Digital disruption in the Treasury Management System space

There is a digital revolution going on in the treasury management system space, not that you would necessarily know.  For many there is still a stark choice – over-priced, over-complex and over-engineered treasury systems or good old Excel spreadsheets. But the world is changing and as with all things technology, it is happening at a rapid pace.

Globally, larger organisations are well catered for as far as treasury management systems are concerned, and in fact it is a crowded and mature market. The PwC Global Treasury Survey of 2014 showed that 80% of those companies surveyed were using some type of treasury management system. However, as with big ERP systems, the issue for the providers of large, expensive treasury systems is how to offer a cost-effective alternative to the massive SME market without detrimentally affecting their existing market. The challenge is to offer a slimmed down treasury management system without compromising the huge premium that they currently charge.

So where is the competition for these large, expensive systems coming from? The answer is the cloud app revolution which is sweeping the world. Platforms are being developed that aggregate a whole bunch of cloud apps, both financial and non-financial. The really clever bit is the integration of these different apps and bringing it all together through a variety of widgets and dashboards to give a complete, and often unique, view of a company’s position. It’s like a Fitbit for business.

Not only are these cloud app aggregators bringing leading edge technology to the SME market but they are doing so for small monthly fees. The apps cross the spectrum of business tools such as accounting systems, CRMs, social media tools and now treasury management systems. All of this for a few hundred dollars a month.

In the on-line accounting world, Xero is leading the charge in the digital disruption revolution with its New Zealand developed, $50 per month product. Treasury systems will need to follow suit with a much cheaper solution.

By leveraging cloud technology, treasury systems can be implemented for costs palatable to the underserviced SME market. There is an enormous amount of importers and exporters hedging their foreign cashflows with forward exchange contracts and possibly FX options. These companies probably aren’t hedge accounting, even if they are reporting under IFRS, but the impact of exchange rate movements is vitally important to their bottom line.

SMEs require the ability to record, report and value their transactions but just as importantly they want access to tools to help them make better hedging decisions. This is not too different from larger companies except SMEs are mostly using plain vanilla instruments. For a small monthly fee SMEs can benefit from a treasury management system with basic functionality, which integrates perfectly with other cloud based apps. So as we have seen with cloud based accounting systems, the power that was once reserved for large organisations can be put in the hands of a much larger group for a fraction of the cost.

Whether the current treasury management system providers have a solution for the SME market remains to be seen. It maybe that they do not care for this part of the market, however there are parallels with the large and expensive ERP systems which have successfully moved into the mid-market space and are now looking at the next tier down. The conundrum for treasury management system providers will be that SMEs will desire the core functionality of a larger system but without the price tag. The digital revolution for treasury management systems may only be in its infancy but it is set to have major ramifications regardless of the size of organisation.

First published on Treasury Insider (www.treasuryinsider.com)

Know your position: FX Volatility, friend or foe?

The FX market is no stranger to volatility. Whether it is global economic or political uncertainties, or a country’s interest rate outlook, they all play out in the currency markets. The constant push and pull of both known and unknown information can lead to bouts of extreme volatility. FX traders love volatility. There are plenty of opportunities to enter and exit positions and make money. FX trading is not for the faint hearted however, it is easier to lose money than it is to make it. But how do businesses that are buying or selling goods and services in foreign currencies navigate their way through the challenges of managing FX risk? FX trading is not a core function for most businesses but yet the impact of the FX market can make or break a financial year. I have witnessed businesses being wiped out due to adverse FX movements such as the commodity exporter that saw commodity prices plummet at the same time as the FX rate soar, a catastrophic combination. On the other hand I have seen a business live to trade another year because it was sitting on significant gains from in-the-money FX hedges that were cashed up to offset the losses suffered in the core business.

There is a plethora of risk management approaches to FX risk. To start with there is the philosophical debate about whether to hedge or not. Some would say that it is a zero-sum game in the long run i.e. periods of currency strength will be offset by periods of weakness, therefore, there is no incentive to hedge, just live with the swings and roundabouts of the prevailing spot rate. Of course the question is whether a business can sustain periods of adverse currency movements long enough to stay in business and enjoy the good times. For those that do participate in FX hedging there are questions of how much to hedge, when to hedge, which financial instrument to use?

The NZD/AUD exchange rate in the last few months has demonstrated massive volatility strengthening 10c (>10%) in less than six months. For years the NZD was extremely weak against the high flying AUD. As every other economy was cutting interest rates following the GFC the Aussies were just digging up more of its natural resources and selling it to China. The global recession did not come to Australia. More recently there has been a significant change in the Australian economic outlook. Current account surplus has turned to deficit as its trading partners have slowed, forcing the Reserve Bank to loosen monetary policy. At the same time the better performing NZ economy has been able to sustain a removal of the post-recession super loose monetary policy conditions. As shown below the interest rate differential of NZ and Australia remains a clear influence on the exchange rate.

Aussie int rate diffs

 

The importance of the Australian economy to New Zealand means that there are a lot of NZ companies exporting to Australia that are having to manage the NZD/AUD exchange rate. Everyone has a view – some you pay for (treasury advisors, consultants) some you don’t (bankers, taxi drivers) but they all have one thing in common – nobody knows the future direction of FX rates. That’s not to say taking advice (paid for or otherwise) is not relevant. No advice will be right all of the time but so long as the view is well considered and relevant to your business then it is hard to be critical after the fact with the benefit of hindsight. Hedging buys a business the necessary time to adjust selling prices or supply contracts to the new FX level.

A fundamental aspect of FX hedging decisions is to quantify and understand the impact of FX movements on the business. By regularly making and updating foreign cashflow forecasts, capturing existing hedging in place and understanding the impact of FX movements on the unhedged component of foreign cashflows, a company is in a much better position to make informed hedging decisions. Whether it is a budget rate or a costing rate to protect knowing your position is essential for making better FX hedging decisions. One thing is certain – FX markets will always be volatile – the question is whether a company has enough visibility on its current position to make sound decisions about the future. Hedgebook is a tool that can help give a company the visibility it needs to make informed FX hedging decisions.

 

Using Hedgebook to make smart fx hedging decisions

Has anyone told you lately that they know where the currency is going? Lots of people think they know if it is going up or down but the reality is that no one knows where it is going in the next 5 minutes, 5 days or 5 years. We might all be able to have an educated guess but that is all it is – a guess.

As a former risk manager I know how hard it is to advise corporates on the risks around fx management. I can remember going to a potential client and explaining to the owner of the business the importance of having a treasury policy and why you should follow it. We could add value in helping with the strategic decisions and the instruments to use but by the way we can’t pick the currency because no one really knows where it is going and we don’t try to. After listening to all this sage advice the owner turned to us and asked what use were we to him if we didn’t know where the currency was going? End of meeting.

It is true no one can pick where the currency is heading. What is important is:

  • Understanding the impact on your business when foreign exchange rates move.
  • Knowing the impact on budget rates or costing rates when foreign exchange rates move.
  • Knowing whether the business can afford to not cover i.e. if exchange rates go any further against you are you losing too much margin or indeed are you out of business.

Having the ability to compare the amount of foreign exchange hedging in place with the impact of exchange rate movements on the uncovered portion is vital information in making rational decisions in an irrational market.

Whilst we can’t pick currencies at Hedgebook (we are still working on that one) we can tell you the impact on your business if rates go up or down. We can tell you in dollars and cents what the impact will be  on unhedged foreign cashflows, what the exchange rate needs to be to achieve the budget or costing rate and what the value of existing hedges are.

Today’s fx risk management isn’t about picking exchange rates but about giving businesses greater visibility over its foreign exchange position. This allows for smarter foreign exchange hedging decisions using all available information. Sometimes the information isn’t what you want to hear but at least you don’t need to hope that things go your way. You can avoid the knee jerk decision – and chuck out the crystal ball.

Hedge accounting fx options: time versus intrinsic value

FX options make up an element of many companies fx risk management strategies. FX options lock in the certainty of worst case exchange rate outcomes while allowing participation in favourable rate movements. In my experience, companies are often reluctant to write out a cheque for the premium so for many the preferred strategy is collar options. A collar option involves writing, or selling, an fx option simultaneously as buying the fx option in order to reduce premium, often to zero.

After transacting the fx option, the challenge comes for those that are hedge accounting and the requirement to split the valuation of the fx option into time value and intrinsic value. IAS 39 allows the intrinsic value of an fx option to be designated in a hedge relationship and can therefore remain on the balance sheet. The time value of the fx option is recognised through profit or loss.

The intrinsic value of an fx option is the difference between the prevailing market forward rate for the expiry of the fx option versus the strike price. We can use an Australian based exporter to the US as an example. In our example the exporter forward hedged US$1 million of export receipts six months ago (the USD income is due to be received in three months’ time). At the time of hedging the AUD/USD rate was 0.8750 and the nine month forward rate was 0.8580. The company chose to hedge with a nine month zero cost collar[1] (ZCC). Six months’ ago the ZCC might have been as follows:

  • Option 1: Bought USD Put / AUD Call at a strike of 0.9000
  • Option 2: Sold AUD Put / USD Call expiring at a strike of 0.8000

AUD USD

The intrinsic value of each leg of the collar will be determined by the difference in the forward rate at valuation date versus the strike rates. For option 1, the bought option, if the forward rate is above the strike of 0.9000 then the fx option will have positive intrinsic value i.e. it is “in-the-money”. It is important to note that the intrinsic value of a bought fx option cannot be negative. The purchaser, or holder, of the fx option has all of the rights and would not choose to exercise the fx option if the market rate was below the strike price. They would simply choose to walk away from the fx option, let it expire worthless, and transact at the lower market rate.

For the sold fx option the opposite is true. If the forward rate is below the strike price (less than 0.8000 in our example) then the exporter, as the writer of the option, will be exercised upon and the difference between the market rate and the strike rate will be negative intrinsic value. Intrinsic value of a sold fx option cannot be positive.

The time value of an fx option is the difference between the overall fx option valuation and the intrinsic value. By definition, time value is a function of the time left to the expiry of the fx option. The longer the time to expiry, the higher the time value as there is a greater probability of the fx option being exercised. A purchased fx option begins life with positive time value that decays over time to zero. A sold fx option begins life with negative time value and tends to zero by expiry date.

When hedge accounting for fx options the splitting of intrinsic value (balance sheet) and time value (P&L) does not have to be a time consuming exercise. At Hedgebook we like to make life easy so as part of the FX Options Held Report the valuations are automatically split by intrinsic value and time value. The screen shot below shows the HedgebookPro output using our Aussie exporter example. With the significant weakening of the AUD in the last six months we see the zero intrinsic value of the bought option at a strike of 0.9000 and very little time value as there is little chance of the AUD strengthening to above 0.9000 by the time the option expires by 30 June. The sold fx option has a large, negative intrinsic value. The exporter will be exercised upon and have to convert the US$1 million of receipts at AUD/USD 0.8000 versus a market rate of closer to 0.7600. There is a small amount of negative time value.

HedgebookPro FX Options Held Report  

FX Options Held Intrinsic_Time

HedgebookPro’s easy to use Treasury Management System calculates fx option valuations split into intrinsic and time value. This simplifies life for those that already use fx options and hedge account, whilst removing obstacles to hedge accounting for those that perceive the accounting requirements as too hard.

The IASB is looking to remove the requirement to split fx option valuations into intrinsic and time components which will simplify the hedge accounting process further, however, currently this appears to be a 2018 story, unless companies choose to adopt early. In the meantime, HedgebookPro provides an easy to use system to ease the pain of hedge accounting fx options.

[1] Premium received from the sold option offsets the premium paid on the bought option.

Infoscan – economical access to financial market data

At Hedgebook we are committed to providing economical solutions to assist the treasury function. Our low cost software, HedgebookPro, provides a treasury management system (“TMS”) entry point for companies that have historically relied on spreadsheets to manage their foreign exchange and interest rate exposures. HedgebookPro is also an alternative for companies that already use a TMS to capture their vanilla derivatives and feel they do not use the full functionality offered by these larger and more expensive systems.

We take a similar approach to financial market data through our company Infoscan. Hedgebook purchased the Infoscan business 12 or so months ago as it is a natural fit for Hedgebook. Many New Zealand market participants of a certain age will remember the Infoscan pagers – they carried a certain cachet at the time! Data is delivered to smartphones these days.

Many companies with exposure to foreign exchange and interest rate markets cannot justify the cost of a Bloomberg or Thomson Reuters product. Websites are OK for accessing spot fx rates on a rough and ready basis but are unsatisfactory for providing the required comfort when entering into larger derivative transactions. Infoscan gives users the visibility over real-time market spot fx rates but, more critically, the fx forward market too. As mentioned, free websites can give an indication of spot rates but accessing accurate forward point information is harder to ascertain.

Whether transacting a new FEC, or adjusting an existing one through pre-deliveries and extensions, it is important for decision makers to have good information at hand regarding the prevailing forward market. Transparency of the forward points provides greater confidence that a competitive market rate is achieved.

Infoscan can deliver data in a number of ways either through a website login or, alternatively, directly into spreadsheets. Like HedgebookPro the market data functionality is delivered in a no fuss, low cost manner and helps enhance fx conversion rates.

FX management and a good night’s sleep

How hard is it really to manage your foreign exchange positions? Often we over think it and probably over-complicate things at the same time. Sure if you are a large corporate with many and varied risks it isn’t easy but for most it can be pretty straightforward. You are either an importer or an exporter. Maybe you can offset some receipts or payments or maybe you can’t but generally you should be looking at managing your net position. That would be a good start to simplifying things.

Next, no matter how big you are you should have a treasury policy that tells you what instruments you can use, who you can deal with and any parameters you need to keep within e.g. Minimum and maximum hedging levels. Generally you should be able to deal with fx forwards and vanilla options. Of course many corporates will only do options if they don’t have to write a cheque, so probably it’s only fx forwards and zero-cost collars.

Ideally you would have two banks to deal with to keep some competitive tension and online dealing platforms are more common now so you don’t even need to ring up the bank to do the deal. You might want to for some advice or to remind the dealer that you are available for the rugby next week. What’s important with currencies though is the medium term trend, not what is going to happen in the next 24 hours.

You should have some parameters to keep within that reflect your business risks and competitive situation. Despite what some may tell you no-one knows where the currencies are going so it makes sense to carry minimum amounts of cover just in case you, your advisor or bank is wrong. Budget rates and costing rates are important to keep front of mind. No one will thank you for protecting the budget rate but everyone will point the finger if you don’t.

We live in an age of information overload so don’t get bogged down on too much detail. Everyone will have a different story on where the currency is going and why. Form your own view on the basis of your own business. If you are unprofitable at a certain level then make sure you have as much cover as possible if it gets close to those key rates. If you know your competitor is covering everything on a short term basis you might need to reflect this in your own policy.

It is also really important to keep an accurate record of your positions and hedges. Not just for yourself to make the right decisions but also to easily report where you are to senior management. For whatever reason everyone seems to have a view on where the currency is going and happy to tell you when you get it wrong. Having good controls and recording mechanisms in this area will give others in the organisation confidence in the way you are managing a sensitive part of the business. They might just ask a few less questions too!

I am not saying currency hedging is easy, far from it, but it shouldn’t keep you up at night either if you follow some basic guidelines and principles.

IFRS 7 – Disclosure Requirements of Financial Instruments

A key pillar of Hedgebook’s ethos is to make life easier for corporates in managing and reporting their financial derivative exposures. This approach extends to aiding Treasurers and CFOs comply with the ever increasing compliance requirements of accounting standards. The most recent standard to create further onus on corporates is the CVA requirements of IFRS 13. We have discussed IFRS 13 on numerous occasions via this blog (and will continue to do so!)

However, the focus of this blog post is the disclosures required by IFRS 7 and specifically the quantitative disclosures in assessing the risks faced by an entity in regards to its financial instruments. Quantifying the risks is demonstrated via a sensitivity analysis.

The Hedgebook application allows a user to perform sensitivity analyses on foreign exchange and interest rate positions at the press of a button and in doing so helps achieve compliance to IFRS 7 as simply and efficiently as possible. These numbers can be included directly into the Notes to the Financial Statements.

Interest Rate Swaps

There is a report within the suite of Hedgebook interest rate reports called the IR Sensitivity Report. A user is able to run the sensitivity analysis in three easy steps:

–          select the appropriate interest rate swap portfolio or individual deals

–          select the valuation date and currency

–          run the IR Sensitivity Report

The Hedgebook app produces the fair value per instrument based on the valuation date zero curve and also the fair values following pre-defined shifts in the yield curve.

Using the 31 March 2014 AUD zero curve as an example, the chart below shows the actual zero curve plus the alternative yield curves that are applied to the swap portfolio:

Sensitivity analysis

The zero curve is flexed by a parallel shift of +/-50, +/-100 and +/-200 basis points. The output of the report is the hypothetical fair value of each transaction under the aforementioned yield curves. The analysis provides information about the extent to which the entity is exposed to risk. The subsequent Hedgebook report can be printed, copied into a document or downloaded to excel for inclusion in the Notes to the Financial Statements.

Foreign exchange

Hedgebook’s sensitivity analysis for fx instruments follows a similar vein to interest rates. The fx curve (spot plus forwards) is flexed by a +/-1%, +/-5%, +/-10% and +/-20% to derive the hypothetical valuations. The subsequent Hedgebook report can be printed, copied into a document or downloaded to excel for inclusion in the Notes to the Financial Statements.

Summary

As regulatory and compliance requirements continue to increase it is important that corporates find ways to increase efficiency and find alternative ways to complete increasing workloads without increasing personnel. A low cost system such as Hedgebook allows senior members of the finance team to focus on added value tasks and not become encumbered by compliance requirements that can be automated such as sensitivity analyses for IFRS 7 disclosure requirements.

Calculating fx forward points

A common misunderstanding we often encounter relates to the calculation of foreign exchange forward points. Foreign exchange forward points are the time value adjustment made to the spot rate to reflect a future date. The forward foreign exchange market is very deep and liquid and is used by an array of participants for trading and hedging purposes. In the corporate world many importers and exporters hedge future foreign currency commitments or forecasts using forward exchange contracts (FECs).

The table below shows a selection of the forward points and outright rates for a number of currency pairs:

Forward points

Table 1: Forward points and outright rates

For example the NZD/USD 1-year forward points are currently -270, while the NZD/USD spot rate is 0.8325. Therefore, at today’s rates a forward rate of 0.8325 – 0.0270 = 0.8055 can be secured for a commitment or forecast in one year’s time. But how did the NZD/USD 1-year forward points come to be -270? The common misunderstanding is that they are traded like the spot rate i.e. based on currency traders’ views for the outlook of a currency’s fundamentals. This is incorrect. FX points are mathematically derived by the prevailing interest rate markets. Using our example of the NZD/USD 1-year forward points the -270 is a result of the 1-year US and NZ interest rate outlook. The NZD/USD is a good example because of the significant interest rate differentials between the two currencies. The aggressive monetary easing policies in the US have resulted in an extremely low interest rate environment. This contrasts with NZ which although has interest rates at historically low levels, they remain well above those of the US. The chart below shows the NZ interest rate yield curve versus the US and the corresponding fx forward points.

NZ and US int rates and fx points

Chart 1: NZ and US interest rates and the NZD/USD forward points

The interest rate market is telling us that the US 1-year swap rate is 0.25% while in NZ it is 3.45%. So how does this equate to -270 fx points?

Example

USD1,000,000 at a spot rate of 0.8325 = NZD1,201,201

If USD1,000,000 is invested for one year at a US interest rate of 0.25% per annum, at the end of one year USD1,000,000 is USD1,002,500.

If NZD1,201,201 is invested for one year at a NZ interest rate of 3.45% per annum, at the end of one year NZD1,201,201 is NZD1,242,643.

The equivalent exchange rate is NZD1,242,643 divided by USD1,002,500 = 0.8067.

0.8067 – 0.8325 = -0.0258 (or -258 fx points in the parlance of the fx markets).

The bid/ask spread of the fx and interest rate markets accounts for the 12 fx point balance. The example serves to provide a “back of the envelope” guide to calculating fx forward points and outright rates.

Even though the calculation of the forward points is mathematically derived from the interest rate market, interest rates themselves are the market’s expectation of the outlook for an economy’s fundamentals i.e. subjective. Therefore the fx forward points are derived from traders positioning on interest rate differentials.

Exporters from countries with higher interest rate environments such as New Zealand and Australia benefit from the negative forward points, while it is a cost to importers. An exporter wants a weak base currency so large negative forward points are an economic advantage. With an upward sloping interest rate yield curve (or more correctly positive interest rate differential) forward points will be more negative the longer the time horizon.

An importer wants a strong currency therefore negative forward points are detrimental to the hedged conversion rate. The impact of negative forward points is a reason that exporters often have longer term hedging horizons compared to importers because the impact of forward points are not penal.

Forward exchange contracts are therefore a flexible, and relatively easy to understand, hedging tool that is commonly used to bring certainty to those grappling with foreign exchange exposures and the volatility of the financial markets.

Scope for Recovery by Australian Dollar Limited as Labor Suffers

The Reserve Bank of Australia cut its key benchmark interest rate to a record low 2.50% earlier this year, highlighting the central bank’s concerns over the sensitivity of the Australian economy to turmoil in emerging markets.

When discussing Australia at the turn of the year, we suggested that: “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.”

These concerns were well-informed, as the Australian labor market has only deteriorated over the course of the year, forcing the Reserve Bank of Australia to cut its main interest rate to a record low of 2.50% at its August policy meeting. This is a significant step lower from the 4.75% rate employed as recently as November 2011; an aggressive rate cut cycle the RBA has employed, indeed.

Nevertheless, it’s evident that concerns surrounding Australia will continue. The country’s most important sector, mining, continues to show signs of slowdown, and government advisors have reluctantly admitted that the global commodity supercycle – driven by rapidly growing emerging markets – may be finished.

We continue to believe that the changing economic climate of Australia will play a negative influence on the Australian Dollar. The labor market remains a primary concern, and has proven to be a major negative influence on the Australian Dollar in recent months:

AUDUSD_unemployment

Over the past two-plus years, after the AUDUSD peak near $1.1100 in the summer of 2011, the RBA’s aggressive easing cycle, in part to help soothe fears over the labor distress, has driven the AUDUSD down to its lowest exchange rate since September 2010, below $0.9000 in August.

Further pressure on the Australian labor market, and thus the Australian Dollar, seems likely. Whereas the AUDUSD was quite stable near $1.0500 for several months while labor markets deteriorated, it’s clear that reality has set in. Despite several rate cuts since November 2011, Australia’s unemployment rate has increased from 4.9% in April 2011 to 5.8% in August 2013, the highest rate since August 2009.

Scope for recovery in the labor market is limited at best as long as the commodity cycle slowdown persists. Data compiled by the RBA in August showed that base metals prices, perhaps most indicative of economic strength in the mining sector, sunk to their lowest level since late-2009 by midyear, an ominous sign considering the time before prices had reached that level it was on the way lower by another 30% amid the global financial crisis of 2008.

RBA CPI

Base metals prices continue to be the guiding light for Australia – and should they remain subdued going forward, we suspect that dovish guidance will remain in place at the RBA, serving as a consistent, bearish influence on the Aussie for the remainder of 2013.

Steel, iron ore and coking coal

Chinese Growth Slows, Hurting Regional Trade Partners

Our last update on the Chinese economy expressed concerns over the future path of growth. The transition to the free market from a centrally-planned state has proven to be difficult as the government fights financial and political corruption, a growing middle class, and international pressure to liberalize its currency, the Yuan.

Chinese growth is slowing, but there’s nothing that the once frequently interventionist government is going to do about it. In part, growth slowed alongside lending activity, as the People’s Bank of China has maintained tighter monetary conditions for two main reasons: as it attempts to weed out illegal and corrupt banking practices that take place off companies’ balance sheets, “shadow banking.”

If only to consider the scope of this problem, on June, the interbank lending rate, overnight SHIBOR (local equivalent to LIBOR), rose by an astounding 578-basis points to 13.4%. In comparison, the 1-week SHIBOR rate rose by 292-bps to 11.0%; this inversion of the SHIBOR curve is a strong indication of extremely tight credit conditions. Typically, yield curves invert when liquidity is a problem; the fall of 2008 was plagued by this issue in the United States in particular.

In our last post regarding Chinese growth, we said, in a ‘tongue-in-cheek’ manner, that “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.”

Were those views ever vindicated: in June, the Chinese government said that so-called arbitrage transactions distorted trade figures in a manner favorable to stronger growth. From Bloomberg: “The transactions “resulted in abnormal growth in mainland-Hong Kong trade for a few months” since the fourth quarter, Shen Danyang, a Commerce Ministry spokesman, said at a monthly briefing today in Beijing. “Even if these arbitrage trades are not necessarily illegal, they are not fully compliant with regulations. That’s why the government has been concerned about this.”

As the government faces these issues and more on the way to opening up the Chinese economy even further, it’s evident that any new policies will be geared towards a more regulated, transparent economy. Accordingly, to prevent fueling a housing bubble (which is a concern now), the government is unlikely to implement further fiscal stimulus in the near-term. This has and will leave the economy weak in 2013:

China GDP

As long as Chinese growth remains in a rut, global trade will remain dampened and hopes for broader global recovery will be teeter. An ongoing concern for Australian policymakers, signs of slowing Chinese growth continue to weigh on the economy, where the Reserve Bank of Australia cut the main rate to a record low 2.50% in August.

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 remain under pressure in the interim.