ministers meet on May 11th, one day before a repayment of €700 million is due to the IMF. Also, U.S. CB Consumer Climate came out with a reading of 95.2 versus 102.6 expected. Continue reading

EUR/USD
Extended its previous week’s gains last week as asset flows favoured the Euro over the Greenback and despite continued concerns over Greece. The rate gained with mostly lower than expected economic data out of both economies. The week began on a soft note, with the rate declining on Monday in the absence of any significant economic data from either the Eurozone or the United States, and after ECB President Draghi said that, “growth projections, as well as inflation expectations – reflected both by outside observers and by ECB staff projections -have been revised upwards. And confidence overall has increased.” Continue reading

USDCAD Overnight Range 1.2223-1.2323

The US dollar is Mr. Toad and it has been on a wild ride this morning. Another bout of weak US economic data (Jobless Claims rose, Housing Starts and Building Permits fell) revered hard won US dollar gains in Europe. USDCAD which had scraped back above 1.2310 prior to the data plunged and is now 1.2228, below the overnight low. The break of major support at 1.2330 combined with a re-evaluation of the Canadian economic landscape and the prospect of higher oil prices have triggered a wholesale bail-out of stale Long USDCAD positions.

The overnight session was entertaining. AUDUSD took over where Canada left off in a lively Asian session. Short AUDUSD traders scrambled to cover positions when Australia announced a whopping 37,700 jobs increase and a drop in the unemployment rate to 6.1% from 6.3% and AUDUSD soared. Kiwi followed AUDUSD higher. USDJPY traders saw the carnage in AUDUSD and USDCAD and sold dollars as well. In Europe, EURUSD traders bought dollars and then reversed course just ahead of the New York opening. The US dollar has been offered ever since.
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The Loonie soared following the Bank of Canada slight shift to a more neutral stance supported by tweak of the language around inflation. It’s now “roughly balanced” rather than “more balanced” which in my opinion does not justify a 0.0125 point drop in USDCAD (From 1.2550 to 1.2425). That move was more a factor of intraday long USDCAD positions getting stopped out. The ongoing drift higher in WTI prices also contributed to the Loonies strength.

Overnight, the US dollar clawed back most of yesterday’s Retail Sales induced losses in a lively session. Economic data from China (GDP, IP and Retail Sales) came out on the soft side but didn’t have much of an effect on FX markets. European traders apparently decided that a minor miss in US Retail Sales didn’t warrant the reaction, especially when Greece’s EU membership is looking more fragile by the day. EURUSD has given back nearly all of yesterday’s gains.
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Our neighbors to the north have had a rough time of it lately. Only recently, the government announced the Canadian economy shrank 0.1% in the January of this year.The reason for this slowdown is obvious; it’s the crash in the price of crude oil which has severely hurt economic activity. Pundits and professors are coming out of the woodwork as we speak, crowing that the Canada is doomed—dogs and cats living together, fire and brimstone, end of the earth kind of stuff.

cad-up-usd-down

I’d like to take a contrarian view.

Yes,there is a current divergence in interest rates between the two currencies. The Fed is most likely to raise at some point this year while many analysts say the Canadian central bank could cut another 25 basis points in light of the recent, dismal economic performance. However, this view ignores a growing imbalance in Canada—rising levels of consumer debt. This problem was enhanced by the surprise rate cut in January, a cut meant to cushion the economy from the consequences of the falling price of oil, a major Canadian economic sector. I don’t think the central bank will want to exacerbate the credit bubble any further in Canada so I don’t think they will cut barring a major economic downside shock.

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USDCAD dropped from the early New York highs following comments from and advisor to Japanese PM Abe stating that JPY is too high at 120.USDJPY plunged from 120.80 to 119.75 taking the US dollar down across the board.

Overnight,China posted weaker than expected trade data and AUDUSD tumbled, dragging down Kiwi and the Loonie with it. Adding to the AUDUSD’s woes was a report that the Australian Treasurer was considering reducing iron ore revenue forecasts by $25 billion over next four years.

The “buy-the-US dollar theme continued into Europe although there wasn’t a clear catalyst for the move. The dollar rally fizzled in early New York trading following the JPY comments by one of Mr. Abe’s advisors.
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EUR/USD Reversed direction, trading sharply lower last week as continued uncertainties for Greece and a possible Fed rate hike in June pressured the rate. The week began with the pair declining after making its weekly high of 1.1035 on Monday despite Spanish Unemployment Change showing a drop of -60.2K, significantly higher than the anticipated -18.3K, while U.S. ISM Non-Manufacturing PMI came out in line with expectations at 56.5. The rate continued its decline on Tuesday despite Spanish Services PMI printing at 57.3 versus 56.6 expected and German Final Services PMI, which printed at 55.4, in line with expectations.
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The New Zealand dollar reached 99.78 Australian cents on Monday. For the first time since the currency was floated in 1985, it has almost caught up with its neighbouring Australian dollar and parity across the two currencies is imminent.

The saving grace for the Kiwi businesses exporting to Australia and the expats sending Aussie dollars home, is the RBA’s announcement that it will hold interest rates at their current level, which may slow the falling Aussie dollar trend in the short term.

However, this will not stop Kiwi businesses basking in the glory of six years of high performance and the country’s strongest economic climate in some time. Nor should stop savvy New Zealand consumers from celebrating the strength of their currency.
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There’s speculation that the Reserve Bank of Australia is going to have to bring the cash rate below 2% to cope with plummeting oil prices.

Collapsing commodity prices are already driving the Australian dollar down, a rate cut will cause it to fall even further and that’s before you consider the chance that the US Fed may decide to raise rates this year and boost the Greenback. So what does this all mean for your business?

Bill shock

There is hardly any product or industry that doesn’t involve overseas suppliers: whether for materials, components or outsourced services such as labour. Small businesses often feel more pain from currency fluctuations because they don’t have the tools and strategies in place that large corporates do, nor the scale to absorb fluctuations.
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Most economists will tell you that the real reason for the economic recovery in the United States over the last several years has been the shale oil boom across the country that was generated by the private sector, with no help from the U.S. government. However, that did not stop the Obama administration from taking credit for the recovery, anemic as it has been. Now as the price of crude oil has crashed, the American economy has slowed concurrently. This is not rocket science; but, I doubt the administration will admit this.

The real question is, when will the economy finally start to accelerate in a normal fashion as it has historically after such a severe downturn? I mean a real recovery, across all sectors of American economic activity? The answer lies in policy, not in some magic bullets from the Fed.
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Officially recorded remittances by the World Bank to developing countries were $435 billion in 2014, an increase of 5 percent over 2013. The growth rate is substantially faster than the 3.4 percent growth recorded in 2013, driven largely by remittances to Asia and Latin America.

Remittances to developing countries will continue climbing in the medium term, reaching an estimated $454 billion in 2015.

Global remittances, including those to high-income countries, are estimated at $582 billion this year, rising to $608 billion in 2015.

Remittances remain an especially important and stable source of private inflows to developing countries, as they bring in large amounts of foreign currency that help sustain the balance of payments. In 2013, remittances were significantly higher than foreign direct investment (FDI) to developing countries (excluding China) and were three times larger than official development assistance.

The brief notes that the global average cost of sending remittances continued its downward trend in 2014, falling to 7.9 percent of the value sent in the third quarter, compared to 8.9 percent a year earlier. However, the cost of sending money to Africa remains stubbornly high, exceeding 11 percent.
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EUR/USD Continued its rally last week as the Eurozone reported mostly better than expected economic data and the United States reported the lowest Non-Farm Payrolls number since December of 2013. The week began on a soft note, with the pair declining despite German Preliminary CPI increasing +0.5% m/m compared to +0.4% expected and Spanish Flash CPI, which declined -0.7% versus -1.0% expected. U.S. data had Pending Home Sales increase +3.1% m/m, significantly higher than the +0.5% that was expected. The rate extended its losses on Tuesday, making its weekly low of 1.0712 as uncertainty over Greece — which is due to make a payment to the IMF on April 9th — pressured the Euro. Continue reading

USDCAD climbed steadily higher overnight and during the early North American session. Falling oil prices are to blame. WTI dipped to $47.70 with expectations that an Iranian nuclear deal could lead to another million barrels per day of crude hitting the market as sanctions get removed. Anticipation of better than expected US data this week, including nonfarm payrolls on Good Friday, is also providing the US dollar with support.
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