Traders Denied M&A Payday as Firms Use Cash: Currencies

It’s getting tougher for currency traders to catch a break.

After investigations into alleged rate-fixing and central-bank stimulus that pushed volatility to pre-crisis lows, dealers are now being denied a windfall from the flurry of cross-border mergers in Europe. Rather than get the euros or pounds they need through currency markets, there’s speculation U.S. companies including General Electric Co. may be dipping into offshore cash piles they’ve built up to mitigate tax liabilities.

“Before the market gets excited that mega takeovers from the U.S. could lift the euro and pound, it’s worth recognizing that U.S. companies are sitting on truly huge cash piles abroad,” Steven Barrow, the head of Group of 10 research at Standard Bank Plc in London, wrote in an April 29 note to clients. “That does change the way we have to look at these takeovers from a currency perspective.”

This is proving to be the latest challenge for the $5.3 trillion-a-day currency market, in which the unprecedented amounts of money poured into the global financial system by central banks have muted many of the trends that dealers, traders and investors use to make money. Parker Global Strategies LLC’s Global Currency Managers Index has plunged 2.5 percent this year, while Deutsche Bank AG, the biggest trader, said April 29 foreign-exchange revenue fell “significantly” in the first quarter “due to lower client activity.”

Skirting Taxes

The value of takeovers announced in 2014 hit $1 trillion this week, reaching that level sooner than any year since 2007.

Multinational companies have accumulated $1.95 trillion outside the U.S., up 11.8 percent from a year earlier, according to a Bloomberg News review of filings. By keeping cash offshore, U.S. companies can avoid paying as much as 35 percent tax on repatriated profits.

Fairfield, Connecticut-based GE is considering tapping its $57 billion in overseas cash to fund its 12.4 billion-euro ($17 billion) offer for Alstom SA’s energy business, a person familiar with the situation said this week. Drugmaker Pfizer Inc., which has proposed buying AstraZeneca Plc of the U.K., has $69 billion in cash overseas, data compiled by Bloomberg show.

Not Transparent

A lack of transparency over what currencies companies hold offshore makes it difficult to trade off the back of these takeovers, said Daragh Maher, a foreign-exchange strategist at HSBC Holdings Plc in London.

He cited the sale of London-based Vodafone Group Plc’s stake in U.S. company Verizon Wireless for $130 billion in February as an example of how acquisitions can affect currency markets. The pound strengthened 4.4 percent against the dollar in September, the most in three years, after the transaction was announced on Sept. 2.

“This is a difficulty for the FX market,” Maher said yesterday in an e-mail. “We saw with the Vodafone-Verizon deal that corporate transactions can have a sizable impact on foreign exchange. But in that instance, there were more transparent grounds for anticipating some flow, and understanding the likely scale of that flow.”

Not so this time. The euro and pound have remained in a tight trading range amid the surge in international interest for European and British companies, with their swings damped by the record-low interest rates and debt purchases of the European Central Bank and Bank of England. The Federal Reserve’s bond-buying program -- which it’s whittling down from last year’s $85 billion a month -- has been the biggest cause of low volatility.

Volatility Plunges

Deutsche Bank’s Currency Volatility Index, based on three-month options for nine major currency pairs, fell to 5.8 percent today, the lowest level since 2007 and down from more than 21 percent in early 2009.

The euro traded in its narrowest range since its 1999 debut last week, moving just 0.7 U.S. cent between $1.3785 to $1.3855, while the pound experienced its smallest moves since March 2002, remaining at levels of $1.6763 to $1.6839.

Deutsche Bank cited lower volatility when it reported April 29 that revenue from its fixed-income and currencies division fell 10 percent to 2.43 billion euros in the first quarter, compared with a year earlier. FX Concepts LLC, the firm founded by John Taylor which in 2009 was the world’s largest currency hedge fund, said in October it was shutting its investment-management business.

Rate Fixing

The foreign-exchange market has also been hit by allegations, first reported in June by Bloomberg News, that traders colluded to manipulate benchmark rates.

Traders’ ranks are rapidly thinning, with more than 30 people from 11 firms having been fired, suspended, taken leave of absence or retired since October, when regulators said they were investigating the market, according to data compiled by Bloomberg. No firms or individuals have been accused of wrongdoing by government authorities.

“That’s a considerable percentage of the workforce,” said Brad Bechtel, managing director at Faros Trading LLC in Stamford, Connecticut.

For those who are left, the jump in takeovers is proving little consolation.

“M&A today through the spot market is not as significant as it used to be,” Derek Halpenny, the London-based head of global markets research at Bank of Tokyo-Mitsubishi UFJ Ltd., said yesterday in a phone interview. “There are a number of issues at play including regulatory control and, possibly more importantly, regulatory uncertainty that’s diminishing the appetite for transacting.”

(For a Currencies column daily alert: SALT FXCOL.)
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