Forex Blog: Currency Trading News & Analysis.

Archive for June, 2005

Long-term investors dump Euro

Jun. 30th 2005

It has been said the Forex market is the largest in the world, with an average daily trading volume approaching $2 trillion. Because there are so many participants and so much turnover, it is difficult to determine who or what is moving the market. For example, as the Euro spirals downward, investors have been trying to pinpoint the source of Euro selling. It seems they have finally found the culprit(s): long-term investors.

It is still unclear whether Warren Buffet, for instance, has unloaded any of his famous $21 Billion+ bet against the USD, which was clearly a losing exercise. Other investors, however, are publicly and privately rushing for the exits. Interviews with investment bankers and money managers reveal long-term investors, especially high net worth families, are selling European assets as well as Euro-dollars, in bulk. In addition, global bond funds, which often hold a large portion of their assets in European debt, have slowly begun to move money into the US, Australia, and emerging markets. The Wall Street Journal reports:

JPMorgan Private Banking…said clients are paying attention to the euro’s woes and have been "very active" in reacting to it. Meanwhile, a currency analyst at Putnam Investment Management…said the investment house has been taking short positions in the euro in its fixed-income and stock portfolios in a bid to profit from euro weakness.

Read More: Euro’s Allure Appears to Wane In Eyes of Long-Term Investors

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

British GDP forecasts signal rate cuts

Jun. 30th 2005

According to fresh economic data, growth is slowing in Britain. Real GDP growth of 2.1% is now projected, compared to earlier forecasts in the 2.7% range. Declining real GDP forecasts accompanied the release of trade data and housing statistics, which also seemed to signal economic slowdown. The situation is not as dire as the data would suggest, as much of the forecasted decline can be attributed to higher-than-expected inflation. Nonetheless, a rate cut at the next Central Bank meeting looks acutely possible. In recent meetings, a minority of central bank governors have proposed rate cuts, which were ultimately vetoed.  While the GDP data would seem to necessitate a cut at the next meeting, nothing can be assumed. For instance, traders have currently priced in a mere .03% cut (which is impossible) into the price of British interest rate futures. The Financial Times reports:

"The market can slam a currency quickly if it believes that a fundamental shift in interest rate psychology could be afoot," said  senior currency trader. Said another trader, "The sterling looked “overvalued” against the main European crosses." [He] advised his clients to build a long euro/sterling position.

Read More: Sterling hits new 8-month low in GDP downgrade

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Posted by Adam Kritzer | in British Pound | No Comments »

USD trends upward as summer sets in

Jun. 29th 2005

Summer is not usually an eventful time of year in the asset markets, and the forex market is no exception. Traders become vacationers, volume slows, and volatility declines. The summer doldrums notwithstanding, economists and investors expect the USD to continue on its upward course. The dollar will be buoyed by the inevitable fall in the price of oil as well as rising consumer confidence.  In addition, Alan Greenspan is expected to raise rates for the 9th consecutive time. On the other side of the Atlantic, political and economic uncertainty abound. Interest rates are low and heading lower.  Business and consumer confidence are approaching record lows.  All in all, the prognosis for the USD is most favorable. FXStreet.com reports:

"And that means that unless there is a reason to be trading (news event or economic statistic), activity will be subdued, although the dollar uptrend is still in place." said one trader.

Read More: Dollar firms broadly as oil prices ease

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

Is the Yuan really undervalued?

Jun. 28th 2005

Investors and economists have been betting on the Chinese Yuan’s revaluation for several years now.  Economists estimate the Yuan is undervalued by 40%.  Congress has adopted the average of 15% and 40% estimates, in calling for a 27.5% across-the-board tariff on Chinese imports.  The Economist’s Big Mac Index indicates the Yuan is 59% undervalued. Who is correct?

There are several viable methods economists use to value currencies. First, the theory of Purchasing Power Parity dictates prices in different countries should converge, to offset divergent exchange rates. An application of this theory to China indicates the Yuan is undervalued by 40%. Next, a nation’s ‘fundamental equilibrium exchange rate’ can be calculated, predicated on current account and trade balances. In this case, while China runs an enormous trade surplus with the US, it runs trade deficits with several other countries. As a result, economists using this method reckon the Yuan is only undervalued by 15-25%. Finally, economists constructing estimates base on the ‘behavioral equilibrium exchange rate’ method use economic indicators, such as inflation and employment statistics, to calculate the fair exchange rate. Such methods produce exchange rates which are only 7% below current rates. As a result, much of the uproar over China’s refusal to revalue may not be predicated on solid economic logic. The Economist reports:

The uncertainty about fair value explains why the IMF and America’s Treasury prefer to say that the yuan needs to become more “flexible” than to call for revaluation outright…calls for a revaluation of 27.5% rest on flimsy foundations.

Read More: Precisely Wrong

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Posted by Adam Kritzer | in Chinese Yuan (RMB), Investing & Trading | No Comments »

New mutual funds track currency movements

Jun. 27th 2005

Currencies have become especially volatile over the last few years.  The Dollar and the Euro are prone to wild swings, which can be magnified through leverage. The Yuan, meanwhile is the subject of endless debate and speculation. Forex trading, however, is extremely risky.  Short term currency movements can be impossible to predict, and risk is often high as result of leverage. In response, several new mutual funds have been created, to allow investors to track long-term trends in currencies. Profunds has created two diametrically opposed funds, allowing investors to bet on or against the USD. Rydex funds recently introduced a leveraged currency fund, which could potentially magnify gains (and losses). One mutual fund, the Franklin Templeton Hard Currency Fund, has existed for over a decade, and has averaged a 7% annualized return.   The Wall Street Journal reports:

Studies have shown that currency funds have no history of tracking the movements of U.S. and foreign stocks and bonds, or most hedge
funds. Currency funds have existed for a while in Europe and Asia and there is no reason why they should be excluded from U.S. portfolios.

Read More: Placing Bets While the Dollar Gets Gussied Up

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EU problems plague Asian Central Banks

Jun. 24th 2005

Asian Central Banks currently hold over $2 trillion Dollars in foreign exchange reserves, 70-75% of which are USD-denominated securities.  As the USD precipitously declined in value over the last few years, Central Banks lost tens of billions of dollars in relative terms.  As a result, many began to ponder the diversification of their reserves into other major currencies, such as Euros or Yen. In fact, for the last year, many Central banks have begun to slow their purchases of US Treasury securities- without going so far as to sell existing securities.  With all of the turmoil surrounding the Euro, Central Banks have begun to reevaluate this strategy.  Central banks are not "traders;" they are not concerned with short-term currency fluctuations.  What do concern them, however, are long-term trends such as the political uncertainty surrounding the future of the EU. While it is not likely that the EU will abandon the Euro, it is possible that certain nations will back out. Dow Jones news reports:

And at the very least, the political turmoil in the E.U. has raised questions about whether the diverse, 25-nation group can efficiently manage a unified economy and a common currency. Because of the turmoil, central banks have turned "euro-neutral from euro-positive", the Tokyo foreign exchange dealer said.

Read More: Threats To Euro Could Slow Asia Reserves Diversification

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Posted by Adam Kritzer | in Central Banks, Euro, US Dollar | 2 Comments »

Euro’s decline plaguing Central Banks

Jun. 24th 2005

Asian Central Banks currently hold over $2 trillion Dollars in foreign exchange reserves, 70-75% of which are USD-denominated securities.  As the USD precipitously declined in value over the last few years, Central Banks lost tens of billions of dollars, in relative terms.  As a result, many began to ponder the diversification of their reserves into other major currencies, such as Euros or Yen. In fact, for the last year, many Central banks have begun to slow their purchases of US Treasury securities- without going so far as to sell existing securities. 

With all of the turmoil surrounding the Euro, Central Banks have begun to reevaluate this strategy.  Central banks are not "traders;" they are not concerned with short-term currency fluctuations.  What do concern them, however, are long-term trends such as the political uncertainty surrounding the future of the EU. While it is not likely that the EU will abandon the Euro, it is possible that certain nations will back out. And this presents a potential problem for Central Banks holding Euros. Dow Jones news reports:

And at the very least, the political turmoil in the E.U. has raised questions about whether the diverse, 25-nation group can efficiently manage a unified economy and a common currency. Because of the turmoil, central banks have turned "euro-neutral from euro-positive", the Tokyo foreign exchange dealer said.

Read More: Threats To Euro Could Slow Asia Reserves Diversification

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Posted by Adam Kritzer | in Central Banks, Euro, US Dollar | No Comments »

Euro’s decline plaguing Central Banks

Jun. 24th 2005

Asian Central Banks currently hold over $2 trillion Dollars in foreign exchange reserves, 70-75% of which are USD-denominated securities.  As the USD precipitously declined in value over the last few years, Central Banks lost tens of billions of dollars, in relative terms.  As a result, many began to ponder the diversification of their reserves into other major currencies, such as Euros or Yen. In fact, for the last year, many Central banks have begun to slow their purchases of US Treasury securities- without going so far as to sell existing securities. 

With all of the turmoil surrounding the Euro, Central Banks have begun to reevaluate this strategy.  Central banks are not "traders;" they are not concerned with short-term currency fluctuations.  What do concern them, however, are long-term trends such as the political uncertainty surrounding the future of the EU. While it is not likely that the EU will abandon the Euro, it is possible that certain nations will back out. And this presents a potential problem for Central Banks holding Euros. Dow Jones news reports:

And at the very least, the political turmoil in the E.U. has raised questions about whether the diverse, 25-nation group can efficiently manage a unified economy and a common currency. Because of the turmoil, central banks have turned "euro-neutral from euro-positive", the Tokyo foreign exchange dealer said.

Read More: Threats To Euro Could Slow Asia Reserves Diversification

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Posted by Adam Kritzer | in Central Banks, Euro, US Dollar | No Comments »

Britain, EU contemplate rate cuts

Jun. 23rd 2005

Britain recently became the latest European nation to entertain the possibility of interest rate cuts.  In its last meeting, held earlier this month, two of the Bank of England’s nine governors voted to cut the federal interest rate by 25 basis points to 4.25%.  There were other members who felt the interest rate cuts made economic sense, but should not be carried out because they would not be widely expected.  Additionally, the minutes from the most recent ECB meeting reveals it, too, is giving serious consideration to rate cuts.  Investors and traders, alike feel rate cuts by both central banks are becoming increasingly likely, reflected in changing bond prices.  The Financial Times reports:

On Wednesday the December Euribor future hit a record high, with the market pricing in about a 40 per cent chance of a cut in eurozone interest rates by the year’s end.  The euro has fallen 5 per cent on a trade-weighted basis since the start of the year, a sign of poor economic prospects, leading to market expectations of rate cuts.

Read More: Central banks flag rate cuts

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Posted by Adam Kritzer | in British Pound, Central Banks, Euro | No Comments »

Greenspan, Snow discuss Yuan revaluation

Jun. 23rd 2005

Alan Greenspan, chairman of the Federal Reserve, and John Snow, Secretary of the Treasury, testified before Congress regarding the planned revaluation of the Yuan.  Both Greenspan and Snow reiterated their collective belief that China should revalue as soon as possible, in the interest of the global economy.  Snow claimed China now has all of the necessary mechanisms and controls in place to support a floating currency.  In their testimony, both men also addressed the proposed legislation of high tariffs on all Chinese imports, should China fail to revalue its currency within a designated period of time. They both agreed it was counterproductive to current diplomatic efforts, and will not likely goad China into revaluing any sooner. Reuters reports:

"The sooner the Chinese, in their own self-interest, move to a more flexible currency regime, perhaps leading other Asian currencies to become more flexible as well, the better for all participants in the global trading system," Greenspan said.

Read More: Greenspan, Snow warn on China sanction

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Posted by Adam Kritzer | in Chinese Yuan (RMB), Politics & Policy | No Comments »

Japan’s trade surplus shrinks

Jun. 22nd 2005

New data indicates Japan’s trade surplus is declining, which spells trouble for the recession-prone economy.  On a monthly basis, Japan’s May trade surplus was $2.7 Billion, down 68% from the previous year.  Most economists had forecasted a decline of 5-10%.  The impact of this development on Japan’s economy remains to be seen.  Japan has just begin to emerge from its 4th recession in 15 years, and is still heavily dependent on exports to drive economic growth.  Furthermore, Japan is counting on a revaluation of the Chinese Yuan to spur trade with its Asian neighbor, but there are no guarantees if and when this move will occur.  Predictably, the Yen is losing value against most major currencies, as investors weigh the implications of the trade data. Bloomberg news reports:

“People have been buying the yen because of it’s healthy surpluses, and now it looks like they’re shrinking,” said a senior HSBC currency strategist.  “I’d be skeptical of buying the yen at these levels.”

Read More: Yen Declines Against Dollar as Japan’s Trade Surplus Narrows

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Posted by Adam Kritzer | in Economic Indicators, Japanese Yen | No Comments »

South Korean economy is struggling

Jun. 21st 2005

Since the year 2000, the South Korean Won has appreciated over 35% against the USD, bedeviling South Korea’s economy, which is heavily dependent on exports to drive growth. Through the currency’s multi-year run, the Central Bank has fought to restrain its appreciation, but to no avail. Perhaps the Central Bank is misguided in its efforts. It seems South Korea’s Central Bank has spent too much time intervening in foreign exchange markets and not enough time conducting monetary policy. Economists argue it should focus on growing the economy, which is now struggling to achieve 5% annual growth, by promoting domestic demand. Most economists also agree interest rates are too high. The Bank of Korea, though, is afraid of lowering them for fear of spawning a domestic real estate bubble and triggering capital outflows. The Economist reports:

So with demand and confidence still weak, further cuts in official interest rates, now 3.25%, would make sense. But the central bank is holding rates…for the seventh month running. Many onlookers think it will keep rates steady while it pursues other objectives that have little to do with economic stability.

Read More: High tech, low growth

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Posted by Adam Kritzer | in Central Banks, Exotic Currencies | 1 Comment »

ECB may finally cut interest rates

Jun. 21st 2005

In response to signs its economy may be slowing, Sweden’s Central Bank lowered domestic interest rates to 1.5%, which is a record for the small Scandinavian nation. Sweden is one of several European countries, not on the Euro, that recently cut rates. The move may provide impetus for the European Central Bank (ECB) to do the same. Economists and high-ranking EU officials have been publicly urging the ECB to cut rates, as the largest European economies collectively stagnate. Nonetheless, the president of the ECB has repeatedly ruled out the possibility of rate cuts, arguing current rates are neutral, given inflation and growth levels. Meanwhile, uncertainty over the future of the EU abounds. Several prominent investment banks are forecasting a period of continued decline for the Euro. Goldman Sachs, for example, has set a year-end target of $1.10 for the Euro. The Financial Times reports:

It was the euro that bore the brunt of the bearish sentiment, suffering from “guilt by loose association…” The euro “remains acutely sensitive to indications the ECB might cut rates,” added Mr Mohi-uddin. 

Read More: Euro slides further on rate cut talk

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Posted by Adam Kritzer | in Central Banks, Euro | No Comments »

Australian Dollar continues to appreciate

Jun. 21st 2005

Among the world’s major currencies, it seems the Australian Dollar is currently the most stable. Uncertainty surrounding the future of the EU has sent the Euro on a sharp downward spiral. Meanwhile, the persistence of the twin deficits continues to vex the US, and Japan has barely emerged from the throes of a multi-year recession. In contrast, Australia’s economy is one of the healthiest and most stable among developed nations, and its interest rates are the highest in the developed world. Additionally, commodity prices are soaring, and inflation remains low. The Australian Dollar may be buoyed in the coming months by signs the Fed and European Central Bank are tightening monetary policy, which is likely to attract risk-averse foreign investors. The Australian Financial Review reports:

With the two major global currencies so much out of favour and the Australian currency’s traditional drivers all flashing green, traders and speculators are finding they need little excuse to load up on the $A.

Read More: $A Cast as Belle of the Ball

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

Big Mac Index tests PPP

Jun. 17th 2005

Economic theory, specifically the Law of Purchasing Power Parity (PPP) dictates the value of a particular currency should reflect its purchasing power. Basically, different prices in different countries should be corrected by exchange rates. Empirical evidence has shown that PPP does hold in the long run, although it often takes several years for currencies to move towards ‘equilbirum.’ Since 1986, the Economist has used the Big Mac Hamburger as a means of testing the theory of purchasing power parity.  Every week, the magazine publishes a listing of Big Mac prices, which often vary by country. The law of PPP holds the prices should be comparable across different countries, when converted into USD. To be fair, though, one must take local variations in the cost of inputs into account. According to the Big Mac Index, Switzerland’s currency is the most expensive, and the Chinese Yuan is the cheapest.

View the Big Mac Index

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BOK governor asked to resign

Jun. 17th 2005

Park Seung, the head of the Bank of Korea (BOK) has recently drawn criticism from lawmakers, who are now demanding his resignation. The governor’s mistakes have been numerous and flagrant, they argue. First, Park has been extremely erratic in his economic forecasts. For example, he guaranteed real GDP growth of 6%, only to revise the figure downwards a few days later, roiling stock and forex markets. His worst and most public mistake was to announce South Korea’s intentions to diversify its forex reserves away from USD. The Korean Won soared on the news, and South Korea was forced to intervene to hold the value down. This fiasco, observe critics, cost Korea billions, and the statement was retracted, anyway.  In short, Korean lawmakers don’t have confidence in Park to conduct economically sound monetary policy, and are subsequently calling for his resignation. The Korean Herald reports:

The sharp bashing of Park for his blunt and inappropriate remarks as head of the central bank and the united calls for his resignation left open the question the BOK governor’s course of action, adding another factor to economic uncertainties, experts said.

Read More: Lawmakers urge BO governor to quit

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Posted by Adam Kritzer | in Central Banks, Exotic Currencies | No Comments »

Eurex to offer currency derivatives

Jun. 16th 2005

The Eurex exchange issued a challenge to the Chicago Mercantile Exchange (CME) when it recently announced it would begin offering currency derivatives.  The market for currency futures, options, swaps, and forwards is currently the fastest growing segment of the overall forex market.  On average, $87 Billion worth of such derivatives are traded every day, and the Eurex intends to capture a share of this volume. The move will benefit investors and traders, through lower commissions, increased liquidity, and greater service. Both exchanges support 24-hour trading of forex products through separate electronic order-entry systems. The Eurex will continue to support the trading of spot contracts (real-time foreign exchange), a market it currently shares with Reuters.  The Financial Times reports:

Users might, however, welcome an alternative to the Merc’s dominance, a pattern that has a precedent in the forex industry when EBS, the interdealer platform, was set up in the 1990s by a group of banks to balance the growing dominance of Reuters.

Read More: Eurex issues a challenge to CME

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

Italy ponders return to Lira

Jun. 15th 2005

Last week, Italy’s welfare minister suggested the Euro was responsible for Italy’s economic malaise and urged a return to the Lira. This week, he announced plans to circulate a petition calling for just that, and will soon begin to collect the necessary signatures.  What is the likelihood of his plan being brought to fruition?

On one hand, many Italians are fervently against the Euro, scapegoating it for the nation’s economic problems. On the other hand, as a member of the Euro common currency system, Italy is able to take advantage of extremely low interest rates on the debt it services, saving billions of dollars per year.  A return to the Lira would be accompanied by a rise in interest rates, and increased expenditure on debt service. Italy’s Prime Minister, Silvio Berlusconi, is currently abstaining from the debate, although he is undoubtedly in support of the Euro.  The Economist reports:

The League’s campaign helps to deflect the blame from his government and towards Brussels, which this week began proceedings against the Italian government for running an excessive budget deficit.  Mr Berlusconi may choose not to jump on board the League’s ill-conceived bandwagon, but nor is he rushing to stand in its way.

Read More: That Lovely Lira

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Posted by Adam Kritzer | in Euro | 1 Comment »

How to bet on the Euro’s decline

Jun. 14th 2005

In the year-to-date, the Euro has declined nearly 10% against the USD.  With all of the uncertainty currently plaguing Europe, the currency may decline further.  There are many ways to bet on the Euro’s decline, the most obvious of which is a simple bet on the currency, itself.  However, it is also possible to take advantage of a weaker Euro by investing in European companies that realize a significant portion of their revenues abroad. When the Euro declines, the products that these companies export naturally become cheaper, in terms of other currencies. In addition, many companies will leverage sudden increases in profit by generally improving their products, or increasing spending on marketing, which may result in future profits. Which companies should you consider investing in? Perennial European powerhouses, such as Siemens and Nokia, are always excellent candidates,   However, European food products companies may also be of interest. MSN Money reports:

The short-term opportunity is especially attractive in the food sector. The shift in dollar/euro exchange rates means that European food companies will not only show higher-than-expected earnings but also will have extra profits to put into marketing programs that can increase market share.

Read More: 5 ways to play currency swings

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

Bank of Japan to tighten monetary policy

Jun. 13th 2005

For the last few years, Japan’s economy has been nothing short of pathetic. Unemployment is still high, and deflation is a constant concern. Recently, however, it seems Japan may be on the brink of growth, and Japan’s Central Bank is already anxious to tighten.  Maybe a little too anxious. The Bank of Japan is determined to contain inflation- which is currently infinitesimally low- at the expense of economic growth. It has already announced that it will begin tightening monetary policy, through a combination of higher interest rates and a lower money supply. It has also hinted towards a tightening of fiscal policy- raising taxes to offset a large budget deficit. However, economic growth can not yet be taken for granted.  The Economist reports:

Recent mis-steps by both politicians and technocrats have highlighted three of the biggest risks to recovery. One is China, with which Japan’s relations hit a new low this week. Figures released on May 25th showed…the volume of exports fell, and has been roughly flat in the past three months.

Read More: Land of the Three Mistakes

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Posted by Adam Kritzer | in Central Banks, Japanese Yen | No Comments »

China considers multi-currency peg

Jun. 13th 2005

According to high-ranking CCP officials, China is seriously considering abandoning the Yuan’s decade-long peg to the dollar. The solution, however, is not likely to please foreign governments, who have been pressuring China to revalue for quite some time. The change would effectively link the Yuan to a basket of currencies, one that includes USD, Euros, Yen, and various other currencies, in a proportion to be determined later. However, it is not clear whether the Yuan would be allowed to appreciate following the switch. China may revalue the Yuan by 3-5%, after which the value would be effectively fixed to the basket. The International Herald Tribune reports:

Pegging the yuan’s value to a basket of currencies, and not just the dollar, would make it a little more flexible and less prone to the swoops and swoons of the dollar in recent years. If the dollar fell against the euro, yen or any other currencies in the basket, then the value of the yuan would creep up in dollar terms.

Read More: China looks at linking yuan to currency pool

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Posted by Adam Kritzer | in Chinese Yuan (RMB) | No Comments »

BOK ponders interest rate hikes

Jun. 10th 2005

At 3%, the Korean discount rate is at a record low. The Bank of Korea (BOK) is now facing pressure to raise rates on a number of fronts. First, narrowing interest rate differentials between the US and South Korea have induced a significant outflow of capital to the US, driving down the prices of Korean equities and irking Korean investors. Hiking interest rates will reverse, or at least slow this trend. Additionally, low interest rates and disappointing stock market returns have driven many Koreans to invest in property. Economists are afraid a bubble may have formed in South Korea’s real estate market, and they would like to see it contained. However, the BOK maintains its chief goal is to stimulate the economy, which is on pace to grow at 4% this year, less than the 5% the BOK is targeting. The Korea Herald reports:

The Bank of Korea is widely expected to leave its overnight call rate at a record low of 3.25 percent today to prop up the still-fragile economic rebound, analysts say. Both economic policymakers and economists share the view that domestic demand is not recovering fast enough to negate slowing overseas sales.

Read More: BOK faces dilemma keeping low rate

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An easy way to trade the Euro

Jun. 9th 2005

Rydex funds has filed an application with the SEC for the first currency ETF, which will trade on the NYSE under the symbol "FXE." Short for ‘exchange traded fund,’ ETFs are typically index funds which can be bought and sold much like stocks. This particular ETF will purportedly mimic the Euro, and will allow traders to place bets on the Euro as though they were trading the currency, itself. There are a few notable differences, however. ETFs are subject to certain taxes and commissions, unlike direct currency trading. In addition, traders will not be able to achieve the same amount of leverage (buying on margin). CBS Marketwatch reports:

Traditional foreign-exchange accounts…typically offer 100-to-1 leverage. With the ETF, most investors will be limited to traditional margin requirements, which at best offer a two-to-one ratio.

Read More: First Currency ETF Filled

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

The woes of the Euro

Jun. 9th 2005

The saga of the battered Euro is far from over. In the wake of French and Dutch rejection of the Constitution, politicians are examining whether the Euro should continue to exist. Many experts are renewing their objections to the Euro, on the grounds that it is not appropriate for a region as large and diverse as the EU to share a common currency. The universal monetary and fiscal policies applied equally to different economies has a resulted in dangerous imbalances. Perennially low interest rates have stimulated the economies of some EU nations to the point of overheating. Meanwhile, Europe’s largest economies are stagnating, as the strength of the Euro has hurt exports. The Euro has also failed to integrate Europe’s vast labor and capital and labor markets, which originally served as the pretext for monetary union. It seems the economies of Europe are fundamentally too different to merit a common currency. The Economist reports:

Unfortunately for euro-boosters, recent policy moves have all been in the wrong direction. Not only has the stability and growth pact, which was supposed to help force fiscal policies into rough alignment, been weakened.

Read More: Can this union be saved?

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Posted by Adam Kritzer | in Euro | No Comments »

In defence of technical analysis

Jun. 8th 2005

Many economists view technical analysis as patently absurd, when used to trade in the forex markets.  Economic theory holds a currency’s exchange rate is tied to a variety of factors, including interest rates, the curren account balance, macroeconomic indicators, and political stability. However, empirical evidence lends support to the legitimacy of technical analysis. Certain currencies appear to trade within ranges, bouncing off different support levels. Stochastic indicators and moving averages are often used with great accuracy to predict the direction of a particular currency. In fact, all banks now pay as much attention to teams of technical analysts as they do economists. However, that technical analysts at different banks are often using the same strategies predicated on the same set of tools to trade currencies is causing some problems. The Asia Times reports:

And in the fun-house mirror logic of markets, the chartists can at times be correct. Sterling/dollar quotes really can approach a barrier. But this is a confidence trick: everybody knows that everybody else knows about the support points, so they place their bets accordingly.

Read More:  FX Commentary

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

Are Central Banks’ appetite for US treasuries fading?

Jun. 7th 2005

According to recent data, in the month of March, central banks were net sellers of US treasury securities, for the first time in two years. However, the largest seller was Norway-which sold $17 Billion in bonds- not Asian banks, as was originally feared. Interestingly, it seemed the dearth of public buying was offset by a sudden increase in private buying. Apparently, offshore hedge funds have been avidly buying up treasury securities for several months now. Economists caution investors that this will not support the Treasury in the long term; if central banks continue to sell, interest rates could potentially soar. The days of China and Japan buying treasuries in bulk may be over. The Economist reports:

By chance, it seems, Standard & Poor’s chose May 16th to reaffirm the American government’s AAA credit rating. The agency cited, among other things, the advantages of the dollar’s role as the world’s reserve currency, which helped to outweigh the country’s twin deficits and low household savings.

Read More: American Treasury bonds: among the missing

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Posted by Adam Kritzer | in Central Banks, US Dollar | No Comments »

Croatia’s Euro peg comes under fire

Jun. 7th 2005

Croatia’s national currency, the Kuna, is currently pegged to the Euro. The currency is constrained by bands, which prevent it from fluctuating more than 15% against the Euro. The Central Bank has announced that it may not longer be able to support the peg, but the reason is not intuitive. Amateur economists might consider the recent drama surrounding the EU and the Euro’s subsequent depreciation, but this would be incorrect. The true reason is a gradual inflow of capital into Croatia has exerted upward pressure on the Kuna.  Spurred by higher interest rates, many banks have exchanged Euros for Kunas, driving the currency to new highs against the Euro. In response, Croatia’s Central Bank has flooded the market with Kunas, to ‘sterilize’ the capital inflows and prevent the currency from appreciating.  The Central Bank, however, has informed the public that this type of intervention cannot be sustained. The Financial Times reports:

[A representative of the Central bank] added that the current arrangement, which permits the kuna to float against the euro within a 15 per cent "price corridor" could not be preserved unless market forces were restrained. The system is sustainable, but the costs of sustaining it are higher and higher," he said.

Read More: Croatia’s central bank fights pressure on euro-peg

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Posted by Adam Kritzer | in Central Banks, Euro | No Comments »

Experts divided over Yuan revaluation

Jun. 6th 2005

Economists seem to agree that the revaluation of the Chinese Yuan is ‘imminent.’ What they cannot seem to agree on is the nature of revaluation, although a few plausible scenarios seem to have emerged. First, a revaluation may simply entail the widening of the bands that currently constrain the Yuan’s fluctuation, which would inevitably lead to the currency’s appreciation. Another option would be to tie the Yuan to a basket of currencies, rather than to the USD by itself. The most drastic move would be for China to engineer a one-time, 30%+ revaluation of the Yuan, after which the currency would conceivably be permitted to float. However, analysts reckon China is likely to simply ‘drop’ the Yuan’s peg by 5-7% against the USD. In this way, China would placate complaining foreigners without rewarding speculators too much. Non-deliverable forward contracts, which reflect investors’ future expectations for the Yuan, currently support this slight revaluation scenario. The Economist reports:

Judging by the shadow yuan, financial markets reflect a sort of average of the divergent views, and are betting on a 6% appreciation within a year. The uncertainties come from the tension between China’s concern for stability and the risk that a small shift in the yuan would create more problems than it solved.

Read More: What’s it worth?

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Posted by Adam Kritzer | in Chinese Yuan (RMB) | No Comments »

The end of the Euro?

Jun. 6th 2005

The Euro has spiraled to 8 month lows against the USD, as investors weigh the EU Constitution’s failure to gain universal ratification.  Many experts and high ranking European officials have hinted the Euro may soon be eliminated. Last week, Italy’s Minister of Welfare attributed Italy’s economic problems to the Euro common currency system.  His claims were later supported by an independent report, which argued the Euro was indeed  responsible for the Italian economic recession. Most of the countries on the Euro are struggling economically, leading many to call for the end of the Euro. The president of the European Central Bank, however, dismisses rumors of the Euro’s dissolution as ‘absurd.’ The situation is further complicated by the fact Europeans never officially approved of the Euro. The Times Online reports:

The euro is vulnerable to a collapse in public support because none of the 12 countries that joined it allowed their people to approve the decision in a referendum. Many Dutch used the referendum on the constitution to show their disapproval of the euro, while in Germany polls show 56 per cent of people want to return to the mark.

Read More: EU leaders forced to calm jitters over euro

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Posted by Adam Kritzer | in Euro | No Comments »

European Union in disarray

Jun. 3rd 2005

Two days after France rejected the EU Constitution, the Netherlands followed suit. As the Euro spiraled downward in value, experts have begun to postulate on the future of the European Union. The growing discontent with the EU is drawing attention to some of the problems with the Euro, namely that a common economic policy is not appropriate for a region as large and diverse as the EU. For example, many economists have argued that the European Central Bank should lower interest rates, in order to facilitate growth in Germany, France, et al. However, the ECB faces a dilemma, for many of the EU member economies are actually growing at a healthy rate, aided by low interest rates. The recent rejections have placed the future of would-be members in Jeopardy. Latvia and Lithuania, for example, have already pegged their currencies to the Euro, in anticipation of joining the monetary union. The Philadelphia Inquirer reports:

"They see joining the EU and joining the euro as a route to economic development," Austin said of the 10 new EU members. "The complaints are coming from the founding members, who are asking, ‘What has the euro done for us?’ Unemployment is rising, and they’re looking for things to blame."

Read More: Setback for Euro

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Posted by Adam Kritzer | in Euro | No Comments »

USD may resume decline next year

Jun. 3rd 2005

Despite widening twin deficits, the USD has been on a tear recently. Economists have attempted to explain this contravention of economic logic by pointing to a variety of factors. First, as the Fed continues to hike interest rates, risk-averse investors seeking stable returns have moved funds (back) to the US. In addition, Congress recently announced a tax break to American companies who wish to repatriate overseas profits. This tax holiday has has triggered significant capital inflows, as companies repatriate billions of dollars in earnings. Finally, economists have identified recent uncertainty in the Euro-area as another source of strength in the USD. The EU is decomposing, and EU member economies are stagnating. Once the fallout from these events subsides, the growing current account deficit while drive the USD down, even with a revaluation of the Chinese Yuan. The Times of India reports:

Almost half of China’s exports to the US reflect the cost of imports of intermediate goods from the rest of the Asian region. Therefore, RMB appreciation would have to be accompanied by appreciation of most other Asian currencies, in order to whittle down the US deficit.

Read More: Dollar Is Bound To Fall: Renminbi revaluation will not plug US trade deficit

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Posted by Adam Kritzer | in US Dollar | No Comments »

Italy to return to Lira?

Jun. 2nd 2005

In an interview with a prominent Italian newspaper, Italy’s Welfare Minister suggested that Italy abandon the Euro and return to the Lira. While the Minister’s comments do not represent official government policy, he is not alone in his beliefs that the Euro has failed Italy. Italy’s economy, like those of France and Germany, is stagnating. Ironically, one of the few developed nations in Europe to experience economic growth is Britain, which is not a member of Europe’s monetary union. Italy’s welfare minister juxtaposed Italy’s recession with Britain’s growth to underscore the failure of the Euro. He argued Italy’s inability to establish independent fiscal and monetary policies has prevented the nation from recovering economically. The Financial Times reports:

"It’s been three years now that the euro, not through its own fault but because of those who managed the move to the single currency, has shown that it’s not capable of dealing with the slowdown in economic growth, the loss of competitiveness and the employment crisis," he said.

Read More: Italian minister moots return of lira

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Posted by Adam Kritzer | in Euro | No Comments »

US pressure on China is misguided

Jun. 1st 2005

The US continues to pressure to China to revalue the Yuan, but to no avail.  Politicians spew protectionist rhetoric and cite the millions of jobs ‘lost’ to China because of its artificially cheap currency. Not all Americans, however, are pushing for revaluation. One think tank has observed that most of the pressure and propaganda originates from powerful lobbying groups, which represent American businesses losing market share to Chinese firms. Unfortunately, American consumers are not represented by equally powerful lobbying groups, which could potentially extol the virtues of an artificially cheap Yuan, which keeps prices low and inflation in check. Perhaps, after the Yuan is revalued and prices begin to rise (at Wal-Mart), politicians will recognize the fallacies in their politics. The Independence Institute Reports:

Government interference in the international marketplace can ultimately lead to a trade war among nations. In the 1930s, the Smoot-Hawley legislation that increased tariffs in the United States was followed by retaliation from other nations.   

Read More: Avoid Threatening China Over Its Currency 

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Posted by Adam Kritzer | in Chinese Yuan (RMB), Politics & Policy | No Comments »

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