Hedgebook releases cloud-based derivative valuation tool to help auditors with IFRS 13

Today Hedgebook announced the launch of Hedgebook Audit, an online derivative valuation tool designed specifically for use by auditors.

Hedgebook CEO Richard Eaddy says “we’ve had a number of conversations with CA firms around the world and it became evident that most simply do not have access to the tools they need to calculate or validate fair values of even vanilla currency, interest rate or commodity derivatives.”

“The implementation of IFRS 13. and the rigour that this brings to the calculation of fair values, means that the requirement for truly independent valuations is greater than ever. Bank supplied valuations just don’t cut it anymore” says Eaddy.

IFRS 13 was implemented at the start of 2013 and defines fair value on the basis of an ‘exit price’ notion and uses a ‘fair value hierarchy’, which results in a market-based measurement.

“We’ve worked closely with key personnel within audit teams to understand what this means to them and what their requirements are. They recognise that their processes are going to need to change so we have developed Hedgebook Audit based on the insights that these interactions generated.”

Hedgebook Audit is a cloud-hosted application that gives audit teams access to accurate, independent fair values for a large range of currency, interest rate and commodity instruments, whether in the office or out in the field. A client’s portfolio is recorded in the system and can then be valued quickly either individually or as an entire portfolio.

Australia’s Reliance on China Puts Aussie at Risk

The Reserve Bank of Australia cut its key benchmark interest rate to 2.75% at its policy meeting in May, underscoring the fragility of the Australian economy as it remains heavily reliant on emerging market growth for support.

Now, with rates at all-time lows, it’s a good moment to reflect on why we’re in the current predicament. After all, dovish monetary policy is only implemented when worries of an economic slowdown persist. The RBA has been cutting rates furiously since November 2011, when its main rate was 4.75%. Yet despite these efforts, the following chart raises two major concerns for Australia.

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Over the past two years, after the AUDUSD peak near $1.1100 in the summer of 2011, the RBA began an aggressive easing cycle that continues today. Yet over this time, the AUDUSD (yellow line) has remained relatively stable – in the past twelve months, it has traded in a roughly 5% band, between 1.0100 and 1.0600.

What hasn’t remained stable has been Australia’s unemployment rate, which has shot up six-tenths of point over the same time frame. Despite several rate cuts the past few years, Australia’s unemployment rate has increased from 4.9% in April 2011 to 5.6% in March 2013, the highest rate since November 2009.

While volatile labor market readings the past several months have unnerved policy officials, such activity is likely to continue as the mining sector peaks, which according to the RBA and government officials should be this year. That’s why the chart above is concerning: the RBA has already done a great deal to help insulate the economy from a slowing China (discussed in the previous post) and yet the labor market is still suffering.

The other concern raised about the Australian Dollar is the fact that it is one of the few major currencies that offers any semblance of yield. With risk appetite buoyant in recent months, this “reaching for yield,” as Fed Chairman Ben Bernanke has described it, has pushed up the prices of Australian (and New Zealand) sovereign debt.

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This perspective feeds back into the discussion from an earlier post on “currency wars.” Investor decisions are being altered because of non-standard monetary policies across the globe, forcing secondary policymakers and consumers (like those in Australia and New Zealand) to change their behavior.

To combat the flow into the Aussie and Australian debt, the RBA recently suggested that the high exchange rate of the Australian Dollar has become problematic: the Aussie “has been little changed at a historically high level over the past 18 months, which is unusual given the decline in export prices and interest rates.” Just like the RBNZ, the RBA is being forced to engage in a loose form of competitive devaluation by repeatedly cutting rates and talking down the exchange rate of its currency.



Year of the Snake: Not the year for strong Chinese growth

As China gets ready to overtake the United States as the world’s largest economy during the middle of the current decade, leaders have had to lead a tricky transition from a centrally-planned state to a free market. A major part of that task is to fill out the middle class that would support a consumption-based economy. But with base metal prices falling and the commodity currencies losing value in recent weeks, concerns over the Chinese growth picture have been stirred.

There’s one major caveat to Chinese data that is truly inapplicable to any other global economic force: you just don’t know if you can trust it. Chinese data seemingly comes out of a black box, where Chinese government readings of the economy tend to outpace private sector readings, or even eclipse foreign government estimates of economic activity.

One recent prominent example of this manipulation emerged in early-May when Chinese trade data showed an incongruent jump in exports despite declining orders to both Europe and the United States, China’s two largest markets. This discrepancy isn’t just our observation. According to researcher IHS Inc. via Sprott Group, “an “astounding” +92.9% jump in exports to Hong Kong, the most in 18 years, raises questions on data quality.”

Putting away our tinfoil hats for a moment, even if there’s no misinformation afoot, Chinese growth is slowing down. Presently, there are no indications from Chinese policymakers that they will try and stimulate their way out of this spell of moderation. Given recent rhetoric, it’s very unlikely that any such measures are taken at all, now or over the rest of 2013.

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The days of “ultra-high speed” growth were in the past, Chinese President Xi Jinping said in early-April. Similar sentiment was promoted by Prime Minister Li Keqiang, who has said that China may have to accept annual growth rates below +7.0% in the coming years. Recent gauges of manufacturing activity suggest that 2Q’13 growth might edge lower towards +7.5% annualized. The HSBC services PMI index fell to 51.1 in April from 54.3 in March, suggesting that the slowdown is not just limited to the manufacturing sector. If there’s one indicator that may confirm these views, it is the Chinese Consumer Price Index.

The chart above illustrates the annualized Chinese inflation rate (yellow) against annualized Chinese GDP (white). The slowdown in Chinese growth accelerated in mid-2011 once price pressures started to fall, a sign that overall demand in the economy was weakening. Now, inflation has fallen by around four percent, tracking GDP’s diminished rate of +7.7% annualized from near +10.0% just two years earlier.

While it appears that the market and policymakers are going to push Chinese growth lower, the ripples these waves will create will be exceptionally important for the global economy. Already, signs of slowing Chinese growth have negatively impacted the Australian economy, where policymakers cut the main rate to a record low 2.75% in May.

The reasons behind the Reserve Bank of Australia’s rate cut are critically important, and are why we believe that, thanks to China, the Australian Dollar could suffer in mid-2013.