Foreign Trade

The Foreign Exchange Joint Standing Committee (FX JSC) was established in 1973 under the auspices of the Bank of England, in the main part as a forum for banks and brokers to discuss broad market issues and the focus of the Committee's regular work remains issues of common concern to the different participants in the foreign exchange market. The Bank of England provides the Committee's Chairman and Secretary: they can be contacted on 020 7601 5982.One of the main responsibilities of the Committee is to maintain the Non-Investment Products Code. This is a voluntary code of good market practice which covers bullion, wholesale deposits as well as the FX market. It is maintained in conjunction with the Sterling Money Markets Liaison Group, the London Bullion Market Assosciation, and certain trade associations.The Committee includes senior staff from many of the major banks operating in the foreign exchange market in London, as well as from voice- and electronic-brokers, corporate users of the foreign exchange market, the Financial Services Authority (FSA) and representatives from the British Bankers' Association, the Association of Corporate Treasurers and the Wholesale Market Brokers' Association.The Bank of England's framework for its operations in the sterling money markets is designed to implement the Monetary Policy Committee (MPC)'s interest rate decisions while meeting the liquidity needs, and so contributing to the stability of, the banking system as a whole.The Bank of England is the sole issuer of sterling central bank money, the final, risk-free settlement asset in the United Kingdom. This enables the Bank to implement monetary policy and makes the framework for the Bank's monetary operations central to liquidity management in the banking system as a whole and by individual banks and building societies.The Bank's market operations have two Objectives, stemming from its monetary policy and financial stability responsibilities as the United Kingdom's central bank. They are:(i) To implement monetary policy by maintaining overnight market interest rates in line with Bank Rate, so that there is a flat risk-free money market yield curve to the next MPC decision date, and there is very little day-to-day or intraday volatility in market interest rates at maturities out to that horizon.(ii) To reduce the cost of of disruption to the liquidity and payment services supplied by commercial banks. The Bank does this by balancing the provision of liquidity insurance against the costs of creating incentives for banks to take greater risks, and subject to the need to avoid taking risk onto its balance sheet. The framework has four main elements:Reserves-averaging scheme. Eligible UK banks and building societies undertake to hold target balances (reserves) at the Bank on average over maintenance periods running from one MPC decision date until the next. If an average balance is within a range around the target, the balance is remunerated at Bank Rate. Operational Standing Facilities. Operational standing deposit and (collateralised) lending facilities are available to eligible UK banks and building societies. They may be used on demand. In normal circumstances, the lending / deposit rates are 25bp higher than Bank Rate and 25bp below Bank Rate respectively. A Discount Window Facility. This is a facility to provide liquidity insurance to the banking system. Eligible banks and building societies may borrow gilts, for up to 30 days, against a wide range of collateral in return for a fee, which will vary with the collateral used and the total size of borrowings. OMOs. Open market operations (OMOs) are used to provide to the banking system the amount of central bank money needed to enable reserve-scheme members, in aggregate, to achieve their reserves targets. OMOs comprise short-term repos at Bank Rate, long-term repos at market rates determined in variable-rate tenders and outright purchases of high-quality bonds.

Importance of forex.

Summary Outlook: On Friday, October 3rd, at 0830ET/1230GMT, US September employment data will be released. We expect the headline NFP number will come in roughly in line with consensus forecasts of -105K, but think the unemployment rate may edge up to 6.2/6.3% versus market expectations of a steady 6.1% unemployment rate. The risk is that the headline NFP shows a larger drop in jobs, potentially owing to strike- or hurricane-related adjustments. Interim economic data (weekly claims, labor differential in Consumer confidence report, ISM manufacturing employment dropping from 49.7 to 41.8) have shown a deterioration in overall labor market conditions, so the risks are clearly skewed to a weaker NFP. We would not be surprised by a NFP job loss of -150/-170K. And be alert for a negative revision to August NFP. But the NFP report is not the only show in town tomorrow, as markets will anxiously be watching to see if the US House can pass the financial sector rescue package. We are highly optimistic that additions to the Senate-passed bill will lead to the bill's passage, and we think this will be greeted enthusiastically by investors. The result could be a significant rally in stocks and a rush to riskier assets, which in FX means buying of JPY-crosses (e.g. EUR/JPY or AUD/JPY). The rescue package may also alleviate credit market strains, reducing demand for USD from bank funding needs. Trading Strategy: Because we think the risks are skewed to a weaker NFP reading, we anticipate an initially negative USD reaction. But we think USD strength this week is likely to see heavy buying of USD on such weakness, leading to a short-term reversal of the initial reaction. From then, we look for JPY-cross buying to materialize based on the prospect of House passage of the rescue bill. If correct, such buying should put a floor under non-JPY dollar pairs, like EUR/USD and GBP/USD. The rest of the session could then see a grind higher in the JPY-crosses, sending EUR/USD, GBP/USD and AUD/USD higher on the day, aided by week-end short-covering in EUR/USD/profit-taking on long USD positions. In concrete terms, a NFP reading of between -100K/-150K could see EUR/USD jump higher by 60-90 pips from pre-release levels, followed by heavy selling then sending the pair down 100-120 pips from its post-NFP reaction high. From there, we then expect that short-covering and outright buying of EUR/JPY will see EUR/USD grind higher. We will be closely watching a long-term trend line that guided the EUR higher since early 2002, currently at 1.3910/30 area. We would stop out (exit) of long EUR/USD positions if it trades below 1.3710/20, roughly 30 points below today's low. We think a short-squeeze higher in EUR/USD is likely on strength over 1.3950/60. Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

ICAP probes suspected forex fraud

The three ICAP staff are among 47 currency traders arrested in a high-profile swoop by the FBI last week.
ICAP said the trio had not traded on the firm's behalf, and added that its own finances appeared unaffected.
"I believe this to be just an isolated incident of three individuals," said ICAP chief executive Michael Spencer.
"I hope that the issue is resolved rapidly."
The lawyers hired by ICAP, an interdealer broker, are to investigate the full extent of the employees' alleged activity.
Arrests
The 47 currency traders detained in the FBI raid were later charged with a range of criminal offences, including fraud.
They include bank staff accused of taking kickbacks to rig transactions so that their employers would lose money, and "boiler room" operators who allegedly sold worthless investments to unsuspecting members of the public.
The FBI swoop netted employees of one other UK brokerage - Tullet Libery, a subsidiary of Collins Stewart - as well as staff at big name Wall Street banks including JP Morgan Chase and UBS.
The companies themselves are not under investigation.
ICAP's announcement came as it unveiled a 47% increase in first half pre-tax profits, and said it was confident of further growth in the month ahead.
"Market conditions remain good for ICAP, and our overall position is very strong," Mr Spencer said.
ICAP shares closed up 5p at £13.85.

Reserve Bank Governor

Reserve Bank Governor Gideon Gono told state media that its abuse had led to high black market prices.
Zimbabwe is facing an economic crisis with a chronic shortage of fuel and basic food stuffs.
Meanwhile, a government minister has warned financial institutions against lending to white farmers in case they are farming "illegally".
Some 4,000 white farmers have been evicted from their land since a controversial land reform programme began in 2000.
Land has been redistributed to some 150,000 black farmers but agricultural production has halved.
Apology
Mr Gono said the foreign currency coupon system, where certain garages accepted payment in foreign currency had initially worked well, but it had only ever been intended as a temporary measure, to reduce queues.

Robert Mugabe blames Zimbabwe's problems on a western plot"Some members of the public started to abuse the facility and used it for speculative and parallel market activities, thus militating against its main objective," he told the Sunday Mail newspaper.
He said he regretted any inconvenience, but it was being scrapped "for the best interest of the wider economy".
In the same paper, Land Reform Minister Didymus Mutasa accused Mr Gono's Reserve Bank and unspecified financial institutions of getting into contract farming with white farmers without checking their status on the farms with his ministry.
He said before any loan can be extended to a white farmer, his ministry needed to be consulted.
Mr Mutasa claims new black farmers are being sidelined on the grounds that they do not have collateral support, while white farmers are perceived to have the capacity to repay as they have title deeds.
President Robert Mugabe has always accused western countries led by former colonial power Britain of sabotaging the economy because of opposition to land reform

Foreign Exchange

India is replacing a controversial foreign exchange law with a more liberal act so as to encourage outside investment.
The old Foreign Exchange Regulation Act (Fera), which has now been revoked, was disliked by traders and businessmen who frequently criticised what they termed its harsh provisions.
Fera came into existence in 1973, and since then many top industrialists and businessmen fell foul of its provisions.
Suspects accused of violating the law were often detained for questioning, and faced the prospect of a prison sentence if they were found guilty.
Deregulation
But under the new Foreign Exchange Management Act (Fema), which comes into force on Thursday, suspected foreign exchange violations are treated as civil rather than criminal offences.
India is attracting more foreign investmentFinancial experts say Fera was devised and implemented when India had a highly regulated economy, and when foreign investment was either not allowed or regarded with much suspicion.
All that changed in 1993, when India liberalised its economy and started to attract a lot more overseas investment.
Since then there has been a substantial increase in India's foreign exchange reserves.
Foreign trade has increased, tariffs have been curtailed and foreign institutions are allowed far greater access to its stock markets.
The new law, experts say, reflects the ongoing desire of the financial authorities to attract more foreign investment and promote exports.
However the authorities have made clear that although Fera is repealed, it still applies to offences committed before its abolition.
There are nearly 7,000 cases pending, some of which are in an advanced stage of investigation.
One of those being investigated for foreign exchange violations is the son of a former Prime Minister, P V Narasimha Rao.

Forex futures market

Average turnover on the world's foreign exchange (forex) markets reached almost $1,500bn a day in April this year, according to the Bank for International Settlements (BIS).
The volume of forex trading is far greater than the size of foreign currency reserves held by any country.
The size of forex trade has played its part in the currency crises of emerging nations over the past year.
The exact figure, $1,490bn, or $1.49 trillion, is 26% higher than when the BIS, which represents central banks, last measured flows in 43 different countries three years ago.
Centred in London
Almost a third of all forex trading occurs in London, by far the world's largest centre, with New York and Tokyo second and third.
US dollar and yen most tradedAt current values, transactions involving US dollars on side of the trade accounted for 87% of forex business. The Japanese Yen was the second-most traded currency.
However, less than half the transactions were simple 'spot' deals, the immediate purchase of currency for commercial transactions.
Most forex trading is on the futures market where currency buyers undertake to buy at a set price at a specified date in the future.
Futures gambling
Foreign exchange futures allow companies to plan their import, export and foreign investment operations with the certainty of knowing what will be the value of the currencies they trade in.
George Soros: forex speculatorHowever, increasingly the forex futures market is home to rich individuals and 'hedge funds' who speculate against currency movements attempting reap windfall gains.
George Soros is the most high-profile example of such currency speculators.
The advent of the euro next year is expected start to stem the sharp increases in forex dealings as eleven European currencies consolidate into one over the next three years.
Global crises
The figures shed some light on how financial crises began in emerging economies over the last year.
The ability for massive daily foreign currency flows to take place made possible the almost overnight collapses of the currencies of countries like Thailand, Indonesia and Russia.
As confidence in the economies of these countries fell away, demand for their currencies fell as investors took their capital out or stopped bringing it in.
Governments had tried to buy their own currencies to underpin their value but couldn't keep up with the sellers.
When they stopped their own forex activity, the forces of demand and supply saw the baht, rupiah and rouble in turn crash in value deepening the crisis of confidence and economic slowdown.
Speculators constantly watching for these market developments hastened the process.