Haven Currency - Forex Article

The yen tends to gain during periods of financial stress as Japan’s export-reliant economy doesn’t need foreign capital to balance current accounts -- the broadest measure of trade. The currency has strengthened against all 16 of its most-traded peers this year, strengthening 4.2 percent against the dollar and 6.6 percent versus the euro.

Japanese officials sold at least 14.3 trillion yen this year to stem gains that cut profits for exporters from Toyota Motor Corp. to Nintendo Co., and Finance Minister Jun Azumi has pledged more action. Intervention in 2012 may fail again as financial turmoil attracts investors to the world’s third-most traded currency for its low volatility.

“When avoiding losses trumps profits during a period of risk aversion, low-volatility assets are very appealing,” Masashi Murata, a currency strategist in Tokyo at Brown Brothers Harriman & Co., said in an interview on Dec. 19. “When the U.S. and Europe moved in a bad direction and people wanted to avoid risk, the yen stood as the only currency that had enough liquidity to absorb demand.”

US Dollar declined as Seasonal Forces Taken over Market : Forex

The Australian and New Zealand Dollars outperformed overnight as stocks advanced, pulling the sentiment-linked currencies along for the ride. The MSCI Asia Pacific regional benchmark equity index added 0.6 percent, rebounding from a three-week low reached yesterday. The newswires attributed the move to better-than-expected US economic reports, arguing these boosted the outlook for export demand from the world’s top consumer market. Indeed, the New York Fed reported that manufacturers’ sentiment in its home state unexpectedly rose to the highest in seven months while the Philadelphia Fed’s gauge of business confidence printed at the strongest since April.

Although this narrative is compelling, a different dynamic seems to be at work. Indeed, S&P 500 stock index futures – a go-to proxy for overall risk appetite – found a bottom and began to climb at around 5:30 GMT yesterday, long before the US data set came across the wires (and well ahead of the unexpectedly strong Eurozone PMI figures as well, for that matter). Rather than any specific catalyst, we suspect seasonal factors are behind recent price action. While there has been no meaningful progress on resolving the Eurozone debt crisis or assuaging investors’ general unease with the increasingly dour outlook for global economic growth, there hasn’t been significant deterioration either beyond what investors were already aware of. This means that without fresh kindling to feed fires of risk aversion, a period of profit-taking and consolidation had scope to emerge by default.

The markets find themselves just ten days removed from the Christmas/New Year holiday period observed in most major financial centers, with most trend-defining scheduled event risk between now and 2012 already out of the way. As such, traders have likely turned their attention to squaring their books and starting to pack up for vacations, preferring not to force any major moves or over-commit to their positions until January. On balance, this suggests that barring a major change in the overall landscape (like a credit downgrade of a large European sovereign for example), a corrective bounce followed by consolidative sideways trade is the likely trajectory over the near term.

This is precisely the dynamic expected to be at work into the end of the trading week. The European economic calendar offers only low-tier releases. Elsewhere, US Consumer Price Index figures on tap later in the day are forecast to see both the headline and core inflation rates remain unchanged from the previous month in November, meaning investors are unlikely to derive any new insights vis-à-vis the Federal Reserve policy outlook from the outcome. Meanwhile, S&P 500 futures are trading 0.7 percent into positive territory, hinting the unwinding of risk-averse positions is set to continue to the detriment of the safe-haven US Dollar.

Forex Trading Rise and rise of citi's star

Few at Citigroup held out much hope when they asked a young Delhi economics graduate to sell foreign exchange products to the British tea companies of Calcutta in 1986. Their lack of optimism reflected Citi’s inability to break into the export market despite a century of operating in India.

But, within eight months of being handed the unenviable task of breaking the stranglehold British banks held over the local tea companies, Anil Prasad and the FX sales team he had built around him became main providers of foreign exchange services to the region’s tea exporters.

That early experience has stayed with Prasad, now Citi’s head of FX and emerging markets banking, the largest franchise of its kind in the world.

Prasad said: “It was the perfect insight into the importance of differentiating your service to meet a client’s individual priorities. I realised that if I could do business with them, I could do business with anyone. If you offer a superior level of service, even in a fully developed market such as FX, you can win business from anyone.”

That Prasad is the only FX chief in the FN100 Most Influential list of investment bankers says a great deal. From London, Prasad oversees 1,500 FX traders and salesmen, servicing 4,000 core banking clients across 81 countries. The scope of his successes – and his challenges – is immense.

After two years spent in his native India, Prasad moved to Citi’s New York options desk. “It was a great time to be in New York,” he recalls. “I learnt to appreciate the important role technology would come to play in improving a bank’s products.”

Prasad remembers pricing FX options contracts using Lotus’s Symphony software suite, in the days before Microsoft’s Excel came to dominate the financial markets. In the 1980s, there was still no accepted method of pricing options. For those able to recognise and realise new, technology-driven applications first in what was still a phone-traded market, Prasad recalls, there were rich rewards on offer.

Then came January 17, 1991 – the night of the first US sorties over Iraq during the Gulf War. Prasad recalls the markets being “very stressed”, decidedly risk-off in tone, with the dollar – then the world’s sole reserve currency and conventional safe haven in times of uncertainty – bid against every major currency pairing.

Prasad thought otherwise. He was of the opinion, he told his trading team, that the risk of a long conflict had been priced far too aggressively into the market by traders, and that the conflict was being inflated by political rhetoric on both sides. Prasad, then 27, and his team took the bold decision to flip Citi’s entire trade book, going short on the dollar and long risk assets.

When the news came back a few hours later, every US jet fighter had made a safe return. Risk assets rallied and the dollar slumped.

Prasad said: “We made a lot of money that night. The market derisked the entire war in one go. I learnt then the importance of always considering a contrarian stance.”

The following year, Prasad was promoted to head of options.

London calling

After a spell in prop trading at NatWest London during the late 1990s, Prasad rejoined Citi in the summer of 2000 as head of local trading for central and eastern Europe, the Middle East and Africa, rising to become head of sales and trading in 2004.

“I actually enjoy the challenge of building a business. It’s ultimately more fulfilling than simply trading,” he said.

In 2007, he was appointed to his current role of global head of FX and local markets. Prasad’s division has not been immune to job cuts in one of the industry’s worst years on record, with Citi making a number of FX trading and sales redundancies this summer, even before widespread layoffs were announced during the final quarter.

But the foreign exchange market – the nervous investor’s first port of call during volatile trading – still accounts for a huge chunk of the bank’s FICC revenues. Cumulatively, those revenues are still the largest on the street, coming in at $14.3bn last year, according to estimates by JP Morgan Cazenove. Citi’s fixed-income revenues also remained resilient during a dire third quarter for most banks.

Overseeing both the emerging market and FX businesses alongside one another has given Prasad a unique remit and a competitive advantage over his peers. Citi broke the mould for high-speed, market-moving research in 2009 when it launched CitiFX Wire, its new client-research portal, hiring journalists in local jurisdictions across dozens of countries to feed intelligence back to its strategic hubs in London and New York.

Bringing the weight of experience to bear on both business lines, Prasad emphasised the importance of having people on the ground in every major client jurisdiction, sizing up liquidity locally rather than from London.

And the approach already looks to be bearing fruit. Citi’s share of the non-financial corporate FX market rocketed by 26% during 2010, according to the annual foreign exchange survey of financial publisher Euromoney.

Plans to seal that dominance with a next-generation cross-asset trading platform, dubbed Citi Velocity 2.0, are already well under way, said Prasad. The platform – offering a host of customisable pre-trade analytics and trading tools for FX and Treasury bonds – will be rolled out to clients globally in January.

Global corporate FX dealing is where Citi remains streets ahead of its rivals, with a market share of 12.67%. The only other bank with a share in double figures is HSBC – another corporate banking giant with designs on becoming a global flow house.

Prasad is not losing any sleep over the competition though. He said: “To do emerging market FX well on a big scale requires more than most banks are willing to invest. It’s difficult to see anyone competing with Citi in a meaningful way in these markets. One of our biggest roles is our advisory capacity, and you need people on the ground in every market to do that. What edge do you have otherwise?

“It’s like servicing the British tea companies in Calcutta. If I offer superior service, I can break into any market.”