Forex Gump's  Instablog

It looks like hedge funds will soon jump over the Chinese hedge! Word around the hood is that China is looking to allow more foreign institutional investors to operate in the country.

But I guess the news comes as no surprise. After all, we've talked about how the Chinese government has taken other steps to open up its markets to foreigners. On top of that, China has been encouraging foreign investors and pension funds to directly trade in the country's stocks and bonds. However, hedge funds, known for carrying out aggressive investment strategies, have never been allowed to operate in the country.

Some say that the situation is about to change very soon though.

It was recently confirmed by the China Securities Regulatory Commission (CSRC) that it is taking into consideration a proposal to issue more Qualified Foreign Institutional Investor (QFII) licenses. These are granted to foreign investors who wish to trade yuan-denominated shares in China's mainland stock exchanges in Shanghai and Shenzhen.

Other than that, a few more tweaks have been proposed to make the application process for QFII licenses more investor-friendly. If the government decides to push through with them, the move could pave the way for hedge funds to gain access to China.

It can't be denied that the qualification requirements for hedge funds are pretty strict. The criteria require that all institutions apart from banks and securities brokerages must have at least $5 billion worth of assets under management. Aside from that, firms must also have been running for at least five years.

But even those qualified under the CSRC's criteria also have a hard time getting their licenses as China has showed that it hasn't been so willing to issue them to hedge funds. For instance, a New York-based hedge fund called Och-Ziff Capital Management is still waiting for its QFII license which it applied for a few years back.

But as I said, all that could change under the new initiative, which promises to ease those qualification requirements and give other firms a fighting chance. For example, it was proposed that the $5 billion asset requirement be lowered which would allow smaller hedge funds to apply for their QFII licenses.

With that, a larger number of QFII-licensed firms would mean that industry watchdogs will widen their scope for monitoring and implementing regulations. This would be in line with their goals to professionalize the industry and to better facilitate capital flows in and out of the country.

So why is this important?

For one, allowing more hedge funds to operate in China could also translate to stronger demand for yuan-denominated assets and the Chinese yuan itself. As I have pointed out in my article about the approval of three Chinese banks' operations in the U.S., these recent moves by China could pave the way for more yuan flexibility down the road. Heck, it could even transform the yuan into a commonly-traded currency!

On top of that, the move could also even out the playing field and address the issue of global trade imbalances. Remember that with an undervalued currency, Chinese exporters enjoy an unfair trade advantage because their products are relatively lower compared to those of their counterparts.

But let's not get ahead of ourselves. These proposals are still subject to the Chinese government's approval and hedge fund owners themselves might not be so open to the idea of additional regulation. Do you think that the QFII reforms could result in more yuan flexibility though? Let us know what you think by voting in our poll below!

Were the G8 leaders able to form concrete solutions last weekend, or was the meeting just an opportunity to watch the UEFA Champions League final together?

Last weekend, the leaders of the U.S., the U.K., Japan, France, Germany, Italy, Russia, and Canada all huddled at Camp David in Maryland, U.S. to talk about the state of the global economy. In short, they talked about what the heck they're going to do with Greece.

For the past couple of weeks, the possibility of a Greek exit from the euro zone has been weighing on risk appetite. The country's inability to form a solid government led to speculations that Greece will default on its debts and left market players to speculate on a Grexit.

The main point that we can take away from the statements released is that the G8 leaders all agree that keeping Greece in the euro block is important for global stability and recovery. Apparently, the leaders are ready to take all necessary steps to strengthen their economies and fight financial stresses.

Unfortunately, the road to recovery might not be so simple. The G8 statement also stressed the truth that measures towards recovery are not the same for each of the G8 economies. In fact, British Prime Minister David Cameron even said that growth and austerity are not alternatives in the euro zone's case, and that fast actions are needed.

It doesn't help that G8 leaders are still divided and unsure about the best plan of action to take. Newly-elected French President Francois Hollande believes that policies pushing for economic growth will eventually pull Greece out of the rut, while German Chancellor Angela Merkel insisted that austerity measures are the way to go.

From the looks of it, Germany seems unwilling to soften its stance on austerity despite calls to boost euro zone economic growth. As U.S. Treasury Secretary Timothy Geithner mentioned during last month's IMF meeting, debt-ridden nations must avoid too much spending cuts that could dampen economic growth, shrink tax revenues, and widen government deficits down the line.

At the end of the day, G8 leaders were all bark and no bite. Although they did attempt to reassure the markets by reiterating their pledge to support global economic growth, they weren't actually able to agree on a concrete plan of action, leaving the fate of Greece and the euro still uncertain.

Despite this lack of resolution, it appears that the G8 summit was able to revive confidence in the markets as we witnessed risk rallies on Monday. Not only were higher-yielding currencies able to snap out of their losing streaks, equity indices also rebounded from their worst weekly performance for this year.

At this point, it seems that any kind of positive news could spur risk appetite as market participants are desperate to see light at the end of the tunnel. Whether this risk rally resulting from the G8 summit would last or not remains to be seen, as the slightest bit of negative news from the euro zone could also force the selloffs to resume. Be careful out there!

And just like that, we're one quarter into the year already! I think it's time we take a look back and see how the forex markets performed in Q1 2012!

Below is a chart of 7 major currencies and how they fared against the U.S. dollar over the past three months:

(click to enlarge)

Interestingly, all the high-yielding currencies posted decent gains versus the dollar, with the New Zealand dollar leading the way with an impressive 5.18% gain. The risk-on environment in Q1 2012 gave the comdolls plenty of room to rise, as the Australian and Canadian dollars were able to post gains against the safe haven Greenback as well.

Also notable is how the Swiss franc managed to appreciate 4.13% against the dollar despite the Swiss National Bank (SNB)'s commitment to weaken the franc. But then again, the SNB was never as concerned about USD/CHF as it was about EUR/CHF, the pair that the central bank bases most of its decisions on.

The British pound was also able to seal a solid performance by rallying late in March to end with a 3.18% gain. And right on its heels was the euro, which was actually quite resilient last quarter. I mean, who would've thought that it would gain 3.16% amidst all that Greek debt drama?

Surprisingly enough, EUR/USD stayed above 1.3000 throughout February and March, even though only 11 out of 49 surveyed banks believed that the pair would stay above that level back in January.

Meanwhile, the yen ended up being the biggest loser, dropping a solid 7.20%. This is quite strange, because if you read my January 2012 Currency Performance post, you'd remember that the yen was actually the top dog for the month of January.

Of course, this is great news for our friends over at the Bank of Japan, which has done everything under its power to depreciate the yen. Looks like they found the yen's weakness after all, eh? And all it took was one monetary policy statement!

That about wraps up our roundup of the Q1 2012 currency performance. Tomorrow, I'll share something I'm sure you'll all be interested in - the big banks' predictions for Q2 2012! Don't miss these hot forecasts, forex folks!