Category: Investing

The US dollar turned in a mixed performance during the first week of the New Year.  It fell against the Antipodeans and yen but rose against the other main currencies. The dollar’s performance against emerging market currencies had been similarly mixed.  It flower against most but fell against the major non-restricted currencies, like the Turkish lira, the Mexican peso, and the Southern African rand.  Most importantly, the buck finished the week on a gentle note, and we expect this to continue into the week forward. 

US job creation in Dec, at 252k, surpassed consensus anticipations.  Upward revisions for the October-November rolls were by a combined 50k.  It had been the weakest monthly jobs growth since August.  The actual wage data were a major disappointment. Average hourly revenue fell 0.2%.   The consensus called for a 0.2% increase.  The 0.4% gain in The fall of revision cut the number in half.  The year-over-year pace slumped to 1.7%, the lowest in two-years.  

The market’s confidence that the Fed’s lift-off will take place near mid-year has been shaken.  The implied yield of the December 2015 Eurodollar futures contract finished the week at it’s lowest level in a month, almost 20 bp below the level seen on Christmas Event.  In the week ahead, much softer retail sales and inflation gauges will likely favor the actual doves and weigh on the buck.  

Technically, the euro could climb toward $1.1875-$1.1900 before the has make a new stand in front of the January 22 ECB meeting.  This sort of gain off the multi-year low set on January 8 near $1.1755 does not likely reflect bottom-pickers and discount hunters as much as a minor round of short covering as the downside momentum appeared to ease.  A break of the $1.1750 are could signal another quick penny decline.  

The dollar peaked one month ago against the yen (Dec 8 ~JPY121.85).  Since then the actual BOJ has added another (approximately) 1.4% of GDP to the balance sheet.  Over the past 30 days, the dollar appears to be carving out some kind of wedge or even triangle pattern, which is a continuation pattern.  The downward sloping top line is drawn off that December 8 high which the high from January 2-3.  It comes in near JPY120.35 by the end of a few days ahead.  The upward sloping bottom line is off the December 16 low spike below JPY115.60 and also the January 6 low simply above JPY118.00.  It shut just above it prior to the weekend.  On a downside split, which looks likely, we initially target JPY117.50 after which JPY116.80.  

After a string associated with disappointing PMI reports, the UK surprised investors with its biggest jump in manufacturing output within seven months and the smallest trade deficit since 06 2013.  Sterling’s downside momentum had carried to just above $1.50 and the data helped encourage a bounce.  Those upticks nevertheless lack conviction, and the short covering was only sufficient for this to flirt with $1.5175. Officially, there is potential into the $1.5250-$1.5300 area.  Expectations of a rate hike continue to push out, reflected in the latest gains in the short-sterling futures contract.  A sub-1% CPI reading is expected on January Thirteen and will likely push the market more in this direction.  

The Australian dollar finished last week over its 20-day moving average for the first time since mid-November.  Positive fundamental information from the smaller than expected industry deficit and larger than expected jump in building approvals appeared to stall the downside momentum.  This took the broader US dollar weakness to drive it higher.  It probed the actual $0.8200 area and the next level of resistance is actually near $0.8250.  From a technical perspective, the Australian dollar looks the most constructive of the foreign currencies we look from here.  The RSI and MACDs possess turned up, the 5-day moving typical is poised to mix above the 20-day average, and it shut at three-week highs before the weekend break.  It also closed above the downtrend collection drawn off the mid- and late-November levels and the high at the start of the New Year.

The technical tone of the Canadian dollar is not nearly as good as it is for the Australian buck.  The Canadian dollar is more like a petro-currency.  This allowed the actual drop in oil prices in order to overshadow the 53.5k begin full-time jobs reported before the weekend break.  The US dollar extended its advancing streak against the Canada dollar to six consecutive days.  It approached CAD1.19 prior to pulling back a little. Above there, the CAD1.1975-CAD1.2000 offers psychological resistance.  The lower degree is equivalent to $0.8350 for Canadian businesses.  

Oil prices have fallen with regard to seven consecutive weeks.  The risk is still on the downside, although the February WTI futures contract spent most the week bouncing along the recent trough.  Saudi Arabia’s last move, to chop the discounts offered in the US and Europe, demonstrate it’s resolve to preserve share of the market.  At the same time, the apparent liberalization people rules on condensate exports could increase US exports by another million barrels a day by the end of the year, according to some industry estimates.  This will intensify the competition within third markets.  Over time, the actual decline in prices will boost demand. There are already original signs that the decline within gasoline prices in the US is boosting demand.  

The drop in essential oil prices, the absence of earnings development in the jobs report, and the increased jitters in the equity market, ahead of Q4 earnings season pushed US 10-year bond produces below 2.0%.  This is beginning to look like the upper end of yields.  Yields recorded a low near 1.86% in the mid-October expensive crash and 1.88% on January 6.  A break could extend the range another Ten bp or so initially, but there’s increasing talk of a move toward 1.50%.  

The S&P Five hundred filled the gap from the higher opening on December Eighteen that we anticipated.  The recuperation off the January 6 low was sharp.  In some ways, it looks similar to the middle of October and middle of Dec lows.  However, the specialized indicators, like the RSI and MACDs aren’t as constructive.  A break of the 2030-2065 range will likely suggest the actual direction of the near-term trend.  Even though the weekly close was over the 50-day moving average, on balance we have a slight near-term bias to the downside.  

Observations based on the speculative placement in the futures market: 

1.  There were two significant changes in yucky speculative position in the futures markets in the Commitment of Traders for the week finishing January 6.  The gross short euro position elevated by 11.6k contracts to 207.1k.  The gross short sterling placement grew by 10.4k to 64.7k contracts.  There was only one other gross position adjustment more than 5k contracts.  It was the 7.7k contract cut of gross long Australian buck positions to leave 17k.  

2.  There was a clear pattern.  Speculators added to the gross short position of all currency futures we track.  The longs were combined but were added to within the euro, yen, sterling and peso.  

3.  It appears as if there was some pre-holiday position squaring, and those positions are being re-established.  The actual gross short euro position peaked in early November near 239k contract and fell to 183k in the middle of December.  There are a few exclusions.  The gross long and short yen positions are smaller now than mid-December, but the net position is little changed at 90.1k contracts short. Before Christmas, it was at 87k.  The market has been creating a larger net short sterling position, which is now about 20% larger than it was on before Xmas.  At 64.5k contracts, the net short peso position is about twice the size of the position at the end of The fall of.  

4.  The net short 10-year Treasury note commodity position slipped to 243k agreements from 261k the prior week.  Nevertheless, this is still a large increase from the 163k net short placement in early December.  The yucky long position rose nearly 30k contracts over the past week in order to 311.5k.  In late October, the gross long position was 457k connections and fell to 273k agreements in the middle of December.  It has increased for the past three weeks.  The yucky short position increased by almost 12k contracts to 554.7k.  This is actually the largest gross short risky position since 2006.  It has grown by about 90k agreements since the end of November.

News Stream May Favor All of us Doves and Spur Dollar Consolidation is republished with permission from Marc to Market

The media has pounced on a statement from SWIFT, the worldwide messaging platform for monetary transactions, which showed a boost in the use of the Chinese yuan to record levels.  According to SWIFT, the use of the yuan surpassed the Australian and Canadian dollar to maneuver into fifth place.  

It is not that there is a reason to question the validity of the Quick data.  The point is that it is becoming exaggerated.  First, the yuan’s share is only 2.17% of global payments by value.  Yes, it has increased from the 1.59% be part of October.  However, to regard it as being a 36% increase is misleading.  

Several press reports tried connecting the increased use in the yuan as a potential precursor to a decision later this year by the IMF. The actual IMF is scheduled to review the actual Special Draw Rights (SDRs), that is a basket of currency (made up the dollar, euro, sterling, as well as yen) that is used to settled inter-government obligations.  

The fact of the matter is that in terms of international use China still punches below its weight.  It’s the world’s largest exporter.  It is among the largest importers. Yet the yuan’s share of worldwide settlement remains minor.  

The yuan isn’t freely convertible.  This was the key reason cited by MSCI last year if this declined to incorporate A-shares (that trade on the mainland) as part of it’s global indices. 

In addition, there is another source of exaggeration that’s widespread and largely undetected. It involves Hong Kong.  It is either a a part of China or it is not.  If it’s part of China, the fact that China and Hong Kong transaction boost SWIFT figures it not really a manifestation of the internationalization of the yuan.  It is the distorted side-effect of having one country with two currencies.  

The same critique applies to China’s claim that a quarter of all its cross-border payments in 2014 were conducted in yuan.  Hong Kong receives nearly a fifth of what are called Chinese exports.  That is another yucky distortion of the internationalization of the yuan.  Whilst, of course, there has been some elevated use of the yuan, there has also been what we called the Sino-ification of Hong Kong. If China’s commercial relationship with Hong Kong would be regarded as an interior and domestic affair (that is how Chinese officials desired to view the Occupy Central movement), then the SWIFT figures would also look quite different. 

Lost in the discussion about the mercurial rise of the yuan is the fact that the global repayments system is highly concentrated.  The actual dollar (44.6%) and the dinar (28.3%) account for almost 3/4 of global payments.  Sterling is in a faraway third with 7.9% reveal.  The yen is fourth at 2.69%.    

SWIFT figures are based on value and shifts in currency values need to be taken into consideration, though it is noticeably absent from the media reports I just read.  Those reports all highlight that the yuan moved ahead of the Canada dollar and Australian dollar, and could surpass the yen’s reveal.  In Q4 14, the Canadian dollar declines 3.6% against the US dollar.  The Australian dollar fell 6.5%. The yen fell 8.5%.  The actual yuan lost a little more than 1% against the US dollar.  

China has granted 10 countries the privilege of clearing yuan trades.  This is just significant because the yuan is still not freely traded.  China doles out the privilege and observers journey over themselves to commemorate the internationalization of the yuan.  A little more than two dozen central banks possess currency swap lines using the People’s Bank of China.  Yet they remain mostly dormant. After big currency swings, such the marked understanding of the Swiss franc and the remarkable depreciation of the Russian ruble, the precise size and conditions of those respective swap lines may be somewhat less clear now.   

It is not immediately clear how many central banks have yuan-denominated assets are members of their reserves.  Some estimates put the number as high as 50.  If it is truly that high (nearly one in four countries) we believe the actual value is relatively moderate.  It would currently be acquired in the "other" category the IMF uses for its COFER data.  Since China accounts for the vast majority of the unallocated supplies, we should look at the allocated supplies to estimate the yuan’s share.   

The most recent COFER data covered Q3 14.  It showed the "other” category was about $196.6 bln. This would likewise incorporate other currencies such as the Singapore dollar, South Korean won, as well as the Swedish krona and Norwegian krone.  Recall that global reserves stood from $11.78 trillion at the end of Q3.  

There is no compelling reason the US as well as Europe should agree at this juncture to include the yuan within IMF’s money SDRs.  If China desires to be included, which is not instantly obvious, there are concessions that could be demanded, such as opening up its capital account and letting the market forces more straight drive the yuan’s exchange rate. 

China’s interest rates are high, especially compared with the euro region and Japan.  Between the Eurozone as well as Japan, more than $3 trillion of bonds offer negative yields.  However, the yuan is not within an appreciation mode.  Ironically, contrary, the PBOC is moderating its decrease.  Last Friday January Twenty three and Monday, January 26, the yuan recorded its greatest two-day decline in nearly seven years.  China appears to be encountering net capital outflows, not inflows as was previously the case. 

There is another Quick story that may have been surpassed by the focus on the yuan’s Two.17% share of global payments.  Recall that SWIFT is supervised by the G10 central banks and the ECB.  It has in the past complied with official sanctions.  For example, it has prohibited Iran to participate in the payments/messaging system. 

Given the increased tensions with Russia more than Ukraine, the US and Europe are thinking about more sanctions against Spain.  Last September, the European Parliament urged countries to consider excluding Spain from the SWIFT system.  At the time, the Russian minister of economic development said such a transfer was unlikely.  He was right, but the issue has not gone away.  Earlier this week Prime Minister Medvedev threatened an “unlimited” response if Russia were to be excluded from SWIFT. 

Nothing appears to have come from the earlier Russian threat to develop a parallel system to SWIFT.  The international repayment system is a public great in a similar way that dollar and euro funding is a public good.  As part of the sanction regime, Euro banks and companies have been refused access to these public goods.  It may still be early to expect Russia to be barred from the SWIFT system.  However, because financial channels are brought to bear, this cannot be eliminated indefinitely, especially if the confrontation escalates.

Too Quick to Exaggerate Quick Data is republished with permission through Marc to Market

In a previous article I posted a chart from the International Energy Agency’s recent Essential oil Market Report that shows global demand for refined products catching up to supply by the 3rd 1 / 4 of this year. My opinion is the fact that all of the analysts who are right now blaming the sharp stop by oil prices on a “glut” associated with supply could change their tune quickly as customers adjust to lower fuel expenses. Just as higher costs reduce demand for any commodity, lower costs will increase demand. This is especially true for a commodity that has a immediate impact on standard of living, like oil does. 

When the price of gasoline stepped below $1.00/gallon in 1986, demand for motor fuels and other refined products increased by almost 5% within twelve months. Today, world interest in hydrocarbon based liquid fuels (such as biofuels) is over 92.5 million barrels per day. You can go to the IEA website and see for yourself which normal seasonal demand is expected to push demand over 94.0 million barrels per day within six months. I think both the IEA and our own Power Information Administration (EIA) are blatantly underestimating the price related need increase that is already starting to show up in the data. 

Last week’s EIA report verifies that demand is already surging in the United States. Granted, part of the year-over-year increase in gasoline consumption may be a result of the harsh winter weather we had last year, but I think this tale is going to play out. If fuel prices remain low till this summer, we should see a sharp increase in the number of Americans which decide to take long driving holidays this year. We do love the SUVs. 

Today’s low crude oil prices are blamed on Saudi Arabia’s decision not to reduce supply even though the world is oversupplied by an estimated 1.Five million barrels per day. In the event that gasoline under $2.00/gallon increases global demand for motor fuels by half of the amount it did back in 1986 (2.5%), demand for essential oil will increase by 2.4 million barrels per day and today’s “glut” will soon fade through memory. 

Gasoline prices in Tx are now under $1.75/gallon at numerous discount stations. 

It is going to take some time to work off the build-up in both oil and gasoline inventories, however, if the IEA and EIA start reporting which demand is catching up with give you the NYMEX strip price for oil will adjust quickly. The actual December, 2015 futures contract for WTI crude oil closed at $53.12/bbl on Fri, January 23 ($7.83/bbl above the entrance month contract). By the way, it has a lot to do with why crude oil inventories are building.

Keep in mind that oil production is also going to drop in response to lower prices. The U.S. energetic drilling rig count came by another 43 for the week ending January 23, 2015 to 1,633. Based on the upstream companies’ capital budgets that i am seeing, I expect the actual active rig count to decrease below 1,000 after May. We will soon have less than 700 rigs drilling for oil in this country and that means U.Utes. oil production will be upon decline by the 4th 1 / 4. In the last three years, only the U.S., Canada and Brazil have increased production. The rest of the world’s oil production has been in decline despite previous $100/bbl oil prices.

Even before the sharp decline in oil prices, global interest in oil was growing for a price of 1 million barrels per day per year. In my opinion, within 6 months the rate of demand growth will accelerate to over Two million barrels per day. Demand may go even higher if consumers adjust their driving habits like they did back in 1986.

Increasing Demand For Refined Products Increases Oil Prices is republished along with permission from Oilprice.com

Oil prices are heavier today, paring yesterday'utes substantial (~6%) gain.  The conclusion that an increase in Iranian oil exports continues to be several months off at greatest fueled gains.  Citing elevated demand, Saudi Arabia announced a lower discount to its Asian clients next month. 

Other producers expect to match suit.  At the same time, a slowing of US rig shutdowns, inventory develops, and an actual small decline in US output (7 days ending March 27) additionally encouraged ideas that a base in oil prices is being carved out.

Speculative positioning in the futures market (the confirming period through March 31) saw shorts cover almost 18k contracts (each contract is for 1000 barrels).  It was the second largest decline of the year as well as left 289.3k short contracts in speculative hands.  The gross longs added 2.4k contracts to 516k contracts.  Before prices began to plunge last July, the gross longs was at 548k contracts.  They had fallen to almost 400k at the end of November and have been rising since then.  

Genscape, a vital provider of intelligence in the oil sector, reported the other day that oil supplies from Cushing, Oklahoma, which is a key storage facility for the delivery of the futures contracts, fell between March 31 and April Three.  Tomorrow the government (EIA) will release its estimate.  The general opinion expects oil stocks to have risen by 3 mln barrels. Some investment houses are forecasting US inventories as well as production to peak this month.  

US oil stockpiles have increased through an about 86 mln barrels this year to 471 mln.  This has sparked speculation that storage capability is being absorbed.  Rising costs for storage is a key way to allocate the scarcer resource.

There is some risk that the surplus oil output morphs into a excess of gasoline.  US refinery prices may be the highest in a couple of many years at just a little over $28 a barrel.  US refineries are finishing their seasonal maintenance and have added refining capacity.  Apparently, the refiners have been significant purchasers of oil over the past little while. 

The euro inversely correlated with the price of Brent in the Nov-Jan period (60-day rolling basis on percent change).  Nevertheless, it turned positive and trended higher to briefly increase through 0.40 in the third week of March (two-year high), and currently is all about 0.37.  Oil and also the euro tend to be positive linked.  It is not only that oil costs and trades in bucks (for the most part), but it is also due to the ECB's reaction function.  It targets headline inflation, frequently driven by oil costs.  It raised rates in 2008 and 2011 as oil prices appreciated whilst Eurozone inflation was increasing.

The Norwegian krone is sensitive to swings in oil prices.  There is a positive relationship between the percent change in the actual krone and the percent change in the cost of Brent.  Over the past 60-days, the correlation is actually near 0.52.  This is the highest since late This year.  Last year, from March through early October, a negative correlation existed for the first time in more than the usual decade.

The Canadian dollar is also sensitive to the changes in essential oil prices.  The correlation reached a 2-year high at the end of last year near 0.67.  This now stands just below 0.55.  There was an inverse relationship for nearly the H1 14, the first time in three years.  Bank of Canada officials warned that the impact of falling essential oil prices extends outside the essential oil patch.  The Bank of North america surprised the markets, cut rates in January, and could feel compelled to cut rates again, perhaps as early as this month.

The correlation of the % change in the Mexican peso (against the US dollar) and the percent change in oil is not as strong as one might expect.  The 60-day rolling correlation stands close to 0.45 now.  This is essentially two-year highs.  The relationship briefly inverted last April/May and some weeks in August.

Oil Travails is republished with permission from Marc to Market

“If you ain’t cheating, you ain’t trying” were the words of 1 trader working in the foreign exchange market. They belie an attitude that was widespread amongst traders in this market in between 2009 and 2013. Being unfaithful was simply a normal part of the trader’s day job. In fact, not cheating would be to shirk your responsibilities.

Widespread cheating in the foreign exchange market offers turned out to be very costly indeed. Previously six months, six large banking institutions around the world have paid out US$10 million in fines over the adjustment of the global foreign exchange market. There’ve also been fines levied against banks for manipulating additional over-the-counter markets such as LIBOR, the ISDAfix and the gold market.

In add-on, there have been fines for other bad behaviour by banks like money laundering, their own role in the sub-prime mortgage crisis, violating sanctions, manipulation of the electricity market, assisting taxes evasion, and mis-selling payment protection insurance. This provides the total amount of fines, which banks have paid since 2008 to over US$160 billion. To place this in context, this really is more than what the UK federal government spent on education last year.

Cleaning upward their act

As the cost of misbehaviour mounts, banking institutions are under increasing pressure to clean up their act. In spite of widespread public cynicism, much has changed within the banking sector. Banks have beefed up their own risk function and elevated oversight of traders.

They have also changed the “tone from the top”. Bankers who talk much more about ethics, careful risk management and serving the customer have largely replaced senior managers of the boom years who promoted a hard-driving, risk-taking culture. A new legal regime is in place to hold senior bank employees personally responsible for wrongdoings on their watch. Banks are required to hold more equity on their balance linens. There have been new laws which changed bankers’ compensation to emphasise long-term overall performance rather than short-term risk taking. Riskier trading and investment banking procedures is being ring fenced from their more staid retail banks.

Problems with the market

All these changes might be producing bankers safer, but will they do anything to make the markets, which they operate within, any less prone to reward bad behaviour? We usually assume a market such as foreign exchange emerges from millions of individual decisions. Changing this might sound impossible.

However, each of these decisions falls within a particular set of constraints. These constraints would be the product of deliberate policy design choices. Changing conduct in a market like foreign exchange involves looking carefully at the design of the market and requesting whether this actually does the task it is supposed to do.

As it currently stands, the foreign exchange market seems to create opportunities for bad conduct:

* It is huge – US$5.3 trillion passes through the market every single day.

* It is extremely opaque – because it is an over-the-counter market, there is no centralised point where trades are cleared and documented. What this means is that unlike the proportion market, there is no single point of knowledge about how much trades and also at what price.

* It is extremely concentrated. Although millions of people participate in the forex market every day, only four banking institutions control over half the market. This effectively means that a couple of hundred people working for these big institutions trade over $2.6 trillion US.

* It is almost entirely self-regulated. Although there are many laws and regulations which apply in additional financial markets such as shares, regulation is almost entirely absent within currency trading. The main body, which oversees the operation of the market, is a panel appointed by the Bank of England whose membership is comprised of mainly currency traders.

It is difficult to expect that a large and opaque market, managed by a small handful of gamers who self-regulate will produce angelic behaviour.

Changing the design

To change conduct within this market, some of these style choices needs revisiting. If policy makers wanted to reduce the size of this gigantic market, they could place a small transaction tax on each currency trade. This would probably have the effect of driving out much of the speculative trading in forex (and related financial devices) which makes up the great majority from the market.

To make the market more transparent, banks, which operate large trading platforms, could be required to share information about the volume of trades as well as the price of deals they are making. This would lessen the information asymmetries between the large banking institutions (who know what is going on) yet others (who do not).

To make the market less concentrated, maybe create a centralised trade similar to the share market for currencies. This would quickly erode the advantages that large banks trading forex have from their currency trading platforms.

To make the market more stringently regulated, then it is possible to replace weak self-regulation by insiders with increased developed regulation by a completely independent body. This would mean there are obvious boundaries between poachers and gamekeepers.

In the united kingdom, the Bank of England is actually reflecting on some of these style choices. With its “fair and effective markets review”, it is looking at the design of FICC (Fixed Income, Currency as well as Commodities) markets. So far, monetary firms and their representatives have mostly engaged with this, and some policy options are already from the table. For instance, there is little prospect of a centralised currency exchange or a Tobin tax on currency trading.

Many important options remain, however. One big question is whether these essential market design decisions will be ones made by market insiders and technocrats, or whether they calls for some degree of genuine democratic thought. This is an important question to ask. Because my colleague Emilio Marti has recently contended, making decisions about the design of the financial markets in a more democratic method will lead to fair outcomes. Keeping the decisions on how to style the biggest market in the world in the hands of a small number of regulators, economists as well as currency traders may not result in a fairer market.

‘If you ain’capital t cheating, you ain’t trying’ – exactly how forex has changed is republished along with permission from The Conversation

The US dollar had begun the week on a firm note, but those gains happen to be trimmed in the second half of the week.  The confirmation that a 06 hike was highly not likely coupled with some softer US data took a cost.  The UK's surprisingly powerful retail sales report raised sterling.  The greenback had tested the upper end of its variety against the yen, nearing JPY121.50 but it ran into profit taking as US yields melted. 

There are three developments to notice today.  First, after reducing its GDP forecasts as well as delaying when the inflation focus on will be reached, at the conclusion of its meeting today, the BOJ improved its assessment of the economic climate.  The precise significance of this might be elusive, but it does appear to confirm that ideas that the BOJ was going to soon expand its QE procedures are premature.  Many experts are pushing that expectation into the second half of the financial year.  Initial support for that dollar is seen in the JPY120.Fifty area.  A break could signal losses toward JPY119.80 in to early next week. 

Separately, as we had previously discussed, yesterday Japan's Prime Minister Abe did commit to $110 bln new local infrastructure spending over the subsequent five years.  This needs to understood in the context of China's AIIB (initially thought to be capitalized with $50 bln has apparently already been increased to $100 bln).  Although many experts often speak about a race to the bottom, the rivalry over developments funds appears more to be a race to the peak.  

Second, Germany's IFO survey was a little better than expected, but still lower from April.  The overall business climate slipped to 108.5 from 108.6.  The consensus was with regard to 108.3.  This was powered by the expectations component that reduced for the second consecutive month.  Still the 103.0 study is still fairly elevated as well as above the Q1 average.  The assessment of current conditions checked up to 114.3 from 114.Zero.  It is the highest reading because last June.   We suggest the take-away from the IFO is that there is a feeling that Germany is near a peak.  That while things are great, it is hard to envisage things getting better. 

Separately, Germany confirmed Q1 GDP at 0.6%, but the details and revisions for Q4 had been somewhat surprising.  Consumption was in line with expectations from 0.6%.  Q4 was revised to 0.7% from 0.8%.  Government spending was 0.7% within Q1.  The consensus was for a 0.2% gain.  Q4 was revised to 0.3% from Zero.2%.  Capital investment rose 1.5%, which was twice the consensus expectation. However, Q4 capex was cut to 0.8% from 1.2%.  Domestic demand came in at 0.5%, the 0.7% the consensus forecast, but Q4 had been revised sharply higher to at least one.1% from 0.5%.  Exports were stronger than expected, growing 0.8% instead of the 0.5%.  Export growth in Q4 was revised to 1.0% through 1.3%. Lastly, imports rose through 1.5%, a touch less than expected.  Q4 import growth was modified to 1.9% from 1.0%.

The dinar tested the previous breakout area (~$1.1060) in the middle of the week.  Since it kept, the euro has been sneaking higher.  It is now testing the actual $1.1200 resistance area, which extends to $1.1220.  A move above there would encourage a push in order to $1.13.  For its part, sterling is consolidating yesterday's sharp gains.  It is holding in a narrow range (a little more than half a cent) near yesterday's levels. 

Third, once again Greek optimism offers hit a wall.  Greek Prime Minister Tsipras was hopeful that a political breakthrough was at hands.  French President Hollande also appeared cautiously optimistic that a special Euro group meeting would be held to discuss the progress.  However, Merkel seemed to play down through emphasizing that greater work is needed and that there is "a great deal to do."  One of the obstacles which have emerged over the past week or so may be the conflicting demands of the European union and IMF.  Germany, which was not really keen on the IMF's participation initially, now says no offer is possible without the IMF. 

As we have noted before, everyone seems to be cognizant of the moral hazards of the debtor, if concessions are made, but very few are considering the moral hazard of the loan companies.  The IMF overrode its own rules on lending to Greece, over the objections of some of its senior staff.  Back in 2010-2011, before the EFSF and ESM, countries in EMU had been so fearful of the impact of the Greek default on their own banking institutions that they lent money to Greece, not for Greece'utes sake or based on its ability to repay, but as a way to support their local institutions.  

In any kind of event, the developments within Riga sent Greek bonds reduce after gaining earlier this 7 days. The 23 bp rise in 10-year yields puts them upward 13 bp on the week.  On the other hand, Greek stocks are up about 0.5% for a 4.7% rise on the 7 days, which is one of the stronger performances in Europe this week. 

Turning to the North American session, the US reviews April CPI and Yellen speaks on the economy. The Fed's Seat will not be entertaining questions, as well as her economic views appear to be clear.  The headwinds on the All of us economy are largely transitory which stronger growth is expected. The actual bar to a hike is actually continued improvement in the work market (note that the 4-week typical of initial jobless claims slipped to new cyclical lows this week) and "reasonable confidence" that inflation will move towards the 2% target in the medium term.  In March, all but 2 Fed officials (governors and regional presidents) expect lift off this year.  Note that US savings flower $125 bln in Q1.  This coupled with income associated with job growth is anticipated to provide the fuel for consumption in the period ahead. 

That stated, today's CPI figures might go slightly in the wrong direction.  The consensus expects the year-over-year headline pace to ease in order to -0.2% from -0.1% and the core rate to 1.7% from 1.8%. The actual core CPI runs a bit higher than does the core PCE deflator. The primary PCE deflator was 1.3% in March. The April report is due out June 1. 

Canada reviews April CPI and March retail sales.  Deflationary winds are not the problem for Canada that they are for a lot of other major economies.  Canada's headline inflation may relieve to 1.0% from 1.2%, as the core is expected to hold steady at 2.4%. 

March retail product sales, are expected to slow after the heady 1.7% rise in February.  The consensus expects a Zero.3% rise on the headline and 0.4% excluding autos.  We think that the risk is on the downside.  The impact on the Canada dollar may be limited.  The united states dollar recorded a range of CAD1.2130 to CAD1.2250 on Tuesday and has been in that range since then.  When the break does come, we are more inclined to expect it on the upside for the US dollar.

Dollar Heavy into the Weekend is republished along with permission from Marc to Market

The euro has shed six cents over the past seven periods.  There are two main forces.  The primary one arguably is within Europe itself.  After an extended flash crash that saw German 10-year yields jump (from Five bp on April Seventeen to almost 80 bp in the first half of May), they’ve come back (to 53 british petroleum today).  The ECB confirmed exactly what many had suspected.  Specifically, that the ECB will expedite it’s bond purchases ahead of the slimmer summer markets. 

Meanwhile, the situation within Greece is becoming more eager.  The government, of course, is still spending money, but is falling deeper in arrears to its providers as it hoards cash so it can repay the IMF.  This recently had to borrow from the reserve account at the IMF so it could make the debt payment to the very same IMF.  These machinations are taking a larger toll on the economy and also the Greek banks, which nevertheless appear to be bleeding deposits. 

European officials talk tough and let you know that the Eurozone is better prepared to cope with Greece than it was in 2010-2012.  Whilst no doubt this is true, it is near the point.  As the Greek tensions escalate, contagion is still evident.  Over the past week, as Germany's 10-year bund yield slipped 5 bp, Italia and Spain's benchmark produces rose 13 and Eleven bp respectively.  Much of it took place today.  Although the electoral successes of the anti-austerity Podemos in Spain's weekend local elections may have weighed upon sentiment, Spanish bonds have not under-performed Italian bonds today.  Under a Grexit, the EMU would be reversible, and investors could very well demand a risk premium.

The second factor that has weighed on the euro is better news from the US.  The economical data suggests that Q2 is indeed dealing with what looks like another contraction in Q1.  The weakness within the March non-farm payroll report was a bit of a fluke.  April employment bounced back and the four-week average associated with weekly initial jobless statements made new cyclical lows.  Leading Fed officials have made it clear that they still assume the opportunity to hike rates later this year.

 

With this backdrop, let's look at the euro's price motion.  The euro's low so far this year was on 03 16 just below $1.0460.  It retested the low on April Thirteen near $1.0520.  The euro flower to a high a little beneath $1.1470 on May 15.  The Great Graphic, created on Bloomberg, shows the Fibonacci retracements of the 2-month euro rally.

Taking the rally from the March 16 low, the 61.8% retracement is about $1.0845.  The retracement should be from the April 13 low.  If so, the 61.8% retracement is a little over $1.0882, violated in North America today.  

Below the $1.0845 area, chartists see support in the $1.0680-$1.0720 area from prior congestion.  In addition, a trend line drawn off the 03 and April lows comes in near $1.06 at the end of the week and $1.0620 on June Five, the release of the next non-farm pay-roll report.

The RSI has edged beneath 40.  A couple of days before the 03 low it was near 15.  The MACD's crossed lower about a week ago.  The pace of the euro's sell off though, has been very sharp, and also the euro is trading below its lower Bollinger Band (~$1.0910).  It is not easy to talk about meaningful nearby opposition, but on ideas the euro will not resurface above the $1.1000-20 area, look for short-term traders to market into a bounce that could extend toward $1.0950.

Great Graphic: Euro Retracements is actually republished with permission from Marc in order to Market

China reported that its currency reserves fell for the third consecutive quarter in the three months ending on March 31.  The dollar value of reserves dropped, $113 bln to $3.73 trillion.  Over the three quarter period, China's reserve holdings have fallen by roughly $263 bln.  

To appreciate what is occurring in China it is useful to place it within the global context.  IMF COFER data covers only through the end of last year.  In the Q3 and Q4, the IMF estimates which world reserve holdings dropped by almost $390 bln.  The PBOC reviews that its reserves fell by about $150 bln over the same time period.

The decline in global supplies of which China, then is really a subset, appear driven through two forces:  valuation as well as capital outflows.  The euro, sterling, yen and other reserve currencies lost value when converted into dollars. For example, by the IMF's reckoning the value of global reserves fell by about 3.3% in H2 14.  During this period, the euro misplaced 12.5% of its value.  The actual yen fell by 19% as well as sterling slipped 3.7%.  All else becoming equal, the dollar's appreciation exerts downward pressure on the value of global reserve assets. 

In addition to valuation adjustments, a strong dollar may have encouraged funds outflows from some countries, especially emerging markets.  Some of these flows are from the private sector as foreign investors repatriated funds.  A few flows appear to have been from the official sector.  One of the key reasons why central banks, especially in emerging markets, build reserves is to keep their own currencies weak.  When the dollar is strong, they have no need to push it higher.  To the contrary, when the US dollar is strong, central banks can liquidate (take profits?) on some of their dollar holdings and/or intervene to slow the descent of their currencies, contrary to the forex war meme. 

Both valuation considerations and capital outflows explain the decline in China's reserve figures.   China does not report the actual currency allocation of its supplies.  This could change in the not too distant future.  If China wants to increase its chances that the yuan is going to be included in the SDR basket, it behooves it to adopt the IMF's best practices, which means reporting the allocation of its reserves.  Although the IMF's report does not reveal country specific data, the market will begin to try to back out the new info and by doing so will like have a good sense of China's allocations.

In the H2 14, as China's reserves fell by $150 bln, it documented a merchandise trade excess of $278.5 bln.  In Q1 15, reserves fell by $113 bln having a $123.7 bln trade surplus.  The gap between the two exaggerates the portfolio capital outflows because other factors, like a deficit on services and foreign direct investment, matter in addition to the valuation adjustment.

Conduct a simple physical exercise. At the end of last year, China kept $3.84 trillion in supplies.  We do not know the euro's reveal, but let us assume it is about the same as those that report forex allocations, which is 22.2%. The euro fell by 11.3% on Q1.  That alone could account for $96 bln of the $113 bln decline in reserves that China documented earlier today. 

When the dollar is depreciating, Chinese exporters have little incentive to hold on to bucks and likely turn them over towards the PBOC.  China has begun a liberalization procedure and exporters have greater discretion.  In a rising dollar environment, there is less need to covert to yuan.

This is an important point.  Below conditions of a falling dollar, the dollar value of supplies tends to increase.  Under problems of a rising dollar, the actual dollar value of reserves has a tendency to decline.  Part of the internationalization of yuan which has captured so many imaginations is really a function of a bull marketplace.  Now that the yuan is not so easily a one-way bet, the internationalization has slowed.  It reveal of trade settlement below SWIFT fell in two places to seventh and an industry survey found that the percentage of companies settling trade in yuan fell to 17% from 22%.

A survey by the Central Banking Publications study of central bankers last month found two interesting advancements.  First, central banks asked estimate that by the end of this season, the yuan will account for Two.9% of global reserves.  Second by 2025, its share will increase to 10%.  

The former seems a bit on the high side.  Global supplies stood at $11.6 billion at the end of 2014. Assuming no change in reserves over the course of the year means some $336 bln of yuan in reserves at the end of 2015.  Among the $6.085 trillion of reserves where the allocation is actually reported, there was $191 bln in other currencies, where the yuan (alongside a number of other currencies, including Sweden, Norway, and Singapore would be discovered).  A 2.9% allocation to the yuan could be worth about $176.5 bln.  

There tend to be $5.515 trillion of unallocated reserves.  Of which we know that China makes up about the $3.84 trillion.  That leaves $1.675 trillion.  Of those, a few 8.65% would need allocation to the yuan to meet the 2.9% survey results.  It seems to be a stretch. 

That said dramatic liberalization could take place that will make it easier to conceive.  For example, currently, for the most part, leaving aside a few of the nuances of the Hong Kong-China equity marketplace link, foreign investors, such as officials, require Chinese authorization to buy yuan or mainland ties.  However, there is front-page commentary within the China Securities Journal arguing to scrap the current allowance system under QFII and RQFII.

This might be putting the proverbial trolley before the horse.  The training that Chinese officials appear to have drawn from both Russia's experience and the East Asian economic crisis (1997-1998) is that before opening the main city account, it is essential to ensure a strong banking system.  China offers liberalized lending rates, but not down payment, rates.  In order to liberalize deposit prices it needs to introduce deposit insurance.  There are some indications that such program can be unveiled as early as next month.

Toward Understanding China's Reserves and Yuan as a Reserve Resource is republished with permission through Marc to Market

The price of gold is essentially unchanged from where it finished this past year.  There have been several interesting developments.  Of particular note, China, India and Russia had been significant buyers last month. 

It seems that the UK exported gold to Switzerland, where it was refined and then shipped to China and India.  Russia continues to build up gold even as its hard forex reserves fall.

According to official Swiss data, its shipments of gold to The far east almost doubled in 03 from February to Fouthy-six.4 metric tonnes.  Switzerland exports of gold to India doubled to a four-month high of Seventy two.5 mln metric tonnes.  However, Swiss gold exports to Hong Kong fell by about a quarter to 30 mln metric tonnes in March.

Overall, Swiss exports of precious metal, which are not sensitive to the strength of the actual Swiss franc, rose 65% in 03 to 223.3 metric tonnes.  This is the highest in at least two years.  Imports rose 51% to 281.Six metric tonnes, which is a new high since the time sequence began.  Imports from the UK jumped six-fold to 97.2 measurement tonnes.

Russia bought about 31.1 metric tonnes of precious metal in March.  This is about three times more than Russia typically has been buying recently.  However, purchases slowed in The month of january and February.  The buys in March seemed to be the "catch-up" as if Russia gold purchases are on a planned program. 

Russia'utes gold accumulation has more than doubled its holdings because the middle of 2009 and contains tripled them since 2005.   Russia's gold holdings amount to One.2k metric tonnes of gold.  It is the fifth biggest national holding behind the US (8.1k tonnes), Germany (Three.4k tonnes), Italy (2.5k tonnes), France (2.4k tonnes). Russia's gold holdings have risen over the last couple of years, as its overall reserves have fallen. 

Gold makes up about almost 15% of Russia's supplies.  Major industrialized countries possess relatively low levels of supplies relative to trade and funds flows.  Their gold holdings are relatively large.  Official gold holdings account for nearly three-quarters of US reserves.  German official gold holdings are almost 69% of its reserves.  Italian and French holdings are proportionately slightly smaller than Germany's.  China's precious metal holdings may be about 1% of its reserves, which says much more about its large reserves than it does about its precious metal.

Russia appears to hold a 100 tonnes more than China though there tend to be suspicions that China's holdings may be under-reported.  Indeed, the PBOC has not updated its official holdings since 2009.  There is some speculation that it may have more compared to doubled its holdings because its last update.  The cloak of secrecy may go aside if China wants to bolster its case for being included in the SDR.  We have previously made a similar point about the currency percentage of its currency reserves.  The actual IMF will hold meetings next month about the SDR, making its final decision at the begining of Q4.

India holds about 558 metrics lots of monetary gold.  It accounts for about 7% of its reserves.  Additionally, it has an estimated 20.6k metric tonnes of gold within private hands and another 10% much more in Hindu temples.  India's gold imports account for nearly a third of their trade deficit.  The Indian government is wrestling with ways to tap into the large personal sector gold holdings.  The following month it expects to declare new initiatives, such as permitting gold deposits at banking institutions with fixed interest rates, the actual sale of gold bonds and gold coins.

The IMF's data indicate that world's currency reserves were valued at $11.6 trillion at the end of 2014.  The precious metal market is far too small to substitute even a significant part of the paper money.  A couple of years ago, the senior PBOC official acknowledged this by indicating that China could only invest 2% of their foreign exchange holdings in gold because of the size of the precious metal market.  Only Russia, where reserve holdings are slipping appears to be really diversifying away from document money.  This is more politically inspired than economic.  The opportunity cost in the low interest rate globe is marginal.  This will change if/when rates rise.

Notable Developments within Gold is republished with permission from Marc to Market

After the strong US jobs data, there was no follow through purchasing of the dollar.  The buck fell against all the major currencies last week, save the New Zealand buck, where the central bank cut rates and signaled the likelihood of another one.

Many, including ourselves, expected the actual dollar to perform better because the recent string of economic data plays into the Fed's fingers.  Even though a rate hike by the FOMC next week is highly unlikely, it can be expected to recognize the reinvigorated financial momentum.  Yellen will most likely try to keep the marketplace focused on the data, not a particular time frame.  Based on current info and the expected trajectory of economic data, a September lift-off continues to be most likely scenario. 

There is a recent pattern.  Whatever direction the euro moves on Friday, it has been moving in the opposite direction on Monday.  After unable to proceed $1.1400 in the middle week, the dinar was sold on Thursday and was drifting lower on Friday.  Then Merkel's remarks (which many observers got of context and used it for what we think is a hyperbolic forex war narrative) sent this quickly lower to $1.1150.  From there, a bout of short covering took it back toward $1.1300.

The euro remains broadly range bound.  After bottoming in mid-March near $1.0460, it spent the next six weeks between $1.05-$1.10.  With the notable exception in late-May and early-June, it has been in a $1.10-$1.15 variety.  The technical indicators tend to be neutral and are not generating a strong signal at the present.

If Merkel's surveys are part of a currency battle, the BOJ's Kuroda comments pointed in the opposite direction.  He suggested that the real effective yen was near a bottom.  Their comments spurred a quick razor-sharp yen advance.  After the razor-sharp move on Wednesday, the yen has spent the next 2 sessions consolidating within which range set at mid week.  The triangle pattern becoming formed is often seen as a continuation pattern, which in the current framework means a lower dollar.  The technical indicators are in conjuction with the dollar retesting the Kuroda-inspired lows close to JPY122.45.  The dollar documented lower highs each program last week.  Rising above the prior day's high then would be the first indication of a possible dollar low.

Sterling snapped a three-week decline against the dollar. The five-day moving average crossed back again above the 20-day average.  With a 2% gain against the dollar, it finished a 618% retracement of its decline from mid-May (~$1.5575) and finished the week above it’s 200-day moving average (~$1.5490).  Near-term potential extends toward $1.5670-$1.5700.  Support is pegged in the $1.5420-40 area.

The Australian buck gained about 1.5% against the US dollar over the past 7 days, but it remains in a $0.7600-$0.7815 range.  Of note, it has generally finished the North American program near the day's highs.  All of us suspect the RBA minutes, to be released next week, will be dovish, offering a contrast to what we expect to be signals that the Given is still planning on moving in the alternative direction.  The Aussie hasn’t closed above its 20-day moving average since May Eighteen.  It is found now close to $0.7760, which may serve as a pivot.

The US dollar saw follow through promoting against the Canadian dollar earlier last week after reversing lower upon the release of the employment data on June Five.  The US dollar turned better bid after easing to CAD1.2200.  Offers in the CAD1.2350 region have checked the greenback's recovery.  If this area isn’t taken out, the risks increase for any test back to the lows.  A break of CAD1.22 alerts of losses toward CAD1.Twenty.  The Bank of Canada's neutrality contrasts with the easing trajectory of the RBNZ and the dovish RBA. 

August light sweet crude is the front month contract now.  Technical indicators are not particularly illuminating.  US stations continue to shut while All of us production remains resilient.  A few shale well has re-opened, and there tend to be reports about how the fracking technology continues to improve.  Now there is more discussion of re-fracking–returning to aged wells with new technology.  For the past month, the July contract has been confined to the $58-$62 range, with a few short-living exceptions.  It is near the middle of that variety now, making it a poor basic level for new exposure. 

US 10-year yields contacted 2.50%, the highest since final September, but the market is reluctant about pushing through there.  The September note futures staged a key reversal on June 11.  First, this pushed through the previous day'utes low to make a new low for the year, and the rallied to shut above the previous day's high.  The yield can fall back toward 2.25%. 

The ten-year German bund yield also rose to its highest level since last September (~1.05%).  Its downside change seemed more powerful, even if not as technically elegant as All of us Treasuries. On the week, the bund yield eased a single basis stage.  The 80 bp region has been a recent shelf, and a break could see yields drop back toward 70 british petroleum.  We want to be attentive to a shift in the relationship whereby bund yields and the euro have been moving in the same direction.  

The S&P Five hundred was virtually unchanged on the week.  However, the technical tone seems to have deteriorated, and also the pre-weekend close was poor.  The actual RSI has turned down, and the MACDs continue to be moving lower.  A break associated with 2088 would signal a retest upon 2072.

Observations based on speculative positioning in the futures market. 

1.  There were 2 significant (10k contracts) position adjustments.  The gross short euro position was cut by 24.4k contracts to 190.6k.  It is the biggest short covering since March 2014.  Remember that the gross short euro position peaked in 03 at 271k contracts.  This decrease in the gross short position accounts for the bulk of the adjustment of the new position.  The actual speculative net short dinar position has fallen through by about 90k contracts since peaking in early April.  The other significant position adjustment was investors continued to amass a large short yen position.  In the reporting period ending June Nine, speculators grew their yucky short yen position by 26.4k contracts to 158.7k. Since the end of April, when the gross short yen position had fallen in order to 54k contracts, it has grown almost three-fold.  The net short position appears at 116k contracts. In late-April, investors were short 5.5k yen contracts.

2.  Speculators generally added to short currency futures positions.  The euro was the best.  So was the Switzerland franc.  The gross short position was trimmed by Eight hundred contracts.  Speculators have been net long francs since early 04.

3.  The speculative net short 10-year Treasury note futures were cut in half to 36.6k contracts. Yucky longs rose by 71.6k contracts to 412.4k.  While they might have been trying to pick a bottom, the bears grew went with the actual momentum, and expanded gross short positions by 34.6k contracts to 449k.

4.  The risky net long oil commodity position was pared by Thirteen.7k contracts to 325.8k. This was the purpose of gross longs becoming trimmed by 10.7k contracts (to 483.8k) and a small increase (3k) of gross short positions (to 157.9k contracts).

Dollar Tone Large – Can FOMC Lift This? is republished with permission from Marc to Market

The Canadian dollar took a sharp tumble on the contrast between the Bank of Canada's price cut and Yellen's verification that the Fed is still on track to hike rates later this year. 

The Bank of Canada cut its overnight price 25 bp to Zero.5%, the second cut this year.  It cited the impact of the drop in oil prices and the failure to non-energy exports to pick-up the slack. 

After contracting in Q1 and April, the Canadian economy expects to contract in H1.  The central bank cut this year's GDP forecast to 1.1% through 1.9% it made in April.  The fact that the Bank noted the output gap is significantly bigger than previously understood is a dovish entrance.  It means that the central bank may still have an easing prejudice, though many, including us, suspect this is the last decline in the cycle.

The US dollar shot through its hurdle around CAD1.28 to reach nearly CAD1.2930.  These are new multi-year highs for the greenback.  It is difficult to speak of resistance when the levels have not been in seven years.  A few talk about a test on CAD1.3000-30.  A break of CAD1.2880 would signal a good intra-day high is in place.  The actual markets await Poloz’s remarks before the longs want to take profits. 

The New Zealand dollar is also trading at new multi-year levels following the disappointing milk public sale.  The RBNZ meets on July 23.  The market fully anticipates a 25 bp reduce then.  It is debating an additional move.  The Kiwi and Canada are competing, as it were, for that big loss on the day.  Both are down around 1.3%.  The following target for the Kiwi comes in close to $0.6575.

Remember the Fawlty Towers episode where a slice of veal that may or even may not have been coated with rat poison is rescued in the kitchen floor and prepared for that plate of a visiting health inspector? “What the eye don’t see,” chirps Basil’s ever-insouciant cook, whilst casually dusting down the offending cutlet, “the chef gets aside with.”

Many feel that a similar viewpoint has too often been applied in the world of finance. Accordingly, the financial industry faces mounting pressure in order to submit to greater public analysis. Naturally, little or no transparency is really a bad thing. However, might the same also be said about an excessive amount of transparency?

Psychology of decision-making

Given that it involves the psychology of decision-making and costly financial repercussions, this issue is definitely an interesting one for behavioural economists. One question associated with fundamental significance is the relationship between openness, anonymity and the degree to which people are prepared to take risks.

This brings us to another TV classic. It might not very rank alongside Fawlty Towers, but when it comes to illustrating how people behave under pressure for financial reward it is perhaps more instructive than Basil’s most maniacal turns.

Deal or No Deal, like many simple ideas, can be extremely revealing. The TV show, where contestants must pick one of 22 identical containers with a range of prizes (through 1p to £250,000) inside, offers a good illustration of prospect theory. This theory, produced by Daniel Kahneman and Amos Tversky, gives a psychologically plausible description of how people help to make risky choices. You may not realize it, but when you are watching Deal or No Deal, you’re getting some fantastic insights into how people choose between probabilistic options that involve risk.

In the study Recently i completed with colleagues in Amsterdam and Rotterdam, we conducted experiments which mimicked the Deal or No Deal format. The general concept was to find out how being in the actual limelight affects an individual’utes attitude to risk.

Risk takers

As using the TV programme, contestants could either accept a known cash offer from an mythical “banker” or hold out for a secret amount contained in a box they pre-selected at random at the start of the game. The prize money varied from €0.01 to €500. Students played the sport either in a laboratory atmosphere on a private computer terminal or in a simulated game-show environment with an audience, a host, and digital cameras. This way we could see how people acted in different circumstances.

We discovered that players in the game show environment demanded a considerably lower provide before agreeing to a deal. The actual apparent reason for this was that they had a greater fear of losing, relative to earlier expectations, if the risky gamble did not pay off.

Many might consider this surprising. After all, there is a popular conception that participants on game shows tend to play to the audience in the hope they will be thought of as entertaining. Nevertheless, our results suggest this is not so.

On the contrary, our subjects found being in the actual limelight comparatively constraining and anonymity comparatively liberating. In other words, making decisions in public does not motivate us to show off: rather, it increased the fear of dropping face after going out on a limb.

No profit without risk

Those that believe the financial industry has been getting too much risk may see this as eminently desirable. At the same time, however, it is vital to remember there is no profit without risk.

Overall, even when they are anonymous, people show a tendency to place too much emphasis on potential losses when evaluating dangerous prospects. Indeed, students playing the Deal or No Offer game in the laboratory additionally put undue emphasis on possible losses relative to potential increases. If we want to improve the quality of decision-making then we need to resist this tendency, not encourage it.

Make no mistake: transparency has its own merits. Above all, a degree associated with transparency is needed to prevent misconduct and potential fraud. The actual growing calls for ever-greater scrutiny tend to be wholly understandable, particularly at any given time when wider awareness of the investment world’s importance and intricacy is on the rise.

Ultimately, though, too much transparency may lead to an overly bureaucratic and unnecessarily timid financial sector. Overcautious choices that arise from excessive transparency will cost clients as well as shareholders money and harm the economy.

Nobody wants to eat on veal with a rat poison dressing so sufficient levels of transparency are needed. However, nobody wants bread and water every day either – and that is the risk if any kind of meaningful measure of freedom is denied.

Deal or No Offer shows how transparency causes us to be risk averse is republished along with permission from The Conversation