Forex Roundup: Bernanke, Schwab, Yuan

by Paul Springer

Federal Reserve Chairman Ben Bernanke hinted at further stimulus this morning, which naturally pushed currencies around in various ways for the short term. Action Forex reviews some of the immediate effects and considers broader reactions of more easing.

“We were not disappointed as his written testimony caused a sharp surge in risk appetite, boosting U.S. equities, and causing higher yielders such as the EUR and commodity currencies like the AUD and CAD to gain on the safe-haven USD,” Action Forex said.

Now Charles Schwab is jumping into the currency trading arena, but not in the typical way.

Schwab said in a statement today that it is teaming up with Broadridge Financial Solutions (BR), a provider of securities processing and business process outsourcing services for financial services firms. The arrangement is not designed for direct trading in currencies. Instead, investors will be able to trade in foreign issues in their local currencies.

“Key to these enhancements will be the launch of a robust, multi-country and multi-currency offering in Q1 2012, where Schwab clients can initially trade in 12 markets and eight currencies,” Schwab said in the statement.

If handled adroitly, trading in the local currencies could allow investors to avoid exchange-rate risk. If not, well, it’s one more way to go broke.

Speaking of broke, the Commodity Futures Trading Commmission alleged it was pretty easy to go that way with Vero Beach, Fla., resident David Ortiz and two of his Forex firms, Goyep International and Royal Returns. The commission says an investigation that started earlier in the year resulted in an order requiring Ortiz to return $1 million to customers who were defrauded in an off-exchange foreign currency scam.

Ortiz and his companies did not respond to the complaint until after the response deadline, the commission said in an order barring Ortiz. Ortiz allegedly lured customers with tales of 10% monthly returns. Old investors were sometimes paid Ponzi-style with new clients’ funds. Some $232,000 was went to “personal shopping at retail department stores, travel, resort hotels, restaurants, utility bills, car payments, and personal credit cards.”

Strange things can happen in the execution of Forex orders, and it’s well worth reading FXCMs “What FX Brokers Don’t Want You to Know.”

In currency news from Mongolia, The Wall Street Journal said it can be difficult to hedge against moves in currencies like the Mongolian Togrog. While the big banks tend to be pretty good at hedging obscure risks, the Journal says, microlenders face major challenges lending to people in country’s with currencies that don’t see a lot of trading.

The problem is, the countries that are poor enough to need microfinance lending usually have extremely illiquid currencies, which make them all but impossible to hedge against. Banks are afraid to send large sums of their currencies there because if the local currency suddenly devalues, the borrowers can’t pay back their loans and the lenders end up short.

Back in the U.S., CME Group says it is planning to offer futures contracts on the yuan near the end of August:

In order to meet growing global customer demand for products denominated in the Chinese currency, these innovative new futures contracts will be quoted in interbank (European) terms, reflecting the number of CNY per US dollar. These futures products are aligned with the OTC market convention for non-deliverable forwards while providing the benefits of counterparty risk mitigation from exchange-traded derivatives.

While trading in the yuan is attractive to institutions for a variety of reasons, CME is also offering contracts scaled to smaller players.

“In order to serve both the institutional as well as the retail market, CME Group will list both a full-sized USD/RMB (CNY) contract as well as an E-micro version,” CME said in its news release.

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