Key Terms, Names And Acronyms That FX Traders Should Know

By Luija Lin, John Kicklighter, Currency Strategist

CENTRAL BANKS

Central Bank

Central Bank

Full Name

Main Benchmark

Interest Rate

Head

Fed

US Federal Reserve

Federal Funds Rate

Ben Bernanke

ECB

European Central Bank

Main Refinancing Rate

Mario Draghi

BoE

Bank of England

Official Bank Rate

Mervyn King

BoJ

Bank of Japan

Overnight Call Rate

Masaaki Shirakawa

RBA

Reserve Bank of Australia

Official Cash Rate

Glenn Stevens

RBNZ

Reserve Bank of New Zealand

Official Cash Rate

Alan Bollard

BoC

Bank of Canada

Overnight Rate

Mark Carney

SNB

Swiss National Bank

3-Month Swiss Franc Libor

Thomas Jordan ( interim )

PBoC

People’s Bank of China

1-Year Lending/Deposit Rate

Zhou Xiaochuan

GENERAL

Basel III – The newest set of capital requirementsfor banks, which requires that institutions maintain aminimum Core Tier 1 CapitalRatio – equity as a percentage of risky assets– of 7 percent. The EBA has mandated that European banks achieve aratio of 9 percent by June 2012. More…

BIS – Bank forInternational Settlements

A multinational organization that serves as a global forum for national central banks. Most notable for setting required minimum capital ratios. Also, the group that releases the most reliable FX market depth figures.

CDS – CreditDefault Swap

A n “insurance” instrument thatcompensates losses on bonds resulting from “creditevents”, w hich could include default or restructuring.The ISDA (International Swapsand Derivatives Association) is the group that determines whether a‘credit event’ has occurred, triggering payouts on CDS.On Mar. 9, the ISDA ruled that Greece’s recent debt-swapwould trigger CDS payouts. More

IMF – InternationalMonetary Fund

International Monetary Fund – a multinational organization that pools funds from member states for use in assisting countries in financial distress. Currently contributing – jointly with the European Union – to the rescue packages for Greece, Ireland, and Portugal. The size of its contribution to the most recent bailout package for Greece is currently under discussion.

Inflation target

Monetary rule used – officially or unofficially – by most major central banks. Under the rule, the central bank would commit to a target inflation rate, thus influencing expectations about inflation and interest rates. Most recently in 2012, the BoJ introduced inflation targets (currently set at 1 percent). Typically, there is a second mandate for monetary policy in some growth measure – in the US, it is unemployment.

OIS Rate –Overnight Index Swap Rate

Reflects market expectations of what a certain interest-rate will average over a given period. Useful for gauging expectations of central bank interest-rate policy. For example, if OIS rates are lower than the current central bank rate, this means markets expect the central bank to lower rates in the future.

US DOLLAR

FOMC – Federal Open Market Committee

The body within the Fed (headed by Chairman Ben Bernanke) which sets monetary policy – including the interest-rate target – for the US. Often used interchangeably with ‘The Fed’ when used in commentary and media.

EURO

CAC – CollectiveAction Clause

Approved by Greece in February, these clausesallow the country to force all holders of bonds subject to Greeklaw to participate in the debt swap. On Mar. 9, Greece announcedthat it would activate the CACs to force 95.7 percent of creditorsto swap their bonds. This move will trigger payouts on CDScontracts, according to the ISDA. More

EBA – European Banking Authority

European financial regulatory body thatconducted two rounds of stress tests on European banks in 2011 andmandated that institutions meet a minimum capital ratio of 9 percent by June of 2012. Has the potentialto put significant stress on the European banking system as itencourages hording of cash rather than lending. More

EFSF – EuropeanFinancial Stability Facility

The EU’s temporary bailout fund set up inmid-2010 with a total “firepower” of 440 billion Euros,backed by guarantees from Eurozone governments. Has alreadycommitted funds to bailouts of Greece, Ireland, andPortugal. More

ESM – EuropeanStability Mechanism

The EU’s permanent bailout fund with atotal “firepower” of 500 billion Euros, to come intoeffect in July 2012. Discussions are currently ongoing aboutwhether to expand the ESM’s capacity and whether to combineit with funds remaining in the EFSF. More

Eurobonds

Proposal that Eurozone countries would jointly issue bonds and would be jointly liable for their repayment. Join issuance was expected to boost market confidence and lower yields, but Germany remains firmly opposed to the idea.

IIF – Institute ofInternational Finance

Group representing more than 400 financial institutions which represented Greece’s private-sector creditors in negotiations over the country’s 100-billion Euro debt swap.

LTRO – Longer-TermRefinancing Operation

Refers to the two rounds of 3-year loans theECB offered European banks at an interest rate of 1 percent (therewas a similar program for 3-month funds alongside each 36-montheffort). The first round for three-year funds drew 489 billioneuros from 523 banks on December 21, 2011. At the latest round onFebruary 29, 2012, 800 banks borrowed a total of 530 billion Eurofrom the facility. The LTROs helped improve market confidence inEurope and lower yields on Italian and Spanish bonds. More

NPV Loss on GreekBonds

Under the Greek debt-swap, creditors would take a nominal loss of 53.5 percent. However, due to the lower interest rates and longer maturities of the new Greek bonds, creditors would take an actual NPV (“net present value”) loss of over 70 percent over the life of the new debt.

PSI – PrivateSector Involvement

A central demand of leading European politicians in the Greek rescue effort, the PSI refers to private-sector creditors taking losses (or haircuts) on their debt holdings. The proposal was reportedly accepted by holders of approximately 85.8 percent of privately held bonds.

SMP – SecuritiesMarkets Programme

The SMP allowed for the ECB to purchase government bonds of the peripheral Eurozone countries – though details of purchases (such as country) are withheld. Given improved market conditions and Greece’s debt swap, an indefinite suspension of the program is under discussion. That said, additional purchases under this program could be treated as a distinct signal of regional financial deterioration.

SPIV –Special-Purpose Investment Vehicle

First proposed at the Oct. 26, 2011 EU summit, an SPIV would pool resources from Eurozone countries as well as foreign investors to support prices on European sovereign bonds. The idea has received a lukewarm reaction from China and other emerging markets and has since been on hold.

Troika

Designation for the IMF , European Commission, and ECB, which jointlyevaluate the progress of Eurozone bailout recipientcountries’ progress in implementing austerity measures. Theyare also responsible for approving bailout payments to thosecountries. More

BRITISH POUND

APF Asset PurchaseFacility

The BoE’s quantitative easing program.Launched in Jan. 2009, the APF allows the BoE to purchasecommercial paper, corporate bonds, and asset-backed securities. Atits February policy meeting, the MPC increased the APF’s scope by 50 billionPounds to 325 Billion Pounds. Also commonly referred to as the‘bond purchasing program’ in the media. More

MPC – MonetaryPolicy Committee

The decision-making body of the BoE, which sets UK monetary policy. The MPC is currently headed by BoE Governor Meryvn King. The BoE and MPC are terms that are often used interchangeably.

OBR – Office forBudget Responsibility

Independent body established in 2010 to monitor the UK government’s progress in implementing its deficit-reduction plan and evaluate its effects on economic growth. With the UK economy exhibiting slow growth and unemployment at the highest in over a decade, there is ongoing debate about whether deficit-reduction should take precedence over stimulus.

JAPANESE YEN

APP – Asset Purchase Program

Launched by the BoJ in Oct. 2010 as a vehicle to purchase Japanese government bonds, corporate bonds, and real-estate investment trusts. Intended to stimulate growth and combat Japan’s perennial deflation, the BoJ most recently expanded the APP by 10 trillion Yen on Feb. 14. The program amplified a yen selloff that began with the month and subsequently drove USDJPY to multi-month highs.

Securities Lending Facility, Special Earthquake Reconstruction Lending Facility

Other major ongoing BoJ liquidity programs meant to spur economic growth.

SWISS FRANC

Exchange rate floor

In response to the strong appreciation of theSwiss Franc on Eurozone concerns, the SNB set a floor of 1.20 Francs /Euro in Sept. 2011, pledging to purchase an“unlimited amount” of foreign currency to defend therate. Speculation remains that the SNB could raise the floor tofurther weaken the Franc. So far, this program has worked in thatthe exchange rate has neither tested or moved below thefloor. More

Negative interest rate s

Another proposed solution to the threat of deflation would see banks charge savers to deposit funds in their accounts. So far, the idea has gained little traction and Swiss lawmakers voted against it in December.

Sight deposi ts

Another one of the SNB’s measures has been expanding sight deposits; the latest move raised them to 200 billion Francs. These are deposits that commercial banks hold at the SNB that could be transferred and converted to cash without restriction.

CHINA

RRR – Reserverequirement ratio

One of China’s main monetary-policytools, the RRR governs the percentage of deposits that banks musthold at the PBoC rather than lend out. A higher RRR means tighterpolicy. China has lowered the RRR by 100 bps since November onslower inflation and signs of a slowing economy and is expected tocut it further. More

1 -year lending/deposit rate

These benchmark rates are China’s othertool for conducting monetary policy, besides the RRR . It is argued that these are more effective atcurbing inflation and they have also shown greater spillovereffects for the capital markets.
DailyFX is the forex news and research arm of FXCM, Inc (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.

Original Article: http://www.dailyfx.com/forex/market_alert/2012/03/12/Key_Terms_Names_and_Acronyms_that_FX_Traders_Should_Know.html

DailyFX is the forex news and research arm of FXCM (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.

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