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China Risks Eroding Confidence in Currency – Benjamin Fuchs

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  • Trader Who Bet on Gradual Yuan Decline Now Sees Steeper Drop

Last year, Benjamin Fuchs’s $2 billion hedge fund prospered by betting against a sudden yuan devaluation. Now, he says forces are lining up that are increasing the odds of steep declines.

By repeatedly tightening capital controls, China risks eroding confidence in its currency, said Fuchs, chief investment officer at BFAM Partners (Hong Kong). At the same time, the dollar’s advance against the yen and other currencies is increasing competitive pressure on China to let the yuan depreciate, he said in an interview.

China’s August 2015 devaluation threw global markets into turmoil and triggered a surge in wagers a follow-on move was imminent. BFAM’s bet that yuan weakening would be more gradual helped power the fund to an estimated 17.5 percent gain last year, said a person with knowledge of the matter. Now, however, the increased pressure on Beijing to allow bigger exchange-rate moves is partly self-inflicted, according to Fuchs.

“We’re starting to see more and more of a negative cycle being created potentially by China itself with aggressive capital controls,“ said Fuchs, a former Lehman Brothers Holdings Inc. trader. China’s attempts to curb outflows are “just making people want to take money out quicker, and make companies change their behavior.”

Yuan Bounce

Seeking to fight off yuan bears, Chinese authorities in the past week have taken steps to support the exchange rate, including encouraging state-owned enterprises to sell foreign currencies, according to people with knowledge of the matter. The yuan gained 1 percent on Thursday in Hong Kong, capping the biggest two-day advance in data going back to 2010. Meanwhile, a jump in the overnight deposit rate in the city made bearish yuan trades more costly.

Pinpoint Asset Management, a $1.5 billion Hong Kong-based hedge fund firm, expects the recent yuan surge to be short-lived, forecasting a 3 percent to 5 percent annual decline over the next three years, Jennifer Wong, its managing director of investor relations, said in an interview. Pinpoint’s China fund rose 2.6 percent last year.

The offshore yuan exchange rate fell 0.5 percent to 6.8224 a dollar as of 11:06 a.m. in Hong Kong Friday.

Donald Trump’s election as the next U.S. president in November has fanned anticipation of increased fiscal spending and tax cuts, driving a dollar rally. Meanwhile, as China’s capital outflows have approached $1.7 trillion since the start of 2015, according to Bloomberg Intelligence estimates, Chinese policymakers have made it harder for local firms to buy overseas assets and take the yuan offshore. They have also repeatedly tightened curbs on citizens’ ability to move money abroad.

Hard Landing

Some investors were betting on a large yuan devaluation last year as concern mounted the Chinese economy was headed for a hard landing. BFAM has made money taking the opposite side of the most bearish wagers, anticipating a more gradual depreciation. The yuan slid 6.5 percent against the greenback in the onshore market and 5.8 percent offshore last year.

Fuchs’s trades have made BFAM a standout among Asia’s hedge funds, who eked out an average 1.1 percent gain last year, according to preliminary data from Singapore-based Eurekahedge. BFAM returned 11 percent in 2015. Fuchs declined to comment on fund performance.

The yen has tumbled 8.6 percent since the U.S. election, while the yuan has slipped 1.2 percent onshore and is little changed offshore. The Korean won weakened more than 3 percent and the Malaysian ringgit depreciated 5.5 percent.

Fuchs expects long-term dollar-interest rates to rise much faster than short-term rates over the coming years, a phenomenon known as a steepening yield curve. As the Federal Reserve accelerates the pace of rate increases, that could put pressure on commercial real estate, he said. Life insurers and pension funds that have invested heavily in commercial property, as well as banks that lend to such projects, may get squeezed because rents won’t rise quickly enough to compensate for higher long-term interest rates, according to Fuchs.

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

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Travellers to Access $4k , Businessmen $5K as CBN Boosts Forex Supplies

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Nigerians travelling abroad can access a maximum amount of $4,000 foreign exchange from the banks following the Central Bank of Nigeria’s announcement to increase forex supplies.

Sources from some of the banks said those travelling on business trips could also access a maximum amount of $5,000 for each trip.

The CBN had said in a recent statement that it had concluded plans to increase the amount of foreign exchange allocated to banks to meet legitimate needs.

This followed the warning by the CBN Governor, Mr Godwin Emefiele, to Deposit Money Banks to desist from denying customers the opportunity to purchase foreign exchange.

The purposes to access forex included Personal Travel Allowance, Basic Travel Allowance, tuition fees, and medical payments as well as Small and Medium Enterprises transactions or for the repatriation of Foreign Direct Investment proceeds, the CBN had stated.

At a virtual Bankers’ Committee meeting last week, the bankers discussed how the CBN intended to assist with forex to ensure availability for the upcoming summer period and the return of students to school in September.

The CBN also said the BDCs would continue to have their weekly allocations.

The committee observed that the rates were going up.

It stated, “The CBN has said that all the banks must make available at all times and anyone who wants to buy BTA, PTA, medical fees, student school fees and all the eligible invisible purchases to ensure that Nigerians are not forced to go and queue in the parallel market.

“So what the Central Bank is doing is to encourage all banks to make sure that there is available forex at all times, and that his information should be communicated on all our platforms.

“We are asking our customers to come to the branches and for BTA, for example, present the required documents, which are basically your international passport, your visa, your valid ticket and fill up the form in the bank.

“And what we have been instructed to do is ensure that we don’t turn anybody back and that we should request from the Central Bank once we exhaust the forex that we have.

“The idea is to have a hitch-free summer period and the resumption for children to go back to school. The idea is to ensure there is less pressure on the forex and then the rates will come down.”

Speaking during the virtual meeting, the Group Managing Director, Access Bank, Herbert Wigwe, said, “I think again as part of the central bank’s role in terms of price stability and the need to support small and medium enterprises, there was a highlight of the need for banks to go and support SMEs who import small raw materials for them to set up their businesses.”

The Managing Director, Ecobank, Patrick Akinwuntan, said, “All banks are available to ensure forex need is met.”

Managing Director, Sterling Bank, Abubakar Suleiman, said the CBN had provided sufficient foreign exchange to meet the needs of all legitimate Nigerian travellers and therefore, the idea of going to any other market should not arise at all.

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U.S Dollar Gained as Fed Shifts Interest Rates Hike from 2024 to 2023, Crypto Drops

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The United States Dollar gained on Thursday after the Federal Reserve raised inflation expectations to 3.4 percent and moved the year it is expected to raise interest rates from 2024 to 2023.

Policymakers suggested that interest rates could be raised twice by late 2023 given “Summary of Economic Projections” (SEP) released on Wednesday.

The dollar index, which tracks the greenback against six major currencies, gained 0.63 percent to 91.103, its highest since May 6.

The jump was as a result of renewed interest in the American economy as growth is expected to hit 7 percent in 2021 despite the rising inflation. Similarly, economic conditions are projected to improve faster than initially predicted.

The Federal Reserve Chair Jerome Powell said “the economic conditions in the committee’s forward guidance will be met somewhat sooner than previously expected.”

The interesting thing is that the Fed has gone beyond simply acknowledging that inflation is rising and that the U.S. economy has a lot of momentum, and it has essentially shifted to a much more hawkish stance in this set of projections,” said Karl Schamotta, chief market strategist at Cambridge Global Payments in Toronto.

Powell said the central bank will maintain its $120 billion monthly bond-buying program to continue to support the economy but also suggested the possibility of pulling back on quantitative easing used to keep rates low.

I think we’re back to talking about a mild rally in the U.S. dollar and the data becoming very important over the summer period prior to Jackson Hole and September’s meeting,” said Simon Harvey, senior FX market analyst at Monex Europe.

Billions Flow Out of Crypto Market Ahead of Better US Economy

Investors are moving money in billions out of the crypto market, according to Whale Alert reports. On Thursday, 26,999,9990 USDT valued at $26,999,990 was transferred from Binance to an unknown wallet while another 19,999,995 USDT transferred from Bitfinex to an unknown wallet.

Investors moved 20,000,000 USDT to Bitfinex; 55,180 Ether worth $134,030,121 from an unknown wallet to another unknown wallet and 55,000 Ether estimated at $133,389,506 was also transferred to an unknown wallet in the early hours of Thursday.

5,000 Ether worth $12,168,082 and 1,000 Bitcoins worth $38,953,357 were transferred from an unknown wallet to Binance. To see the rest of the money being moved out of crypto space visit Whale Alert.

Cryptocurrency market capitalisation dipped by 5.03 percent in the last 24 hours but has lost $898 billion from $2.523 trillion it attained on Wednesday, May 12, 2021, to $1.625 trillion on Thursday, June 17, 2021.

The plunge in cryptocurrency was a result of improving global economic outlook, especially in the United States of America, the largest crypto investing nation.

The unregulated crypto space is largely treated as a haven asset to avert disaster during the global downturn. Meaning, an improvement in the global economy will generally impact cryptocurrency capital inflow and overall performance. Investors King expects cryptocurrency to extend its decline in the third quarter.

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CBN Raises Customs Forex from N381/US$1 to N404.97/US$

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The Central Bank of Nigeria has raised the Naira exchange rate for cargo clearance from N381/US$1 to N404.97/US$1.

This was confirmed by Uche Ejesieme, the Public Relations Officer (PRO), Tin Can Island Customs Command.

The PRO explained that it was not the customs job description to raise the foreign exchange rate but that of the central bank.

The N24 difference has been implemented on the customs system managed by Web Fontaine.

Commenting on the situation, Kayode Farinto, the Vice President of the Association of Nigerian Licensed Customs Agents, said the increase would further escalate inflation on import goods and hurt consumers’ buying power given the present economic situation.

An importer, Gboyega Adebari, who was shocked at the decision said stakeholders will be greatly affected by the decision.

According to him, “When we went to assess a job this morning, we were told that the exchange rate has been increased, though we have been expecting it, but we don’t expect that it would be so sudden. The implication of this on cargo clearance is that cost of clearance would increase by N24 difference.

“The cargoes that already enroute Nigeria would also be affected, the jobs that we want to clear this morning were affected.

“When you go back to the importer and request for money, they will tell you there is no notification of increase from customs, so the freight forwarders are the ones that would bear the additional cost.”

Naira plunged to N502 against the United States Dollar at the parallel market on Wednesday and traded at N715 to a British Pound and N605 against the European common currency, Euro.

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