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May 16, 2008

Correlation or Causation

The slight recovery of the USD has been accompanied by a couple of other interesting trends: falling gold and oil prices, and rising equity and bond prices. What is the connection here? With regard to gold and commodity prices, the prevailing theory was previously that high prices were caused not by supply issues, but rather by the Fed's easy monetary policy, which was stoking the embers of inflation. The recent rise of the Dollar has poked a broad hole in this theory, because of the simultaneous fall in prices for certain commodities, namely gold. This has led some analysts to conclude that commodity prices are fluctuating irrespective of the Dollar.

With regard to oil, there does exist a 95% correlation between the price of oil and the EUR/USD exchange rate. However, it now appears that strong oil had been driving the weak Dollar, and not vice versa. The Dollar is also deriving some impetus from a rally in equity and bond markets, which have outperformed their European rivals.  Bond yields remain lower in the US, but with the stabilization of the Dollar, perhaps foreign investors will be convinced that the US is the least risky place to invest during the global economic downturn.

Read More: The dollar rallies at last

Posted to Investing & Trading, US Dollar | Permalink

May 15, 2008

UK: No rate Cuts for 2 Years

The US Federal Reserve Bank is known for ambiguity and vagueness. The Bank of England, it appears, is not trying to emulate this approach. The Bank put an end to speculation about its near-term monetary policy by announcing that it does not plan to cut interest rates for at least two years. Apparently, inflation has breached the Bank's 2% target, and its internal models are forecasting that it won't be until 2010 that price inflation returns to a more palatable rate. This is bad news for the British economy, which is in the throes of an economic downturn precipitated by the housing crisis and would surely benefit from a loosening of monetary policy. By extension, the British Pound should also suffer a "correction," as a combination of inflation and lack of suitable investment opportunities will send investors rushing for the exits. The Financial Times reports:

Mr King contrasted his position – and its focus on controlling inflation – with that of Ben Bernanke of the US Federal Reserve. “We did not fall prey to the sirens to cut interest rates further as some other central banks have done,’’ he said.

Read More: No interest rate cut for two years, Bank warns

Posted to British Pound, Central Banks | Permalink

May 14, 2008

Canadian Dollar Spurred by Oil

Just a few weeks ago, the Central bank of Canada aggressively cut interest rates in order to slow the spread of the US economic downturn to Canada. Accordingly, investors were quite bearish on the Canadian Dollar. With the price of oil surging, however, the Loonie has regained some of its luster, inching back towards parity with the Dollar. If commodity prices remain at current levels, Canada may avoid an economic recession. Economists have scaled back expectations that the BOC will have to continue cutting interest rates. Nonetheless, the median investor expectation is for a sustained decline in the Loonie, perhaps to $1.08 by year end. Bloomberg News reports:

The loonie, as the currency is known because of the image of the bird on the one-dollar coin, has traded near parity with its U.S. counterpart this year after climbing 17 percent in 2007.

Read More: Canada's Dollar Reaches Two-Month High as Oil Surges to Record

Posted to Canadian Dollar, Central Banks | Permalink

May 13, 2008

Q1: Dollar Down 4%

Although the first quarter of 2008 ended on March 31, it wasn't until last week that the Federal Reserve Bank finally finished tallying all of the data and released its obligatory report on the performance of the Dollar. On a trade-weighted basis, the Dollar declined 4%, a figure which accounts for a whopping 11% decline against the Japanese Yen and an 8% decline against the Euro. According to the Fed's analysis, January was relatively kind to the Dollar, as traders remained uncertain as to how the credit crisis would affect the US economy. An outpouring of negative data in the next 4-6 weeks sent the Dollar spiraling downward, although it recovered at the end of March, as the Fed moved to build liquidity in the financial markets. The Fed also noted that it did not intervene in currency markets during the first quarter, firmly putting to rest rumors to the contrary. Forbes reports:

There had been intermittent discussion in the markets of a coordinated foreign exchange intervention by the G-3 central banks, but the Fed report confirmed officially what markets already realized.

Read More: NY Fed reports trade-weighted dollar down more than 4% in first quarter 

Posted to Central Banks , Economic Indicators, US Dollar | Permalink

May 12, 2008

Yen Falls on Risk Aversion

"The credit crisis is over! No it's not! Yes it is!"

Such back and forth represents the tenor of the debate currently transpiring in the financial markets. Every day seems to bring new economic data, which is quickly seized upon by both sides as evidence for their respective positions, causing the markets to rise and fall accordingly. In this regard, the Japanese Yen and the Swiss Franc serve as proxies for investor sentiment. When the markets rally, investors are quick to dump both currencies in favor of higher-yielding alternatives. On the other hand, when a large investment bank announces a write-down on its subprime investments, or when economic data indicate falling housing prices, investors are quick to unwind their short positions (carry trades). The advice of the Forex Blog is to take every development in stride and to remember that no definitive conclusions can be reached at this point.

Read More: Yen Weakens on Speculation Worst of Financial Crisis Is Over

Posted to Investing & Trading, Japanese Yen | Permalink

May 09, 2008

New Forex ETFs

WisdomTree and Dreyfus Funds recently unveiled five new currency ETFs in order to fill a broad gap in the emerging markets category. Previously, investors were limited to such mainstay currencies as the US Dollar, Euro, Japanese Yen, British Pound, Australian Dollar, Canadian Dollar, and Swiss Franc. These new ETFs will expand this list to include the Indian Rupee, Brazilian Real, and the much-anticipated Chinese Yuan. It will also offer products for the Euro and Yen, but these probably won't draw much attention. The RMB ETF, especially, will be pounced on by investors, who have been clamoring for years for a cheap and easy way to capture the upside of the Yuan's inevitable appreciation. In addition, all of the ETFs will also return modest yields based on prevailing interest rates in the representative countries. Reuters reports:

In the case of India, Brazil and China, the yields on the ETFs may differ from yields available locally due to restrictions on foreign investors.

Read More: WisdomTree, Dreyfus to offer five currency ETFs

Posted to Investing & Trading | Permalink

May 08, 2008

Chinese Exporters Dump Dollar

The anecdotal evidence that China is diversifying its forex exposure away from the Dollar continues to mount. To date, most of the focus has centered around the Central Bank of China, which is passively diversifying its reserves into European and higher-risk assets. Apparently, Chinese exporters are also getting nervous about the impact of a falling Dollar on their respective bottom lines. The RMB has risen 11% since the beginning of 2007, which means Chinese companies now receive 11% less on sales to destinations abroad than they did for equal-priced goods in 2007. As a result, some companies have taken to quoting prices in Euros or to adjusting Dollar-denominated prices every few months. Other companies are building assumptions of a more valuable RMB into their profit models, and setting prices accordingly. The New York Times reports:

“We are gradually increasing our emphasis on the domestic market until we can forget about the export market, because the profit margins on exports are so thin,” [said one exporter].

Read More: Some Chinese Exporters Prefer Euros to Dollars

Posted to Chinese Yuan (RMB), Euro, US Dollar | Permalink

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