Speediest Traders Are Becoming Less Welcome in Currency Markets – ECB

By John Detrixhe

  • Aggressive, short-term arbitrage strategies are ‘saturated’
  • Speed bumps may have thwarted some types of fast trading

The most aggressive high-frequency currency traders are showing signs of losing steam, suggesting platforms have succeeded at thwarting some speedy strategies. 

Electronic specialists are making waves by eclipsing major banks in foreign-exchange trading. But some strategies — focused on fast execution and short-term arbitrage — have reached a “saturation point,” according to the Bank for International Settlements. At the same time, platforms have adopted so-called speed bumps to blunt advantages of the savviest firms, which have been blamed for sniffing out trader intentions to bet against them.Those factors are behind a drop in buying and selling hedge fund and principal trading firms, which fell to about $390 billion per day from $580 billion three years ago, according to a BIS report published Sunday.

As aggressive strategies wane, firms are increasingly confined to supplying quotes for market making. That’s seen as a passive and potentially more benign style of trading. That shift has winners: BIS says firms like XTX Markets Ltd. and Virtu Financial Inc. have grown their share of territory that used to only be the domain of banks.

“These firms have expanded their business to become top liquidity providers in FX markets,” the BIS report said.

Executives at major electronic trading firms say the easy money has already been made. In the U.S. stock market, for example, speed-trader revenue fell to $1.1 billion this year, down from $7.2 billion in 2009, according to Tabb Group estimates.

Principal traders are especially prevalent in spot foreign-exchange, where volume has fallen 19 percent to $1.65 trillion in the past three years. High-frequency strategies are often used in the spot market because it’s highly standardized, making it better suited to algorithms. Trading in foreign-exchange derivatives for corporate hedging and other purposes rose.

Some on the buy side, however, still need convincing that trading has gotten safer.

“Everyone’s guard is still up for some of this predatory type trading,” said Michael O’Brien, director of global trading at mutual-fund company Eaton Vance Corp. “It’s hard to tell whether it has changed. It’s still something I’m concerned about.”

Electronic firms account for at least 6 percent of market making, according to a rankingthis year by Euromoney Institutional Investor Plc. But the BIS says their share is probably higher because many don’t report volume. While such firms used to primarily transact on anonymous, exchange-style venues, they’re increasingly trading directly with customers.

“The buy side is increasingly looking at direct relationships with principal trading firms,” O’Brien said. “It’s not going to eliminate the banks, but it certainly will compete with them.”

BIS points to a sign that high-frequency strategies have stalled: trade sizes have plateaued. Automated firms tend to thrive in buying and selling small orders. After declining for several years, the average size of trades on interdealer platforms have been roughly flat, at about $1.5 million to $2 million, since 2008.

Some firms may have worn out their welcome at banks. Principal traders generally use credit lines to buy and sell currencies — a bank service known as prime brokerage. Those brokers have been shedding some customers as they reassess profitability and customer risk profiles following the 2015 Swiss franc shock. According to BIS interviews, banks have kept big clients and electronic market makers while dumping retail brokersand some speed traders.


ECB Delivering a Dovish Taper Reinforces Bets on Euro Parity – Bloomberg

By Stefania Spezzati

  • RBS, MUFG forecast that the euro will weaken further
  • Steepening bias to yield curves is intact, strategists say

The European Central Bank’s latest policy decision is reinforcing calls for the euro to drop to parity against the dollar.

The odds of the euro weakening to $1 in the next six months have risen to about 44 percent, from 31 percent on Dec. 7, the day before the ECB decision, options prices show. The euro dropped to $1.0506 on Dec. 5, the lowest since March 2015. It was last below $1 in December 2002. 

ECB President Mario Draghi said Thursday the central bank will reduce its monthly bond purchases to 60 billion euros from 80 billion euros starting in April. The program will run until at least December 2017, longer than some analysts predicted. Officials also lifted the restriction of buying bonds yielding less than the deposit rate and reduced the lower-maturity bound to one year from two years, making a raft of new securities eligible for the central bank’s asset-purchase program.

The main driver of EUR/USD is short-end rates, so the ECB announcement is EUR/USD bearish, Royal Bank of Scotland Group Plc strategists, including London-based Paul Robson, wrote in a research note to clients. “It increases our confidence that EUR/USD gets to parity and EUR/GBP gets to 0.80. With growth weak, inflation low and government debt levels high, the ECB is taking big risk with its policy pivot on both growth and debt sustainability. So growth risks add more fuel to the short EUR fire.”

Here are more analysts’ reactions.

MUFG strategist Derek Halpenny

  • ECB was “a more dovish event than expected” which “reinforces the downside risks for EUR/USD”
  • That keeps bank’s forecast of a breach of parity in the first half of 2017 in play

BNP Paribas strategists including Steven Saywell

  • “We expect EUR/USD to extend its decline in the New Year, and target 1.04 by the end of Q1 2017, even as the pair seems likely to consolidate in the shorter term.”

Goldman Sachs Group Inc. strategist Francesco Garzarelli

  • “The net impact of these changes in the size, duration and composition of the ECB’s demand for bonds should encourage a steepening of the EUR yield curve in both core and periphery countries, and, all else equal, keep long-dated intra-EMU spreads in check while improving the transmission of monetary policy through the financial sector”

Morgan Stanley strategists including Anton Heese

  • “The change in policy mix announced by the ECB has had an ambiguous impact on rates, with some measures being supportive, and others less so”
  • “Given the ambiguous impact these measures should have on the level rates, we refrain from recommending outright duration positions coming out of the ECB. We like 5s30s steepeners, as we think the potential for continued ECB accommodation due to the weak inflation outlook will be increasingly priced into the 5y sector while long-end Bund valuations still remain rich vs. history and are vulnerable to moving higher still due to the ECB reducing less duration from the market”

CBN: Foreign Reserves Accumulated $825 Million in November – Thisday

By Kunle Aderinokun

There was an accretion of about $825, 149,623 to Nigeria’s foreign reserves in November, data from the Central Bank of Nigeria (CBN) has revealed.

According to the figures obtained from CBN on the movement in reserves, which is a 30-day moving average, on November 1, the gross foreign reserves stood at $23,946,448,274 and by November 30, the level was raised to $24,771,597,897, representing an increase of $825,149,623 or 3.45 per cent in the review month.

The foreign reserves, according to the International Monetary Fund, consist of “official public sector foreign assets that are readily available to, and controlled by the monetary authorities, for direct financing of payment imbalances, and directly regulating the magnitude of such imbalances, through intervention in the exchange markets to affect the currency exchange rate and/or for other purposes.”

Nigeria’s foreign reserves had been under severe pressure before the introduction of the flexible foreign exchange regime, which allows the exchange rate to be determined by supply and demand. As it were, before the advent of the flexible foreign exchange regime, the unabatedly rising demands for the United States dollar had pushed the value of the naira southward and the CBN, in its wisdom, had intermittently intervened in the market, defending the national currency with the foreign reserves. The intervention had at various times eaten deep into the reserve, used to settle payment of the nation’s import obligations. For instance, the external reserve was reported to have lost $1.5 billion in the second quarter (before the introduction of the flexible regime), which may not be unconnected with the response of the CBN to the falling value of the naira.

But the positive development in November, may be considered a reversal of fortunes or the beginning of a positive turnaround, giving the trend of activities in recent past.

Analysts at FBNQuest, an investment banking and research arm of FBN Holdings, have described the accretion in the month of November as “a rare increase in reserves.”

According to the firm, “CBN data show that gross official reserves picked up by US$820m in November on a 30-day moving average basis to US$24.8bn. The monthly average movement has been an outflow of US$430m over the past 12 months.”

Recalling that, “This first sizeable increase since July 2015, when the FX holdings of public bodies were transferred to the CBN, is apparently due to the disbursement of US$600m by the African Development Bank (AfDB) in the form of budget support,” FBNQuest analysts argued that, “We do not see another inflow on this scale until Q1 2017, when the sovereign Eurobond is due to be launched.”

FBNQuest noted that, “The reserves may appear comfortable according to one traditional measure: on the basis of the balance of payments for the 12 months through to end-June, they provided cover for 6.6 months’ merchandise imports and for 4.6 months when we add services.”

But it pointed out that, the cushion is not wholly owned by CBN as its latest figures showed that it was the owner of only 73 per cent of reserves.

Given the oil price and allowing for the OPEC accord in Vienna last week, and seeing still robust import demand, the CBN is playing cautiously, observed the FBNQuest analysts.

“Since August it has sold just US$1.5m per day (to one bank according to a rota). In addition it has honoured four forward contracts since the devaluation/liberalisation in June, and held a special FX auction for petroleum marketers this week.”

“In June we were told that a floating exchange-rate regime was imminent. We urge patience, however, since we cannot currently identify the large autonomous FX inflows which will prove the short-term, game-changer. We are content with our favoured piecemeal solution in which a series of transactions over time supplies the trigger (Eurobond, balance under the AfDB facility, World Bank support and oil-related transactions),” the analysts concluded.


Forex inflow drops by $447m on oil facility attacks – Punch

By Ifeanyi Onuba

The persistent attacks on the country’s oil installations by militants in the Niger Delta have resulted in a decrease of about $447m in foreign exchange inflows from $1.4bn in September to $957.3m in October. 

Figures obtained from the Central Bank of Nigeria show that the $447m decline represents a drop of 31.85 per cent.

Investigation also revealed that the total outflows also decreased during the period, dropping significantly by $1.44bn or 58.68 per cent from $2.46bn to $1.02bn during the same period.

The price of crude oil currently hovers between $53 and $54 per barrel and the country may be losing much in terms of volume as a result of the persistent attacks on oil installations.

This, according to findings, has resulted in a decline in oil production to about 1.6 million barrels per day as against the budgeted production volume of 2.2 million bpd.

Based on the current daily crude oil output of 1.6 million bpd at the price of $51 per barrel, the country is currently earning a total of $81.6m as against $112.2m, which it could have earned had 2.2 million bpd been produced.

Speaking on the drop in oil production, finance analysts told our correspondent during separate interviews that the Federal Government should allow states to develop their untapped resources, stating that the current economic downturn had provided a platform to carry out the exercise.

They contended that while the country had been badly hit by the decline in oil production and revenue as a result of the activities of militants in the Niger Delta, there were a lot of untapped resources at various states, which could be developed for the purpose of economic prosperity.

Those who spoke to our correspondent on the issue included the Head of Banking and Finance Department, Nasarawa State University, Keffi, Uche Uwaleke; and a former Managing Director of Unity Bank Plc, Mr. Rislanudeen Muhammed.

Uwaleke, an associate professor of finance, stated that once the federating units were given the powers to control their resources, it would help promote healthy economic competition.

He said with competition, the federating units would come up with innovative ways of stimulating their respective economies.

He said, “The seemingly endless crises in the Niger Delta region will substantially abate if the country is restructured in a way that allows greater control of resources by the federating units.

“The present economic recession is a direct consequence of the drastic fall in government revenue, which has been blamed in part on militancy in the Niger Delta.

“The good news is that every state in this country is endowed with human and material resources. Economic restructuring will enable states to develop their competitive advantages, which can bring about multiple revenue streams and fast track the much needed diversification of the Nigerian economy.”

Muhammed said there was a need for the government to push all the states into making them to develop their economies in a sustainable manner.

He said, “Nigeria has huge economic potential outside oil sector, largely untapped due to the Dutch disease that has for years made us lazy and always relying on oil as a source of income, notwithstanding the fact that oil constitutes only 10 per cent of our Gross Domestic Product.

“There is potential for growth in non-oil export in most states and virtually every state has one form of economic competitive advantage or the other.

“The states do not have to grow at the same pace but hard work will make all the difference. For example, virtually the whole of Zamfara State is sitting on gold and diamond, largely untapped with little going to illegal miners.

“The current economic reality is a good opportunity for all the states to wake up and diversify their incomes but current tax laws need to be amended to ensure more percentage of the resources is controlled by them.”

But the Minister of Budget and National Planning, Udo Udoma, said although the government was focused on diversification of the economy, it needed oil revenue to effectively diversify the economy.

He said Nigeria’s immediate priority was to get oil production output back to the desired level to secure the revenue needed to diversify the economy.

Udoma explained that though the global slump in oil prices introduced some shocks that affected the country’s economy, the immediate reason for the slump into recession was massive reduction in output caused by militancy in the oil-bearing Niger Delta region.

The minister said the government was currently exploring a number of engagements that would ensure return of normal production activities in the region.

He added that the government was intensely focused on a long-term economic agenda that would ensure sustainable economic growth and revenue development.

Tanzania, Nigeria’s Dangote reach natural gas supply deal – Reuters

By Fumbuka Ng’wanakilala

DAR ES SALAAM Dec 10 (Reuters) – Tanzania and Nigeria’s Dangote Cement have reached a deal on the supply of natural gas to the firm’s manufacturing plant in the East African country after negotiations stalled over prices, Tanzanian President John Magufuli said on Saturday. 

The $500 million cement factory in the southeastern Tanzanian town of Mtwara, set up last year with an annual capacity of 3 million tonnes, runs on expensive diesel generators and has sought government support to reduce costs.

But the negotiations had stalled with the state-run Tanzania Petroleum Development Corporation (TPDC) saying the company was seeking “at-the-well prices”.

After meeting Aliko Dangote, the company’s chairman who is Africa’s richest man, Magufuli blamed unspecified middlemen of interfering with supply plans and said the issue has now been resolved with gas supplies to be sold at a “reasonable” tariff.

“They (Dangote Cement) will now buy natural gas directly from the state-run TPDC instead of going through middlemen,” Magufuli told journalists after the meeting.

He did not give details on the new tariff.

Dangote, Africa’s biggest cement producer, has an annual production capacity of 43.6 million tonnes and targets output of between 74 million and 77 million tonnes by the end of 2019 and 100 million tonnes of capacity by 2020.

The company plans to roll out plants across Africa. In Tanzania, Dangote is seeking to double the country’s annual output of cement to 6 million tonnes.

The country announced in February that it had discovered an additional 2.17 trillion cubic feet (tcf) of possible natural gas deposits in an onshore field, raising its total estimated recoverable natural gas reserves to more than 57 tcf.

(Reporting by Fumbuka Ng’wanakilala; Editing by Aaron Maasho and David Evans)