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East Asian financial cooperation is at a crossroads. The Chiang Mai Initiative Multilateralisation (CMIM) and its surveillance unit — the ASEAN+3 Macroeconomic Research Office (AMRO) — are continuing to grow in size and importance. However the structure of these two organizations must change to accommodate this growth.

The CMIM is a currency exchange agreement among the finance ministries as well as central banks of the ASEAN+3 states (including the Hong Kong Monetary Authority). The scheme, which evolved from the earlier Chiang Mai Initiative (CMI) bilateral currency swap network in 2000, aims to provide financial support for short-term assets problems. To manage macroeconomic difficulties, each member can swap it’s local currency with US bucks up to the amount of its financial contribution to the reserve pool times its borrowing multiplier.

After an amended agreement that came into effect on 17 July 2014, how big the CMIM was doubled from its initial value of US$120 billion in order to US$240 billion, and a crisis-prevention mechanism — the CMIM Precautionary Line (CMIM–PL) — was introduced. The IMF delinked portion was raised to 30 percent, meaning that members might draw up to 30 percent of their maximum borrowing amount with out requiring IMF lending conditions.

Despite these types of accomplishments, the CMIM is still a work in progress. In May Next year, some member states pushed to increase the IMF delinked portion in order to 40 percent by 2014, but this has not yet been realised. AMRO continues to be drafting the operational guidelines and qualifications for accessibility CMIM–PL. And AMRO still has to go through domestic processes to ratify the ‘AMRO Agreement’, which will change it into an international organisation.

These issues are intertwined and are essential to advancing this regional financial safety net. Addressing these issues requires clear vision about the long term relationship between the CMIM and other international lending institutions such as the IMF.

The CMIM lending conditions must be tailored to be perfect for the interests and needs of East Asian nations, and can likely be different from the IMF’utes. But the differences between CMIM as well as IMF conditions must complement — not compete with — each other.

The link with the actual IMF remains another concern. Once the CMI was introduced, ASEAN+3’s monitoring mechanism was not on par with the IMF’s. The states agreed to include IMF lending conditions into the CMIM in order to discourage moral hazard (when states take on more risk after being insured through other institutions).

Since then, CMIM participants have worked to reduce links to the IMF. The delinked portion increased through 10 percent in 2000 to 30 percent in 2012. So when may ASEAN+3 raise the delinked portion further?

The solution largely hinges on how AMRO evolves in years to come. If AMRO is strengthened and functioning well as a surveillance unit, the likelihood of moral hazard will be reduced, requiring less links with the IMF.

But the entity must improve capability and further its role as an independent authority to effectively undertake these functions.

The easier job is strengthening AMRO’s effort. AMRO remains very small — housing no more than a dozen experts — but there has been steps in the right direction. ASEAN+3 possess added two deputy directors and something chief economist to the office.

But the jury is still out on how to make AMRO more independent. The entity aids the Executive Level Decision-Making Body (ELDMB) to create decisions on issues such as approving CMIM lending. But the ELDMB is actually mandated to oversee AMRO’s actions. The ELDMB consists of the deputy-level authorities of the ASEAN+3 finance ministries and main banks. As such, AMRO is inevitably tied to governments. Such a relationship could affect its activities.

It seems clear that the CMIM cannot escape from the old game of sovereign politics. In East Asian financial history, inconsistent interests and contestations between states have spilled over and influenced several CMIM details.

How may future outcomes unfold? Will they be in favour of the possible lenders (China, Japan and South Korea) or the potential debtors (ASEAN)? The decision-making structure of the CMIM has been set up in a way that no single fellow member is dominant. China (such as Hong Kong), Japan and the 10 ASEAN nations have equal vote reveal at 28.41 percent. South Korea’s vote reveal is smaller (14.77 %), but the two-thirds supermajority voting system allows the country to cast a determining vote under certain circumstances. Neither ASEAN nor the +3 nations may block a collective decision on its own. Future results will depend on how the parties collaborate with one another.

In coming years, we are likely to see how the CMIM will progress. It’ll involve both technical elegance as well as politics. But the outcomes that do unfold will reveal priceless information about the political dynamics in East Asia. For those interested in East Asian local cooperation, the CMIM is definitely worth keeping an eye on.

Where to now for the Chiang Mai Initiative Multilateralisation? is republished with permission from East Asia Forum

The US dollar has been on a roller coaster ride. Many have lost confidence in the underlying trend.  An important prop for the dollar, namely the prospects for the Fed's lift-off, extends again, this time ostensibly due to the heightened unpredictability of the financial markets, apparently sparked by events in The far east.

The September Fed funds futures have nearly fully listed out the risk of a hike next month. The effective Given funds have traded 14-15 bp this month, and the September Fed funds contract suggests an average effective rate of 17.5 bp next month.

We continue to believe that the main driver of this third significant dollar rally since the end associated with Bretton Woods is the divergence of the flight of monetary policy between the US (and UK) and nearly all the other high income countries, and lots of emerging markets, including The far east.  There are a number of cross currents, and other considerations, including marketplace positioning, use of euro as well as yen for funding reasons, and hedging flows which at times may obscure or perhaps reverse (technical correction) the actual trend.

Nevertheless, we expect the actual divergence theme to gain more traction over time.  The Federal Reserve may raise rates at some juncture and not only will the ECB and BOJ continue to ease for at least the next 12 months, but there is danger that the central bank stability sheet exercise lasts a lot longer.  The ECB's staff, which will update its forecasts in the week ahead, is likely to cut both its growth and inflation forecasts at the September 3 central bank meeting.

The Dollar Index slammed to its lowest level since January in the market panic at the start of last week.  This overshot the minimum objective from the double top pattern we noted (~94.30).   It rebounded as well as on Thursday had retraced nearly Sixty one.8% of the decline since the July 7 (~98.33).  The trend line drawn off that high and also the August 19 high (~97.’08) comes in near 95.Eighty on Monday and drops to about 95.15 by the end of the week.  A move above Ninety six.40 would signal a return of the 98.00-98.30 area.

The panic saw the dinar reach almost $1.1715 at the start of last week.  The subsequent sell-off saw it shed a lot more than nickel.  The euro settled on its lows for the week, leaving a potential shooting star candlestick formation on the every week charts.  The break associated with $1.12 creates scope for an additional half cent of diminishes but pushing the euro below the $1.1130 area may require fresh fundamental incentives, possibly by means of more confidence that the Fed is still on track to hike rates next month, or that the ECB is particularly dovish.   On the upside, the $1.1280-$1.1310 band should limit dinar gains if the euro bears squeezed out of their shorts re-establish.

Switzerland suddenly reported that its economy broadened in Q2.  The consensus had been expected the second consecutive quarterly contraction.  That helped booth the dollar's upside momentum.  The CHF0.9680 is a potent block now to additional dollar acquire, though if overcome, the following target is near CHF0.9800.  Assistance is near CHF0.9500.  Support for that euro is at CHF1.0750 and then CHF1.0700.  A rest of CHF1.0680 would mark a substantial technical deterioration.

The dollar additionally retraced 68.2% of its losses against the yen of the drop from August 18 high close to JPY124.50 through the spike have less August 24 near JPY116.20.  Overcoming that retracement objective close to JPY121.35, a band of resistance exists in the JPY121.80-JPY122.15 which will provide the next test.    Around the weekly charts, the buck posted a potential bullish sludge hammer pattern.  An appreciating buck against the yen assumes firm, if not rising US prices, and stability to higher equities.

The greenback rose against virtually all of the currencies last week save japan yen. Sterling was among the poorest.  Losing about 2.20%, sterling nearly matched up the Australian dollar's decline (2.25%), only surpassed by the New Zealand dollar's 3.35% fall.  Since August 18, the implied yield on the June 2016 short sterling futures contract dropped more than 13 bp because investors anticipate that greater deflationary forces will delay the BOE rate hike.

Sterling fell to its lowest level since July 8 before the weekend.   A persuading break of the low established then (~$15330) could spur an additional drop into the $1.5180-$1.5200 area. Sterling shut below its 100-day moving typical (~$1.5480) for the first time since early May.  It has spent most of the last two months above the 200-day moving typical (~$1.5370) as well.  On the weekly graphs, sterling posted a large outside lower week, which is a bearish development.  On the top side, the $1.5450 area ought to offer resistance.

The Australian buck tested a monthly trend collection dating back to 2001.  It is near $0.7025.  Assisted by a head and shoulders bottom on the hourly bar charts, the Aussie dollar bounced a little through $0.7200 before the sellers re-emerged.  It ceased shy of the measuring objective of the head and shoulders pattern, which seems to reflect the aggressiveness of the bears.  Even though there is no expectation that the RBA may cut rates when it fulfills on September 1, they’ll likely not rule out the next cut.  A rate cut gets to be more likely if the currency stops falling.  Look for another check on the $0.7000-$0.7025 support. 

Canada's basic principles are poor and this appeared to outweigh the recovery within oil prices.  In addition, the US two-year premium over Canada recouped most of the ground it had lost earlier in the 7 days. Canada expects to statement a contraction in Q2 Gross domestic product in the coming days and a softening of the labor market in August.  The US dollar's pullback in the CAD1.3355 spike on August Twenty five fizzled near CAD1.3140.   Another run at the highs looks likely.  Over the longer term, we look for the Australian dollar to fall towards $0.6000 and the US buck to rise toward CAD1.40.

Oil costs staged a strong rebounded in the other half of last week after falling to $37.75 on August 24.  The bounce carried the October light crude futures contract to $45.25, which completes a Sixty one.8% retracement of the slide in prices since July 29.  The next objective is near $46.Eighty and then $48.00.  There is great momentum, and the October contract finished the week above it’s 20-day moving average (~$42.95) for the first time since June 23.  The October contract posted a possible key reversal on the weekly bar charts.  It made a new multi-year low early in the week and then proceeded to rally, taking out the previous week's highs.  It closed at its highest level since the finish of July. 

The 10-year US Treasury yield plunged to 1.90% in the stress at the start of last week.  As markets calmed and economic information, including durable goods purchases and a sharp upward revision to Q2 GDP helped yields recover by 30 bp before consolidating.  Some link the rise in US yields to selling by Chinese authorities.  While we do not rule out a few Treasury sales, we suspect exaggeration, as is the market's wont.

Note that the TIC data, which is not complete, but authoritative, shows China's holdings of US Treasuries rose by about $27 bln in H1 14, the most recent data.  The Federal Book custody holdings of Treasuries with regard to foreign officials rose through about $26 bln this month, which includes $9 bln liquidation over the past two weeks.  We assume yields can move back into the 2.20%-2.25% range.  A stronger barrier in yields may be closer to 2.33%. 

The S&P 500 recoup half of what it lost once you have registered the record high on August 18 near 2103 to the panic low near 1867 on July 24-25.  That retracement is near 85.  Small penetration of this did take place, but buying grew shy ahead of the 2000 tag.  The 61.8% retracement is close to 2013, and additional resistance is likely near 2050.   Support is incorporated in the 1940-1945 area.  While the technical factors appear constructive, with a potential bullish hammer candlestick design on the weekly charts, advancements in overseas markets are a wild card. 

Observations based on speculative positioning in the futures market: 

1.  The actual CFTC reporting week ending July 25 saw large swings in currency prices and several significant (10k contracts or even more) adjustments of speculative yucky futures positions.  The gross long euro and yen positions jumped 19.3k contracts (to 87.8k) and 14k (in order to 59.9k) respectively.  A Thirty seven.1k contract decline in the risky gross short position displays a powerful short squeeze. 

2.  The actual gross short Australian dollar position jumped by 13.6k contracts to 111.0k, which makes it the second largest gross short position after the euro.  The euro's gross short position cut by 7.3k contracts, departing 153.9k still short.  The gross short Mexican peso position jumped by 18.4k contracts to 103.5k. 

3.  Although there were minor adjustments in the speculative gross sterling placement, they were sufficient to switch the net position from short in order to long for the first time since Sept 2014.  The bulls added 6k contracts towards the gross long position, that now stands at 58.1k contracts.  The bears cut the gross short placement by 1.2k contracts, leaving 54.8k.  The net lengthy position stands at 3.3k contracts. 

4.  The general pattern was adding to longs and cutting shorts for the euro, yen, and sterling.  Speculators added to gross short Canadian and Australian dollar positions and the Mexican peso.  Speculators trimmed gross wishes of these currencies, except for the Canadian dollar.

5.  Given the following price action over the July 26-28, we suspect that some of these new positions were unwound in the euro and yen.  Sterling drop in the second half of last week warns that some of the late longs may have also been reduce.  Sentiment still appears extremely negative toward the dollar-bloc. 

6.  The web long US 10-year Treasury futures tucked to 1.3k contracts from 7.3k.  Gross longs and pants were cut.  The bulls sold 58.4k contracts, leaving the actual gross long position from 395.2k contracts. The has covered 52.4k gross brief contracts, leaving 393.9k. 

7.  The net lengthy speculative light sweet oil futures positions were pared through 5k contracts, leaving 215.6k.  Given the large movement in prices, it is surprising to see exactly how small of a position adjustment took place.  The longs added 1k contracts, lifting the yucky position to 474.2k contracts.  The bears trimmed their own gross position by 4k agreements, leaving 215.6k.

The Dollar: Now What? is republished with permission from Marc to Market

The capital markets are quieter today.  Equities remain heavy, however losses are comparatively moderate.  Core bond yields are slightly softer.  The US dollar is firmer against the major and most emerging market currencies. 

The news stream is light and the focus before the ECB meeting tomorrow is the US ADP work estimate.  Expect a 200k increase after 185k in July.  The Bloomberg consensus is for a 218k rise in nonfarm payrolls when reported on Fri. 

The EIA energy report also will draw attention.  The crude stockpile expects to rise by 900k barrels.  Even when US production is not what it really was estimated under the prior methodology, output is still popular higher than consumption.  Last week's run-up to almost $50 a barrel for that Oct light sweet raw contract is a distant memory.  The nearly $1 loss today brings the contract to nearly $43.50, which is a 50% retracement of the rally off the spike low on August Twenty-four.  The next retracement level is near $42.15.

Australia reported Q2 growth had been half of what the consensus anticipated at 02% on the quarter.  The actual Australian dollar was pressed below $.7000 for the first time in six years.  It recovered to $0.7050 were it had been sold again.  A break of $0.6980 focuses on $0.6950.  On Thursday, Australia reviews retail sales and trade figures.  The derivatives markets are pricing in about a 50% chance of a November rate reduce. 

The UK reported a under expected improvement in building PMI.  The August studying stands at 57.Three, up from 57.One in July, but shy of the 57.5 consensus forecast.  Sterling has under-performed this week, despite BOE'utes Carney signaling higher rates in the UK at Jackson Hole last weekend. After the Aussie and Kiwi's 2% reduction over the past three sessions, sterling may be the weakest of the majors, shedding about 0.75%.  It has been pushed via $1.53 for the first time since earlier June.  The initial approach associated with support near $1.5250 has sparked some buying.  It that much cla goes, stronger support is near $1.5200. 

Chinese markets, which ostensibly have been the source of the increased volatility, are now closed till next Monday. President Xi offers put much importance ultimately of WWII celebration in China. Production was slowed or halted around Beijing to reduce the pollution.  Even though some reports had suggested large-scale treatment in the equity market might cease, the guiding hands of officials was still regarded as present in order to provide a few element of stability ahead of the special event. The key then is what occurs next week. 

We have argued the seemingly policy confusion is a reflection of a political struggle within China. We suggested the concentration of power by Xi means the curbing of the Leading Li.  Li is being associated with the large-scale intervention in the stock market that has failed to originate to the tide.  Xi has upped the ante by rebuking the Youth League, which is a main political faction.  Li's roots are with the League.  Xi criticized them to be out of touch and apparently trying to block Xi's changes. 

Separately, yesterday Hong Kong Monetary Authority intervened the other day to prevent the Hong Kong dollar from appreciated through the top of its peg.  The intervention was the very first since April.  Officials verified selling about HKD15.5 bln (~$2 bln) to protect the HKD7.75 level. The US dollar remained pinned there these days, suggesting the possibility of more intervention.  Official confirmation has not yet been provided. 

Reports suggest that because 2009, there have been eight occasions in which the S&P 500 offers lost more than 2% on the first trading day of a new 30 days.  The market finished the 30 days higher each time.  Twice the gain was less than 1%, as well as twice the gain had been more than 10%.  Three times the monthly gain was between 5.9% and 6.7%.  The remaining time, the market finished 2.35% higher. 

The euro is finding assistance near $1.1240.  On the topside, initial opposition is near $1.1320. Yesterday's higher was near $1.1330.  The 38.2% retracement of the move from $1.1715 on August 24 to $1.1155 on July 28 is near $1.1370. 

The dollar recorded a low near JPY119.20 late in North America the other day and has since recovered toward JPY120.50.  While the euro offers retraced almost a third of its losses, the yen has retraced 50% at JPY119.15.  A move above JPY120.Fifty today likely requires increases in the S&P 500 as well as firmer US yields.

Calmer Markets but Sense of Foreboding still Powerful is republished with permission through Marc to Market

According to Dan Steinbock, the internationalisation of the renminbi is actually accelerating. The inclusion from the yuan in the IMF basket of reserves is now a matter of time.

On July 11, the People’s Bank of China (PBOC) adjusted the actual exchange rate of the Chinese language renminbi (RMB) against the US dollar to reflect market conditions. The net impact was a devaluation of 1.9% in accordance with the dollar.

The adjustment had been an effort to comply with the requirements the International Monetary Account (IMF) to include the yuan in the book currency basket. The move towards a more market-determined rate is what the IMF and the US Treasury, along with European financial authorities, have been asking for.

It aligns well with Beijing’utes effort to speed up the RMB internationalisation.

The Renminbi Goes International

Today, China is the world’s biggest exporter and the second-largest economy in the world in absolute terms. At the end of last year, the RMB moved into the fifth position in global payments, but still accounts barely over 2% of the international payments total. However, its explosive possible reflects its rise as a settlement currency for China’s global trade to 23% by early 2015.

Until the global financial crisis, the RMB had little exposure to worldwide markets because of government controls that prohibited almost all exports from the currency, or its use within international transactions. In the era of Xi Jinping and Li Keqiang, China is rebalancing toward consumption and development, and Beijing is fostering the RMB’s rise in worldwide finance.

After China joined the planet Trade Organization (WTO) in Mid 2001 and exports truly took off, the actual RMB has evolved as an international currency for paying for goods and services. Within this era – roughly, the 2000s before the global crisis – foreign multinationals invested in China, but Chinese foreign investment was minimal.

In the 2nd stage – the first half of the actual 2010s – China consolidated its part as the world’s trading engine. As Chinese capital is actually increasingly going out, leading Chinese brands, from ICT (Lenovo, Huawei, Tencent, Alibaba, China Cellular) to financial institutions (ICBC, China Construction Bank, Agricultural Bank associated with China, Bank of The far east) to oil and gas (Sinopec, PetroChina) are becoming familiar abroad.  Further, the RMB’s role is expanding as a currency for worldwide investment.  Concurrently, the number of Chinese vacationing overseas has soared in order to 117 million.

In the third stage, the actual RMB seeks to achieve a new status as a reserve currency with sovereign governments. That is where we’re today. The transition will not occur without friction. All major international currencies – the US dollar, Euro, British sterling as well as Japanese yen – have experienced their share of growth discomfort.

The summer turmoil in the Chinese equity markets reflects these types of transitional challenges. In early The year 2013, I predicted the impending boom in the Chinese markets. Within mid-June, that boom resulted in a serious correction. Despite volatility, the potential of Chinese market prevails.

RMB Monetary Channels

The internationalisation of the RMB also benefits from the actual steady expansion of new RMB cleaning banks, which provide direct access to RMB liquidity in China, while contributing to the expansion of offshore RMB.

The launch of the Shanghai-Hong Kong Stock Connect – the cross-boundary investment channel which connects the two markets – has boosted the growth of trading volumes, along with Shanghai’s Free Trade Zone (FTZ), which is paving way to new FTZ reforms in other cities.

Despite initial specialized challenges and the Chinese stock market correction, the China Worldwide Payment System (CIPS) expects a fall introduction. Scaled down, its use will be for cross-border yuan trade deals.

There are almost an estimated $500 billion of RMB bilateral currency swaps – agreements between two nations to ensure access to each other’utes currency if needed – in China and more than 30 countries.

These efforts are complemented by the launch from the massive “One Belt, 1 Road” regional initiatives in China’utes regional proximity and internationally.

After years of hollow reform promises by the G7 nations, China can also be taking a more proactive role in global finance, with the BRICS New Development Bank and also the Asian Infrastructure Investment Bank (AIIB). Despite initial US resistance, the AIIB took off dramatically last spring, especially after the UK joined the bank, which provided the way for other EU economies.

Emergence of RMB Commodity Trading

Intriguingly, the dominant role of the dollar in global commodity pricing evolved in the 1970s once the US dominance began to deteriorate. When America became an energy importer, it grew more dependent on the leading oil producers. As the Middle East’s oil economies opted for the dollar because payment currency, the petrodollar era came to rest on financial and strategic relations (oil for US dollars and military aid).

Until recently, these arrangements have enhanced US geopolitical might in the Middle East, including Washington’s ties with Saudi Arabia. However, as the US shale revolution became popular and China’s role as the largest buyer has steadily increased in the region, the old status quo is gradually eroding.

While the actual dollar remains the dominant forex for most commodities, China’s part in international commodity trade has increased dramatically. It is the biggest consumer of iron ore, zinc oxide, lead and copper. In the coming years, increasing share of commodity trade is likely to cost in RMB, as evidenced through the emergence of RMB-denominated contracts upon exchanges in Chinese cities.

As the world’s largest customer and producer of precious metal, China also hopes to lead to determining gold prices. Just three years ago, Hong Kong Exchanges and Clearing bought the London Metals Exchange, while Shanghai is going to launch an RMB-denominated gold-index.

In the future, item prices are likely to gravitate towards the RMB and other large emerging-economy currencies.

The $1 Trillion Dollar Reserve-currency Decision

The RMB’s route to a major reserve currency includes economic and geopolitical challenges. In the past, the value of the currency has caused major debates. These ended in May, when the IMF reported that the RMB was valued, while advocating Beijing to develop a flying exchange rate within 3 years.

Nevertheless, US Congress and the Treasury still argue that the RMB should be buying and selling at higher levels from the dollar, due to China’s industry surplus, the plunge associated with oil prices, and rising Chinese productivity. These quarrels are no longer persuasive, however.

The trigger for the fall of oil prices was the US shale trend and the Middle East’s overcapacity. The US has had regional trade deficits for decades with East Asia (first with Japan, then with the Asian tiger financial systems, and more recently with China). In addition, in the decade just before recent turmoil, the RMB appreciated 30% against the dollar.

According to China’s central bank, foreign central banks held over $110 million in RMB-denominated assets in April. Despite rapid RMB expansion, the actual starting-point is low. In 2014, complete foreign exchange reserves amounted to more than $6 trillion.

Today, the RMB satisfies most basic preconditions of a reserve forex. China has become the second-largest economy on the planet. Second, the RMB has evolved within an environment of low inflation, small budget deficits and stable growth. Third, an upswing of the RMB as major book currency relies on strong institutional support. The fourth condition requires deep, open and well-regulated capital marketplaces, which is why China is speeding up financial reforms. In April, Beijing pledged that the capital account liberalisation would occur after the year.

China had hoped the RMB could be in the IMF’s container by January 1, 2016. Nevertheless, in early August, they requested the IMF to delay its RMB inclusion until September 2016. The timing matters. Before the summer, Standard Chartered and AXA Investment Managers estimated that at least $1 trillion of worldwide reserves would switch in to Chinese assets when the IMF encourages the RMB as a reserve forex.

Toward Multiple-currency Reserves

In nominal terms, the size of the Chinese economy is likely to exceed those of the US in the 2020s. However, dimensions are not everything. While the US economy surpassed that of Britain in the late 19^th century, sterling remained the preferred currency in international commerce and the dominant device for investments and sovereign reserves well into the early 20^th hundred years.

Things began to change after The first world war, when the dollar surged within trade finance. As traders began to move from sterling to dollar and central banks started to expand their dollar reserves, the stage was set for a transition.

In the past half a decade, the RMB has achieved dramatic progress in commodities, trade, investment and sovereign reserves. It is increasingly central to item trading. The RMB’s catch-up using the Japanese yen and the British pound will take longer – and even longer, to gain parity using the dollar and the euro, which still represent 45% and 28% associated with international payments, respectively.

Nevertheless, the actual RMB’s role as a main reserve currency is now a matter of time. In the short-term, the changeover means increasing market unpredictability. In the medium-term, it has potential to support China’s rebalancing and thus growth potential customers globally.

The RMB will be the first emerging-economy currency that will join the sovereign supplies. In that role, it will lead way to other major emerging-economy currencies in the future.

The Internationalisation of the Renminbi is republished along with permission from The Difference Group

The emission scandal at the world's second largest automaker, Volkswagen, offers reportedly "rocked" the German politics and business elites.  Some possess argued that it will rival the actual refugee challenge for Germany.  Other people have argued that it is a supply of euro weakness.

To be sure, Volkswagen is the not first car maker caught manipulating its emissions tests. Ford did a similar thing with its vans in The late nineties.  Hyundai and Kia compensated $100 mln in fines last year for fixing their tests.

This is not to justify in any way what Volkswagen has done, but simply to note that there is no precedent for this turning into some sort of systemic crisis.  One should not exaggerate its impact on the euro's exchange rate.  First, consider the euro-dollar's correlation using the DAX.  Conducting the correlation around the percentage change finds the actual correlation is -0.39 over the past 60 days and -0.45 over the past 30 days.  However, the inverse relationship is greater between the euro and also the S&P 500 than it is using the DAX at -0.52 and -0.Sixty for the past 60 and 30 days respectively.

Second, here is a Great Graphic (made up on Blomberg) that shows the performance of Volkswagen ADR (whitened line) and the euro-dollar exchange price (yellow line).  The dinar rallied strongly in April through mid-May, while Volkswagen shares continued to trend lower.  Similarly, in the first part of 06, the euro appreciated without an interruption of Volkswagen's downtrend.  This particular happened again in late July.  When news of the scandal first broke, the euro had been coming off from its post-FOMC rebound.  

Just because the Volkswagen scandal may not have larger capital market implications doesn’t take away from the gravitas of the situation.  Volkswagen employs 270k workers straight and even more indirectly through its suppliers.  The German car sector employs 775k people.  Autos and parts are the biggest German exports accounting for about 20% of roughly 200 bln euros.

The good from US authorities may be a maximum of $18 bln.  There are also other lawful costs, including likely penalties from other authorities.  In addition, there are costs associated with the recall.  There may also brand costs and increased costs of production to fix the problem, let alone expenses associated with tougher regulation, which will be a probable consequence.  In terms of valuation, the market cap is lower by a little more than 20 bln euros.  The German auto industry also encounters headwinds from the Russian sanctions and also the slowdown in China.

More broadly, the scandal comes at a time when many Germans find themselves in a crossroads.  Through the financial crisis and the sovereign debt crisis, Germany emerged as the regional hegemon, though many Germans would not accept that label.  Yet it is clear that France has been unable to match German economic prowess or competitor it for leadership within Europe, even if still may command key appointments in the multilateral institutions.  

Germany was widely criticized for wanting strict enforcement of the controlling treaties associated with EMU, especially on fiscal exchanges.  After losing a election at the ECB, the Bundesbank participated in a finish run to the European Court of Justice.  The ECJ overruled the Bundesbank's objections.  Germany has additionally received criticism from the European union, the IMF, and the US because of its large current account surplus and the lack of stimulus to help offset the austerity in the periphery.  Most recently, criticism has been over displaying flexibility over the rules for its unilateral overture to take 800,000 refugees. 

The Vokswagen scandal is much more embarrassing for the German model and conceit of rules-based society than material for the German brand.  Germany's two fears, being isolated or blamed for that destruction of Europe, is not at play here.  However, the German export associated with schadenfreude is fully in play.

Volkswagen and the Euro: Preliminary Ideas is republished with permission from Marc to Market

There were three significant risky gross position adjustment one of the currency futures in the Commitment of Traders reporting week ending November 3.  They were all expanding the gross short positions. Speculators additional 30.9k contracts to raise the gross short dinar position to 207.2k.  It’s risen by 69k contracts in the past two weeks.

The bears increased the web short yen position through 14.9k contracts to Eighty five.3k.  In the past two weeks, it has elevated by nearly 33k contracts.  The actual gross short Swiss franc position doubled to 24.8k contracts. This is the biggest jump in more than four years. 

The jump in the yucky short franc position was adequate to swing the net placement from long 1.5k agreements to short 7.0k contracts.  Speculators were net really miss two weeks.  In contrast, speculators tend to be remain net long sterling futures, albeit marginally so (0.2k  contracts).  However, given sterling razor-sharp slide in recent times, many likely wished they had sold more. 

Speculators added to gross short currency positions with minor exceptions in the Canada and New Zealand dollars.  Because of the newfound dollar bullishness, this is not surprising.  What’s surprising is that speculators additionally added to gross long currency futures positions.

There were 2 minor exceptions, sterling, and the Canadian dollar, both slipped with a little more than 2k contracts.  The actual gross long peso position rose less by less than Twenty contracts, which we curved to zero.  

The bears designed a significant stand in US Treasury futures.  The gross short placement jumped by 87.3k contracts, the most since March 2011, to 570.9k.  The bulls pared back, reducing 10% of gross long placement or 41.3k contracts in order to 406.6k.

Since the end of the reporting period, the December 10-year note dropped a full point.  The net short position jumped to 164.3k contracts from -35.6k.  It is the third 7 days of net shorts.  In the middle of October, speculators were transporting a net long position (Seventeen.7k contracts). 

Speculators in the oil market pulled back.  Both longs and shorts were trimmed.  The actual longs were shaved by Six.2k contracts, leaving 493.4k.  Almost 16k gross short contracts were covered.  The bears are holding on to 247.2k short connections.  The net long position increased by 9.6k contracts to 246.2k.

Observations on the Speculative Placement in the Futures Market is republished with permission from Marc to Market