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Archive for May, 2007

Mid East Surprised by Kuwait De-Peg

May. 31st 2007

Two weeks ago, Kuwait sent a shock wave through the Middle East when it suddenly announced that it was terminating its currency’s peg to the USD, and instead linking the Dinar to a basket of currencies.  The announcement caused a great deal of tumult, because it was widely believed that a dozen Mid East nations-most of whom peg their currencies to the USD- were in the early stages of planning a joint currency.  Now, however, the prospects for this common currency are uncertain at best.  As a result, several countries in the same region were quick to criticize the move while renewing their commitment to maintaining their respective Dollar pegs.  The Khaleej Business Times reports:

“At the Central Bank of Oman we did not know about this. There was a position by the leaders of all Gulf countries to remain pegged to the dollar and we have abided by that decision,” said one official.

Read More: Oman sticks to dollar peg after Kuwait forex shift

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Posted by Adam Kritzer | in Exotic Currencies, Politics & Policy | No Comments »

Japanese Yen Slides Further

May. 30th 2007

The Japanese Yen continues to slide against the both USD and the Euro, despite Japan’s purportedly strong economy.  The release of dovish inflation data was music to the ears of Japan’s Central Bank, which seems intent on leaving interest rates frozen at .5% for as long as Japan’s economy will support it.  Meanwhile, volatility is way below its historical average, and traders remain committed to the carry trade. In addition, currency futures prices indicate that traders believe the Yen will fall further in the near-term. Bloomberg News reports:

“In times of low volatility and plenty of cash, people tend to put on carry trades,” said Meg Browne, a senior currency strategist.

Read More: Yen May Reach Record Low Versus Euro as Prices Forecast to Fall

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

Canadian Dollar Approaches Parity

May. 29th 2007

After a multi-year run-up against the USD, the Canadian Dollar has been relatively quiet of late, gradually inching up but mostly trading flat.  Last week’s release of Canadian retail sales data, a relatively mundane economic indicator, jumpstarted the currency and sent it upwards against the USD.  As a result, Canada’s Central Bank is mulling its first rate hike in over a year, directly aimed at controlling its currency.  In the short term, however, higher interest rates would likely bring more capital to Canada.  With a booming economy and stock market to match, the country has never been more attractive to investors.  Commentators are once again whispering about USD-CAD parity (a 1:1 exchange rate), an event that up until a few years ago, most would have dismissed as impossible. The Star reports:

Canada’s buoyant dollar reflects not just a weakening U.S. currency but a booming economy that is benefiting from higher prices of crude oil and metals like copper and gold, prompting big takeovers in the mining industry from foreign companies.

Read More: Currency hits highs not seen since 1970s

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

Commentary: What to do about the Chinese Yuan?

May. 27th 2007

The Chinese Yuan refuses to die as a topic of conversation among forex speculators. In theory, the currency is among the world’s most prosaic; since its famous “revaluation” by the Chinese government nearly two years ago, the Yuan aka RMB has appreciated at a leisurely pace, roughly equivalent to 3% per year. Last week, the CCP took a step further in liberalizing its currency system by widening the band in which the Yuan is permitted to fluctuate, to .5% daily.

However, this did little to appease foreign diplomats and American politicians, who contend that the Yuan remains vastly undervalued, and that the Chinese government is guilty of currency manipulation. Two American Senators, Lindsey Graham and Charles Schumer, are still threatening to introduce a latent piece of legislation into Congress, which would slap a 27.5% tariff on all Chinese imports, unless the CCP promptly increases the value of the Yuan. (The 27.5% represents an average of the high and low estimates, 40% and 15%, respectively, of the extent of the Yuan’s undervaluation relative to the USD.) For its part, China maintains that not only is the currency fairly valued, but also that it will not be pressured into hastening the Yuan’s rate of appreciation. So, two questions need to be answered: Is the Yuan undervalued and if so, should China allow it to appreciate at a more rapid pace?

The first question is probably the trickier of the two to answer. Economists use admittedly crude techniques to value currencies. One method involves a calculation of purchasing power parity (PPP), which dictates that currencies should adjust in value relative to each other in inverse proportion to their respective price levels. In the case of the Yuan, PPP analysis suggests that the Yuan may be undervalued by as much 50%. However, this is to be expected; since income levels in China are vastly lower than in the US, one would expect prices to be lower, irrespective of exchange rates. Other methods used to estimate the fundamental value of the Yuan involve sophisticated statistical analysis, producing estimates of undervaluation ranging from 0% to 50%. In short, it appears as though the Yuan remains marginally undervalued, but the extent of which remains guesswork.

Upon concluding that the Yuan is undervalued, should China be expected to allow the currency to fluctuate more freely (i.e. appreciate)? It depends on who you ask.  American officials argue that the revaluation of the Yuan represents a crucial piece of the drive to reduce the burgeoning US trade deficit. However, upon closer examination, this notion is revealed to be false since most of China’s exports to the US are themselves repackaged products from other parts of Asia. Further, a sudden revaluation of the Yuan would likely result in the relocation of Chinese production to facilities to other low-wage countries, thus doing little to stem the US trade deficit. From China’s point of view, its economy is helped by an artificially cheap currency in that its export sector receives an indirect subsidy. However, it is constrained in its ability to conduct monetary policy as well as in its need to accumulate massive forex reserves, both of which would be relaxed in the event of a revaluation.

Not withstanding that China’s stubbornness mean it will not be bullied into appreciating its currency, it is probably in everyone’s best interest if it capitulates. My prediction, for what it’s worth, is that China will ultimately allow the RMB to appreciate at a slightly faster pace against the USD, probably somewhere in the neighborhood of 5% a year.

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

China’s Forex Arm Begins Investing

May. 22nd 2007

China’s Central Bank recently made waves in forex markets when it created several state-owned organization charged with investing a portion of China’s $1.2 Trillion in forex reserves.  Scant additional information was released until last week, when it was revealed that the first major investment would be a $3 Billion stake in The Blackstone Group, which is planning an Initial Public Offering.  While it should be clear that China is taking its plan to diversify its reserves seriously, the news should come as a partial relief to Dollar Bulls, because in this case, the diversification will not involve the sale of USD.

Read More: Blackstone details float as China
takes $3bn stake

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Posted by Adam Kritzer | in Central Banks, Chinese Yuan (RMB), US Dollar | No Comments »

Kuwait Terminates USD Peg

May. 21st 2007

Since 2003, the small mid-east nation of Kuwait has effectively prevented its currency, the Dinar, from fluctuating by fixing it to the USD.  Last week, however, it became the latest casualty of a falling dollar and was forced to scrap its peg and instead link the Dinar to a basket of currencies. While the stability that accompanied the peg was certainly a benefit, as was the sudden boon provided to Kuwait’s economy by an artificially cheap currency, the Central Bank ultimately decided that the country’s economy could no longer bear the inflationary pressures generated by the peg.  Many Kuwaiti senior policymakers fought the change tooth and nail because they fear it will hinder the region’s efforts to form a common currency, but Kuwait insists that it is still committed to a common currency.  The Kuwait Times reports:

The decision will help reduce “imported inflation.”  The planning ministry said last week that the inflation rate reached 5.1 percent in the first quarter.

Read More: Kuwait drops dollar peg

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China Increases Yuan Trading Band

May. 20th 2007

In a sop to western policymakers, China recently announced that it would widen the Chinese Yuan’s daily trading band, from .3% to .5%.  In theory, this means the Yuan will now be permitted to fluctuate by up to .5% per day against the USD.  In practice, however, the Yuan’s daily rate of appreciation probably won’t exceed .05%, and only then on an especially volatile day.  Two years ago, China revalued the Yuan and since then, the currency has appreciated at an annualized rate of 3%.  However, the west was not mollified, and continued to pressure China relentlessly to allow the Yuan to appreciate further.  Unfortunately for the west, this latest policy change is unlikely to have any practical impact on the valuation of the Yuan, as analysts are predicting the currency will appreciate by only another 3% this year.  Bloomberg News reports:

The yuan never moved the maximum permitted under the previous limit. It moved 0.13 percent from the daily reference rate on April 16, the most this year, according to Bloomberg data.

Read More: Yuan Rises to Highest Since July 2005 on Wider Trading Band

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

US Congress Discusses Yen Manipulation

May. 17th 2007

This week, the US Congress conducted a hearing on “Currency Manipulation And Its Effects On American Businesses And Workers,” for which it invited numerous experts to weigh in on undervalued currencies.  Among those who testified was General Motor’s Chief Economist, who discussed Japan’s purported policy of holding down the Yen, within the context of the auto industry.  He argued that by maintaining an already large and growing reserve of foreign exchange, by purchasing US assets through quasi-governmental institutions, and by threatening to intervene in forex markets if the Yen appreciated, Japan has successfully prevented the Yen from rising over the last few years, despite such a course being justified by economic fundamentals.

“Japan’s policies provided anywhere from a $2,000 to $14,000 cash windfall for each of the 2.2 million vehicles Japan’s automakers exported to the U.S. in 2006.”

Read More: GM chief economist testifies against alleged Japanese currency manipulation

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Posted by Adam Kritzer | in Japanese Yen, Politics & Policy | No Comments »

Asian Nations Form Forex Bloc

May. 16th 2007

The leaders of 13 Asian nations recently agreed to pool part of their combined $2.7 Trillion in forex reserves to create a safety net of sorts, which would protect any and all of the member countries in the event of a currency crisis. The move stems from the 1997 Southeast Asian economic crisis, in which several Asian economies summarily devalued their currencies and were forced to enter into burdensome agreements with the International Monetary Fund.  The bloc also announced that it would continue preliminary discussions over the possibility of a common Asian currency.  However, this is probably still at least a decade from coming to fruition.  Xinhua reports:

“A relatively modest proposal for a currency index comprising a weighted basket of regional currencies has been bogged down in wrangling.”  Officials from the ADB now agree the proposal of a single currency is "many decades from being viable."

Read More:

China joins Asian bloc to create a forex safety net

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Posted by Adam Kritzer | in Emerging Currencies, Politics & Policy | No Comments »

Saudi Forex Reserves Reach $250 Billion

May. 15th 2007

By some measures, Saudi Arabia’s reserves are the fastest growing in the world.  The country’s reserves recently crossed the $250 Billion threshold, and are now growing at a pace equivalent to nearly 40% per year.  The source of the reserves should be a mystery to no one: oil.  Oil prices have surged over the last five years, bestowing a windfall of profits to the entire Middle East region.  Plus, as summer gets underway, oil prices are sure to climb further, which will ensure continued growth in Saudi forex reserves.  Fortunately for the US, the majority of the world’s oil contracts are settled in USD, which means the boom in oil prices has actually stabilized the USD, despite its contribution to the US trade deficit.  In addition, Saudi Arabia is one of the world’s most reliable investors in US capital markets, which means Dollar bulls can breathe a cautious sigh of relief that reserve “diversification” will probably be given short shrift by the Sauds.

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

Warren Buffet Returns to Forex

May. 13th 2007

Two years ago, Warren Buffet made headlines when he entrenched a $20 Billion dollar bet that the USD would decline in the near term. Unfortunately for Mr. Buffet, who happens to be one of the world’s most respected investors, the Dollar had a great year, and Buffet lost almost $1 Billion. [However, over the course of the bet, which actually began three years prior, his company, Berkshire Hathaway, reputedly pocketed over $2 Billion]. Now, after a long hiatus, Buffet is returning to forex markets, though with much coyness; he has not announced explicitly which currency he is betting on. Analysts have varying opinions, with some speculating that he is shoring up his bet against the USD, while others anticipate a bet against the Yen, which is vastly undervalued, from a fundamental economic standpoint. Regardless, the markets are sure to take notice of someone of Buffet’s stature. The Financial Times reports:

Perhaps the most surprising call for him would be to reverse
his stance on the dollar. Paul Mackel, currency strategist at HSBC, says it is possible that Mr Buffett thinks that US economic growth could accelerate, and has bought the currency.

Read More: What is Buffet Buying?

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

Corporate Profits Buoyed by Forex Gains

May. 10th 2007

While the American economy is sputtering, US corporations are earnings record profits and stock market capitalization is soaring.  These seemingly contradictory trends are being driven by the decline in the USD.  Multinational corporations, especially those based in the US, are conducting a growing portion of their business abroad and subsequently, their foreign sales are booming.  When corporations convert these profits from the currencies they are booked in back to USD, on which their financial statements are based, they are realizing the equivalent of a 5-10% bump from foreign exchange gains.  Many of these companies are web-based, such as Yahoo, Amazon and eBay.  Ironically, as the economy sags, betting on these types of companies may be akin to a bet against the USD.

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Fed Tries To Maintain ‘Goldilocks’ Economy

May. 9th 2007

Today, the US Federal Reserve Bank announced that it would hold the benchmark federal funds rate at 5.25% and will likely wait a few more months before nudging rates upward or downward.  In a press release that accompanied its monthly meeting, the Fed was unusually candid, indicating that it is receiving conflicting signals from economic data.  On the one hand, the economy is now growing at is slowest pace in nearly four years. On the other hand, the unemployment rate is below 5% and jobless claims remain low.  Typically, such an economic deadlock would be broken by inflation data, but in this case, inflation is trending only slightly above the Fed’s stated comfort level. In short, economists are mixed as to what kind of interest rate movements would be most conducive to what has been termed the ‘Goldilocks’ economy [not too hot, not too cold, but just right]. The New York Times reports:

In March, the Federal Reserve gave itself more flexibility to make its next move a rate cut rather than a rate increase. Instead of referring to the possible need for “additional firming,” which is Fed-speak for a rate increase, it simply referred to the possibility of “future policy adjustments.”

Read More: Fed Gives No Signal of Rate Shift

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Brazil Aims to Curb Appreciation in Real

May. 7th 2007

According to Bloomberg markets, Brazil’s currency, the Real, is the best performer this year among 16 major currencies that Bloomberg tracks.  It should come as a wonder to no one, since the country boasts a surging economy and one of the developing world’s highest benchmark interest rates, at 12.5%.  Brazil’s case is further helped by an air of stability, a perception which has brought billions of dollars of foreign capital into Brazil and is contributing to the country’s $50 Billion-a-year trade surplus.  Last week, Brazil’s Central Bank, took its boldest step yet in stemming the rise of Real, by engaging in a large series of reverse currency swaps, in which the Bank essentially bought USD in the futures market.  Analysts interpreted the move as a sign that Brazil is about cut interest rates.  Bloomberg News reports:

“Now, if this is not a sign that they are holding the real and will have to cut 50 basis points at the next monetary policy meeting, I don’t know what is,” said one economist.

Read More: Brazil’s Real Falls on Reverse Currency Swap Contracts Sale

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

Commentary: Implied Volatility Explained

May. 5th 2007

Technical analysts use a myriad of indicators and indices to
try to gauge where currencies are headed. Many seek insight in the prices of derivatives, where forwards, futures,
options, and swaps are used to make bets on the future movements of
commodities, securities, and even currencies. Let’s ignore swaps, which are more complicated and virtually
inaccessible to retail investors.  Currency
futures, forwards, and options are based on the same premise: one party agrees
to buy/sell a specific unit of a specific currency at a fixed price on or
before a fixed date in the future.  In
the case of forwards and futures, the contract represents an obligation.  In the case of options, it is a choice. 

As is probably self-evident, there are only a few variables
which determine the price of a currency option: the underlying exchange rate,
strike/purchase price, time to maturity, risk-free rate, and volatility of the
underlying currency. The first four variables are known: the fifth, volatility,
can be induced from the price of the option. You will often here of traders quoting “implied volatility” prices,
which, given the other four variables and the price of the option, can be
calculated easily enough. Based on the
price of the option, the volatility figures implicitly represent how investors
collectively view a currency’s prospects.

Volatility is worth paying especial attention to because it
can help you sort through the layers of analysis and guidance that pundits,
like myself, proffer with regard to forex markets. Implied volatility offers an instant snapshot
of how much investors believe a currency will fluctuate over the term of the
option.

Implied volatility is currently drawing the attention and scrutiny
of forex analysts because it is much lower than would be expected given the
Dollar’s recent collapse.  The USD has
fallen to a record low against the Euro and a 26-year low against the British
Pound, and many analysts, including myself, expect the Dollar to fall
further. However, implied volatility of
USD/Euro and USD/GPB options indicate that investors believe the worst of the
Dollar’s travails are behind us.  The
markets can be wrong, and in the case of currencies, which are among the most
difficult to forecast, they are frequently wrong.  But, prices do not lie: in this case, they are
telling us unequivocally that traders are not expecting further Dollar
volatility.

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Posted by Adam Kritzer | in Commentary | No Comments »

New forex products to meet rising demand

May. 2nd 2007

Anecdotal evidence that forex trading is expanding rapidly can be found everywhere these days, from the decline in volatility wrought by a surplus of liquidity, to the proliferation of websites and companies that offer guidance to retail currency investors.  Lured by the most liquid market in the world and 100:1 leverage, hedge funds have also piled in currencies.  As a result, in its not-yet-released annual report, the Bank of International Settlements is expected to confirm that daily forex volume now exceeds $3 Trillion, up from $2 Trillion in 2004!  Wall Street investment banks are springing into action to meet this growing demand for forex products and services.  This week, Citigroup launched an ETF based on “common FX strategies.  Credit Suisse, meanwhile, launched an index that lets investors mimic the carry trade.

Read More: Race to profit from currency markets

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Posted by Adam Kritzer | in Investing & Trading | 1 Comment »

Carry Trade Beginning to Unwind

May. 1st 2007

Nearly two months ago, China’s stock market declined 15% in one session, leading capital markets around the world to drop off precipitously. This collapse quickly spread to forex markets, where spooked traders began to unwind their Japanese yen carry trades, fearful that the volatility would trigger a short squeeze, causing the Yen to rapidly appreciate. While the yen has returned to its former low levels, it seems foreign investors have prudently unwound up to 60% of their short positions in the Yen, anyway.

A quandary has plagued analysts, who are attributing the failure of the Yen to appreciate to a surge of carry trade interest by Japanese retail investors. Long term Japanese interest rates remain pathetically low, and Japanese investors have taken to buying securities in American and Australia, where yields are significantly higher. However, if Japan’s Central Bank begins to raise rates- as analysts expect will take place as soon as May- investors could be persuaded to repatriate their capital to Japan. The Economist reports:

Retail investors’ direct share of Japan’s
foreign-currency market may be 20-30%, whereas individuals’ holdings of foreign
currency exceed foreigners’ holdings of Japanese securities. The clue to the
yen’s future, in other words, lies with the little man.

Read More: Out with a whimper

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

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