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Archive for April, 2005

“Economic Outlook” for Japan

Apr. 29th 2005

The Bank of Japan recently released its annual "outlook report." As suggested by its title, the report summarize the bank’s forecasts for future economic growth. With regard to the year 2005, the bank lowered both its forecasts for growth and inflation. In spite of a global economic recovery over the last couple years, Japan’s economy may actually contract this year. At .1%, inflation is a non-issue. Japan’s Central Bank has kept interest rates low, so as to encourage investment, and maintain low borrowing costs for Japanese firms. None of these measure have been able to stimulate the economy, however. The Bank of Japan also released its forecasts for 2006, which were quite bullish. Many economists, however, take these predictions with a grain of salt, and view them as political- rather than economic- statements. Morgan Stanley reports:

The Bank aims to preserve market expectations for an exit strategy by its bullish forecast together with the suggestion about the reduction of the current account balance, thereby avoiding an over-reaction by the market. Also, the Bank has a track record of trailing economic turning points due to its stubbornness.

Read More: Japan: A Long Shot

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Russia may appreciate Ruble

Apr. 29th 2005

In response to rising inflation, Russia may allow the Ruble to appreciate. Russia’s Central Bank has set a target inflation rate of 8.5%, which, if achieved, would actually represent a 3% decrease from 2004. Soaring commodity prices, have trickled down through Russia’s economy, triggering a broad increase in prices. Russia currently maintains a "managed float" exchange rate regime, in which the value of the Ruble is technically determined by market forces. However, the Central Bank intervenes on a daily basis, to essentially fix the value of the Ruble against a basket of currencies. Rather than raise interest rates, Russia’s Central Bank will likely allow the exchange rate to appreciate against the USD and the Euro, so that Russia will receive more Rubles for its exports, namely commodities. The Financial Times reports:

An economist at Moscow Narodny Bank, added: “Inflation pressures are very prominent and, given the limited sterilization instruments, the burden is going to be placed on the exchange rate.”

Read More: Russia may allow currency to gain

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The economics behind China’s exchange rate crisis

Apr. 28th 2005

Jeffrey Frankel, a professor of economics at Harvard University, believes the laws of economics Will eventually force the Yuan to rise against the dollar, in real terms at least. China’s economy is growing exponentially, and the Chinese government seems either unwilling or unable to cool it off. As the demand for Chinese goods continues to skyrocket, so too must prices. According to Frankel, the extent of the rise will be such that in a decade, the Chinese Yuan will be fairly valued against the USD, in real terms. While nominally, one USD would be worth 8.28 Yuan, the inflated costs of Chinese goods would ensure equilibrium. Such a situation would be disastrous for China, however. It would be in China’s best interest to slowly appreciate the Yuan against the Dollar, through the use of a crawling peg exchange rate regime. If China waits to long, warns Frankel, the results could be catastrophic. Reuters reports:

"The alternative of waiting for a time of balance-of-payments deficit often turns out to mean exiting the peg under strong downward speculative pressure, with the result that confidence is undermined and the national balance sheet is weak," Frankel says.

Read More: Yuan undervalued at least 35 pct

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Posted by Adam Kritzer | in Chinese Yuan (RMB) | 1 Comment »

Fed faces a Hobson’s choice

Apr. 28th 2005

First quarter real GDP growth was reported to be 3.1%, below the 3.5% that economists had previously forecasted. On the surface, this appears to support claims that the US economy is gradually losing steam. However, many investors believe this quarter may represent an aberration, and they continue to be bullish in their short and long term forecasts. The release of GDP data coincided with the release of inflation data, which indicated inflation is indeed increasing. This has led many economists to observe that the Fed faces a so-called Hobson’s choice, in conducting monetary policy. The nature of the dilemma dictates the Fed has two options.  It can either to continue to raise rates, in order to keep pace with rising inflation. Instead, it may opt to freeze rates in the short term, to combat unemployment by stimulating the economy. The Financial Times reports on the implications for the USD:

A senior currency strategist…argued that stagflation should have the unintended consequence of supporting the dollar; while rising rates encourage buying of US bonds, weak growth should cut demand for imports, allowing the trade deficit to narrow.

Read More: Dollar Edges up as Market Undecided over GDP data

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UN warns of Asian economic slowdown

Apr. 27th 2005

In a recent report, the UN warned that Asia may soon experience a collective economic slowdown. The report was upbeat, in that it  forecasted regional real GDP growth of 6%. However, this figure represents a sharp drop from last year, when real GDP topped 7%. The report attributes this slowdown to a rise in global commodity prices and a weaker USD. The US is the world’s largest buyer of Asian manufactured goods, and the weak USD makes Asian exports comparatively more expensive. The report also advised China to cool its economy, and prevent bubbles in asset prices from expanding. VOA news reports:

"Provided the growth is accompanied by faster productivity, that will be much better," a UN economist said. "But if growth is accompanied by more investment, that will just drive up inflationary pressures in China, which has implications in the rest of the world."

Read More: UN Predicts Slower Growth for Asian Economies

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Is Monetary Policy still relevant?

Apr. 26th 2005

With economies becoming more market oriented, and markets, themselves becoming more globalized, some investors have begun to question the relevance of monetary policy. The purpose of a central bank is to control interest rates and often the exchange rate vis-a-vis the money supply. However, economic liberalization and globalization have severely constrained central banks ability to achieve this task. In a command or highly regulated economy, the central bank can control the money supply by limiting capital mobility. In an open economy, investors are essentially free to invest there money where they see fit. Moreover, interest rates and exchange rates are no longer determined exclusively by central banks, which serve as mere guides. Rather, the rates are determined by market forces, and investor expectations and interest rate parity are the preeminent influences.

Bl Pandit, an Indian economist defends monetary policy as an effective economic tool. It is especially important in developing economies, he argues, where destabilizing shocks must be predicted and neutralized, and where inflation is a perennial problem.  India’s Financial Press reports:

The multiple indicators for monetary policy have to incorporate signals not only from the real sector but also from debt, equity, credit and currency markets—both domestic and foreign. This makes the practice of monetary policy more demanding.

Read More: Has the Monetary Policy Lost its relevance?

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South Korea liberalizes capital controls

Apr. 26th 2005

South Korea is taking steps to liberalize its capital controls, with the purpose of spurring outbound foreign investment. South Korea has amassed over $200 Billion in foreign exchange reserves, while trying (in vain) to prevent the Won from appreciating against the dollar. Rather than continue its futile intervention in forex markets, South Korea has wisely decided to allow for greater outflows of capital. This policy will serve the dual purpose of lowering South Korea’s forex reserves, as South Koreans exchange Won for foreign currency, and should also check the Won’s broad appreciation. The specifics of the policy have yet to be worked out. Previously, South Koreans were limited in the amount and type of investments they could undertake abroad. Now, however, South Koreans will be permitted to invest in real estate properties abroad, even if only for investment purposes, and not for their utility. The Korea Times reports:

Local investors will be allowed to purchase overseas properties through real estate investment trust funds managed by the asset management firms. The government is also studying ways to relax rules requiring the domestic institutional investors to obtain prior approval from the regulators for the trading of financial derivatives products in overseas markets.

Read More: South Korea to Stimulate Outbound Investment

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Fed won’t respond to global imbalances

Apr. 22nd 2005

In a recent interview, a member of the Federal Reserve Bank stated that the Fed will not respond to widening global imbalances. The US government has been running large fiscal deficits the last few years, and issued short and long-term
bonds to finance the spending. Because the government must service the debt by making periodic interest payments to bondholders, it is in their best interest
that interest rates remain low. The Fed, apparently, is unwilling to take this into consideration when conducting monetary policy. Instead, it has pledged to predicate monetary policy on inflation forecasts. It should also set interest rates to facilitate the correct pricing of assets. Many fear, for example, that cheap access to credit has led to bubbles in  many sectors of the economy, including real estate and some commodities. Reuters reports:

Despite the steady pace of interest rate hikes since last June, the Fed has further to go before the federal funds rate reaches a neutral level where it has no impact of inflation and growth. The Fed is likely to raise rates further at a measured pace ‘if growth is sustained and inflation remains contained.’

Read More: Global imbalances can’t tie Fed’s hands

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Chinese currency peg as unfair trade practice?

Apr. 22nd 2005

It is clear that American lawmakers are frustrated with the growing trade imbalance, and many feel the Chinese currency peg is to blame. Accordingly, lawmakers have requested the peg be officially labeled an unfair trade practice, under US trade law. The Bush administration has 45 days to respond to the petition. If it votes affirmatively, the US could rightfully impose trade sanctions or import tariffs on Chinese imports. However, this seems unlikely, as the Bush administration has previously rejected two similar petitions. It seems the administration is pursuing more diplomatic means in trying to coerce China into undoing the peg. However, congressmen have warned that another rejection could force them to use legislation to put pressure on China. Reuters reports:

U.S. manufacturers blame China’s long-held policy of tying its currency to the dollar for much of the U.S. trade deficit with China, which hit a record $162 billion last year. They argue the currency peg makes U.S. imports more expensive and Chinese exports cheaper, giving Chinese companies an unfair price advantage of 25 percent to 40 percent.

Read More: Lawmakers reviewing request for China Yuan Probe

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Posted by Adam Kritzer | in Chinese Yuan (RMB) | 1 Comment »

US in ‘Sweet Spot’

Apr. 21st 2005

In a recent interview, Treasury Secretary John Snow said the US economy is currently in a ‘sweet spot.’ Most economic fundamentals underscored by a high real GDP growth rate, signifies the US economy is indeed strong. Bond traders have largely reinforced this belief, as bond spreads are extremely thin, which signify investors’ confidence in the economy. However, warned Snow, the US will not likely remain is this buoyant position for long. The CPI rose by .4% last month (4.8% annualized), which has some economists worried about inflation. Most of the increases in price have occurred in transportation and energy, and may only be short term increases. Snow also addressed the United States’ widening fiscal and trade deficits. Adopting more fiscal prudence, and forcing China to revalue its currency, will solve each of the problems, respectively, said Snow. Reuters reports:

"Although we’ve seen some softer numbers in some areas, the overall picture remains very, very good," Snow told reporters. "The fundamentals are still strong. I’m confident the American economy is going to continue to have good growth in a basically non-inflationary environment."

Read More: Snow dismisses stagflation, as CPI spikes up

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Investors consider possibility of EU breakup

Apr. 21st 2005

According to a new report by Morgan Stanley, the EU may be in the process of dissolving. The integration effort, which was originally undertaken for political reasons, has failed to live up to expectations. Many economists make a superficial comparison between the EU and the United States, as each is a collection of semi-autonomous entities linked together by a common constitution and common currency. However, they argue, it makes sense for the United States to be linked by a common currency, as there is a high degree of economic integration and interstate trade. In contrast, the EU is a diverse collection of sovereign nations whose economies are relatively distinct from each other.

Some nations, notably France and Holland, are beginning to come to terms with this. They realize that the political union should be distinguished from the economic union. Euro area growth is sluggish at best. Unemployment is high, and aggregate demand is low. There is a complete absence of fiscal discipline, in contravention of the EU constitution, which looks like it may soon be scrapped. Many investors are beginning to price this risk into the Euro, which has failed to rally against the USD, despite a record trade deficit. Before, the big question was whether the Euro might one day rival the USD as the world’s reserve currency. Now the question is, in 5 years, will the Euro still exist?

Read More: Markets too ‘complacent’ about breakup of Euro-zone

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US economy fraught with weaknesses

Apr. 19th 2005

The US economy is currently one of the strongest in the world, among developed nations. However, economists are warning that it may be losing steam. They point to such statistics as consumer confidence and retail sales data, which are increasing, but at a slower-than-expected pace. This trend will likely continue in the short-term for a few reasons. First, as fuel costs creep ever-higher, Americans will have less disposable income to spend on non-durable goods. Next, with rising interest rates, leveraged companies and individuals with adjustable-rate mortgages will witness a rise in the cost of paying back loans. Finally, as the USD depreciates, so do the costs of imports rise. This spells trouble for the US, which is running a record trade deficit. Analysts are watching this situation closely, as American consumers, in part, drive the global economy. With many developed economies stagnating (Japan, Europe et al), American consumers will continue to play an important role. BMO Nesbitt Burns reports:

Contributing to this concern is the still relatively tepid U.S. job market. Business investment likely continues strong, but corporate earnings growth is slowing as the cost of production rises. Trouble spots are everywhere: Think airlines, autos, GSEs, housing, and sub-prime loans.

Read More: The Risks of a U.S. ‘Soft Spot’

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Posted by Adam Kritzer | in US Dollar | 1 Comment »

Inflation may cause rate increase in UK

Apr. 19th 2005

The British Pound is continuing its run against the USD, as investors and traders anticipate a rise in UK interest rates. Newly released inflation data indicates that prices are increasing at a faster pace than interest rates, due to surprising strength in Britain’s economy. At last month’s meeting of the UK central bank, only one member voted to raise rates. At the time, the other members were confident that interest rates accurately reflected inflation expectations, and voted not to change rates. In response to this new development, they may be forced to act. Economists, however, are quick to point out that much of the rise in prices can be attributed to rising transportation and energy costs, and may not be an accurate metric of general economic performance. The Financial Times reports:

A senior forex strategist said that inflation was just 1.3 per cent if energy and transport costs were stripped out. He argued that the Bank would be unlikely to hike rates in response to an energy shock unless there was evidence of this feeding through into second-round effects such as higher wage growth.

Read More: Surprise Inflation Boost for Sterling

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Posted by Adam Kritzer | in Major Currencies | No Comments »

China is capable of floating currency

Apr. 18th 2005

According to a top Treasury department official, China is fully able to float the Yuan. Recent improvements and reforms have left China with the mechanisms and structures needed to float its currency. It has taken steps to liberalize its current account, so as to allow the outflow of USD. It has appointed several prominent international banks to serve as market-makers in the new foreign exchange market. The Chinese government has even dispatched top officials to the Chicago mercantile exchange, which will likely serve as a model for China.

Yuan-denominated currency derivatives, such as swaps, futures, and options are already extremely popular. At this point, they serve as a mere hedge against revaluation. In the future, however, they may take on a more important role, as the Yuan will surely become one of the most frequently traded currencies in the world. The only thing that is preventing China from floating the Yuan tomorrow is China, itself. The Chinese government has used a cheap Yuan for over a decade to buttress its policy of export promotion, and is understandably nervous about the impact a revalued Yuan will have on its economy.

Read More: China can float its currency, U.S. official says

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Taiwan to depreciate currency

Apr. 15th 2005

Taiwan’s currency, the NT dollar, declined today, as Taiwan’s central bank threatened to depress its aberrantly strong currency. Taiwan ran a trade deficit last year, and looks likely to do so again this year. The Taiwanese are quick to blame their strong currency as the cause of there trade problems. They are calling for Taiwan’s central bank to depreciate the NT dollar, so that Taiwanese exports can compete with exports from other Southeast Asian nations. The Japanese Yen’s sudden decline has only intensified exporters’ fears of uncompetitiveness. The central bank is likely to respond affirmatively, as a any decline in Taiwanese exports would put a damper on Taiwan’s economy. This intervention will take the form of a sale of NT Dollars, which should sufficiently depress the currency. The Taipei Times reports:

"The central bank will probably be keen to prevent the Taiwan dollar’s appreciation against currencies of Taiwan exporters’ competitors," Dariusz Kowalczyk, investment strategist at CFC Securities Ltd, said in Hong Kong. "The Taiwan dollar will come under pressure."

Read More: Speculation over currency sell-off pushes NT lower

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US Trade deficit worsens

Apr. 14th 2005

At $61 Billion, the United States’ trade deficit has set yet another record. It was expected that as the USD depreciated, and the economy reached a more mature stage in the current economic cycle, that this deficit would narrow. There appears to be no end to the deficit problem in sight. Asian economies, with their cheap currencies and exports, deserve much of the blame. US fiscal irresponsibility is also culpable, as the current administration is not treating this problem with the gravity it merits. As usual, the pessimists have been quick to voice their opinions on the widening deficit. They argue that the deficit is not sustainable in the long run. At some point, Asian economies will decide they no longer wish to finance the deficit, and a day of reckoning will occur. The IMF agrees. If the imbalance is not soon addressed, the US may be forced to raise interest rates at a quicker-than-expected pace, stunting economic growth. The Financial Times reports:

This would probably prompt a similarly abrupt rise in US interest rates, which could kill off the US housing and consumption boom and explode over- leveraged financial institutions, with severe global consequences.

Read More: Imbalances Worsen

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Referendum on EU expansion looms

Apr. 14th 2005

Despite a recent decline, the Euro has appreciated against the USD for several consecutive years. Although the American twin deficits are certainly to blame, many credit strong EU fundamentals for the Euro’s appreciation.  Many investors have confidence in the EU as a credible threat to American economic preeminence. They have faith in EU-member economies, and in the stability of the Euro. Accordingly, many investors have been pouring money into eastern and central European economies, guided by the belief that these nations will soon be invited to join the EU. This tremendous inflow of capital has kept interest rates low and caused many currencies to appreciate in value. A referendum is currently scheduled for May 29, to determine whether the EU should be expanded to include more nations. France and the Netherlands have already leaked the distinct possibility of a ‘no’ vote. This would put a severe damper in investor’s expectations for Europe, to say the least. The Science Daily reports:

A French "No" in the referendum… means the momentum of Europe is halted. It means that future EU enlargement is put on hold. It also suggests that the political commitment of European voters to the EU future is a lot weaker than that markets assumed, which puts a crack into the credibility of the euro.

Read More: France’s No threatens currency chaos

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Political Instability Grips Canada

Apr. 13th 2005

Canada is undergoing a political crisis with potentially far-reaching implications. The investigation concerns members of the Liberal Party of Canada, who may have received kickbacks in exchange for lucrative advertising contracts. The most prominent member of the Liberal Party happens to be Paul Martin, the Prime Minister of Canada. It is distinctly possible that Canadian Parliament will force an ad hoc election to see if Paul Martin shall remain Prime Minister.

It is extremely difficult to forecast the effects this type of crisis will exert on the economy, especially in a nation is perennially stable as Canada. Regardless, many investors are rushing for the exits, selling Canadian equities and Canadian Dollars. It is uncertain whether the political crisis is solely responsible for this flight of capital. Many analysts point to recent declines in the prices of global commodities, which could adversely effect Canada, a nation rich in natural resources. In addition, the Central Bank of Canada does not look set to raise interest rates, while its counterpart to the South will likely continue to raise rates at a measured pace. For all of these reasons, it will probably not be smooth sailing for the Canadian Dollar. Globeandmail.com reports:

"Political uncertainty may now be filtering through into foreign exchange markets," concurred Avery Shenfeld, senior economist at CIBC World Markets Inc. "We’re getting a lot of calls about the odds of an election in the next few months. It has forced the markets to put a political-risk premium into Canadian assets, whether it’s stocks, bonds or the currency," he said.

Read More: Foreign investors unload loonie

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Singapore to appreciate currency

Apr. 12th 2005

The Monetary Authority of Singapore announced today that it will allow the appreciation of its domestic currency, in order to keep pace with inflation. Somewhat surprisingly, Singapore also lowered its annual forecasts for economic growth and inflation, which has left many investors confused. Singapore currently maintains the value of its currency against a trade-weighted basket of foreign currencies. It uses this exchange rate regime to conduct monetary policy. The central bank’s decision to allow the dollar to appreciate is equivalent to a raising  interest rates. Whereas a typical central bank would simply raise interest rates to manage inflation, Singapore appreciates its currency. Singapore’s central bank has been fighting to keep its dollar down, in the wake of a weaker USD and a massive inflow of foreign capital. It has finally capitulated, and will allow the dollar to appreciate. If Singapore’s economy, however, continues to sputter, the central bank may soon move to check the dollar’s appreciation. The Financial Times reports:

However MAS said “underlying growth support for the Singapore economy remains intact,” predicting a modest rebound in demand for electronics, the city-state’s biggest manufacturer, in the second half of the year. It predicted that economic growth this year will likely come in at the low end of the government’s 3 to 5 per cent forecast.

Read More: Singapore to let dollar rise

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Mixed outlook for Japanese Yen

Apr. 11th 2005

How the Japanese Yen will fare in the coming months is currently a popular topic of discussion. The Japanese Yen has appreciated for several consecutive years, and many investors are bullish on its future. They point to an improving economy, made possible by low interest rates. The Japanese government seems to agree, having recently upgraded its assessment of the Japanese economy for the first time in almost a year. Many analysts agree, citing technical indicators as evidence that now may be an especially good time to buy the Yen. 

But, for every bull, there’s a bear, and this situation is no exception. Japan is almost completely dependent on other nations for raw materials, notably oil and natural gas. As the prices of these commodities rise, Japanese businesses and consumers must spend more of their free cash and disposable income, respectively, on purchasing these commodities. In most countries, the profits earned by domestic producers of raw materials offsets the higher costs born by other businesses that use these raw materials as inputs in production. This trade-off does not exist in Japan, and each additional Yen spent on gas causes a proportionate decline in Japanese GDP, which could weaken the Yen. Furthermore, this increase in the cost of raw materials has left Japanese companies with less profit. Many foreign investors are selling Japanese equities, which has caused a significant outflow in foreign capital. Only time will tell who is more prescient- the bulls or the bears.

Read More: Yen Nears Its Bottom

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US may impose tariff on Chinese imports

Apr. 11th 2005

The US Senate voted by nearly a 2-1 margin in favor of threatening China with tariffs, if it does not soon allow the Yuan to float. The proposition is extremely vague, and does not include a timetable for reforms, nor does it lay out a test to determine if the reforms have taken place. Rather it calls for a 27.5% across-the-board tariff on all Chinese imports. Massive factory closings and layoffs in American manufacturing sectors have led politicians to embrace a limited form of protectionism. With the recent elimination of quotas on Chinese textile imports, American textile production will probably soon fade into insignificance. Congressman are searching for any means possible to make American exports more attractive, and China’s exchange rate regime represents an easy target. China has two definitive options: it can embrace reform or accept tariffs on exports to America. Either way, Chinese imports may soon become more expensive. The Christian Science Monitor reports:

Letting the yuan "float" in global currency markets, however, would help level the competitive playing field between Chinese and American companies. But China refuses to do that, claiming that parts of its economy, such as banks, are still too weak to bear the pressure of global competition that a floating yuan would bring.

Read More: Freedom From China’s Currency

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China prepares to float the Yuan

Apr. 8th 2005

China is slowly moving toward revaluation of the Chinese Yuan. The currency, which is currently fixed to the USD and trades within a narrow band, may soon be allowed to fluctuate freely. China’s Central Bank recently approved 7 (foreign) banks as market makers in the new exchange rate system. The banks will be permitted to make the market in a dozen or so of the most popular currency pairs (i.e. USD/Euro, USD/Yen, etc.). Eventually, these banks will be permitted to make the market in Chinese Yuan. Economists and nation-states continue to urge China towards reforming its exchange rate regime, sooner rather than later. The Economist reports:

How much these moves will accelerate currency reform is uncertain. In a recent interview with the People’s Daily, the party mouthpiece, Zhou Xiaochuan, the central bank governor, said that the priority was to improve its exchange-rate mechanism, not simply to revalue.

Read More: China’s Yuan: Softly, softly

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IMF identifies potential instabilities

Apr. 8th 2005

In a recent report, the IMF identified potential sources of financial instability in the global economy. It advised Central Banks to continue raising interest rates to ‘neutral’ levels, that neither inhibit nor facilitate economic growth. It warned that raising rates too high or not enough would have negative consequences that could echo throughout the global economy. It is important that central banks raise rates high enough to prevent speculative bubbles- which may already exist- from expanding to unsustainable levels. On the other hand, it is important that central banks do not raise rates too high, so as to stifle liquidity in capital markets. The banks must tread delicately.

In addition, the IMF warned that trading in complex financial securities could prove to be dangerous, as such securities have never been tested in times of financial distress. Derivatives and collateralized debt obligations are two such examples. Both of these securities are traded by the most sophisticated individuals and institutions, who all make use of the same financial models. As a result, a period of prolonged financial distress could cause investors to sell the securities en masse. New Zealand’s Stuff.com reports:

Emerging markets so far have benefited from improved financing conditions over the past two years, which have stemmed in part from increased global liquidity but also from increased reliance on domestic capital markets, the IMF said. But it also said that many emerging markets "continue to face considerable maturity and currency mismatches on their balance sheets."

Read More: Big rate rises risk financial stability – IMF

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Paranoia in South Korea

Apr. 6th 2005

South Korean officials are becoming more vocal in their criticism of speculators. A bubble may be forming in South Korea’s real estate market, and many believe the Won is overvalued. They are quick to point fingers at foreign hedge funds for driving the Won to record levels. South Korea has pursued an economic policy of export promotion for several decades now. They believe this policy, and the concomitant low exchange rate, are vital to economic growth. Accordingly, the Central Bank has gone to great lengths to try to keep the exchange rate competitive, including buying over $200 Billion in American treasuries and issuing $7 Trillion Won worth of stabilization bonds in the last year alone. Perhaps the time has come for South Koreans to abandon their "anti-market hysteria" and learn to accept prices which are determined by free markets. The South Korea Times reports:

It is time to abandon the costly illusions of mercantilist logic and export-led growth policies that were defeated intellectually in 1776 with the practical limits made clear in 1997. As such, exchange rates should be determined by supply-and-demand conditions and economic fundamentals that do not introduce price distortions into the economy.

Read More: Anti-market Hysteria

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EU fights to contain government spending

Apr. 5th 2005

At a summit last week, EU members spent much time mooting the current rule which prohibits nations from running large budget deficits. The rule officially caps spending at 3% of GDP, and threatens violators with large fines. However, the rule has been completely ignored by many member nations, with France and Germany as the most egregious offenders. (None has even received so much as a public rebuke.) The two nations justified their deficits with the claim that the entire EU benefited from their respective spending on defense and R & D.

The European Union is completely unique, in that member nations are free to pursue independent fiscal policies, while they must all adhere to a common monetary policy. This can cause problems, as international lending rates should be correlated with government debt, and the risk of default. The implication here is that all member nations borrow money at the same rate, regardless of disparities in creditworthiness. Ostensibly, Italy could run a deficit equivalent to 20% of GDP without being forced to compensate lenders with a higher interest rate. The EU must soon reconcile this discrepancy, if it wishes to maintain any degree of monetary stability. The Economist reports:

The ECB hinted that it might respond to a new bout of fiscal incontinence in the euro area with higher interest rates. It still subscribes to the logic underlying the stability pact: that a single-currency area without a single government needs strong and enforceable rules to contain national budget deficits.

Read More: Debasing the Currency

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Investors and Fed disagree over inflation

Apr. 5th 2005

The Federal Reserve Bank continues to highlight inflation as a potential cause of concern for the US economy. In recent speeches and meetings, both national and regional officials have cited many statistics in defense of their claims. The producer price index and the consumer price index are rising, they say. However, investors feel that current inflation forecasts of 2.4% will hardly restrain an economy that is growing at %3.8. For this reason, they have depressed long term bond yields, which are closely tied to long-term inflation forecasts. In fact, the bond yield curve is currently inverted, so that long term yields are actually lower than medium-term yields. This phenomenon is likely the result of investors’ beliefs that the Fed’s inflation fears are overstated. The situation has left Alan Greenspan perplexed, as he has made inflation a central theme in most of his recent speeches. Reuters reports:

Evidence that inflation is being kept under control may lie in the lackluster pace of wage growth. Wages increasing at a slower rate than consumer prices is a "calming influence on the bond market," said a senior economist at A.G. Edwards. "Even though the Fed has raised some concern about rising inflation, inflation so far has not gotten out of hand," he said.

Read More: Bond, currency markets ask: where’s the inflation?

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Japan denies rumors of diversification

Apr. 4th 2005

Japan’s Central Bank responded to rumors that it was gradually diversifying its foreign exchange reserves with an emphatic denial. All eyes have been on Japan recently, as rumors of diversification have surfaced and been squashed- only to resurface. Japan is home to the world’s largest foreign exchange reserves, with over $800 Billion in dollars alone. It has bought over $300 Billion Dollars in the last two years in an effort to stabilize the Yen, which continued to appreciate. Now, Japan’s Central Bank is faced with a dilemma: continue buying Dollars in a futile effort to stabilize the Yen, or Sell Dollars to try to recoup losses on its forex reserves. Japan has pledged not to diversify, so as not to roil currency markets, but many experts feel Japan may soon run out of options. Furthermore, Japan is treading dangerously, as other Asian nations are watching it for cues on how to handle their respective reserves. A rumor last month exemplified just how precarious this situation is. Reuters reports"

Prime Minister Junichiro Koizumi’s comments last month that diversification in currency reserves was necessary sparked a wave of dollar selling as the comments were interpreted as implying a reduction in dollar holdings.

Read More: Japan Denies Changing Currency Mix in FX Reserves

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Posted by Adam Kritzer | in Japanese Yen | No Comments »

Bubbles in global markets may necessitate interest rate increases

Apr. 4th 2005

Dangerous bubbles may be forming in global asset markets. In nominal terms, oil and real estate prices have reached record highs. Corporations are spending record sums of money on acquisitions. Venture Capital firms are practically giving away money to anybody with an idea. Warren Buffet, considered many to be the the US’ savviest investor, is sitting on a pile of cash, $43 Billion high. Might he be on to something? Excess global liquidity is forcing investors to pour money into increasingly obscure sectors of the economy in search of returns. Houses and commodities are being purchased in bulk as investments, rather than for their utility. Corporate junk bond spreads have fallen. Spreads on emerging market debt has also fallen, and may not accurately reflect the inherent risks involved in lending to developing countries. A collapse in global asset markets could echo around the world, and destabilize entire economies or lead to massive debt defaults. Should central banks quickly raise rates to preempt such a collapse? The Fort Wayne Journal-Gazette reports:

I don’t know whether the Fed was right or wrong last month in not raising interest rates more than a quarter of a point and in sticking to its promise of “measured” increases in the future. What I do know, however, is that it is silly for the Fed to continue to ignore the condition of asset and currency markets when making such decisions and explaining them to the public.

Read More: Global Economy in Cash Bubble

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Posted by Adam Kritzer | in Investing & Trading | No Comments »

Strong Euro threatens member economies

Apr. 1st 2005

European manufacturing has hit 4-month lows, threatening economic growth in the area. European exporters are complaining that the strong Euro has rendered their products uncompetitive in international markets. European companies that sell their products exclusively to Europeans have also found reasons to complain. Comparatively cheap products from Asia, and even America have undercut their European counterparts. Unemployment is rising across Europe, and leaders are looking for someone or something to blame. If the situation continues to worsen as it looks likely to do, I would expect European leaders to begin pressuring American officials to appreciate the USD. Reuters reports:

The fall in exports was largely attributed to the Euro’s strength and slowing global demand, Williamson said, but euro zone manufacturers also faced intense competition from cheaper imported goods from China in their home market.

Read More: Strong euro curbs euro zone manufacturing growth

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Posted by Adam Kritzer | in Euro | No Comments »

Oil Companies active in Nigerian forex markets

Apr. 1st 2005

Multinational Oil companies are refining ever-increasing quantities of oil, to keep pace with burgeoning demand. Nowhere is this more evident than in Nigeria, where oil companies are earning extraordinary profits on extraordinary sales. Many of these firms are American, and thus are responsible for paying USD dividends to their American shareholders. For this reason, and for the added stability of the USD, many firms exchange their foreign profits for USD. Record profits have resulted in record volume on Nigeria’s foreign exchange. To preempt a potential depreciation of the Naira, Nigeria is diverting much of the exchange volume through its banks. This is easier said than done, as All Africa News reports: 

[Unfortunately] most of the oil firms became racketeers, selling forex to a select few banks above the prevailing rates at the DAS (official market).

Read More: Oil Firms Inject $48.2m in Forex Market

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Posted by Adam Kritzer | in Exotic Currencies | 1 Comment »

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