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Getting Caught on the Backswing – Will US Sanctions Undermine the Dollar?

sanctions

Getting Caught on the Backswing – Will US Sanctions Undermine the Dollar?

Since the Bretton Woods Agreement in 1944 there has been one currency that eclipses all others for international trade: the U.S. dollar. The dollar dominates when it comes to reserves and the settlement of trades, a hegemony that affords U.S. foreign policy incredible strength on the world stage. However, the U.S. reliance on the strength of the dollar to pursue far-reaching sanctions is also beginning to cut at the roots of that strength, as allies and global trading partners simultaneously pursue their own economic agenda and react to perceived over-reach by U.S. policymaker. 

A View from the Top

In 2019, the dollar comprised over 60% of global debt, more than 60% of global reserves for foreign exchange, and was the medium used in 40% of international payments, according to the European Central Bank (ECB). Despite the economic output of the Eurozone roughly matching that of the U.S., the euro accounted for only 20% of foreign exchange reserves and just over 20% of international debt (1).

This allows U.S. foreign policy a potency lacking in other international currencies. The Trump administration has relied heavily on this dynamic, imposing coercive economic measures on a wide spectrum of targets from Venezuela to North Korea and exponentially increasing the number of sanctioned entities. In fact, the U.S. sanctioned around 1,500 Specially Designated Nationals and Blocked Persons (SDNs) in 2018 alone, almost 50 % greater than in any other single year. 

Growing trends have become noticeable in the financial streams flowing between borders; a rise in the use of the euro, RMB and ruble as forex currencies, development of routes around the conventional financial sector, and flurry of interest surrounding the nascent potential of cryptocurrencies. The major drivers of these changes are unrelated to sanction policy and are more tied to the politicization of U.S. monetary policy or the inherent economic interests of other nations and trading blocs, including turning their own currencies into global standards. Regardless of the drivers, these developments suggest an international system ill-at-ease with the power of the dollar.

Secondary Nature, Primary Threat

The unrivaled strength of the U.S. dollar affords U.S. policymakers a weapon unavailable to any other nation. This is built on by the ‘secondary’ nature of U.S. sanctions – extending the impact of sanctions to non-U.S. entities who do business with sanctioned entities or individuals – that leaves few avenues to evade the regime. 

As virtually all dollar-denominated transactions pass through the U.S. financial system, even if just momentarily when they are “cleared,” very few businesses are able to trade with the targets of primary sanctions without themselves falling under the secondary regime. Violators are potentially liable for sizeable fines or other punishments, including being locked out of the U.S. financial system themselves. 

While this is a useful tool for closing down avenues of terrorism, crime or other illicit activity, it also means countries that disagree with the targets of U.S. sanctions must either comply or place their own industry at risk. The EU-U.S. divergence on the Iranian Nuclear deal, or on U.S. sanctions towards Cuba, are good example of this. 

This increasing sanctions activity provides the seedlings that may undermine the dollar’s strength, as it prompts allies that disagree with sanctions regimes to develop alternatives to the dollar – such as the Euro, Chinese RMB or Russian ruble. Special Purpose Vehicles, such as the EU-Russian INSTEX, are created – albeit with difficulty – to provide routes around the conventional financial system. 

Alternatives

Against this politicization of the dollar, various countries are developing alternatives. The euro is staking its claim with the development of the INSTEX vehicle and a declaration by Jean Claude Juncker, then-president of the European Commission, “to do more to allow our single currency to play its full role on the international sector” (2).

Similar gauntlets are being thrown by the ruble – Russia has been developing its own payments system since the Crimean sanctions in 2014 – and the RMB, with the Chinese Cross-Border Interbank Payment System (CIPS) launched in 2015. Given the size of the Chinese market and its growing world position, the RMB could theoretically pose a challenge to the dollar. However, the politicization of the RMB’s value – witnessed most recently in its rapid devaluation targeted at injuring the U.S. as part of the trade war – undermines its use as a global currency in the near to medium term. 

Another potential pitfall for the dollar is the development of new financial technologies, including the much-discussed Blockchain and cryptocurrencies. Such systems allow for the circumvention of the U.S. financial system and enable payments in relation to sanctioned activities, and have already have been used to facilitate illicit payments in North Korea and Iran. 

Mobile payments are also on the rise, further reducing global exposure to the dollar. However, as with other examples above, the use of some of these alternatives are being driven in significant part by illicit activity, which may lay the seeds of its own demise or limited adoption. 

The dollar’s strength on the international stage is undeniable, affording U.S. foreign policy unparalleled reach and potency. However, increasing international attention is being given to the Trump Administration’s fondness for relying on coercive economic measures in foreign policy, including the imposition of sanctions, tariffs, export controls, and investment restrictions. 

Each time a trading partner or ally objects to the U.S. policy goals but is forced to accept a new sanctions regime because of the dollar’s dominance, that dominance is eroded. While the dollar remains by far the best safe-haven for investments, backed as it is by a resilient economy and a history of stability, the potential corrosive effect of sanctions cannot be ignored. The future use of sanctions should factor in this unintended consequence and overall sanctions policy designed to ensure the long-term dominance of the U.S. dollar. 

 

Matthew Oresman leads Pillsbury Winthrop Shaw Pittman’s International Public Policy practice, carrying out high-profile activities in many of the world’s capital cities. He principally advises governments, political leaders, businesses and NGOs on achieving their most important objectives. He regularly designs and implements legal and policy solutions, including managing integrated U.S. and Europe-based initiatives. He advises global businesses on entry into emerging markets and compliance with U.S. and international regulations.

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(1)https://www.ecb.europa.eu/press/key/date/2019/html/ecb.sp190215~15c89d887b.en.html

(2) See Juncker, J.C. (2018), “The Hour of European Sovereignty”, State of the Union Address 2018 – https://ec.europa.eu/commission/sites/beta-political/files/soteu2018-speech_en_0.pdf

forex

How to Analyze Data for More Profitable Forex Trading

Successful forex trading is the art of being able to predict when currencies are going to shift in value in relation to each other, and what direction that shift is going to be in. The good news is that those fundamentals are relatively simple; is the dollar going to weaken against the yen? Will the pound pick up against the euro? Another piece of good news is that there are huge swathes of data available to the average retail trader to enable them to make these decisions. Of course, you may opt to rely on your instincts and make decisions as the situation in the various currency exchanges unfolds before you.

While there is a place for this kind of fast thinking and quick decision making in forex trading, it will only ever form the basis of a stable and successful long term strategy – one which delivers consistent levels of profit – if the quick decisions are built upon the foundations of a clear and thought through long term plan. And this kind of planning is only possible if you know exactly what kind of data to be on the lookout for, and about the tools which are available aid in your analysis. 

The complexities of big data in the age of seamless digital communication are such that it would be impossible to summarise every possible metric or analytical approach accessible to the retail trader in the space available. What is possible, however, is an overview of the main planks of data analysis a trader needs to bear in mind, and a look at a few of the types of tool which can make that analysis easier and more accurate.             

Forex Fundamentals 

When a trader buys and sells shares the analysis required is focused, in the main, on the good health of otherwise of the company in question, and whether the various indicators predict that the shares are likely to rise or fall in value. Wider market conditions have an impact as well, of course, but these conditions would be the same for any stock being traded, which places the emphasis firmly on the choice of stock.

Where forex trading is concerned, however, the fundamental issue is always going to be the relative strength and weakness of a pair of currencies. Looking ahead in an effort to take advantage of shifts in value means analysing macro-economic figures such as interest rates, unemployment rates and GDP (gross domestic product). Many of these figures are firmly fixed in the economic news cycle, meaning it’s simple for a trader to see in advance when a country or bloc such as the EU is likely to announce figures which might impact on currency fluctuations (predicting what this impact will be is a more complex matter altogether, of course).

Requiring more vigilance to spot, on the other hand, are the sudden shifts which might be triggered by an event such as a comment in a ministerial press conference which is assumed to increase the chances of a no-deal Brexit and so sends the value of the pound dropping. Fundamental analysis based on one-off events of this kind requires a close attention to detail, up to the minute (or even second) access to newsfeeds and the willingness to take up positions instantly.        

Technical

Technical analysis is based not on real world events beyond the confines of the currency exchanges, but on in-depth analysis of the way in which the price of currencies has moved in the past. By focusing on charts of price movements and analysing them with a variety of tools – both manual and automatic – a trader can identify patterns which have repeated in the past and can be expected to repeat again in the future. Past performance is no guarantee of future success, of course (some clichés become clichés because they happen to be true), but the relative stability of the major currencies, over the long term, means that patterns of movement can become relatively predictable. 

Market Movements

A further method of analyzing the forex markets is by watching out for larger than usual shifts in the number of traders investing in a particular currency. As soon as a large number of traders invest in a particular currency, the future pool of people who might opt to sell that currency expands, with the result that the potential value of that currency is impacted upon. Analyzing market movements could be referred to as depending upon the wisdom of crowds. As has been shown in the past, that wisdom can often be mistaken. A stampede to buy or sell a specific currency could be triggered by knowledge of where the value of that currency is heading, but it could also be caused by a simple self-fulfilling prophecy – sometimes, if enough traders take a position, enough other traders assume there must be a good reason for doing so and follow suit, creating a pattern which feeds off itself with little or no external justification.     

It’s not a question of which of these three modes of analysis is the most effective, since the best results will always be gained by combining elements of all three. The deluge of data which is available, however, particularly where technical analysis is concerned, means that the wiser trader will make use of some of the tools which are available:

Session highlighter

One of the key attractions of forex trading is the fact that the currency markets are open somewhere in the world 24 hours a day throughout the week. The fact that different markets are open at different times of the day means that the sessions within those markets are likely to have different impacts on the pairs of currencies which a trader is working with. A session highlighter tool can be used to divide a traders charts into these various sessions, and then to highlight any movement that occurs over set periods, such as a minute, a specific number of minutes or an hour.     

Volatility Tool for Forex 

A volatility tool will show a trader how much, and in what way, a pair of currencies has moved on an hourly basis during a period such as the last thirty days. This enables the trader to build up a fuller picture of the way the currency pair behaves, and note any patterns such as recurring movements on specific days or at a specific time of the day. The more advanced versions of the tool will calculate the typical movement range and, given a time period by the trader, will display a percentage probability that the pair will stay within the set range.   

Signal service

Signal service providers offer instant information in the form of tips, delivered either by experts or AI systems, which recommend trades are made at a certain time and price on the basis of analysis. There are different types of signal services available, some based on fundamental analysis (i.e. news which might impact on the markets) and some on technical analysis. Signals shouldn’t be confused with the kind of AI that trades automatically on your behalf – they are merely providing information in a timely manner which it is up to you, as a trader, to interpret.  

Undertaking and applying analysis is a key practice of any successful trader. The degree of analysis a trader carries out will depend upon their inclination and appetite for hard number crunching, but the rule to remember is that while there really isn’t such a thing as too much analysis (as long as it’s used to eventually take a position), the concept of too little analysis is all too real.   

How to Find Your Way in the World of International Payments

Credit card, direct deposit, check, cash, e-pay… making domestic payments is a breeze these days, with enough flexibility to offer optimization based on your vendor’s payment preferences. International payments, on the other hand, are much more complex, and bring to mind painful images of cumbersome wire submissions.

Alternate options, such as fintech solutions, enable companies to submit all their domestic and international payments in one file. If the fintech also includes vendor maintenance as part of their services, then the payment file draws banking details from the fintech’s vendor network, eliminating the responsibility of maintaining that data from AP teams’ plates.

But before we delve too deeply into the process, let’s take a step back and explore nomenclature. Over time, companies have imposed their own internal vocabulary over common terms. Terms like ‘wire’, ‘direct deposit’, and ‘ACH’ are often used interchangeably, even though they operate differently. Let’s synchronize our understanding of these words.

What’s in a name?

International vs. cross-border vs. FX

“Cross-border payments” is a self-explanatory term—the definition is right in the name. These funds cross international borders to reach their destination.

“International payments” also describes cross-border payment activity, but carries other specific interpretations as well. For example, it may also refer to funds transferred within a single country through a bank or fintech located outside of that country (e.g. Canada to Canada, but through a U.S. fintech).

The term “FX” (Foreign Exchange) is occasionally thrown around to describe international payments, though it typically refers to currency exchange instead of the transmission of funds.

At the end of the day, as long as your company recognizes the nuances, the use of any term is fine. For simplicity’s sake, the rest of this article will refer to “international payments.”

Stepping out of history and into the future

Wire vs. EFT

Wire is the most popular and recognizable form of international payment processing. From a simplistic, yet technical standpoint, wire payments transmit account data from one bank to another. It’s sometimes the only method for sending money from one country to another, especially when working with specific currency exchanges or infrequently paid countries.

The term “EFT” (Electronic Funds Transfer) is quite a bit broader. It is a catch-all phrase used to describe any electronic payment process. Wire, ACH, direct deposit, and other methods fall under this umbrella.

Standardized codes

Codes are commonly used to determine various international payment factors. Use of the wrong codes can cause downstream payment issues, so it’s worth identifying each type, since they often appear to be very similar to one another.

Country Codes

ISO (International Organization for Standardization) country codes are country-specific abbreviations with varied uses.  Although three ISO country code variations exist—ISO Alpha-2, ISO Alpha-3, and ISO Alpha numeric—the ISO Alpha-2 code is used most in the international payment scope, in IBANs and SWIFT codes. 

As the name suggests, ISO Alpha-2 codes are 2-character codes assigned to each country for identification purposes.  For example, the United States is “US”, the United Kingdom is “GB”, and China is “CN.”

Currency Codes

Currency codes are 3-digit codes that identify currencies. Their resemblance to ISO Alpha-3 country codes may cause confusion, so it’s always worthwhile to make sure you’ve got the right code before adding it to payment instructions.

For example, the ISO Alpha-3 country code for the United States is “USA” while the currency code for U.S. dollars is “USD”. Similarly, “CHE” is the ISO Alpha-3 country code for Switzerland, while the currency code for Swiss francs is “CHF.”

Payment specifications

Information requirements for international payments are far less cut-and-dried than those for domestic processes. The details often vary depending on the payment type, currencies, and the countries involved.

SWIFT/BIC Codes

Veteran AP personnel are likely very familiar with the SWIFT system (Society for Worldwide Interbank Financial Telecommunications), which is known as the BIC system (Bank Identifier Code) in some countries.

SWIFT codes were introduced in the ‘70s as a way to streamline the global money-transferring process and reduce the possibility of human error. SWIFT codes are a series of characters that identify the bank, country, and branch location to which a payment should be sent. Decades later, they still play a significant role.

Routing Numbers

While SWIFT codes are still essential to send international payments, the growing financial industry has highlighted the need for additional details.

Routing numbers are the collective answer, and play a fairly large role in the modern payment structure.

The caveat is that they may not always be called “routing numbers”, which is a U.S. term. For example, Australia has the “BSB Code”, China the “CNAPS”, and India the “ISFC Code”.

While it may seem redundant to provide both the SWIFT and routing details, it is an excellent way to clarify the payment destination.

IBANs and Account Numbers

IBANs (International Bank Account Number) arrived in the ‘90s as a way to further standardize banking information, and have been adopted primarily by countries in the European Union, the Middle East, and several countries in Africa. While IBANs vary in length depending on the country, they contain these common factors:

ISO alpha-2 country code

Check digits

Bank identifier

Branch identifier

Account number

Because IBANs often include the bank identifier (which shares digits with the SWIFT code), further account information isn’t typically necessary, which massively simplifies the payment process.

Countries that have not adopted the IBAN must still provide the SWIFT code, routing details, and the account number, as well as any country-specific requirements with their invoices.

Country-specific details

Additional details can include purpose of payment, tax documentation, and company phone numbers, amongst other things. Since each country requires specific information, it can be tricky to know exactly what to supply.

When in doubt, ask your payment solution provider—they can outline each country’s requirements, as needed.

Putting it all together

While international payment processes have evolved over time, the task is still nothing to sneeze at. Fortunately, fintechs like Nvoicepay have simplified the process, and store and maintain banking details on your behalf. That way, when you’re ready to pay your international vendors, you’re good to go in just a few clicks of your mouse—no more painful single-payment submissions through the bank.

Alyssa Callahan is a Technical Marketing Writer at Nvoicepay. She has four years of experience in the B2B payment industry, specializing in cross-border B2B payment processes.

 

More US Businesses Mull Trading in China’s RMB

New York, NY – German and French companies are using renminbi to trade (RMB) and now, increasingly, American businesses are too, according to a recent HSBC global survey of international business decision makers in 11 countries.

“More US businesses are using RMB to settle trade and more plan to use it amid expectations by business leaders that their trade with China will increase in the next 12 months,” the survey found.

Seventeen percent of US businesses leaders said their companies had used RMB to settle trade this year, up from nine percent last year.

With the global average of RMB use at 22 percent, this places US businesses just behind French (26 percent) and German (23 percent) businesses in terms of RMB use outside of China, Hong Kong and Taiwan.

Furthermore, the survey found, 22 percent of US businesses, who aren’t already using RMB, said they plan to use it within the next six months to five years, up from eight percent a year ago.

Globally, an average of 32 percent of leaders said they planned to use RMB in the future.

“As China continues to internationalize its currency, there are more opportunities and considerations in trade, investment, cash management and funding for US companies,” said Steve Bottomley, Group General Manager, Senior Executive Vice President, and Head of Commercial Banking for North America, HSBC Bank USA.

US-based businesses, he said, “are becoming more comfortable using RMB and are increasingly making it, or looking to make it, a part of their competitive strategy and planning.”

Trade with China Set to Grow

US business leaders may have good reason to do so as 55 percent said they expect trade with China, the world’s largest trading nation, to grow over the next 12 months, though that percentage is down from last year’s survey, when76 percent said it would.

American businesses now sell about seven percent of their exports to China, compared to just one percent a decade ago. HSBC expects that to increase to 14 percent by 2030 with a third of China’s trade settled in RMB by 2015 and the currency fully convertible by 2017.

Still, the survey found most US businesses surveyed said they don’t use RMB because they don’t understand or aren’t aware of the benefits of using it.

However, two-thirds of companies in mainland China and Hong Kong said foreign firms doing business with China gain financial and relationship advantages from using RMB, including receiving discounts on RMB-denominated transactions.

“Hedge Against Fluctuations”

Additionally, global leaders said the top reasons for using RMB were meeting demand from counterparties, minimizing foreign exchange risks and increased convenience.

“US businesses can use RMB to hedge against fluctuations and potentially reach additional suppliers,” said HSBC’s Executive Vice President and Head of Large Corporate, Commercial Banking, Martin Brown.

“It may also improve business relationships by making it more convenient for their Chinese counterparties, who may be reluctant to take on dollar exposure because their cost base is denominated in renminbi,” Brown said.

When asked what might help non-RMB users reconsider trading in the currency, those surveyed suggested more simple procedures, further liberalization of the exchange rate; expansion of RMB eligible transactions; and the availability of more guidance.

The HSBC survey was conducted by Nielsen and involved business executives from 1,304 international companies that currently do business with Mainland China or are a business in Mainland China that imports/exports outside of the region.

The research surveyed international businesses in Australia, Canada, China, France, Germany, Hong Kong, Singapore, Taiwan, the UAE, the UK, and the US.

07/10/2014