Foreign Exchange & International
Operations Department
Patrick El Hajj CFA
Money Market Chief Dealer
Role of the Central Bank
1-Currency issuance : the Central Bank prints and issues notes and coins for the government usually backed by holdings of government bonds ( Gold and Foreign currency in the case of Lebanon).
2-Banker to the banks : It provides a payments system for the transactions between banks and liquidity.
3-Banker to the government.
4-Banking supervision : The Central Bank regulates the banking system to seek to maintain financial stability .
5-Maintain financial stability (provides emergency liquidity assistance to financial institutions that might otherwise collapse, damaging the economy as a whole. Ex: LCB case).
6- Monetary policy function: increasing and decreasing the money supply by using 3 tools : Interest rate, open market operations and reserve requirement ratio.
7-Reserve Management: The Central Bank manages the portfolio of foreign exchange reserves of the country and may buy or sell them to influence the exchange rate ( Intervention ).
One of the major roles of the central banks is to control inflation and stimulate growth. Central bankers should always keep in eye on major economic indicators such as inflation , growth , unemployment GDP , Trade balance etc….
Top Economic indicators
1. Gross domestic product (GDP) : it is the market value of all officially recognized final goods and services produced within a country in a given period of time .
(Released 30 days after the quarter ends)
2. US Initial Jobless Claims SA :
Weekly initial jobless claims are the actual number of
people who have filed for unemployment benefits for
the first time. (Released weekly)
3. Nonfarm payroll – Unemployment Indicator :
A measure of the total number of persons employed in
nonagricultural sectors of the economy.
(Released 1st Friday of the month)
4. Consumer Price Index – CPI – Inflation Indicator
It is a price measures for tracking the price of a market
basket of goods and services purchased by individuals.
The weights of the components are based on consumer
spending patterns.
(Released 15 days after the end of the month)
5.Producer Price Index- PPI- Inflation Indicator
Measures prices received by producers at the first
commercial sale.
(Released 17 days after the end of the month)
6. Industrial Production
Industrial production is the measure of physical output in
factories, mines and utilities. Activity in manufacturing
accounts for about 85% of total industrial production with
the remainder of output from utilities and services.
(Released 16 days after the end of the month)
7. Retail sales
The report details the dollar value of purchases made at
retail stores. (Example: Auto dealers, department stores,
etc…).
(Released 14 days after the end of the month)
8. Trade Balance
Surplus and deficits in trade reflect the competitiveness
of a nation’s economy, which in turn indicates demand
for a country’s currency. It’s released about 40 days after
the end of month .
(Released 40 days after the end of month)
9. Purchasing Manager Index – PMI
Is an economic indicator derived from monthly surveys of
private sector companies.
An index reading of 50.0 means that the variable is
unchanged, a number over 50.0 indicates an
improvement while anything below 50.0 suggests a
decline. The further away from 50.0 the index is, the
stronger the change over the month.
(Released first business day after the end of month)
10. Open Market Committee decision
The Federal OMC is the Federal Reserve committee
that makes key decisions about interest rates and the
growth of the United States money supply.
Economic Indicators - USA
Economic Indicators - Euro zone
Its very hard for a country to survive without financial
assistance if it is borrowing at very high yields ( above 7 % )
Dealing Room
Definition of Reserves
Our main role in the Dealing room is to manage the USD 37 Billion foreign reserve of the Central Bank.
These are assets of the central bank held in different reserve currencies, mostly the US dollar, and to a lesser extent the euro, the UK pound, the Japanese yen and other foreign currencies.
http://en.wikipedia.org/wiki/Assethttp://en.wikipedia.org/wiki/Central_bankhttp://en.wikipedia.org/wiki/Reserve_currencyhttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/Eurohttp://en.wikipedia.org/wiki/Pound_sterlinghttp://en.wikipedia.org/wiki/Japanese_yen
Foreign Reserve Composition
Net reserve (BDL ownership )
Deposits of Local Banks ( RR) -Liabilities
Local banks covering their reserve requirement ( 15 %) .
Deposits of international Banks -Liabilities
Arab and International Banks and central banks placing time
deposits with BDL.
Other liabilities
Local and international banks buy Certificate of Deposits issued
by BDL.
Time Deposit
Each Day The department of Foreign Exchange and
International Operations release new rates on time
deposit based on the Libor for the USD and Euribor for
the Euro .
LIBOR stands for the London Inter-Bank Offered Rate
( the most popular benchmark ).
Euribor stands for the EURO Inter-Bank Offered Rate.
Borrowing cost : Rates paid for Local and Foreign banks
BDL Foreign Reserve Currency Composition
U.S. Dollar
EURO
Pound Sterling
Japanese Yen
Swiss Francs
Other Arab Currencies
International Reserve Assets
Reserve Currency Allocation
Gold Reserves
According to Bloomberg data Lebanon is ranked 2nd in the MENA region after KSA and 15th globally
2012 MENA Gold Reserves (mil troy OZ)
10.382
9.2225.583
4.624
2.539
2.431
0.83
0.709
0.41
0.399
0.15
Saudi ArabiaLebanonAlgeriaLibyaKuwaitEgyptSyriaMoroccoJordanQatarBahrain
Why do Countries Hold Reserves?
Exchange rate targeting : Ex: Lebanon and Switzerland. The Central Bank of Lebanon has set a range for the LBP 1501-1514 . Whereas the Swiss National Bank has set a floor for the EUR/CHF at 1.20. They both intervene on regular basis to defend those prices.
Exchange rate stability : Central banks could intervene to reduce the volatility in the FX market. €/$ ATR 100 to 200 points).
Store of national wealth. Sovereign rating :The higher the FX reserve the better the
sovereign rating of a country the lower the borrowing cost.
Used to avoid financial crises : The Central Bank can use its reserve in time of crisis to pump liquidity into the market.
Exchange rate Systems
Fixed exchange rate systems determine a preset
exchange rate and defend it .
Advantage : Exchange rate stability.
Disadvantage : Lost control of monetary policy .
Economic shocks hit the real economy, rather than
the exchange rate.
Pegged exchange rate systems tie the exchange rate to
another major currency, but allow it to float within a
range.
Advantage : good for trade, it gives confidence to
investors.
Disadvantage : Shocks hit the real economy.
Exchange rate Systems
Flexible exchange rate systems allow exchange rate to
float freely according to supply and demand.
Advantage : currency absorbs economic shocks,
government retains control of monetary policy.
Disadvantage : volatility adds risk to trade.
6 September 2011 : The SNB set a floor on the
Eur /CHF at 1.20
CHF appreciation became a burden on the Swiss export industry. The Swiss National Bank intervened in the market selling CHF in order to weaken the
threat posed by a strong Franc
USD/LBP AT 1501-1514 SINCE 1999
USD/LBP Closing Prices
Year DECEMBER
1980 3.6475
1981 4.6100
1982 3.8100
1983 5.4900
1984 8.8900
1985 18.10
1986 87.00
1987 455.00
1988 530.00
1989 505.00
1990 842.00
1991 879.00
1992 1838.00
1993 1711.00
1994 1647.00
1995 1596.00
1996 1552.00
1997 1527.00
1998 1508.00
1999 1507.50
2000/2012 1507.5
Where do we invest our fund ?
A certain amount is kept in our accounts with our
correspondents and the rest is managed on a daily basis.
We invest our funds with investment grade banks (rated AA
and above) and Central Banks. The investments are made
for different time period going from one day up to 3 years
depending on our liquidity needs.
We buy treasury bills, notes and bonds.
Our policy is to stay very liquid in order to be able to
intervene in the FX market ( USD/LBP) supporting the
Lebanese pound whenever need it.
Eligible Assets
BDL Investment :
• Time deposits
• Certificate of Deposits
• Treasury Bills (less than 1 yr)
• Treasury Notes ( 2 to 10 yrs)
• Treasury Bonds (20 & 30 yrs)
All our investments are made on Reuters dealing 3000 and
Bloomberg , which are systems that links all the treasury
desks around the world together.
US SOVEREIGN SECURITIES
European Sovereign Securities
US Treasury Bill Description
US Treasury Note Description
Reuters Dealing and Bloomberg terminal
Rogue traders
If you put a rogue trader behind a Bloomberg terminal or
Reuters dealing and leave it without supervision, you can
be bankrupt in a matter of days
A rogue trader is an authorized employee making
unauthorized trades on behalf of their employer.
http://en.wikipedia.org/wiki/Employeehttp://en.wikipedia.org/wiki/Employer
The world’s biggest rogue traders in recent history
Number 1: Jerome Kerviel Societe General Paris loss $ 7.2 billion
In 2008 , SocGen's "rogue
trader" Kerviel lost the French
bank approximately $7.2 billion
through arbitrage of equity
derivatives from unauthorized
trades.
Number 2: Yasuo Hamanaka, Sumitomo corporation Tokyo
-Loss $ 2.6 billion
In 1996 Yasuo hamanaka who was once nick-named ” Mr. Copper” because of his aggressive trading style in the copper market, caused Sumitomo to lose $ 2.6 Billion from his unauthorized copper trades on the London Metal Exchange.
As a result of his rogue trade, Mr. Copper was sentenced to eight years in prison in 1998. He was released in July 2005, a year before his sentence was supposed to end.
Number 3 : Kweku Adoboli UBS London Loss $ 2.3 billion
In September 2011, UBS revealed an unexpected $ 2.3 billion loss believed to be caused by a rogue trader in the banks London office. Kweku Adoboli,31 yrs old.
Shortly after the massive
trading loss was discovered, the Swiss Bank’s CEO Oswald Grubel resigned from his post.
Number 4: Nick Leeson - Barings Bank GBP 827 Million
Nick Leeson. He was employed by Barings Bank as a trader in the early 1990′s. As a trader he was responsible for bankrupting Barings Bank in 1995, a 233 year old bank , known as the Queen of England bank, with losses of $1.3 billion.
He was sentenced for 6.5 years and to jail in Singapore.
He now lives in Ireland and is a professional speaker.
Dealer at BDL are supervised by the Middle office , The Head of Treasury , The Back office and the Auditing Unit
Dealer Middle
Office
Head
of
Treasury
Back
Office
Auditing
Unit
The Foreign Exchange Operation
In the Forex market, we have the spot , forward ,swap
and option market . We only deal in the spot market. The
spot market represents currency exchange rates for the
immediate delivery of currency. FX market daily volume
around $ 4 trillion , the biggest market in the world ( $ 1.5
trillion in the spot market).
In the front office we are responsible for buying and
selling the USD against the Lebanese pound and other
foreign currencies whenever needed.
In the FX there is always BID and ASK.
BID (offer to buy )- The amount that a dealer is willing to pay for a base currency.
ASK ( offer to sell)-The amount that a dealer is willing to receive for the base currency
• Bid ASK
$/LBP 1501 1514
BDL sells USD at 1514 and I buy at 1501 )
The spread between the Bid and Ask Price represents the Dealer’s income. The Ask is always higher than the Bid .
• Bid Ask
EUR/USD 1.3303 1.3306
We trade the 6 Majors
+ Arab currencies
The Euro (EUR/USD ) the Fiber
The Japanese Yen( USD/JPY) the Yen
The British Pound ( GBP/USD) also known as Sterling or
Cable
The Swiss Franc (USD/CHF) The Swissy/Chief
The Australian Dollar ( AUD/USD) the Aussie
The Canadian Dollar ( USD/CAD) the Looney
Base Currency Versus Quoted or Variable
Currency
The exchange rate is the price at which one unit of the base currency can be bought or sold, in terms of a number of units of the quoted currency.
XXX/YYY
XXX is the base currency
YYY is the quoted currency
EUR/USD 1.2240 means that 1 Euro equals1.2240 USD
USD/JPY 110.08 means that 1 USD equals 110.08 JPY
EUR/USD Daily Graph
EUR/USD Monthly Graph
Currency Performance
Gold Performance
Gold Performance
Crude Oil Performance
The End