Why the Central Bank of the Russian Federation merges on Forex?
Hello, fellow traders!
At the beginning of the new year, it is customary to sum up the financial results of the past period, so the Central Bank of the Russian Federation published statistics on the accumulation of foreign exchange reserves, according to which, traders of the Bank "leaked" $ 9.5 billion in the Forex market. Finanz.ru journalists drew attention to this. Some may be surprised at the lack of loud resignations following this report, but the result of 2017 was also negative - losses amounted to $ 4.5 billion according to studies of the same portal.
Statistics suggest various conspiracy theories: from wrecking to a drop in professionalism among the Bank of Russia traders or their actions in the "private interests". In fact, the issue of “discharge” is easy to understand: reports on gold reserves and transactions concluded are available to everyone, the numbers are reliable, given the high and important status of the organization, its international position and its integration into the global financial system. And the reasons for the losses are not at all the lack of talent of traders. Let's see: what actually led to such an impressive loss?
Strategy of the Central Bank of Russia
Before discussing the progress of transactions of Central Bank traders, you should understand the specifics of the strategy of the country's main financial institution.
The first-line bank acts in the interests of state policy, without the goals of commercial earnings. The main task is to accumulate a “safety cushion”, which plays the role of a damper in case of external shocks and supports internal economic reforms.
The government and lawmakers are pursuing a certain economic line, which a financial institution is obliged to accept and take into account, responding to its own monetary policy strategy. Ultimately, any actions and plans of the state are reflected in the formation of foreign exchange reserves.
Russia's foreign exchange reserves - what is wrong with them in 2017-2018?
Russian business media in 2017 and since the summer of 2018 have criticized the Bank of Russia for the "unjustified" losses of gold reserves in a stable economy. The claims are logical: the Central Bank can and must lose foreign currency and gold during the economic crisis, but during the surplus budget it is obliged to maintain a continuous growth of foreign assets.
The transactions of the Central Bank in 2017 looked somewhat strange for the layman - the press blames him for buying US dollars in the first and second quarters of 2017 (19.5 billion euros converted into USD). The holding of the position continued until the end of 2018, until the Bank of Russia switched back to the euro by converting purchased dollars.
The EURUSD rate chart below shows approximately the moments of entry and exit from this position. The euro was sold at the worst price in 2017, but the dollar was bought at the bottom of 2018. This is already changing the picture of loss. If we calculate the relative drawdown, given the volume of gold reserves of more than $ 460 billion, then in 2017 it amounted to 1%.
However, the press is silent about the previous cost of buying the euro in 2016: look carefully at the chart - the Central Bank closed the previous long EURUSD, which was re-opened in 2018, in fact, without losses, since the transactions occurred in one large horizontal price hallway:
The Central Bank explains the rebalancing of positions by avoiding the negative yield of state treasury bonds of the European Union followed by the purchase of American securities, which, unlike the first ones, showed a “peak” yield of 3%. At the same time, the Bank of Russia reached the maximum levels of coupon payments, starting the sale of Fed bonds in the fall of 2018, as can be seen on the chart below.
In this way, the total real result of the transaction is balancing the EUR currency to USD “to zero” with the maximum profit earned on bonds.
At the end of 2018, the business press blames the Central Bank of Russia for investments in yuan and gold. However, the last asset is not so often remembered after his Christmas rally, which restored the rate by 80% to the values of 2017.
Let us dwell on gold. Since 2012, the Central Bank has been making regular purchases of gold, increasing volumes. In 2018, a particularly large batch of metal was purchased - 270 tons. To understand the size of deals, let’s take Turkey as an example, which took second place in purchases of this metal, which replenished its reserves by “only” 20 tons.
If the Bank of Russia conducted the bulk of transactions in the middle of the year, it managed to get a huge profit by gaining an 18.5% stake in gold and gold reserves in the precious metal. Given the negative forecasts for the volume of the global economy, the profit from such investments will continue to grow.
Losses in the yuan have nothing to justify so far - the Chinese currency took a 14.7% share in the gold and foreign exchange reserves, purchases occurred at the time of the constant depreciation by the People’s Bank of China, which dropped the national currency by 7.5%, which led to a current loss of $ 5 billion. On the chart below The decrease of the renminbi to the US dollar from 0.16 to 0.15 $ is illustrated:
The central bank explains the deal as a diversification of assets, but it can be fairly accurately assumed that the purchase of Chinese currency is more connected with politics than with accumulation tactics and we can talk about this position in a year.
How does the Central Bank of Russia trade on Forex?
Currency trader of the Central Bank of the Russian Federation Renat Valeev revealed some of the "secrets" of trading the Bank of Russia in the Forex market. According to a former employee, the country's main bank is "late" with transactions a priori, because:
- Adheres to a long-term plan fixed in fractions of currency and gold relative to the total volume of gold reserves;
- Portfolio rebalancing takes place with significant deviations of percentages, i.e. always at the maximum / minimum of the market (in the opposite direction);
- Each trade goes through a bureaucratic approval process, which is preceded by a detailed analysis.
The Bank of Russia thinks on a significant time scale and adheres to plans that are designed for a period of one year to five years, so annual reports will show only an interim result.
You can familiarize yourself with the Central Bank's trading strategy in more detail on the pages of Renat Valeev’s book “The Art of Trading”. Also, the author actively shares the knowledge gained, speaking at various seminars.
Thanks to the book, the mechanism of transactions of the Bank of Russia becomes clear - to traders “from above” they lower the plan of percentages of the foreign currency portfolio. For example, in 2014, the crisis year, he looked like this:
- EUR - 42.5%
- USD - 42%
- GBP - 9%
- CAD - 5%
- AUD - 1.5%
The daily work of traders consisted in transactions leading to the preservation of the above balance, i.e., the growth of the euro, leading to an increase in the dollar to 43%, led to the dumping of the American currency from reserves. Thus, all types of transactions were of a counter-trend nature due to the specifics of the task of balancing gold reserves.
The measure of the activity of the Central Bank of Russia, as was already indicated at the beginning of the article, is the parameter of the volume of gold reserves, the starting point for which can be considered the 2015 (post-crisis) year. The graph below clearly shows an increase in gold and currency reserves to $ 464 billion.
When reading materials that focus on the figures of "huge" losses, always compare this amount with the information provided and you will see that the drain by Forex traders of the Central Bank does not exceed 2%. This is an excellent indicator of money management, taking into account a clear trend towards an increase in total reserves.