Soft Red Winter Wheat's Outperformance Boosts Interest in the Grain Trade

CBOT wheat has surged in price in 2012 mainly owing to drought concerns impacting yield.  The price is driven somewhat by US Department of Agriculture reports and the US Drought Monitor readings. The default wheat type is something called "Soft Red Winter". A variant called "Hard Red Winter" trades mainly on the Kansas City Board of Trade.

The main contracts are Z (December), U (September), N (July), K (May), H (March). The contract size if for 5,000 bushels (roughly 136 metric tons). The bushel is used for volumes of dry commodities.

The CME group provides literally masses of historical technical analysis indicators for wheat, ranging from Bollinger bands to EWMA techniques.

The origin of futures trading is the commodities markets - and includes the trading of grain by elevators and processors. To understand the wheat food chain requires some understanding of the underlying technologies of grain.

Deutsche Bank Hails Offshore RMB Market

Deutsche Bank has hailed the three markets for Chinese currency: onshore CNY (restricted for foreigners), offshore CNH which is fully deliverable (H=helpful for offshore traders), and the USD-denominated NDF market. Offshore daily trading volumes in CNH are now equivalent to USD 2bn. Hong Kong's CNH deposit base stands at 576bn as of January 2012 (HKMA, established 1993).

China Warns of Inflationary Risks of Global QE

Across Asia central banks, including PBOC Governor Zhou Xiaochuan, are expressing concerns of the inflationary risks of QE3. China has cut rates twice (June and July 2012) as growth has slowed. The RRR has been cut thrice since late 2011. To decipher the economic comments on inflation we need to be au fait with the following terms and concepts.

Core versus Headline

Headline inflation measures total inflation in the economy. Core inflation removes factors like food and energy which can experience price spikes and may thus be perceived as a more robust measure of inflation.

Relationship between Inflation and Credit

The book "An Inflation Primer" by Melchior Palyi is an interesting one with respect to bond markets. It describes the difference between inflationary and non-inflationary credit.

Investing in Inflation

It is possible to "invest" in UK inflation via the vehicle known as "index-linked gilts". These differ from "conventional" gilts in that the principal and S/A coupon payments are adjusted in line with the RPI (Retail Price Index). Gilts issued before July 2002 have their coupons calculated by the Bank of England, from July 2002 they are calculated by the UK DMO. RPI was 2.9% in August 2012.

How 3Rs Impact the Global Currency Markets

Statutory versus Voluntary Reserve Ratios

Some countries have Required Reserve Ratios (RRRs) that are statutorily enforced whilst other countries have voluntary reserve ratios.

Required reserves apply to commercial banks and usually take the form of cash or deposits made with a central bank. If a bank holds more than the required reserve, it is said to hold excess reserves.

Variation by Country

The Bank of England used to have a reserve ratio but abandoned it in the early 1980s. Canada also has no reserve ratio requirement. The US Federal Reserve has a reserve ratio that operates in tranches.

Relationship between Reserve Ratio and Inflation

The greater the reserve ratio (and correspondingly the greater the reserves held at the central bank) the less money there is for individual banks to loan, leading to lower money creation and potentially higher purchasing power of the money in circulation.

All things being equal, there is an inverse relationship between the Reserve Ratio and Inflation.

Bigger RR -> potentially lower inflation
Lower RR -> potentially higher inflation

Reserve Ratios for Inflation Control

The People's Bank of China (PBC or PBOC) alters the reserve ratio in order to control inflation. Standard Chartered anticipates a RRR cut due to "easing headline inflation" and recommends USDCNH puts. The Reserve Bank of India also controls the Cash Reserve Ratio (CRR) to control the money supply and therefore inflation.

Central Bank Slang: Near Money or Quasi Money

Reading central banking websites you will come across many unusual economic terms, such as near money or quasi-money - which refers to stuff that's not cash, but very close to cash,

They mean one and the same thing, namely highly liquid assets that can be easily converted into cash.

The IMF and World Bank do surveys of money and quasi-money in the world financial system.

Examples of quasi money would be savings accounts, money market accounts, bonds near their redemption date, government T-bills, foreign currencies (especially widely traded ones like USD, JPY and EUR).

59 orders wipe out $58bn of market value from Nifty

One Broker Broke the Market

Friday's debacle on the Nifty (aka Nifty 50, India's benchmark free-float market cap index) resulted in a brief erasure of $58bn from the National Stock Exchange (drop of 16% in the index value). The culprits, Emkay Global Financial Services Ltd., admitted $126m volume-worth of orders triggered the problem, which fired off circuit breakers on the National Stock Exchange (wrong data entry on a basket sell order).

Protected by the Circuit Breakers

The NSX (whose corporate HQ is in Bandra, Mumbai) triggers circuit breakers when there is a 10% or larger move (check out this guide to Asia circuit breakers).

Whose in the Nifty Fifty

Stocks in the "Nifty 50" include Tata Steel, GAIL (India) Ltd, Axis Bank Ltd., ICICI Bank Ltd and Jaiprakash Associates.

Many of these stocks (Tata Steel, for example) are also part of the Sensex (or BSE 30) which are the 30 largest stocks on the Bombay Stock Exchange.

RBS Plans Complete Exit from Commodities, JPM Charges In

Eighty percent of the precious metals trading at RBS is in gold, and now RBS wants to disband this business too (in 2010, non-US assets of RBS Sempra Commodities were sold to JP Morgan for $1.7bn). RBS is one of the banks marred in the interest rate rigging scandal.

In contrast, JP Morgan, a licensed depositary for precious metals, has asked the CME for approval for additional vault space and applied to be a weight master for silver. Value chain optimisation - here we come!

Tracking Gold Volatility via Gold Volatility Indexes

The CME Group has a series of volatility indexes based on the methodology of the "classic" VIX index.

Here's a quick revision of the VIX.

VIX is the TICKER SYMBOL for the Chicago Board Options Exchange Market Volatility Index and is also known as the "fear index" or the "investor's fear guage". It measures implied volatility of short-dated S&P 500 index options. Trading in futures on the VIX began in March 2004. From February 2006, trading on VIX options became possible.

The GOLD VIX is a similar product from the CME Group (which includes the COMEX). If you see the acronym GVF on the COMEX website - that means Gold Volatility Futures. There's not much volume on that yet, though.