CHINA: BYD Doubling Derivatives Book is Further Reminder of Effects of FX Vol
Apr-25 13:36
Chinese (and Hong Kong-listed) carmaker BYD confirm they are to double their FX derivatives trading quota to $10bln. This is likely as a result of the recent spell of volatility in FX markets and a move to broaden hedging mandates, while serving as a further reminder that the lagged effect of market vol still poses risks to corporates ahead.
- Public data shows ~90% of all sales from Chinese exporters are settled in USD, so a sharp depreciation of the USD could expose onshore firms to tighter profits and be at greater risk of margin calls across their cumulative FX book.
- MNI's Policy team cited ex-SAFE official Guan Tao in writing that Chinese firms should hedge their USD risk by diversifying trade settlement currencies and avoid being harmed by a possible exit by investors from USD-denominated assets (see more here: https://www.mnimarkets.com/articles/mni-interview-chinese-firms-should-hedge-dollar-risk-guan-tao-1745331196004 )
- We noted earlier this week the effects of broad USD volatility are being keenly felt in the corporate world: UK AIM-listed currency risk management firm Argentex suspended trade in their shares after FX vols compromised their short-term liquidity position. Firms like Argentex sell FX hedging products including forwards and options to corporate clients, who are then subject to margin calls should markets move against their position. In turn, the firm hedges its cumulative exposure in the wholesale market via major banking partners - but are then exposed to the same margin call risk through times of volatility.
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US DATA: Gold-Adjusted GDPNow Due Today, ~2pp Impact
Mar-26 13:33
- Atlanta Fed’s GDPNow will be updated today and will also include a more formal “gold-adjusted” estimate now that we’re out of the FOMC media blackout.
- GDPNow’s Patrick Higgins wrote on LinkedIn on Mar 7 that its gold-adjusted figure would have been tracking at -0.4% for Q1 real GDP growth rather than -2.4% in its formal Mar 6 update. Alternatively, it would have been +0.4% rather than -1.6% in a post-payrolls intermediate update on Mar 7.
- We don’t see a reason why this 2pp gold adjustment will be revised in today’s update, which applying to the -1.8% in the latest update from Mar 18 would leave a gold-adjusted +0.2%.
- As a reminder, this gold adjustment is being made after a surge in monetary gold imports in January in what was seen primarily as an arbitrage play, with these non-productive assets captured in import data but not in GDP data.
- Tomorrow’s advance February report will only give a clue as to how much this has changed, in the broad “industrial supplies” category, before a much better idea with the full release on Apr 3.
- For now, Comex gold inventories climbed further in February (with a 25% increase through Feb after 47% through Jan) and indeed Bloomberg consensus currently eyes a goods trade deficit of $138bn in Feb, narrowing from $156bn in Jan but still above the $122bn in Dec and $104bn in Nov.
- Looking through some of these impacts rather than the more mechanical Atlanta Fed GDPNow approach, GS see Q1 real GDP tracking at 1.3% annualized. That’s still a sizeable moderation from the 2.35% in Q4 and 3.1% in Q3.
EUR: EURUSD Slides to Fresh Weekly Low Amid Supportive Greenback Tone
Mar-26 13:30
- A broader greenback bid sees EURUSD slide through the overnight/Tuesday lows of 1.0778/77 respectively, which extends the pair’s pullback from its recent high.
- The move down is still considered technically corrective at this juncture, and first support to watch is 1.0763, the 20-day EMA. Below here, more significant support is seen further out at 1.0631, a key short-term pivot level.
UK DMO UPDATE: "Programmatic gilt tenders" to be introduced for off-the-run gilt
Mar-26 13:27
- The DMO's remit notes that:
- "The DMO will be introducing programmatic gilt tenders in 2025-26 to assist with the delivery of the financing remit. It is envisaged that these operations will typically involve the sale of "off-the-run" gilts. The DMO will announce the planned dates of these gilt tender operations as part of its quarterly gilt issuance calendar and will typically include the type and maturity sector (for conventional gilts) of the gilt to be tendered in each case, taking into account market feedback both ahead of each quarter and, with respect to the identity of the gilt to be issued, closer to each tender date. Market participants will be consulted on the identity of the gilt and the maximum size to be offered at each individual gilt tender ahead of the planned gilt tender date. The gilt, nominal size, and scheduled tender date will typically be confirmed at least two business days prior to the planned tender date."
- We assume that this is the main reason behind the larger unallocated bucket.
- But what it means is there is actually LESS certainty that the unallocated bucket will end up in mediums / longs.
- Note that in the current fiscal year, the DMO held three tenders for the 0.125% Jan-26 gilt.This kind of operation may become more common if there is market demand.
- So shorts could actually end up being larger than announced here.
- We will know more on how the DMO plans to run this in the consultation agenda which is due out at 15:30GMT.
