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Is there a right way to regulate crypto? Yes, and this is how

Cryptocurrency is a promising asset class for people and investors, but the lack of proper regulation slows down its innovation.
Cryptocurrency is becoming increasingly mainstream. Between the entrance en masse of traditional financial

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Cryptocurrency is a promising asset class for people and investors, but the lack of proper regulation slows down its innovation.

Cryptocurrency is becoming increasingly mainstream. Between the entrance en masse of traditional financial institutions — from investment funds, to banks, to insurance companies — to the multitrillion-dollar market capitalization, crypto is truly unignorable. 

As such, it is also increasingly on the radar of regulators around the world, particularly in the United States. How can this industry balance stability and investor protection on the one hand with the promotion and support of innovation on the other?

There are three paths to regulating crypto. The first is to not regulate it as much, but given the incredible growth and increasing overlap with traditional financial markets, it is unlikely that regulators will find that path tenable.

Another option is to regulate the industry from on high, without deep engagement or consultation from good-faith companies in the crypto space. This way could be perilous and could sacrifice the powerful financial innovation of blockchain that could be harnessed for good.

The third — and we believe the only truly viable option — is regulation that involves an ongoing partnership with the industry itself. Many in the crypto industry already see this sort of proactive, innovation-oriented regulation as something that will greatly advance the industry.

Related: Blockchain will thrive once innovators and regulators work together

Bitcoin regulation in historical context

Bitcoin (BTC) was born over a decade ago as a peaceful protest against the expansive monetary policy of the great financial crisis of 2008. What started as a niche industry for cyberpunks, libertarians and, quite frankly, people wanting to buy weed more conveniently and anonymously has morphed into a concentration of mind power, with 46 million Americans owning Bitcoin. The sheer scale of crypto as an asset class, with a market capitalization peaking north of $2 trillion, puts it on the radar of every lawmaker and regulatory agency in the world. To expect crypto to march onward in the unsupervised manner of its early years is simply unrealistic. Mainstream asset classes cannot go unnoticed, and the influx of new investors needs protecting.

Related: Europe awaits implementation of regulatory framework for crypto assets

As entrepreneurs, our concern about regulation does nt stem from a desire to run amok. If history is any guide, too often the regulation on innovative businesses is imposed by legislators who are, quite understandably, not into the intricate details of industry-native processes and have little or no practical experience. This gap between innovators and regulators opened up decades ago with the massive expansion of internet-based companies, and has resulted time and again in unnecessarily burdensome rules that do little to serve their purported purpose. The alternative is of no benefit to advanced jurisdictions because nimble companies will usually seek offshore tax havens with little regulatory friction and lax rules, which ultimately hits state coffers, especially in post-COVID-19 remote-work-adjusted societies. The reality is: Legislation lags behind innovation, which occurs at a significant pace.

The matter gets even more complicated when one considers the decentralized finance (DeFi) space. These solutions, colloquially referred to as “noncustodial” or “unhosted” — meaning there is not a centralized third-party intermediary, but the intermediary is the software itself — present challenges when it comes to putting them into existing rules, especially in financial intermediation and securities laws.

Related: Authorities are looking to close the gap on unhosted wallets

CeFi as bridge between DeFi and regulation

Our hypothesis is that the most productive legislation will come from regulators working with good-faith actors in the crypto space who wish to actively engage with them. What does that engagement look like? One part of it is taking proactive steps to work within the existing regulatory frameworks in order to better identify where gaps and friction remain.

To take the example of DeFi above, while it presents new regulatory challenges, there are ways to ease this burden initially. Centralized finance (CeFi) companies can be the interim solution, serving as a bridge between the traditional financial sector and the regulatory framework that encapsulates them on one hand and the decentralized finance space on the other. These companies very well understand the sector from both the infrastructure point of view and the needs of their users.

Until we reach the conclusion that the current regulatory framework does not apply for blockchain companies or the sector gets specific legislation, CeFi businesses have been on a license acquisition crusade, culminating in a significant number of licenses from regulators across the globe, with more pending authorizations in the pipeline. This means that they are perfectly placed to allow DeFi projects to piggyback on our infrastructure, as they are just starting to consider allocating funds to legal expenses and lobbyism.

Also, they can rely on established Know Your Customer (KYC)/Anti-Money Laundering (AML) procedures prescribed by the Financial Action Task Force (FATF), as well as fiat on- and off-ramps to broaden their offering and bring it to their users in a manner that is compliant with the incumbent rules.

Related: FATF draft guidance targets DeFi with compliance

Key concerns of regulators and how the industry can help

If one part of being an engaged partner to regulators is seeking to work within existing frameworks first, another part is having a perspective on key areas of legitimate concern for regulators, so they can work with industry rather than against it to develop solutions.

Crypto is volatile. Despite being in a downward trend, volatility is here to stay. As a disciple of Benoit Mandelbrot and a student of capital markets, let me tell you: Volatility tends to cluster — i.e., volatility begets more volatility. This is what attracts many people to the space — the promise of multiple X on their initial capital. Of course, volatility works both ways. Yes, Bitcoin can go up 15x in 12 months, but it can also undergo corrections of 30% in a matter of hours. Such rapid, severe corrections occur in every bull cycle. However, it just so happens that those corrections usually precede larger legs up, as the March 2020 crash showed.

The more recent correction of May, while not as severe, was important because it showed the remarkable resilience of the DeFi space. There were cascades of liquidations, yet the protocols stood their ground (for the most part) and performed as designed even as Bitcoin slumped 35% and Ether (ETH) close to 40%, futures traded in severe backwardation, and implied volatility in the options market surpassed 250%. In my former life, I was a trader in equities futures, and I have vivid memories of the S&P 500 flash crash of May 6, 2010, where the indexes lost 10% within minutes, only to retrace those losses a short period after. It was anything but orderly as the most advanced, sophisticated, regulated and monitored markets experienced total mayhem. It took five months for the Securities and Exchange Commission and CFTC to gain a preliminary understanding of what actually happened.

It is also worth noting that despite the May correction, Bitcoin is up 27.26% in 2021 and has surged 284.58% over the past 12 months. Meanwhile, the S&P 500 has added 11.95% year to date and 34.63% over the past year. Gold is flat for the year and has gained 11% in the past 12 months. In short, much of the volatility concerns around Bitcoin have to do with one’s time scale — and moreover, the investment strategies one is using.

Within this overall framework of volatility, there is one aspect worth discussing further: leverage.

As the best-performing asset of the past decade, Bitcoin is unique in many aspects, and investing requires a certain mindset and the right time horizon. Day trading any asset — but even more so, cryptocurrencies — is a one-way ticket to obliterating your trading account. 100x, 135x and 500x leverage means you get liquidated when the underlying asset moves less than 1%, which in crypto might mean seconds. Here’s a great thread on volatility and cascades of liquidations. Spoiler alert: Although objective and informative, it comes from someone who profits enormously from excessive leverage.

Bitcoin and other crypto assets are a great addition to any well-diversified portfolio and should be bought and holded for extensive periods of time during which, history has shown, Bitcoin has outperformed every other asset, except perhaps the U.S. dollar against the Zimbabwe dollar. Should you put your kid’' college funds in crypto after it has 15x-ed in 12 months? Probably not. And definitely not with any sort of leverage, as even 2x leverage can get you liquidated in a March 2020 sort of correction, which saw intraday prices dip more than 50%.

Related: Risk management in crypto: Aka 'the art of not losing all your money'

At our company, we have little tolerance for leverage and have been advising our extensive customer base to be cautious since at least January. A client depositing $100,000 worth of Bitcoin gets an instant crypto credit line of $50,000 with us. Compare that to a trading platform that allows traders to enter trades with 100x leverage. That means, in order to buy a position of $100,000 in BTC, the margin required is $1,000. The rest of the $99,000 is borrowed at rates that are lucrative for the lender. Additionally, exchanges and prop shops profile their clients — they are quick to identify those high-rollers engaging in 100x levered trades, then they gladly take the other side of the trade, as everything these clients deposit can instantly be booked as profit.

In our opinion, leverage in the crypto space would be a reasonable place for regulators to look when analyzing who is focused on investor protection. The legitimate purpose of protecting investors in nascent industries is a difficult balancing act, as it sometimes borders on the stifling of innovation. But the reverse is true as well: “Innovation” cannot be used as an excuse for rapacious behavior because 100x leverage is not innovation. Forex got it pre-Satoshi, and no, it does not contribute to the betterment of society.

Companies need to work with their respective national bodies to ensure the right type of investor protection legislation is implemented. This approach is far more constructive than the alternative: stubbornly insisting that the current regulatory framework is obsolete and doesn’t capture the cutting edge of crypto and fintech.

Crypto and money laundering

On money laundering, most crypto industry participants have the same feeling: On one hand, we are happy to play by the rules. On the other, crypto has been unfairly maligned when the massively preferred currency of money laundering has been and remains the U.S. dollar.

Any widely accepted currency is prone to money laundering, and the fact remains that the incumbent financial system and the U.S. dollar are the preferred means for illicit purposes. It is not just about the medium of exchange itself. Do the rewards of aiding the finance of illicit activities outweigh the repercussions? Just type in your search engine the name of a major bank plus money laundering and you will see how large the problem is. Then try to find out how many of the complaints were civil vs. criminal, and what percentage ended up with settlements with “no admission of guilt.” As long as a slap on the wrist and a few percentage points of the gains from abetting illicit activities remains the punishment, there is little to no hope that money laundering will suffer any significant blow.

There is no data to support that Bitcoin plays a meaningful role in the transnational money laundering scene. Crypto is also far from being as anonymous as people may think. The fact that a system can be misused does not mean the system should be outlawed; otherwise, we would have long parted ways with banking, cash, fiat currencies, the internet and just about any manifestation of human ingenuity. Yet, we hear the concerns, and we are making sure that in the history books, they will be nothing more than temporary FUD — fear, uncertainty and doubt.

There is another important point on money laundering concerns. We use plenty of tools — such as the sophisticated algorithms of Chainalysis, CypherTrace and Coinfirm — to trace the origins of cryptocurrencies and show a detailed flow of funds. This allows us to draw definitive conclusions on the status of a particular crypto deposit and apply the risk-based AML approach of the FATF. Sure, there are obfuscation tools and cross-chain techniques that make tracking more difficult, but nothing more than what already exists in the banking sector — cross border transfer, offshore jurisdictions, etc.

As someone who has a significant portion of their net worth derived from cryptocurrencies, let me say: Getting fiat currencies from the sale of crypto into the banking system is a Herculean task, so it is the furthest thing from a “money launderer’s dream.” Top tier-one banks require extensive proof of funds from early Bitcoin investors, including, but not limited to, the cryptographically signed messages of the earliest wallets. So, I am not sure how a darknet drug dealer would transfer crypto wealth into the U.S. dollar or euro in any meaningful amounts. Their best hope is to stay within crypto and pay for goods and services with crypto. Sounds similar to the method that the drug cartels have been using since before Pablo Escobar’s days.

Why protect crypto? It’s the only truly free market

In the crypto markets, regulators have something truly unique. The cryptomarket is the only free market, where there is no central bank to engage in interventionist policies, to control interest rates and the money supply. There is no lender of last resort, which in traditional markets has created some moral hazard and has encouraged aggressive long positions. There is no Fed put, no Plunge Protection Team, no bailouts.

In crypto, the market forces of supply and demand and of leveraging and deleveraging get to play out without an arbiter. While this can be dramatic at times, it adds to the antifragility of the space and makes it quick to adapt to new circumstances. While painful for novice investors who come in late to the party and usually with leverage, none of the corrections in crypto cost any government taxpayer money.

This means that crypto cannot be a systemic risk and no company within it can ever be “too big to fail,” which is a net positive for the advancement of innovation. Unlike traditional finance, in crypto, it’s those that develop good products and services that survive.

If crypto has been in a bubble in the past years — and it might very well be — equities have been in a bubbly state for the better part of the last decade. Tesla’s normalized price-to-earnings ratio is 676.35, and as Lyn Alden put it:

“The S&P 500 is arguably the second most expensive it has ever been in absolute terms, which doesn’t bode well for long-term returns.”

But the bubble in crypto should be viewed as a byproduct of the aggressive monetary policy by the world’s central banks and fears of 1970s type inflation, so eloquently said by Paul Tudor Jones, the guy who put “hedge” in the term “hedge funds.”

Related: Forecasting Bitcoin price using quantitative models, Part 2

The future of regulation

There is no doubt that the next Google, Amazon, Facebook or Apple will come out of the crypto space. But for the crypto market to sustain and surpass its current market capitalization of $2 trillion, it needs to continue its path to maturity.

This is why as innovators, but also as licensed institutions, we welcome a constructive dialogue with all key stakeholders of the regulatory process that will ideally translate into clear rules around the way business ought to be structured. It is for the benefit of all involved — regulatory bodies, businesses and retail clients — to have clear guidance and regulatory certainty. This will lead to sustainability, innovation, security of funds, consumer protection, sound AML procedures, and ultimately, more revenue for the jurisdictions that decide to embrace crypto, echoing the United States’ embrace of the internet in the early 2000s.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Antoni Trenchev is the co-founder and managing partner of Nexo, a provider of instant crypto credit lines. He studied finance law at King’s College London and Humboldt University of Berlin. As a member of Bulgaria’s parliament, Trenchev advocated for progressive legislation to enable blockchain solutions for a variety of e-government services, most notably e-voting and the storage of databases on a distributed ledger.

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August Monthly

Fear that the spread of the Delta mutation of the covid would disrupt the global economy spurred the unwinding of risk-on positions. Interest rates fell, and the traditional funding currencies:  the US dollar, Swiss franc, and Japanese yen, strengthened..

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Fear that the spread of the Delta mutation of the covid would disrupt the global economy spurred the unwinding of risk-on positions. Interest rates fell, and the traditional funding currencies:  the US dollar, Swiss franc, and Japanese yen, strengthened most in July. While major US indices set new record highs, as did Europe's Dow Jones Stoxx 600, the MSCI Emerging Markets Equity Index fell 7%.

The preliminary July PMI reports were below expectations in the US, UK, and France.  Japan's composite PMI has been contracting since February 2020.  There has been some re-introduction of social restrictions in parts of Europe.  The UK's "Freedom Day" (July 19), when mask requirements and social restrictions were supposed to be dropped, turned into a caricature as the Prime Minister and Health Minister were in self-quarantine due to exposure, and the number of cases reached the highest level in 5-6 months. 

Given the large number of people in the world that remain unvaccinated, the challenge is that the virus will continue to mutate.  Moreover, even in high-income countries, where vaccines are readily available, and stockpiles exist,  a  substantial minority refuse to be inoculated. This is encouraging the use of more forceful incentives that deny the non-vaccinated access to some social activity in parts of the US and Europe.  In the US, the vaccines have been approved for emergency use only, and broader approval by the FDA could help ease some of the vaccine hesitancy.  Yet, rushing the process would be self-defeating.  An announcement still seems to be at least a couple of months away.  

In some countries, the surge in the virus even where not leading to hospitalizations and fatalities, maybe tempering activity and postponing more "normalization" like returning to offices.   The increase in the contagion has also prompted several companies to postpone plans to have employees return to offices. In other countries, like Australia, the virus and social restrictions are having a more dramatic economic impact.  Its preliminary July PMI crashed to 45.2 from 56.7, the lowest since last May.  Although many countries in East Asia seemed to do well with the initial wave, they have been hard hit by the new mutations.  For some, the recovery already had appeared to be in advanced stages.  

Floods in China, India, Germany, and Belgium add to the economic angst.    A freeze in Brazil sent coffee prices percolating higher.  Wildfires in Canada stopped the downside correction in lumber prices.  While rebuilding is stimulative, in the first instance, the natural disasters could be inflationary as transportation and distribution networks are impacted. 

The market reacted by pushing down nominal and real interest rates.  In late July, the US 10-year inflation-protected note yield (real rate) fell to a record low near minus 1.13%  Ten-year benchmark yields in the US, Europe, Australia, and China were at 4-5 month lows.  Expectations for rate hikes by high-income countries eased, and Beijing surprised investors by cutting reserve requirements by 50 bp (freed up ~$150 bln of liquidity).   

Still, other central banks, like Russia who hiked rates by 100 bp in late July, are pushing forward.  In Latin America, Brazil, Mexico, and Chile are likely candidates for rate hikes in August.  The market anticipates additional rates hikes from the Czech Republic and Hungary.  On the other hand, Turkey's central bank meets under much political pressure to cut rates.  Inflation is not cooperating, and it reached 17.5% in June,  a new two-year high.  Yet, the Turkish lira downside momentum eased, and this alone, in the face of a stronger dollar, meant it was the best performing emerging market currency last month, up about 3.0%.  Its 12% loss year-to-date still makes it the second-worst performing emerging market currency so far this year, behind the Argentine peso's nearly 13% decline.  

The Federal Reserve does not meet in August, but the Jackson Hole symposium (August 26-28) may offer a window into official thinking about the pace and composition of its bond purchases.  Under that scenario, a more formal statement would be provided at the end of the September FOMC meeting (September 21-22). Chair Powell has pledged to give ample notice about its plans to taper.  This means that the initial timing of the beginning of the tapering may be vague by necessity.  Many expect the Fed to begin reducing its bond purchases either later this year or early next year.  

The debt ceiling debate may add another wrinkle.  The debt ceiling waiver expired at the end of July.  There are several different ways that Treasury can buy time.  There are many moving parts, and it is hard to know exactly when Secretary Yellen would run out of maneuvers, but she probably has around two months.  In the past, the uncertainty was reflected in some T-bill sales.  Recall it was the debate over the debt ceiling (the government has already made the commitments or spent the funds and now has to pay for them) that prompted S&P to remove its AAA rating for the US in 2011. 

Meanwhile, Beijing is waging an internal battle to retain control in the technology and payments space.  It has also stepped up its antitrust actions and moved to make it more difficult for internet companies to have IPOs abroad. At the same time, the US threatens to de-list foreign (Chinese) companies if they refuse to allow US regulators to review their financial audits.  This is more than quitting before getting fired, though at the end of July the US announced that concerns over risk disclosures have prompt it to freeze applications for Chinese IPOs and the sale of other securities.  Its efforts to turn the private schools into non-for-profits are driven by Beijing's domestic considerations, but foreign investors--hedge funds, a couple US state pension funds, and provincial pensions in Canada appear to have been collateral damage.  Even the Monetary Authority of Singapore had exposure.

The jump in Chinese yields and the drop in equities that pushed the CSI 300 (an index of large companies listed on the Shanghai and Shenzhen exchanges) 21% below the February peak prompted some remedial measures by officials.  They succeeded in steadying the bonds and stock markets, and the yuan recovered from three-month lows as July wound down. However, both the disruption and the salve, the selling of industrial metals, coal, and oil from its strategic reserves, demonstrate the activist state that gives foreign investors reservations about increasing allocations to China.  To draw foreign capital, officials may be tempted to engineer or facility a strong recovery in shares and the yuan.  

Beijing is also meeting resistance from abroad.  Its aggressiveness in the region, including the aerial harassment of Taiwan and rejection of the Arbitration Tribunal at the Hague regarding the United Nations Convention on the Law of the Sea (that pushed back against Chinese claims in the South and East China Seas). Over the past few weeks, the situation has escalated. The UK announced it will station two naval vessels in the area.  Japan has promised to defend Taiwan should it be attacked by China.  The US has not been that unequivocal.   The EU has been emboldened.  Latvia became the first EU member to open a representative office of "Taiwan" instead of Taipei.  

Many wargame scenarios are premised on China attacking Taiwan, but this does not seem to be the most likely scenario. Top US military officials have testified before Congress that Beijing wants to have the ability to invade and hold Taiwan within six years based on comments from President Xi to the People's Liberation Army.  Yet, if China senses that the status of Taiwan is truly changing, it could move against the Pratas Island, which is off the east coast of China and the south tip of Taiwan.  It is closer to Hong Kong than Taiwan.  It is an uninhabited atoll with a garrison.  Taking this island would send a signal about its determination, with the costs and risks of invading Taiwan. It is true to the ancient Chinese idiom about killing a chicken scares the monkeys.  

Bannockburn's World Currency Index, a GDP-weighted basket of the top dozen economies, rose fractionally after falling 1% in June.  The two largest components after the dollar are the euro and yuan.  The former slipped by was virtually flat near $1.1860 and the latter softened by less than 0.1 %.  The yen, with about a 7.3% weighting in the basket, was the strongest, gaining about 1.25% against the US dollar.  Sterling was almost eked a 0.5% gain.  The Indian rupee slipped 0.1%, while Brazil's real was the weakest currency in the index, falling by about 4.6% in July.   

The BWCI rose by 6.5% in the last nine months of 2020 after falling by 3.2% in Q1 20 as the pandemic struck and structural dollar shorts and safe-haven flows favored the dollar.  It fell by 1.5% in Q1 21 as if correcting the previous advance.  It rose by 1.1% in Q1.  More so than bilateral exchange rates, the BWCI gives the impression that broadly speaking the dollar's losses from last year are being consolidated more than reversed. 

Dollar:  The greenback's two-month uptrend stalled in the second half of July, sending the momentum traders and late longs to the sidelines. The dollar's pullback had already begun before the FOMC meeting at which the Fed lent support to priors about a tapering announcement in the coming months.  The next opportunity is in late August. The weaker dollar tone that we expect to carry into August could create the conditions that make a short-covering bounce ahead of the Jackson Hole symposium more likely.  Some assistance,  like the moratorium on evictions, ended on July 31, and others, like the federal emergency unemployment compensation (where states continue to participate), are finishing in early September. Meanwhile, the Biden administration appears to see some of its infrastructure initiative approved in a bipartisan way and the other part through a reconciliation mechanism that it can do if there is unanimous support from the Senate Democrats.  Inflation remains elevated, and Treasury Secretary Yellen and Federal Reserve Chair Powell warned it may remain so for several more months but still expect the pressure to subside.  The price components of the PMI have eased in the last two reports. There appears to have been some normalization in used car inventories that also reduce the pressure emanating from the one item alone that has accounted for about a third of the monthly increase of late.  

Euro:   The leg lower that began in late May from around $1.2265 extended more than we had expected and did not find support until it approached $1.1750 in the second half of July.  A trough appears to have been forged, and the euro finished near the month's highs.  Technical indicators favor a further recovery in August.  Overcoming the band of resistance in the $1.1950-$1.2000 shift the focus back to the highs.  The low for longer stance by the ECB may be bullish for European stocks and bonds.  The Dow Jones Stoxx 600 reached new record highs in late July.   Bond prices are near their highest levels since February-March.  The IMF raised its 2021 growth forecast for the euro area to 4.6%from the 4.3% projection in April and 4.3% next year from 3.8%.  The economy seemed to be accelerating in Q3, but the contagion and new social restrictions may slow the momentum.  Inflation is elevated about the ECB's new symmetrical 2% inflation target, but it pre-emptively indicated it would resist the temptation of prematurely tightening financial conditions.  The debate at the ECB does not seem about near-term policy as much as the commitment and thresholds for future action.  

 

(July 30,  indicative closing prices, previous in parentheses)

 

Spot: $1.1870 ($1.1860)

Median Bloomberg One-month Forecast $1.1885 ($1.1950) 

One-month forward  $1.1880 ($1.1865)    One-month implied vol  5.3%  (5.6%)    

 

 

Japanese Yen: The correlation of the exchange rate with the 10-year US yield is at its highest level in a little more than a year (~0.65, 60-day rolling correlation at the level of differences).  The correlation of equities (S&P 500) and the exchange rate is in the unusual situation of being inverse since early this year.  In early July, it was the most inverse (~-0.34) in nine years but recovered to finish the month almost flat. The yen rose by about 1.4% in July, offsetting the June decline of the same magnitude. Its 5.7% loss year-to-date is the most among the major currencies and the second weakest in the region after the Thai Baht's nearly 9% loss. The JPY110.60-JPY110.70 represents a near-term cap. The JPY109.00 area should offer support, and a break would target JPY108.25-JPY108.50.   The extension of social restrictions in the face of rising covid cases is delaying the anticipated second-half recovery.  The preliminary composite PMI fell to a six-month low in July of 47.7.  

 

Spot: JPY109.85 (JPY111.10)      

Median Bloomberg One-month Forecast JPY109.85 (JPY110.70)     

One-month forward JPY109.80 (JPY111.05)    One-month implied vol  5.4% (5.4%)  

 

 

British Pound:  Sterling reversed lower after recording a three-year high on June 1 near $1.4250 and did not look back.  It dipped briefly below $1.38 for the first time since mid-April on the back of the hawkish Fed on June 16 to finish July at new highs for the month and above the downtrend line off the early June highs.   A convincing move back above $1.40 would confirm a low is in place and a resumption of the bull move, for which we target $1.4350-$1.4375 in Q4.  The postponement of the economy-wide re-opening until the middle of July, and a central bank looking past the uptick in CPI above the 2% medium-term target, weighed on sentiment.  The central bank will update its economic forecasts in August, and both growth and inflation projections likely will be raised. The furlough program ends in September, and it may take a few months for a clear picture of the labor market to emerge.  Nevertheless, the market has begun pricing in a rate hike for H1 22.  

  

Spot: $1.3905 ($1.3830)   

Median Bloomberg One-month Forecast $1.3930 ($1.3930) 

One-month forward $1.3910 ($1.3835)   One-month implied vol 6.6% (6.5%)

  

 

Canadian Dollar:  The Canadian dollar reached its best level in six years in early June (~$0.8333 or CAD1.20) but has trended lower amid profit-taking and the broad gains in the US dollar.  The usual drivers of the exchange rate:  risk appetites, commodities, and rate differentials were not helpful guides recently.  Canada has become among the most vaccinated countries, and the central bank was sufficiently confident in the economic outlook to continue to slow its bond purchases at the July meeting despite losing full-time positions each month in Q2. Speculators in the futures market have slashed the net long position from nearly 50k contracts (each CAD100k) to less than 13k contracts in late July.  The downside correction in the Canadian dollar appears to have largely run its course, and we anticipate a better August after the heavier performance in July.  Our initial target is around CAD1.2250-CAD1.2300.  

 

Spot: CAD1.2475 (CAD 1.2400) 

Median Bloomberg One-month Forecast  CAD1.2435 (CAD1.2325)

One-month forward CAD1.2480 (CAD1.2405)    One-month implied vol  6.8%  (6.5%) 

 

 

Australian Dollar:  Since peaking in late February slightly above $0.8000, the Australian dollar has trended lower and by in late July briefly dipped below $0.7300, posting a nearly 9% loss over the past five months. The 50-day moving average ~$0.7570) fell below the 200-day moving average (~$0.7600) for the first time since June 2020, illustrating the downtrend after the strong recovery from the low near $0.5500 when the pandemic first stuck.  The combination of a low vaccination rate and the highly contagious Delta variant forced new extended lockdowns for Sydney and social restrictions that have sapped the economy's strength.  It will likely slow the central bank's exit from the extraordinary emergency measures.  Indeed, the Reserve Bank of Australia is likely to boost its weekly bond-buying from A$5 bln to at least A$6 bln.  A convincing break of $0.7300 could open the door for a return toward $0.7000, but we suspect the five-month downtrend is over and anticipate a recovery toward $0.7550 over the next several weeks.  

 

Spot:  $0.7345 ($0.7495)       

Median Bloomberg One-Month Forecast $0.7425 ($0.7610)     

One-month forward  $0.7350 ($0.7500)     One-month implied vol 8.9  (8.5%)   

 

 

Mexican Peso:  The dollar chopped higher against the peso in July and reached a high near MXN20.25 on July 21. It trended lower and, in late July, fell below the seven-week trendline support near MXN19.90.  After finishing June less than 0.1% weaker, the greenback lost about 0.4% against the peso in July, which was the fifth consecutive month without a gain.  The other notable LATAM currencies were the weakest three emerging market currencies (Chilean peso ~-4.1%, Colombian peso ~-4%, and the Brazilian real ~-3.8%).  If the upper end of the dollar's range has held,  a break of MXN19.80 may warn a test on the lower end of the range (~MXN19.50-MXN19.60).  The 5.75% year-over-year CPI for the first half of July and the highest core inflation for early July in more than 20-years keep expectations for another rate hike intact when Banxico meets on August 12.  The market has another hike priced in for the September 30 meeting as well.  The dispute with the US over measuring domestic content for auto production under USMCA could undermine Mexico's role in the continental division of labor, but instead, producers in Mexico may choose to pay the WTO auto tariff standard of 2.5%.  The IMF's latest economic forecasts revised the projection for Mexican growth this year to 6.3% from the April projection of 5%.  

 

Spot: MXN19.87 (MXN19.95)  

Median Bloomberg One-Month Forecast  MXN19.94 (MXN19.97)  

One-month forward  MXN19.95 (MXN20.02)     One-month implied vol 10.5% (10.7%)

  

 

Chinese Yuan: The dollar spent most of July within the trading range that had emerged in late June found roughly between CNY6.45 and CNY6.4950. The range was maintained even after the PBOC unexpectedly cut reserve requirements by 50 bp (announced July 9). However, Beijing's more aggressive enforcement of antitrust, discouragement IPOs abroad, making private education non-for-profit without foreign investment triggered sales of Chinese shares. It helped lift the dollar in late July to around CNY6.5150, its highest level in three months and just shy of the 200-day moving average.  The pursuit of domestic policy objectives appears to be putting at risk strategic goals.  A drying up of capital inflows from spooked foreign investors may have slow efforts to liberalize capital outflows that could eventually lead to making the yuan convertible.  At the same time, China's actions give a timely example of what holds the yuan back from a significant role in the world economy and why a technology solution (e.g., digital yuan) will not suffice.  As the dollar briefly traded above the upper end of its recent range in July, the risk is that it slips through the lower-end range, which could spur a move toward CNY6.40.  

 

Spot: CNY6.4615 (CNY6.4570)

Median Bloomberg One-month Forecast  CNY6.4555 (CNY6.4360) 

One-month forward CNY6.4780 (CNY6.4815)    One-month implied vol  4.0% (4.7%)

 

Disclaimer 



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Government

World’s Largest Pension Fund Slashes US Treasury Exposure By Record Amount

World’s Largest Pension Fund Slashes US Treasury Exposure By Record Amount

The world’s largest pension fund, Japan’s Government Pension Investment Fund, made a record cut to the weighting of Treasuries in its portfolio last fiscal year,…

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World's Largest Pension Fund Slashes US Treasury Exposure By Record Amount

The world's largest pension fund, Japan’s Government Pension Investment Fund, made a record cut to the weighting of Treasuries in its portfolio last fiscal year, sparking a global debt selloff.

GPIF slashed it US government bonds and bills to 35% of foreign debt holdings in the 12 months ended March, from 47% previously, according to an analysis by Bloomberg of the latest data.

Source: Bloomberg

Notably, that level of exposure is below FTSE Russell's World Government Bond Index's 38% weight in Treasuries (so GPIF is actually underweight USTs on a global basis).

The giant Japanese fund shifted into mostly European sovereigns with France, Italy, and Germany benefiting the most...

Source: Bloomberg

GPIF “substantially adjusted” allocations to bonds denominated in the dollar, euro and pound as an estimated tracking error was relatively high in the first half after the pandemic drove up market volatility, Eiji Ueda, the fund’s chief investment officer, wrote in the report.

Which helps explain overall Japanese official holdings of USTs over the past year...

Source: Bloomberg

GPIF's decision follows a longer-term trend evident in other major nations as 'dedollarization' accelerates...

Source: Bloomberg

As with many other aspects of Japanese culture, "GPIF has a large influence over the investment decisions of other pension funds in Japan,” said Ayako Sera, a market strategist at Sumitomo Mitsui Trust Bank Ltd. in Tokyo. “What it does has an impact in the market.”

However, Sera suggests a lot of the selling was because hedged Treasuries were unattractive: “Current yield levels don’t compensate investors enough to take foreign-exchange risks,”

Something that is now very much incorrect as FX-hedged Japanese investors are getting the best yields since 2014...

Source: Bloomberg

Interestingly as Morgan Stanley pointed out, we think that it is important to avoid the trap of forcibly fitting a narrative to lower yields, a trap investors dealt with merely four months ago:

Treasury yields rose sharply in March, largely due to selling from Japanese investors, based on their fiscal year-end considerations.

Yet, most investors mistook the rise in yields as validation for a super-hot economy, and the consensus bought into the idea that 10-year yields were headed above 2%. We cautioned investors that yields had overshot relative to the economic reality.

Over the coming weeks, economic data in the US couldn’t keep up with unrealistic expectations, and 10-year yields started grinding lower.

Source: Bloomberg

In other words, GPIF's decision to dump US Treasuries fooled the world into believing the recovery was accelerating... But of course, now that yields are collapsing again, the asset gatherers and commission-rakers conveniently brush it off as "QE-driven distortion"...

Does GPIF know something the rest of the world doesn't about just how 'transitory' inflation is?

Tyler Durden Mon, 08/02/2021 - 15:16

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Stocks

Best Penny Stocks to Buy Now? 3 to Watch In Early August

Are these penny stocks worth adding to your watchlist next month?
The post Best Penny Stocks to Buy Now? 3 to Watch In Early August appeared first on Penny Stocks to Buy, Picks, News and Information | PennyStocks.com.

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3 Penny Stocks For Your Early August Watchlist 

With a new month here, the time to find the best penny stocks to buy is now. But, it’s not as easy as making a watchlist and hoping for profits. Rather, investors need to understand where the stock market is headed, and which penny stocks may benefit. In 2021, it’s all about considering how short-term trends may result in heightened popularity or volume with certain penny stocks. 

And because there are so many events going on simultaneously, it can be a lot to keep track of. However, by paying attention to the news and understanding wholly how it could affect different industries or companies in specific, investors can work to stay one step ahead of the game. The best trader will always be the one with the most information on hand. And in 2021, information is more accessible than ever. 

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With the Robinhood IPO occurring only a few days ago, we see that trading is open to all. Because the stock market is so democratized right now, billions in capital have flooded in over a short time frame. So, recognize that volatility is high, but the chance of turning a profit can be equally high if you know how to trade penny stocks. With all of this in mind, let’s take a look at three to watch in early August.

3 Hot Penny Stocks to Watch Right Now 

  1. New Oriental Education & Technology Group Inc. (NYSE: EDU
  2. Ebang International Holdings Inc. (NASDAQ: EBON
  3. Globalstar Inc. (NYSE: GSAT

New Oriental Education & Technology Group Inc. (NYSE: EDU)

In the past few months, the trend of education penny stocks has increased greatly. And one of the more interesting companies in this field right now is New Oriental Education & Technology Group Inc. This company offers K-12 private educational test preparation services. As of May 31st, 2020 the company’s services and programs were offered in 104 schools, 1,361 learning centers, and 12 bookstores. This is a substantial reach for the company and one that could prove to be beneficial to it in the long run. 

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Only recently, the Chinese government placed a ban on for-profit tutoring. While this expectedly resulted in a price drop for EDU stock, shares did make a small comeback shortly after. Over the past year, EDU stock has lost over 85% of its value.

However, in the past few days, shares have climbed by over 15%. In addition, the company’s volume during that time has also increased substantially. Needless to say, the situation in China may still have more questions than answers so a more speculative sentiment has materialized in the market. Based on this information, it’s up to you to decide if EDU stock is worth watching or not.

Ebang International Holdings Inc. (NASDAQ: EBON)

Ebang International Holdings Inc. is a blockchain penny stock that we’ve been covering for quite some time. The company creates a large range of blockchain-related products. And for that reason, its share price is usually highly correlated with that of certain cryptocurrencies.

In specific, Ebang manufactures Bitcoin mining machines for sale in the U.S., China, and Hong Kong. The company provides mining machine hosting services for remote usage as well. This has become a popular trend among Bitcoin miners, as remote hosting is much more efficient than running in-person operations.

With cryptocurrencies like Bitcoin and DogeCoin exploding in value at certain points in 2021, the company has experienced a lot of positive momentum as well. 2021 has been a landmark year for crypto because of its large growth in popularity and massive attention in the news. And as stated before, it’s important to stay up to date with the price of crypto as EBON stock often moves with the crypto industry as a whole. In addition, the large microprocessor shortage witnessed over the past few months has been a major benefit to EBON. 

As a provider of Bitcoin mining machines, Ebang has seen the demand for its products rise substantially during that time. In the past five days, shares of EBON have risen by over 3.5%. While this may not seem like a major gain, it is substantial considering EBON’s trajectory throughout the last six months or so. With this information in mind, is EBON a contender for your penny stock watchlist?

Penny_Stocks_to_Watch_Ebang_International_Holdings_Inc_EBON_Stock

Globalstar Inc. (NYSE: GSAT)

Globalstar Inc. is a communications penny stock that has continued to make moves in the market over the last year or so. YTD, shares of GSAT stock are up by a staggering 305% or so. And while prices are down in the last month, we can look at the future prospects that Globalstar has to see where it could be headed. 

For some context, Globalstar is a company that provides mobile satellite services such as GPS tracking for emergency locations, anti-theft, asset tracking, and more. In addition to this, it offers IoT tracking devices for cargo, container, and rail cars. With the increasing globalization of the world, devices like these are important to keep the transport industry running. And, it also works as a complement to Globalstar’s other assets. 

[Read More] Best Multibagger Penny Stocks to Buy? 3 For Your Watchlist

On July 1st, Globalstar announced its partnership with FocusPoint International Inc. FocusPoint will provide crisis assistance services under the Global Overwatch & Rescue Plan to Globalstar customers.

“We are so pleased to extend this valuable service to Globalstar customers. Many of our users partake in extreme sports and engage in higher than average travel frequency making this offering a service that can help further improve our customers’ peace of mind. FocusPoint provides a comprehensive risk consulting service that is a great compliment to the connectivity we provide our customers.” 

The CEO of Globalstar, David Kagan

The safety market is one that is both large and growing. With the pandemic coming back for a fourth wave, many are forgoing vacations to large population areas, and instead choosing to stay outdoors. This means that there could be heightened demand for GSATs products if all goes according to plan. Keeping this recent announcement in mind, will GSAT stock be on your watchlist?

Penny_Stocks_to_Watch_Globalstar_Inc._(GSAT_Stock_Chart)

Which Penny Stocks Are You Investing In?

Finding the best penny stocks in 2021 can be challenging. But, by learning how to trade penny stocks, investors can stay ahead and feel confident in their strategies moving forward. With all of this in mind, which penny stocks are you investing in right now?

The post Best Penny Stocks to Buy Now? 3 to Watch In Early August appeared first on Penny Stocks to Buy, Picks, News and Information | PennyStocks.com.

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