Currency instabilities

FX (Foreign Exchange) trading has now reached 4 trillion dollars worth PER DAY. That is a 20% increase since 2007 and the present banking crisis began. I think that gives us a pretty broad clue as to where much of the slosh of easy ‘bail-out’ and stimulus money has gone. I think it equally tells us where the money that is missing from stock market trading volumes went to, and where the outflows from money market funds has gone.

One more thing to keep in mind the average leverage level in FX trading can be routinely as high as 50X. Far, lower leverage levels, or a mere 30x was enough to sink Bear Stearns. This is speculators and predatory banks using loose money to chase high returns.

The Swiss Central Bank has spent most of the last year selling Swiss francs in a largely doomed and ineffectual effort to stop the Swiss Franc from appreciating. The high value of the Franc against the Euro has been unwanted by both parties. The high value of the franc versus eastern European currencies such as the Hungarian Florint is a disaster in the making.

Remember in Hungary, Poland and others, the large bulk of mortgages and much other debt besides, was taken NOT in the local currency, the Florint, but in Swiss francs. People did this because the rate at which they could borrow Swiss francs was much lower than the rate for their own currency. The risk they ran, by borrowing in a foreign currency, was if the rate of exchange between the currency they earned their living in, and the currency their debts had to be paid in, changed radically. With the rise of the Swiss franc everyone who has to pay debts in that currency is having to pay much more. The cost of debt in Hungary and Poland and others has soared. Hungary in particularly is in an unsustainable financial situation.

And it is this unsustainability of a nation’s finances when their currency rises or falls to a point where it is hurting or even killing the needs of the people in whose name that currency is issued and backed, that is the problem. It is a destabilizing financial and political force.

The political effects of FX speculation are clearest now in Japan. Where the inexorable rise of the Yen against both the Dollar and the Euro is causing a serious economic crisis. The financial class do not have confidence that the present Prime Minister, Mr Kan, will do what is best for the banks and financial class. The problem, apart from the instability of having Prime Ministers coming and going as if it were Italy we were talking about, is that 70% of the public prefer Mr Kan to his challenger Mr Ozawa.

I don’t think it will go well if the people’s choice is ousted and it’s perceived he’s been removed in favour of the bankers choice.

Both the BoJ and the Swiss Central bank are likely to be forced to intervene again. The Japanese just did but it was an abject failure. The Swiss have largely failed all year. Is it really surprising when 4T dollars worth is being traded each day.

People talk about a bond bubble. And I do think there is one. But there is also a vast speculative force roaming the globe just looking for a chance to push a currency against the wishes and needs of those who depend on it.

This is the key to FX trading on this scale. This is no longer currency trading as it usually is. 4 Trillion dollars worth a day at 50X leverage is predation pure and simple. It serves no national, social or global use what so ever. It is a matter of finding a nation which looks vulnerable to a significant rise or fall in its currency value and then gathering round it like hyenas round a weak animal.

If the speculators can push the currency against the needs of that nation and its people, they can draw the CB of that nation into intervening to try to ‘save’ the currency. The sheer volume of bets against the CB and its currency put the odds very much in favour of the market winning. If it can happen to a country as relatively strong as the UK what chance does Hungary have.

The Hungarian people have done little wrong. Their economy is not vastly in debt. But their currency is vulnerable to appreciation on the Swiss franc. The Hungarian can do almost nothing about this situation.

You might ask why the Swiss should care? One reason is that if Hungary were to be pushed into defaulting, their default would knock at least one very large Austrian bank on its backside. Such a destabilizing event is precisely all it could take for another large landslip. Remember ear Stearns was 2% of financial holdings on the US when it went. Look where that led.