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Digital pound “likely before 2030” – Industry roundup: 7 February

Digital pound likely before 2030, says UK Treasury

A state-backed digital pound is likely to be launched before the end of the 2020s, according to the UK Treasury and the Bank of England (BoE). Both institutions say they want to ensure the British public can access safe money that is easy to use in the digital age.

UK Chancellor Jeremy Hunt said that the planned central-bank digital currency (CBDC) could be a new “trusted and accessible” way to pay, although it will not be built until 2025 at the earliest. “We want to investigate what is possible first, whilst always making sure we protect financial stability,” he added.

The Treasury and the BoE will formally start a consultation for the digital currency from today. They stress that cryptocurrencies such as Bitcoin and Ethereum are not backed by a central bank and the value can be highly volatile. By contrast, although a BoE-backed digital pound would employ similar technology, it would be stable. Ten digital pounds would always be worth the same as £10 in cash, the Treasury stresses.

In 2021, when still in the post of Chancellor, Prime Minister Rishi Sunak asked the BoE to look into backing a digital pound. Last October, his Financial Service Minister Andrew Griffith warned a lengthy delay could create problems for the British economy.

Andrew Bailey, the BoE’s governor, said: “The case for a digital pound in the future continues to grow. A digital pound would provide a new way to pay, help businesses, maintain trust in money and better protect financial stability.”

However, a note of dissent has come from the House of Lords economics committee, which has stated that there is yet to be a “convincing case” for the creation of a digital pound, which could also involve “significant challenges for financial stability and the protection of privacy”.

Roubini predicts that China will end dollar’s dominance

The Chinese yuan (CNY) poses a threat to US dollar dominance, according to Nouriel Roubini, the celebrated economist who has been dubbed “Doctor Doom”. in a column written for the Financial Times he predicts the emergence of a bipolar global currency regime developing as a result of the intensifying geopolitical contest between the world’s two biggest economies.

Roubini, chief economist at Atlas Capital Team, has established a reputation for pessimistic forecasts. He says that as the world becomes ever more split between US and Chinese influence, “it is likely that a bipolar, rather than a multipolar, currency regime will eventually replace the unipolar one.”

While sceptics typically caution that China’s rigid currency controls should prevent the yuan from overtaking the dollar, the US has its own version that “reduce the appeal of dollar assets among foes and relative friends.

“These include financial sanctions against its rivals, restrictions to inward investment in many national security-sensitive sectors and firms, and even secondary sanctions against friends who violate the primary ones,” Roubini writes.

Since last February the US and its Western allies have frozen Russia’s foreign exchange reserves and expelled it from the SWIFT financial system. In addition, the Biden administration has sought to cut off China's access to key technologies and investment that could aid its military.

Other recent efforts to undermine the dollar’s dominance include Russia and China opening talks to develop a new reserve currency with other emerging economies in the BRICS group as well as an effort by Russia and Iran to create a cryptocurrency backed by gold.

In addition China and Saudi Arabia transacted for oil in yuan in December, Roubini said, and “it is not farfetched to think that Beijing could offer the Saudis and other Gulf Co-operation Council (GCC) petrostates the ability to trade oil in renminbi (RMB) and to hold a greater share of their reserves in the Chinese currency.” Other analysts have forecast that the rise of a so-called petroyuan will gain momentum as China leverages its status as the world’s biggest oil importer.

In addition, Roubini predicts that the growing interest in central bank digital currencies (CBDCs) will help accelerate dollar's erosion as a global reserve currency over the next decade. “The intensifying geopolitical contest between Washington and Beijing will inevitably be felt in a bipolar global reserve currency regime as well," he writes.

However, another economist, Paul Krugman counters that investors shouldn’t lose sleep over potential threats to the dollar’s dominance. The Nobel Prize-winner wrote in the New York Times that he doesn’t expect to see the greenback displaced as the major currency for international trade anytime soon.

Fluctuating dollar raises US companies’ hedging costs

Volatile global currencies have impacted corporate earnings in the past year, and while forex markets have calmed more recently, some companies are looking to guard profits and lower hedging costs, reports Reuters

Last September currency volatility drove the J.P. Morgan VXY G7 Index to its highest in more than two years. Volatility is still elevated at 10.1, above a 10-year average of 8.34.

Currency gyrations hit major corporates such as IBM, which cited FX in reporting a US$3.5 billion decrease in its 2022 revenue in Q4 earnings, while Facebook parent Meta Platforms said its US$32.2 billion revenue last quarter would have been US$2 billion more but for currency headwinds.

In Q3 2022, North American and European companies reported US$47.18 billion in negative currency impacts, 26% more than the loss in Q2, according to Kyriba’s latest Quarterly Currency Impact Report.

“FX volatility is a critical concern for corporate CEOs and their finance chiefs even as the (dollar) has weakened against... other currencies that US corporates are exposed to,” said Andy Gage, senior vice-president of FX solutions and advisory at Kyriba.

The dollar has slipped by more than 7% against a basket of currencies over the past three months, having reached a 20-year high in 2022. Although welcome news for companies looking to regain some of last year’s losses, “volatility remains especially concerning as organisations finalise year-end reporting and prepare guidance for 2023,” said Gage.

A strong dollar means income earned overseas for US-based companies is worth less when converted and makes American exports less competitive. Although the dollar has pared its gains, strategists expect more gyrations in currency markets this year, as central banks adjust monetary policies to fight inflation.

Volatility, which causes wider bid-ask spreads and makes hedging more expensive, is causing companies to reassess their hedging programmes, Reuters reports.

Companies typically use FX forwards to lock in future exchange rates to minimise currency risks, allowing them to agree an exchange rate ahead of time. The Federal Reserve’s aggressive hiking of US rates has seen forward points increase across many currency pairs containing USD, said Amol Dhargalkar, managing partner and chairman at Chatham Financial.

“There's a psychology and a desire not to lock in lows or highs, depending on which direction you're going on the currency,” said Dhargalkar.

Some companies are using options to protect against losses caused by exchange rates. This could mean they will benefit if currency fluctuations work in their favour. Abhishek Sachdev, CEO at the UK’s Vedanta Hedging, said 30% more of his mid-market clients are using options than a year ago.

Australia lifts interest rate to 3.35%

Australia’s central bank has announced a further hike increase in interest rates, extending the record run of hikes to nine meetings in a row as it tries to tame inflation, and indicated there are “further increases” to come.

At its first board meeting of 2023 the Reserve Bank of Australia (RBA) raised its cash rate by 25 basis points (bps) to 3.35%, its highest level in just over a decade. Most economists had predicted such an increase.

“Global inflation remains very high” RBA governor Philip Lowe said in the accompanying statement.

“It is, however, moderating in response to lower energy prices, the resolution of supply-chain problems and the tightening of monetary policy,” Lowe said. “It will be some time, though, before inflation is back to target rates.”

The RBA began hiking rates last May, when a 25 bps increase took it from just 0.10% to 0.35%.

Lowe said he anticipates more rate hikes to come as inflation remains stubbornly high at 7.8%, and the RBA is “resolute” on returning the rate to 2% to 3%. “The Board expects that further increases in interest rates will be needed over the months ahead to ensure that inflation returns to target and that this period of high inflation is only temporary,” he said.

“In assessing how much further interest rates need to increase, the Board will be paying close attention to developments in the global economy, trends in household spending and the outlook for inflation and the labour market. The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.”

Renewed period of bond scarcity looms in Europe

Early indications point to traders bracing for another period of bond scarcity in Europe that could blunt the impact of monetary tightening, according to a Bloomberg report.

Concerns centre on the likelihood that the European Central Bank (ECB) won’t extend a waiver on a 0% remuneration cap for government deposits that expires on 30 April. The report suggests that could drive some of the €390 billion of cash held by national Treasuries into higher-yielding money markets, where safe securities such as government bonds are used as collateral, pushing down rates.

Strategists at Société Générale, Bank of America and Commerzbank believe that traders may already be preparing for that eventuality and hedging their risk. Last month the premium that investors are willing to pay for German two-year bonds over equivalent swaps increased for the first time since September, bucking a broader trend in repo markets.

An extension of the waiver is “no longer being perceived as a foregone conclusion by the market,” Commerzbank strategists wrote in a note to clients, alerting them to the divergence.

The 0% cap was initially introduced to encourage governments to place deposits on the market, and to assuage concerns around potential monetary financing. The restriction was temporarily removed last September to help the ECB ensure that its rate hikes filtered through the real economy in a time of collateral scarcity.

Money market conditions subsequently improved, with German two-year asset-swap spread falling over 50 basis points (bps) from September’s peak. Some suggest this should be enough for the ECB to adhere to its plan to encourage governments to find alternative arrangements to central bank deposits while others, including JPMorgan Chase, think officials will likely opt to avoid any risk of market disruption.

“Our discussions with investors in December and early January suggested that not many were preparing for the return to 0% remuneration by the end of April,” Sphia Salim, head of European rates strategy at Bank of America wrote in a note, adding that recently those “views seemed to evolve.”

The report suggests that an ECB meeting on 16 March may bring clarity on the cap, but until then “the market should continue to price a risk premium in the swap spreads,” Société Générale strategists recommended to clients. They estimate markets are pricing in around a 33% chance of the ECB reinstating the cap.

The ECB hasn’t indicated whether it intends to prolong the waiver. After the cap was temporarily removed last year, Chief Economist Philip Lane said officials were “attentive” to the collateral scarcity concern.

Any signals that the cap will be reinstated as originally planned are likely to cause “strong” swap spread widening, according to Commerzbank.

Royal Golden Eagle closes US$550 million sustainability-linked derivative with MUFG

Singapore-based Royal Golden Eagle (RGE) has closed its sustainability-linked derivative (SLD) with MUFG Bank, a first for both the pulp, paper and palm oil giant and the bank.

The US$550 million SLD enabled RGE’s member company Apical, a vegetable oil processor, to partially hedge the interest rate risk of US$787 million of sustainability-linked loans (SLLs) it secured last November. It enables Apical to fix its interest rate for US$550 million of its loan for a period of two years, amid a rising rate environment.

Similar to other sustainability-linked financial products, corporates taking up SLDs have to pay a higher rate if it does not meet their pre-defined sustainability key performance indicators (KPIs).

Having an SLD tagged to its SLL potentially exposes RGE to a double whammy if it fails to meet its sustainability targets. The group would not only have to pay a higher rate on their SLLs, but also face a step-up rate for this SLD.

RGE’s KPIs include raising the level of verified traceability to its plantations, increasing engagement of suppliers to promote sustainable practices and traceability, increasing the number of Roundtable on Sustainable Palm Oil certifications among smallholder farmers, and reducing greenhouse gas emissions through methane-capture facilities.

Tey Wei Lin, president of RGE, said the company opted for this financing tool, which imposes a second penalty if they do not meet their targets, because “it facilitates an even greater level of accountability from (them)”.

“We are confident that we will deliver on our commitments. Sustainability is at the core of our business, and it has to be a company-wide effort. The SLD helps to further align our teams across the company to deliver on our targets, while hedging our interest rate exposure,” he said.

However, unlike sustainability-linked loans and bonds, where borrowers and issuers benefit from lower interest or coupon rates for meeting their sustainability targets, RGE’s SLD is structured such that there are no step-down rates even if they do so.

While there may not be a direct commercial benefit from taking up SLDs, Nick Yee managing director at MUFG and head of global client solutions sales for Asean, Indian and Oceania says that companies may experience a boost in their reputation on environmental, social and governance (ESG) factors, as banks would view such clients as being committed to their sustainability KPIs. He noted, however, that the bank can structure SLDs with the step-down rate feature for clients who prefer such options.

Yee adds that SLDs are a relatively new financing tool, of which many corporate clients in Asia are unaware. While the bank is seeing more interest among clients in taking up interest rate swaps due to the rising rate environment, a majority of these are not SLDs, even among corporates with SLLs. However, Yee expects interest in SLDs to grow.

London “tops league of crypto-ready cities”

An assessment of eight key indicators including taxes, ATMs, jobs and events in crypto, points to London as the most crypto-ready city in the world for businesses and start-ups according to research conducted by crypto tax software provider Recap.

The UK capital is joined in this year’s “top three” by Dubai and New York. However, Hong Kong, which was positioned as the most crypto-ready location in 2022, fell to seventh place in the latest research, which named the 20 leading locations as follows:.

1.       London, UK

2.       Dubai, Unted Arab Emirates

3.       New York, USA

4.       Singapore

5.       Los Angeles, USA

6.       Zug, Switzerland

7.       Hong Kong

8.       Paris, France

9.       Vancouver, Canada

10.   Bangkok, Thailand

11.   Chicago, USA

12.   Berlin, Germany

13.   Sapporo, Japan.

14.   Lagos, Nigeria

15.   Lisbon, Portugal

16.   Kuwait City, Kuwait

17.   Tehran, Iran

18.   Sydney, Australia

19.   Osaka, Japan

20.   Kuala Lumpur, Malaysia

Key factors considered in the study include the total number of crypto-specific events, crypto-related jobs, crypto-specific companies and the number of crypto ATMs. Some of the non-crypto considerations include quality of life, research and development spending as a percentage of gross domestic product and capital gains tax rate.

London is home to the most people working in crypto-related jobs — an indication of higher interest among the general public in the crypto ecosystem. However, other cities overshadow London in some metrics, strengthening the case for the global adoption of cryptocurrencies.

Standard Chartered wins regulatory approval for China securities arm

Standard Chartered Bank (Hong Kong) has received in-principle approval from China Securities Regulatory Commission (CSRC) to establish a securities unit in mainland China. The move will see the creation of Standard Chartered Securities (China), which will have renminbi (RMB) 1.05billion (US$155.69 million) of capital injection initially.

The Beijing-based firm will offer underwriting, asset management solutions to asset-driven securities as well as own-account trading and brokerage services. It will also provide onshore and offshore clients with various solutions associated with Chinese onshore capital markets.

Standard Chartered head of financial markets in Asia John Tan will serve as chairman-designate of Standard Chartered Securities (China), while Grace Geng will be appointed as CEO-designate of the firm.

The latest clearance represents the first of its kind approval granted by CSRC to establish an onshore securities firm, wholly-owned by a foreign entity through greenfield investment after China removed ownership constraints for foreign financial firms in 2020.

Last month, CSRC reportedly granted approval to both Standard Chartered and American banking JPMorgan to set up fully-owned joint ventures (JVs) in China.

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