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Thai Baht Rises to 13-Year High

Sep. 24th 2010

As I pack my bags and head to Thailand for a vacation (for forex research purposes…yeah right), I thought it would be appropriate to blog about the Thai Baht’s strength. The momentum behind the Baht has been nothing short of incredible, and as often happens in the forex markets, the currency’s rise is becoming self-fulfilling. It has already appreciated 8.5% over the last year en route to a 13-year high, and some analysts predict that this is just the beginning.

THB USD Baht Dollar Chart 2006-2010

The last time I travelled to Thailand, in 2004, the Baht was trading around 40 USD/THB, compared to the current exchange rate of 30.7. That’s pretty incredible when you consider that during the intervening time, Thailand experienced a military coup and related political instability, as well as a financial crisis that dealt an especially heavy blow to the world’s emerging market currencies. And yet, if you chart the Baht’s performance against the Dollar, you would have only the faintest ideas that either of these crises took place.

To be sure, the financial crisis exacted a heavy toll on Thai financial markets and the Thai economy. Stock and bond prices lurched downward, as foreign investors moved cash into so-called safe haven currencies, such as the US Dollar and Japanese Yen. However, the Thai economy was among the first to emerge from recession, expanding in 2009, and surging in 2010. “Compared with a year earlier, GDP rose 9.1%, while the economy grew 10.6% in the first half,” according to the most recent data.  Tourism, one of the country’s pillar industries, has already recovered, along with exports and consumption. Projected export growth of 27% is expected to drive the economy forward at 7-7.5% in 2010, according to both the IMF and Thai government projections. The consensus is that growth would have been even more spectacular (perhaps 1-2% higher) if not for the politcal protests, which were finally quelled in May of this year.

Thailand GDP 2008-2010

Despite concerns about risk and volatility, foreign investors are once again pouring funds in Thailand at a record pace. Over $1.4 Billion has been pumped into the stock market alone in the year-to-date. As a result, “Thailand’s benchmark SET Index has rebounded30 percent since May…helping send the SET to its highest level since November 1996.” Capital inflows are also being spurred by Thai interest rates, which are rising (the benchmark is currently at 1.75%), even while rates in the industrialized world remain flat.  At this point, the cash coming into Thailand well exceeds the cash going out, which remains low due to steady imports and restrictions on capital outflows by Thai individuals and institutions. This imbalance is reflected in the Central Bank of Thailand’s forex reserves, which recently topped $150 Billion, more than 50% of GDP.

Anticipation is building that Thailand will use some its reserves to try to halt, or even reverse the appreciation of the Baht. After last week’s intervention by the Bank of Japan, such intervention is now seen not only as being more acceptable, but also more necessary. Due to pressure from the Prime Minister, the Central Bank has convened at least one emergency meeting to determine the best course of action. So far, members can only agree that restrictions on capital flows and lending standards to exporters should be relaxed.

For what it’s worth, Thailand’s richest man has urged the Central Bank not to act: “The effort is likely fruitless as foreign capital is expected to incessantly flood into Thailand because of the country’s healthy economic recovery and export growth. The baht as a matter of fact should become even stronger should Thailand’s politics remain in normal condition.” He is supported by the facts, which show that the Thai export sector has held up just fine in the face of the rising Baht, though perhaps only because other Asian currencies have risen at a comparable pace.

If other Central Banks were to step up their intervention – (Deutsche Bank has argued, via the chart below, that all “Asian central banks have for many years been more or less persistently in the market “stabilizing” their currencies, but with a clear bias towards preventing USD depreciation in this region”) – the Bank of Thailand would probably have no choice but to follow suit.

Foreign Exchange Reserves, Central Bank Intervention in Asia 2000-2010

Otherwise, it might not be long before the Baht clears 30 USD/THB. My next post on the Baht, in 2015, will probably be in the form of a similar lamentation…

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

Trading In Emerging/Exotic Currencies Increases

Sep. 2nd 2010

The long wait is over! The Bank of International Settlements (BIS) has just released the results from its Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity, conducted in April 2010. The report contains a veritable treasure trove of data, perhaps enough to keep analysts busy until the next report is released in 2013. [Chart below courtesy of WSJ].

Daily Turnover in Forex Markets

First, the data confirmed earlier reports that average daily forex volume had surged to a record level in 2010: “Global foreign exchange market turnover was 20% higher in April 2010 than in April 2007, with average daily turnover of $4.0 trillion compared to $3.3 trillion. The increase was driven by the 48% growth in turnover of spot transactions, which represent 37% of foreign exchange market turnover. The increase in turnover of other foreign exchange instruments [consisting mainly of swaps and accounting for the majority of forex trading activity] was more modest at 7%.” In addition, for the first time, investors and financial institutions accounted for a larger share of turnover than banks, whose trading activity has remained roughly unchanged since 2004.

The composition of the turnover actually didn’t change from 2007, interrupting a shift which had been taking place over the previous 10 years. Specifically, the share of overall turnover accounted for by the so-called major currencies actually increased in 2010, from 172% to 175%. [Since there are two currencies in every transaction, total volume sums to 200%]. Growth in the G4 currencies (Dollar, Euro, Pound, Yen) was more modest, however, increasing from 154% to 155%. This reversal is probably attributable to the credit crisis, which drove (and in fact, continues to drive) investors out of emerging market currencies and back into safe haven currencies, namely the Dollar, Yen, and Pound. However, this theory is belied by the significant increase in Euro trading activity, which certainly hasn’t benefited from the recent trend towards risk aversion.

Forex Composition, Major Currencies Versus Emerging Currencies

While emerging currencies as a group accounted for a smaller share of overall activity, certain individual currencies managed to increase their respective shares. The Singapore Dollar, Korean Won, New Turkish Lira, and Brazilian Real all fit into this category. Still other currencies, such as the Indonesian Rupiah and Malaysian Ringgit, also managed impressive gains but account for such a small share of volume as to be insignificant when looking at the overall the picture. Those who were expecting even bigger growth should remember that it’s ultimately a numbers game: the amount of Ringgit it outstanding is dwarfed by the number of Dollars, so any gains that the Ringgit can eke out are impressive. In addition, when you consider that the overall forex pie is also increasing, the nominal increase in volume for these small currencies was actually quite large.

Growth in Emerging Currencies Forex Volume
The ongoing search for yield in all corners of the financial markets is likely to bring some of the more obscure currencies into the fold. “In June, I began getting questions about Uruguay, Vietnam and others,” said Win Thin, senior currency strategist at Brown Brothers Harriman in New York…investors often asked Mr. Thin questions about less-familiar currencies such as the Ukrainian hryvnia and Romanian leu.” In the same article, however, Mr. Thin cautioned that interest in such currencies is still probably lower than in 2007-2008, for a good reason. “It’s not like the Group of 10, or even the more liquid emerging market currencies where, if you decide you’ve made a mistake, you can get out.”

Due to the lack of liquidity and higher spreads, these obscure currencies aren’t really suitable for trading. Of course there will be a handful of institutional and even retail investors that want to make long-term bets on these currencies. They tend to be more aware of the risk and less sensitive to the higher cost and lower convenience. The overwhelming majority of traders, however, churn their portfolios daily, if not hundreds of times per day. A 10pip spread on the USD/MXN (Dollar/Mexican Peso) would be considered too high, let alone a 50 pip spread on any transaction involving the Ukrainian hryvnia.

In short, the majors will account for the majority of trading volume for the foreseeable future, regardless of what happens to the Euro. At the same time, that won’t prevent a handful of selected emerging currencies, such as the Chinese Yuan, Indian Rupee, Brazilian Real, and Russian Ruble from increasing their share. As liquidity rises and spreads decline, volume will increase, and their rising importance will become self-fulfilling.

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The R in BRIC Stands for….Romania?

Feb. 19th 2010

By now, most investors are well aware of the acronym BRIC, which stands for the emerging market powerhouses of Brazil / Russia / India / China. When the idea was conceived in 2003, it seemed to make a lot of sense, as these four economies were at the top of the GDP ‘league tables,’ year-after-year. While China, India, and to a lesser-extent, Brazil, all continue to outperform, Russia has begun to lag. Perhaps Russia needs to be replaced as a member of BRIC. If the acronym is to be preserved, the only choices are Romania or Rwanda.

But seriously, last year Russia’s economy declined by 8%, compared to expansions of 6.5% and 8.3% in India and China, respectively. The Ruble fared equally poorly, relatively speaking. Compared to the Brazilian Real, which erased most of its 2008 decline, the Ruble’s rise offset less than half its previous losses. A similar picture can be painted with its. stock market. Not coincidentally, oil/gas prices have followed a similar pattern.

Real versus ruble

That the fortunes of Russia’s economy are too closely tied to energy exports is only half of the problem. The other half is as much cultural as structural. Russia’s economy is still largely oligarchical, and competition is lacking. Corruption is rampant, and the bureaucracy is out of control. In short, there is “a combination of corruption, poor governance, government interference in the private sector, and insufficient investment in the oil and gas sector,” which makes it unlikely that the Russian economy will embark on a stable course of development anytime soon. “What’s more, the warning signs of more economic trouble ahead are growing — for example, the increasing rate of non-performing loans on Russian banks’ balance sheets.” To put it bluntly, Russia’s economic prospects are somewhere between bleak and pathetic.

What about the Ruble, then? In the long-term, the Central Bank has pledged to shift its monetary policy away from micromanaging the Ruble. For the time being however, it remains focused on keeping the Ruble within a carefully prescribed range. Of course, it’s unclear whether the Central Bank sees its charge as defending the Ruble against a decline or against excessive depreciation, so currency traders shouldn’t read too much into it.

On the surface, the Ruble would seem to represent an excellent candidate for the carry trade. Despite being trimmed 10 times in 2009 alone, the Central Bank’s benchmark interest rate still stands at a healthy 8.75%. Moreover, the Central Bank has basically promised not to cut rates any further from the current record low. Remarkably, though, real interest rates are slightly negative, as Russia’s estimated inflation rate is 8.8%. Even more remarkably, this is the lowest level in decades! In other words, there is no interest too be earned from a Ruble carry trade, and the only upside is the appreciation in the Ruble.

And that ignores the downside risks, which are significant. After Russia defaulted on its debt in 1998, the international financial community basically lost confidence in the Ruble. Now, all of Russia’s government debt is denominated in foreign currency, mainly Dollars and Euros. Russian investors seem to harbor the same suspicions about their currency, and in 2008, the Ruble’s fall became self-fulfilling as investors transferred more than $150 Billion out of Russia, in the fourth quarter alone.

In short, I see very little upside from investing in the Ruble. There is no money to be earned from a Ruble carry trade. Betting on the Russian economy seems misguided. Betting on a continued rise in oil and gas prices would be better achieved by buying oil and gas futures directly. Meanwhile, any hiccup in the global economic recovery will certainly be met with an exodus of capital from Russia. Stick to the BIC countries instead.

ruble 5 years

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Posted by Adam Kritzer | in Emerging Currencies, Exotic Currencies, News | 3 Comments »

Commodity Currencies Remain in the Spotlight

Feb. 3rd 2010

In 2009, so-called commodity currencies – both individually and as a group – registered record-breaking gains. The Brazilian Real and the South African Rand finished up more than 30%, while the Australian and New Zealand Dollars finished up about 25% each, and the Canadian Dollar not far behind. While the outlook for 2010 is slightly less rosy (if only because of the law of averages), investors would still be wise to keep such currencies on their radar screen.

With the appreciations of 2009 canceling out the depreciations of 2008, currency markets are close to “equilibrium.” Going forward, then, investors will to find a rationale other than sheer momentum for making bets. Strong commodity prices represent one such rationale. This is not only the case because currency prices are rising and are underpinning the recoveries in the respective countries that are rich in their production, but also because economic recovery – and “normal” growth as well, for that matter – in many other economies is built precariously on debt and the expansion of sovereign money supplies.

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Commodity currencies – and commodities in general – have always held allure as investment vehicles because of their tangibility and necessity. Simply, modern economies depend on commodities for their functioning. Thus, countries rich in natural resources would seem to represent safe bets, since they can be assured of demand both during periods of expansion and during economic downturns.  The strong performance of commodity currencies in 2009 underscores this point, since despite the fact that prices for many commodities are well below the record highs of 2008, these currencies are very close to their 2008 highs.

More specifically, the Canadian Dollar often tracks the price of oil; this correlation will probably only strengthen when the oil sands of western Canada are developed. While rich in many natural resources, it is gold that both Australia and South Africa are famous for, and to which their currencies are often tethered. Brazil and New Zealand deal in a more diverse array of commodities, and the Kiwi and Real often move in tandem with broad-based commodities indexes. There is also the Mexican Peso (oil), the Russian Ruble (natural gas), the Norwegian Krona (oil), and Chilean Peso (copper), but the correlations between these currencies and the respective commodities for which they are famous tend to be looser.

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Of course, there are many other economies that are rich in natural resources, but for various reasons (lack of liquidity, fixed exchange rates), their currencies aren’t (as) appropriate for investing. Even the currencies I listed above don’t always reflect commodities prices. For example, Canada’s fiscal problems and South Africa’s monetary easing will arguably weigh down the Loonie and Rand, respectively, in 2010.

For commodity pure-plays, your best bet, then, would be to invest in the commodities themselves. Of course, commodities don’t pay interest and their costs associated with holding them (whether directly or indirectly) and they tend to fluctuate with greater volatility than currencies. Another option is the just-announced WisdomTree Commodity Currency Fund, an ETF composed of a basket of commodity currencies, many of which I listed above.

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Emerging Markets Bubble Continues to Inflate, but for How Long?

Nov. 13th 2009

Yesterday, emerging markets (proxied by the MSCI Emerging Markets Index) recorded their biggest fall since July, ending a week of solid gains. Still, this one-day slide of 1.4% pales in comparison to the nearly 100% gain that the index has achieved since bottoming last March. In other words, while investors might be starting to pull back, the direction of asset prices is still upward.

Emerging Market Stocks

As for what’s causing this across-the-board appreciation, that was the subject of my previous post (Inverse Correlation between Dollar and Everything Else…Still), in which I merely stated the obvious; that the Fed’s year-long program of negative real interest rates and quantitative easing (i.e. wholesale money printing) has unleashed a flood of cash into global capital markets. Since we’re not just talking about the Dollar, here, it makes sense to point out that the Fed’s easy money policies have been copied by Central Banks in most other industrialized countries, including the UK, Canada, Switzerland, Sweden, and to a lesser extent, the EU.

As for why emerging market assets and currencies seem to be outpacing appreciation in other asset classes, that’s also not difficult to explain. First of all, by some measures, emerging market stocks have hardly outperformed other assets. Oil, for example, has risen by 131% in less than a year, to say nothing of other commodities. Still, by other measures, growth has been remarkable. Most emerging market stock indexes and currencies have fully erased (or come close to erasing) the losses recorded during the peak of the credit crisis. Bonds, meanwhile, have gone one step further. Yields are collapsing, and prices have exploded – by 25% in the last year, sending the JP Morgan Emerging Market Bond Index to a new record.

Emerging Market Currencies

Is it safe to call this a bubble? Intuition would suggest so; given that all assets are rising across the board, without regard to particular fundamentals, it would seem that only a herd/bubble mentality could offer an explanation. Some analysts, in fact, have given up completely on fundamental analysis, instead using fund inflows (i.e. investor demand) to predict whether some emerging market assets will continue rising. As Nouriel Roubini (the NYU economist that famously predicted the credit crisis) summarizes: “Traders are borrowing at negative 20 per cent rates to invest on a highly leveraged basis on a mass of risky global assets that are rising in price due to excess liquidity and a massive carry trade.” P/E ratios are nearly twice as high in some emerging markets, compared to stocks in the S&P 500.

On the other side of the equation are the bulls and the efficient market theorists.”By historical price-to-earnings ratios — the ratio of stock prices to per-share profits — these levels can be justified, if the economic recovery continues. With massive layoffs, business costs have been cut sharply. “The hope is that when consumers and companies start spending, the added sales will drop quickly to the bottom line [profits].” Other proponents argue that the rise in asset prices is exactly what the Fed wants, since it implies that the markets are once again characterized by stability and liquidity.

Regardless of whether growth materializes, however, that doesn’t change the fact that the free ride can’t and won’t last forever. At some point, Central Banks will be forced to raise interest rates and start withdrawing Trillions of Dollars from global capital market. This will cause the Dollar to rise, and investors to rapidly unwind their carry trade positions. Warns Roubini, “A stampede will occur as closing long leveraged risky asset positions across all asset classes funded by dollar shorts triggers a co-ordinated collapse of all those risky assets – equities, commodities, emerging market asset classes and credit instruments.”

If the tech-bubble and real-estate bubble taught us anything, it is that there is no free lunch in the markets. It is not possible for all investors in all assets classes to simultaneously win. At least, in the long-term. In the short-term, meanwhile – it pains me to say this – let the party continue. My only warning is this: when the music stops, don’t be the one caught with your pants down…

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How will Foreign Investment Tax Affect the Real?

Nov. 4th 2009

On October 20, the executive office of the government of Brazil enacted an emergency measure, calling for a 2% tax on on all foreign capital inflows. And with one foul swoop, this year’s 35% rise in the Real had come to an end, right?

The tax certainly took investors by surprise, with the Brazilian stock market falling by 3% and the Real falling by 2%, the largest margins for both in several months. The tax is comprehensive and applies to essentially to all foreign capital deployed in Brazilian capital markets, whether fixed income, equities, or currencies. While the tax doesn’t apply to those currently invested in Brazil, the possibility that it would cause potential investors to stay away was enough to cause a sell-off.

The ostensible reason for the tax levy is to prevent a further rise in the Real. By most measures, the currency’s rise has been excessive, more than erasing the losses incurred during the credit crisis. The concern is that a more expensive currency will derail the Brazilian economic recovery before it has a chance to firmly get off the ground. “Brazil’s currency needs to weaken as much as 19 percent for sustainable economic growth, said Nelson Barbosa, the Brazilian Finance Ministry’s top policy adviser.”

According to cynics, however, the tax is a backhanded effort to raise revenue to fund a growing budget deficit. The government continues to spend money (perhaps to offset the negative impact on exports brought on by the Real’s rise) as part of its stimulus plan, but is increasingly tapping the bond markets to do so. The tax is expected to bring in an impressive $2.3 Billion over the next year, which could go part of the way towards fixing the government’s fiscal problems.

The real question, of course, is how the Real will fare going forward. The initial reaction, as I said, was ‘The Party’s over…‘ But investors with a longer-term horizon aren’t fretting. “In the medium term, the measure will have a limited impact. The fundamentals point to a stronger real, with commodities rising and the dollar weakening globally,” asserted one economist. While investors aren’t happy about paying an arbitrary 2% fee to the government, such pales in comparison to the 10%+ returns that investors still aim to reap from investing in Brazil over the long-term.

Ignoring the possible bubbles forming in Brazilian capital markets (admittedly, a dubious suggestion), Brazil still looks like a good bet, especially on a comparative basis. Interest rate futures point to a benchmark interest rate of 10.3% at this time next year, compared to ~1% in the US. Even after accounting for inflation and the 2% tax levy, the yield spread between Brazil and the US remains impressive. For that reason, the Real has already stalled in its expected fall against the US Dollar, standing only 1.7% below where it was on the day the tax was declared.

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It’s unclear how determined the Brazilian government is towards pushing down the Real. The comments by its finance minister suggest that the consensus is that it is not slightly – but extremely overvalued. Thus, it’s likely that the government will enact other aggressive measures to prevent it at least from rising further. It continues to buy Dollars on the spot market, and is trying to make it easier for Brazilians to take money out of Brazil. It is not yet ready to tamper with its floating currency, but by its own admission, the “government was studying additional measures to regulate the heavy inflow of foreign investments and its impact on the country’s currency.”

There are also implications for other (emerging market) currencies. As I wrote earlier this week (“Central Banks Prop Up Dollar“) a number of Central Banks have already intervened or are currently mulling intervention in forex markets, to push down their currencies. You can be sure that other governments will be studying the situation in Brazil closely, with the possibility of implementing such policies themselves.

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Posted by Adam Kritzer | in Emerging Currencies, Exotic Currencies, News | No Comments »

Euro retreats from 2009 Highs

Aug. 18th 2009

In forex, timing is everything. If I had written this post a couple weeks ago, the headline would read “Euro Touches 2009 High.” Perhaps if I had waited another week, it would have read, “Euro Approaching 2009 High.” But alas, I chose today to write about the Euro, and the headline I chose is probably the most appropriate under the circumstances.

euro-dollar1
On August 5, “The euro hit a high for the year against the dollar as stocks trimmed their losses in afternoon trading Wednesday despite a generally cautious tone in currency markets.” Analysts were careful to point out that the markets remained cautious and the Euro eased past – rather than smashed through – its previous high. Technical analysts would and have argued that this paved the way for the subsequently rapid decline: “The euro is testing the base of an ascending channel with daily momentum charts showing a ‘double top in overbought territory.’ ”

This notion might have some merit, considering that fundamentals arguably favor a continued Euro appreciation. “The economy of the 27-country European Union shrank 0.3 percent in the three months ended June 30, for an annual rate of roughly 1.2 percent. The 16 countries that use the euro registered a 0.1 percent decline for the second quarter, or an annual rate of roughly 0.4 percent.” While output remains well below its 2008 levels, the slight contraction represents a tremendous improvement from the first quarter, when GDP shrank by 2.5%.
eu-2009-gdp

“Underlying the strong reading were solid performances in France and Germany, each of which grew 0.3 percent in the second quarter, government data showed.” This is helping to offset further contractions in Italy and Spain, which have turned into economic laggards as a result of the housing bust. In addition, exports in Germany grew by 7% last month, and “Investor sentiment improved more than analysts had expected in August to its best level since April 2006.” On an aggregate basis, “the euro zone’s trade balance with the rest of the world rose to 4.6 billion euros ($6.5 billion) in June, compared to a flat balance in the same month last year,”

Still, explorers looking for bad news and/or cracks beneath the surface will have no difficulty finding them. German exports (and output in general remain down year-over-year. In addition, there are still trouble spots in the EU, notably in western Europe. “Already, the euro area’s unemployment rate stands at 9.4 percent, its highest level in 10 years, and the anemic growth of the coming quarters will not be enough to arrest the slide. That, in turn, could drag down consumer confidence or even generate political backlash in Europe, economists said.” Most worrying is perhaps that, “consumer prices in the euro area dropped 0.6 percent in July…” ‘Deflation is becoming entrenched in the euro area, which would be very bad for the economy.’ ” Good thing the ECB left some room to lower rates further.

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Bank of Israel Steps up Intervention on Shekel

Aug. 6th 2009

Over the last year, Israel has quietly amassed one of the world’s largest repositories of foreign exchange reserves. On average, the Central Bank of Israel has purchased $100 million worth of Dollars every day since July 2008, bringing its total reserves to $52 Billion. The Bank’s goals are twofold: to sterilize the inflow of speculative money pouring into Israel in order to mitigate inflation, and to stem the appreciation of the Shekel.

Towards this latter, the Bank received a boost by the credit crisis, which caused an outbreak of risk aversion and sent investors rushing to shift funds into so-called safe haven countries/currencies. As a result, the Israeli stock market tanked, and the Shekel plummeted 30% in a matter of months.

shekel-dollar

Thanks to the recent upswing in risk appetite, however, the Shekel has bounced back, having risen 10% since April. While the Shekel still remains well off its its 2008 highs, the sudden rise still elicited the attention of the Bank of Israel, which announced that it would respond to the, “Unusual movements in the exchange rate that are inconsistent with underlying economic conditions, or when conditions in the foreign exchange market are disorderly,” by intervening heavily in the open market. It “is believed to have purchased between $1.5-1.7 billion this week so far.”

The Bank has also taken steps to inadvertently degrade its currency by lowering its benchmark interest rate to .5%, and buying bonds on the open market. “The central bank will have bought a total of 18 billion shekels ($4.7 billion) of bonds when it completes the program….The bank said in its statement that it does not intend to sell the securities it purchased and will continue buying foreign currency.” While its unclear whether the program has succeeded in stimulating the economy – which contracted by 3.7% last quarter – it has provoked inflation, which is still running in excess of 3% per year.

The forex markets have taken notice of both developments, sending the Shekel down 4% since Monday. Still, it’s not clear whether the Bank of Israel has any real credibility with traders. By its own admission, its intervention program is temporary: “It is clear that we won’t carry on buying foreign currency forever. Everybody understands that the central bank can’t beat the market, but sometimes the market does things that are not justified.”

Analysts, meanwhile, insist that the Shekel’s appreciation is not unusual, and that the intervention runs counter to fundamentals. “[The] market pressures strengthening the shekel against the dollar, are, in fact, consistent with underlying economic conditions. Fundamental economic conditions favoring the revaluation of the shekel include the accumulation of a balance of payments credit of $4.3 billion over the past thee quarters.” These analysts, then, are more concerned about rising inflation then about the competitiveness of Israeli exports.

Barclays, an investment bank, evidently subscribes to this school of though, and predicts the Shekel “will increase 2% after breaching their so-called resistance levels.” Merrill Lynch, meanwhile, sees the Shekel appreciating an additional 10% over the next year.

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Should G20 Crack Down on Forex Speculation?

Nov. 24th 2008

The last few months have born witness to an unprecedented level of volatility in forex markets, to say nothing of the fluctuations in other areas of securities markets. Emerging markets currencies in particular, as well as a handful of industrialized currencies, have crashed violently, as a process of de-leveraging continues to send capital back to the US and Japan. This instability has led some policy-makers to revive an erstwhile exhortation to limit the role of speculators in forex markets, who collectively may account for as much as 90% of daily forex turnover. Specifically, a 1% tax on all forex trades has been proposed, which would be deducted automatically and used to finance infrastructure projects around the world. It has also been suggested that forex markets follow the lead of equity markets by adopting a so-called "up-tick" rule, which would be used to counter sudden waves of predatory short-selling that can cripple a country’s currency in minutes. CSRwire reports:

Such bear raids are rarely to "discipline" a country’s policies, as traders claim, but rather to make quick profits. In the transparent FXTRS system, traders selling falling currencies begin to see that the rising tax is cascading into the country’s currency stabilization fund and cutting into their gains.

Read More: Why Obama Missed Bretton Woods II

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Zimbabwe Revalues Currency

Aug. 5th 2008

The exchange rate between Zimbabwe’s local currency and the US Dollar is currently 110 Billion:1, give or take a few zeroes. This complete collapse in confidence surrounding the currency is redolent of post-war Germany, when a wheelbarrow full of Deutsch Mark was required to buy a loaf of bread. The same hyperinflation, estimated at 100,000,000% on an annualized basis, has gripped Zimbabwe, causing prices to skyrocket and the local currency to plummet. As a result, the Central Bank has announced a plan to redenominate the currency by removing 10 zeroes from notes currently in circulation. Analysts agree, however, that this move is merely symbolic, and unless the Central Bank comes up with a comprehensive plan to fight inflation, they may have to repeat the re-denomination process later this year. Voice of America News reports:

Economist John Robertson agreed the zeros will soon be back on notes without a concerted effort to tackle the root causes of hyperinflation. Journalist Jonah Nyoni commented that what needs to be removed is not the zeroes from the currency but the leadership of the country.

Read More: Zimbabwe’s Central Bank Snips 10 Zeros In Currency Redenomination

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Posted by Adam Kritzer | in Exotic Currencies, Politics & Policy | 1 Comment »

Dollar Holds Steady as World Awaits US Data Reports

Sep. 4th 2007

Credit problems in the US have been the source of much turmoil throughout the global markets in the past few months. Tuesday was good for the US dollar, which held strong against both the yen and the euro. However, forthcoming economic reports from the US may or may not tip the scales. According to Reuters:

"The panic is almost over, but the market has lost its direction and is waiting for more news, especially any good news," said Kikuko Takeda, a currency strategist at Bank of Tokyo-Mitsubishi UFJ.

Read more: Dollar drifts as U.S. data awaited for direction

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US Dollar Strong in Monday Asian Trade

Aug. 27th 2007

Reports from Tokyo indicate that the US dollar is holding steady in Asia as of Monday morning. After receiving promising reports from the west, recent fears about the US credit problems have alleviated and risky trades have resumed in Asia. Since then, the dollar has strengthened considerably. The Philippine Star reports:

The better US economic news slightly pared back market expectations that the US Federal Reserve will cut its benchmark interest rate next month, dealers said.

Read more:Dollar steady in Asian trade

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Posted by Amy Cottrell | in Exotic Currencies, US Dollar | No Comments »

Singapore Market Steady Despite Global Turmoil

Aug. 17th 2007

Although recent credit problems in the US have led to a global market crisis, Singapore remains largely unaffected. The Singapore dollar was weakened briefly on Thursday, only to bounce back again by Friday. As for the foreign exchange markets, Singapore has been watching the unfolding drama with close observation. This is, perhaps, the reason for the city-state’s stable economy. Reports Forbes:

The MAS [Monetary Authority of Singapore] said it ‘has not needed to conduct any extraordinary operations in the markets. However, we stand ready to act if the situation warrants.’

Read more: Singapore’s forex, money markets orderly despite global slump, says MAS

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Posted by Amy Cottrell | in Exotic Currencies | No Comments »

Norwegian Krone Rises on Rate Hike

Jul. 18th 2007

The Norwegian Krone is certainly not a very popular currency among participants in the forex markets.  Nonetheless, the currency has enjoyed a strong year, having moved away from clinging to the coattails of the Euro and has actually surpassed the common currency by a considerable margin.  In fact, the Krone recently touched a 10-month high against the Euro, and a multi-year high against the USD, spurred on by a rate increase by the Central Bank of Norway.  In addition, the consensus among analysts is that the Central Bank will hike rates several more times over the next year, bringing the benchmark rate to 5.75% by 2008.  Surely, the most opportunistic among us has already begun searching for a broker that facilitates trading in Krone!

Read More: Norwegian krone jumps as central bank hikes interest rates

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New Zealand Intervenes on Behalf of Kiwi

Jun. 19th 2007

After watching the New Zealand Dollar (“Kiwi”) rise to a 22-year high in trade-weighted terms, the Bank of New Zealand decided it had had enough and intervened directly in forex markets to hold down the value of the currency.  Last week, the Bank was forced to raise interest rates due to soaring inflation.  Strong commodity prices and a commensurately strong economy have ushered in a surge of foreign capital, which in turn, have driven the Bank to hike rates, which in turn has made New Zealand more attractive to foreign investors.  This vicious cycle proved frustrating enough that the country’s Central Bank evidently felt the only way to curb the currency’s rise was to actively hold it down.  The Economist reports:

A strong currency can be a curse for exporters, however. In New Zealand’s case, the carry trade has given the kiwi dollar an extra upward push. With the yen nearing five-year lows against the American dollar this week, such trades may well continue.

Read More: A Warning Shot

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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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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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Vietnamese Dong Attracts International Attention

Apr. 24th 2007

Despite a surging economy, Vietnam’s currency, the Dong, has managed to escape the attention of international traders and investors.  Last year, Vietnam registered the strongest economic growth in Southeast Asia, at 7.7%, and is projected to grow by over 8% this year.  However, due to a devaluation program maintained by the government to support the Vietnamese export sector, the Dong has remained low.  In addition, the government does not allow speculators to buy Vietnamese currency unless it is being used for a specific purpose, typically investment.  As a result, the market for currency derivatives is beginning to take-off in Vietnam, as speculators seek a means of capturing some of the strength in Vietnam’s economy that is sure to lift its currency.  The International Herald Tribune reports:

Vietnam this year ended a decade-long policy of “managed devaluation” that caused the dong to weaken 30 percent. The central bank will “keep the dong stable, in a flexible manner, so that it can help our exports,” said one analyst.

Read More: Currency is Vietnam’s new lure

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Brazilian Real surges to 6-year high

Apr. 11th 2007

Six years ago, Brazil’s economy was in shambles, annual price inflations routinely exceeded 10%, and Brazilian interest rates were hovering around 20%.  Its currency, the Real, traded at roughly 4/USD.  Flash forward to the present: Brazil’s economy is now on solid footing, inflation has been held in check, and Brazilian asset prices are strong.  The result is a much stronger Real, which has doubled in value since 2002. Of course, many analysts have been quick to point out that the Real is benefiting from high commodity prices, which are unlikely to be sustained in the medium-term.  The Financial Times reports:

Brazilian assets suffered during recent nervousness over the troubled US mortgage market. But this seems to have passed and confidence in the global economy and strong commodity prices have caused a return of investment flows.

Read More: Brazilian currency set to hit fresh peak

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Russian Rouble Gains Popularity

Mar. 14th 2007

Last summer, Russia’s Central Bank relaxed capital controls on its currency, making the rouble almost fully convertible with other currencies. As a result, the rouble is quickly gaining respectability and becoming popular both among traders, who are speculating the rouble will appreciate, and investors, who are driving the currency higher with their purchase of Russian securities. Soaring commodity prices and a red-hot Russian economy have driven increases in capital inflows. While the rouble is no longer pegged directly to the Dollar, however, it remains linked to a basket of currencies, and its appreciation is being carefully controlled by Russia, so a rapid run-up is still unlikely. The Gulf Times reports:

“There is no doubt that it’s being closely managed. But that said I think it’s still a great, very low volatility currency versus the basket and that’s important in the current environment of emergency market currency weakness and volatility.”

Read More: Russian rouble carving out a place in forex industry

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Indonesia’s forex reserves near $50 Billion

Feb. 19th 2007

China and Japan are no longer alone in their unofficial quest to pile up foreign exchange reserves. Indonesia just announced that its reserves have surpassed the $45 Billion mark, and to the surprise of no one, these reserves are largely held in USD-denominated assets. The announcement is significant for a few reasons. First, it means that Asian nations not lumped in with the Asian Tiger economies – Taiwan, Hong Kong, South Korea, and Singapore – have begun to reap some of the fringe benefits of economic growth, notably surging forex reserves. Second, it is symbolic of the fact that the USD remains the world’s de facto reserve currency. At the same time, it should make USD bulls quiver, because such countries could conceivably pile out of the USD just as quickly as they have piled in.

Read More: Indonesia says forex reserves hit 45 bln USD

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Oman withdraws from Mideast monetary Union

Jan. 23rd 2007

Inspired by the success of the European Union, the Cooperation Council for the Arab States of the Gulf (GCC), which includes the nations of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates, is aiming to establish a monetary union by 2010. The six-nation bloc plans to function in many ways like the EU, with a common currency and a common monetary policy. However, one nation, Oman, will not be participating in the union because of what it believes to be draconian conditions of membership. Specifically, Oman is not willing to adhere to the requirement that caps public debt at 60% of GDP, one of the prerequisites of membership. The Gulf News reports:

The GCC’s single currency plan can go ahead with the absence of one member state, like in the eurozone where only 13 countries out of the EU’s 27 adopted the euro.

Read More: Why Oman pulled out of the single currency

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Thailand moves to stem Baht appreciation

Dec. 18th 2006

In the year-to-date, the Thai Baht has appreciated by almost 20% against the USD, making it one the world’s strongest performing currencies. This becomes especially impressive when you consider that it has taken place against the backdrop of a military coup. Today, the Central Bank of Thailand effectively put an end to the Baht appreciation by effecting immediate controls on foreign capital inflows. The Central Bank has come to the (correct) conclusion that the run-up of the Baht has been a result of a surplus of speculative capital rather than a sudden increase in demand for Thai goods and services. Accordingly, foreigners who wish to make bets in Thai capital markets will henceforth be required to keep their money in Thailand for at least one year before they can withdraw it. The Financial Times reports:

The baht weakened further on Tuesday, trading at Baht35.67 to the dollar by early afternoon, 1 per cent down from the nine-year high point of Baht35.06 reached earlier Monday before the central bank’s announcement.

Read More: Thai stocks plunge on capital controls

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Zimbabwe issues new currency

Aug. 17th 2006

With today’s post, I thought I would take a break from reporting on the major currencies and interest rate speculation, a topic which I feel has been beaten to death. A few weeks ago, Zimbabwe announced that it was issuing a new currency, in order to rein in activity in black market currency exchange. Many countries, including Zimbabwe, with ill-defined economic policies, are often severely constrained in their ability to conduct monetary policy because they don’t know how much cash is circulating. By issuing a new currency, the Zimbabwe government is effectively forcing its citizens to make known the amount of currency they possess, and may enable the country to draft a more practicable economic policy.

Central bank Governor Gideon Gono knocked three zeros off all banknotes and devalued the local dollar by 60 percent in a bid to snuff out a thriving forex black market, where the exchange rate is nearly three times the official one.

Read More: Panic as currency deadline looms in Harare

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Australian Dollar pulled in both directions

Feb. 27th 2006

For the better part of a year, the Australian Dollar (AUD) has remained relatively constant in value, hovering around .75 USD. Economists and analysts have identified several factors that are preventing the AUD from moving by pulling the currency in opposite directions. On one hand, commodity prices and Australian economic fundamentals continue to perform strongly, which would seem to drive the AUD upward. On the other hand, the interest rate differential between the US and Australia has narrowed to only 100 basis points, which may not be enough to bring the capital of risk-averse foreigners to Australia. By the same token, many investors are moving funds to New Zealand, where interest rates exceed 7%. The Sydney Morning Herald reports:

All told, last year saw the lowest degree of variability in the Aussie’s value in any year since the float in December 1983.

Read More: Goodness knows why our dollar’s so stable

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New Zealand Dollar tied to bond issuance

Jan. 19th 2006

For years, New Zealand has been home to the highest interest rates in the first world. Accordingly, it has had very little difficulty financing massive budget deficits, as foreigners have been all too eager to earn high returns lending it money. However, the government has become increasingly concerned that it may have issued too much debt, warning the Japanese government that further issuance could threaten the stability of the New Zealand Dollar. Basically, the bonds have significantly increased the amount of New Zealand currency in circulation, which could lead to inflation. If the law of purchasing power parity holds, the New Zealand Dollar will move in the opposite direction as prices. AFX News Limited reports:

The Kiwi is ‘near to the top of most people’s lists of things to sell this year’, with interest rates expected to fall.

Read More: NZealand dollar slumps as govt holds talks with Japan on uridashi bonds

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Currency traders punish New Zealand Dollar

Dec. 9th 2005

Spurred by favorable interest rates, currency traders have bid up the value of the New Zealand Dollar to a 20-year high in trade weighed terms. This week, however, the NZD was a dealt a major blow, as Standard and Poor’s announced that New Zealand can no longer sustain its massive current account deficit, which is approaching 8% of GDP. In addition, the Central Bank of New Zealand announced the end of its policy of monetary tightening. If the US, Europe, and Canada continue to raise interest rates, the New Zealand interest rate differential will become less attractive. As the old saying goes, ‘what comes up must come down.’ The Financial Times reports:

The Australian dollar fell 0.7 per cent to A$2.3169 against sterling as soft GDP data strengthened a perception that Aussie rates have also peaked.

Read More: Headstrong kiwi flies too close to the sun

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Brazilian Real continues to soar

Nov. 9th 2005

The Brazilian Real surged to a 4 ½ year high against the USD today, on the heels of strong economic growth and stratospheric interest rates. Brazil is currently among the strongest economies in the developing world, often lumped in the same category as China, India, and Russia. Investment in fixed capacity has spurred significant increases in production and exports, and hence, GDP. In addition, Brazil’s federal funds rate currently exceeds 19%, a level that has made foreign creditors all too eager to lend to Brazil. In fact, Standard and Poor’s, an international rating agency, recently raised its rating on Brazilian government bonds, a move which will surely suck in more foreign capital, and provide additional support for the Real. The Financial Times reports:

The real was further aided by a government announcement that it planned to sell more bonds maturing in 2015, a move likely to increase portfolio inflows into Brazil even further. The real has now risen 31.7 per cent against the dollar since May 2004.

Read More: Brazil’s real hits 4 ½ year high

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South Korean economy continues to boom

Oct. 27th 2005

According to recent GDP data, South Korea’s economy grew by 4.4% in the last quarter, which officially became the most productive in over two years. Economists attribute the sudden increase in growth (from 3.3% to 4.4%) to soaring demand. While South Korea’s economy has traditionally been driven by exports, figures from the latest quarter indicate domestic consumption is also making an impact, as hitherto frugal consumers dip into savings. Analysts are already speculating the Central Bank of Korea will further tighten monetary policy by raising interest rates next month, which should lend additional support to the Korean Won on top of the positive GDP data. The Financial Times reports:

“The Economy is staging a steady recovery after hitting bottom in the first quarter. The upward trend is likely to continue towards the end of this year, which raises the prospect of another rate hike,” said [a Korean economist].

Read More: Demand Drives S Korean Growth

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Central Bank of Philippines raises interest rates

Oct. 20th 2005

In a surprising move, the Central Bank of Philippines raised interest rates for the third time this year. The move was seen by investors as a preemptive response to certain inflationary trends. The Central Bank also admitted to trying to maintain the interest rate differential between Philippines and the US, so that creditors would continue to hold its debt. The Philippines also recently raised its value-added-tax in order to boost government revenues and decrease its reliance on foreign borrowing. The Philippine Peso received support from the news, reports The Financial Times:

Thursday’s action, which lifted the peso in the last few minutes of trade, took the central bank’s overnight borrowing rate to 7.50 percent and its overnight lending rate to 9.75 percent.

Read More: Philippines raises rates to tackle inflation

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Currency traders assess impact of bird flu

Oct. 18th 2005

The fear that avian flu will soon become a global pandemic intensified last week, amid reports of outbreak in Russia and Turkey. While the disease is still effectively a moot economic issue, economists and investors are already drawing up worst case scenarios. According to several prominent currency traders, global economic shocks usually hit developing economies (and their currencies) the hardest. Since most developing Asian nations, however, have effectively fixed their currencies to the USD, their currencies will be spared. In this case, the Australian Dollar and New Zealand Kiwi will likely depreciate upon a massive flu outbreak. These currencies are both highly correlated with trade and commodities, and any sign that the global economy is in trouble could send risk-averse investors running for the exits. Reuters reports:

Investors see the fortunes of the Australian and New Zealand dollars as sensitive to even slight changes in global economic growth as they are commodity-based currencies, whose economies are heavily reliant on international trade.

Read More: Some currency investors debate bird flu mutation

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Asian monetary union unlikely

Oct. 17th 2005

In a recent speech, a high-ranking Australian central banker discussed the prospect of Asia forming a union similar to that of the EU and adopting a common currency. Glenn Stevens said such a union is extremely unlikely, because the economies of Asia are too diverse. There are already several multilateral trade and currency agreements that link much of Southeast Asia, leading many pundits to speculate that a common currency represents a logical next-step. However, at this point in time, it seems these nations’ respective monetary policies are sensitive to the US, rather than to each other. Dow Jones News reports:

Wile there have been various calls for a common exchange rate policy, usually based around targeting a common basket, divergent interests within Asia prevent finding an obvious acceptable exchange rate linkage.

Read More: RBA’s Stevens Doubts Asian Monetary Union Any Time Soon

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Central Bank of Brazil may intervene

Oct. 4th 2005

The Brazilian Real has climbed 25% against the USD in the last 12 months, thanks to soaring commodity prices and a booming economy. In order to prevent an expensive currency from hurting the export sector, Brazil’s Central Bank has announced that it will begin to buy USD, by auctioning off artificially cheap Reais. While this type of direct intervention should theoretically prevent the currency from appreciating further, analysts believe the Real’s momentum is sustainable, and the intervention will not have a significant impact. Bloomberg News reports:

“The central bank’s intervention may force a correction in prices, but it won’t reverse the main trend in the currency markets, which is for a stronger real.”

Read More: Brazil’s Currency Falls After Bank Sells Reais for Dollars

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Indonesia to curtail fuel subsidies

Oct. 3rd 2005

Heeding the advice of economists and international credit rating agencies, Indonesia has decided to limit fuel subsidies to consumers, which kept the price of fuel in Indonesia artificially low. As oil prices have soared in recent months, Indonesia has been forced to devote an ever-higher fraction of its federal budget to these subsidies, straining its finances. The decision to reduce fuel subsidies was not made lightly, for the country’s improved credit rating may come at the expense of reduced economic growth. In addition, the Indonesia Rupiah benefited from the announcement, but remains down 6% from only 3 months ago. The Financial Times reports:

Indonesia’s senior finance minister, Aburizal Bakrie, said he expected economic growth to be 5.9 per cent this year, down only marginally from a budget forecast of 6 per cent, and for inflation to be back below 10 per cent by the year’s end.

Read More: Markets stable as Jakarta raises oil price

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Indonesia raises interest rates

Sep. 5th 2005

The Central Bank of Indonesia has finally raised interest rates, in a move that may turn out to be too little too late. In the past month, Indonesia’s currency, the Rupiah, has depreciated 10% against the USD. Indonesia notoriously spends almost 1/3 of its annual budget on artificially fixing energy prices for its citizens vis-à-vis fuel subsidies. As the price of oil has risen, the cost of dispensing fuel subsidies has risen proportionately. In the last month, Indonesia’ current account surplus has shrunk dramatically and may soon become a deficit. The failure of Indonesia to stabilize the imbalance through appropriate monetary and fiscal policy measures irked currency traders, who responded by thrashing the Rupiah in forex markets. The Economist reports:

[The Central Bank] revealed that it had squandered one-tenth of its reserves in a vain attempt to stem the rupiah’s fall. Despite a few high-profile foreign investments, the capital account remains lamentably in the red.

Read More: Rupiah ructions

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Indonesia to mitigate currency crisis

Aug. 30th 2005

Supported by booming economies, most Southeast Asian currencies have soared in recent years. Indonesia’s currency, the Rupiah, unfortunately has not fared well, declining recently to a 45-month low against the USD. The cause is not economic malaise, but rather the rising price of oil. For whatever reason, Indonesia expends a great deal of effort and money on artificially lowering the cost of fuel, typically by meting out fuel subsidies to consumers and businesses. As the price of oil has risen, so have Indonesian fuel subsidies, which now consume nearly 1/3 of Indonesia’s budget. This has exerted a tremendous strain on Indonesia’s money supply and credit markets, to the point where economists now reckon the Central Bank needs to raise interest rates by 100 basis points (1 percentage point) in order to prevent a full-scale currency crisis. The Financial Times reports:

Should the currency slide further and remain below Rp11,000-12,000 to the dollar for a quarter, they say, it would lead to corporate defaults and put pressure on the banking system.

Read More: Indonesia expected to act as currency slips further

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Malaysian forex receipts expected to rise

Aug. 25th 2005

The value of a particular currency should theoretically reflect demand for that currency. Accordingly, diligent forex traders scrutinize trade data and capital flows in order to identify trends in the movement of foreign exchange. Malaysia, for instance, recently announced that it expects tourism to double in the next five years. Because tourism represents one of Malaysia’s largest exports, the country will witness significant inflows of foreign exchange. While this activity should buoy Malaysia’s currency, the Malaysian Central Bank will likely continue to ‘manage’ the Ringgit and prevent it from appreciating too much. The Business Times reports:

The Ministry of Tourism has projected RM59.4 billion in tourist receipts in 2010 from 24.6 million tourists. This compares to RM29.7 billion spent by a total 15.7 million foreign holiday makers in Malaysia last year.

Read More: Malaysia expected to double forex income

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Wealthy investors set sights on Asian currencies

Jul. 28th 2005

As forex news has gained more coverage in the media, and currencies have become ever more volatile in the wake of recent political and economic developments, forex trading has surged in popularity. Now, it seems wealthy investors have caught forex fever. Several prominent investment banks and money managers have begun marketing currency investments to their wealthy accountholders. Citigroup, for example, recently introduced a note tied to a basket of Asian currencies, including the Korean Won and the Indian Rupee. The product is principal-protected, meaning there is no downside. The only catch is a $50,000 minimum investment. Slightly more affordable is Everbank’s “Asian Advantage” CD, which is tied to four ‘Pacific Rim’ currencies, including the New Zealand Dollar and Singapore Dollar. The CD requires only a $20,000 investment. The Wall Street Journal reports:

Many of the “baskets” that the private banks have created involve derivatives and options, which are designed to harness a current trend and give investors exposure to certain sectors without having to buy the actual investment.

Read More: Banks Beckon Wealthy to Invest in Currency Plays

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New Zealand Dollar may reverse course

Jul. 27th 2005

The New Zealand Dollar-or Kiwi- has recently underperformed almost every industrialized currency, and has been dubbed “the dog of the currency world.” However, several developments have induced optimistic forecasts from economists and experts, who predict a period of NZD appreciation. First, the revaluation of the Yuan has generated broad levels of support for ‘Pacific’ currencies. Next, real economic growth and inflation in New Zealand continue to climb, which may force the Bank of New Zealand to forestall its planned rate cuts. At 6.75%, New Zealand interest rates are currently the highest among developed nations. As a result, several prominent New Zealand analysts have predicted double-digit appreciation of the NZD by year-end. The Dominion Post reports:

The Bank of New Zealand is picking the US-NZ dollar cross rate to fall from the current 67.5 level to 67 by September, and to 66 by December. Brokers First NZ Capital expect it to drop even faster – to 66 by September, to 64 by December and to 61 by the end of next year.

Read More: Currency volatility dogs rate forecasts

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Brazil’s Central Bank holds rates constant

Jul. 25th 2005

Brazil’s Central Bank voted for the second consecutive month to hold interest rates constant at 19.75%, which remain among the highest in the world. The Central Bank continues to target inflation in conducting its monetary policy. Specifically, it is aiming for 2005 and 2006 inflation targets of 5.1% and 4.5%, respectively. However, Brazil’s ultra-tight monetary policy may be counter-productive, as certain foreign investors continue to pour ‘hot money’ into Brazil’s economy in order to take advantage of the unnaturally high interest rates. If economists are correct in their estimates, the Central Bank will fail to meet its respective inflation targets for the next couple of years, which means current interest rate levels will likely endure in the foreseeable future.

Read More: Brazil cenbank holds key rate steady at 19.75 pct

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Malaysia may renew peg to USD

Jul. 8th 2005

While many southeast Asian economies explicitly peg their currencies to the USD, it is China that suffers the most scrutiny.  This is natural, as China is by far the largest economy in this region, excluding the Asian ‘Tigers’ and Japan.  A new rumor is circulating that that China and Malaysia, another serial currency pegger, may team up and revalue their currencies at the same time. The Malaysian Ringit was initially pegged to the USD following the Southeast Asian economic crisis, and has been held in place since.  Malaysian officials have hinted that the country may revalue in response to fundamental indicators, which suggest the currency is grossly undervalued.  However, the Malaysian prime Minister insisted while his country and China remain close political allies, no dual currency revaluation agreements are being considered. AFX News Limited reports:

Amid intense speculation about a looming adjustment of the ringgit, Abdullah has said in recent weeks that Malaysia will not adjust its currency peg for the time being but is closely watching developments in the financial markets.

Read More: Malaysia, China not collaborating on currency peg adjustment

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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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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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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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South Korea: to diversify or not

May. 24th 2005

As I reported last week, a high ranking official in South Korea’s Central Bank announced the end of his organization’s routine intervention in currency markets. The official’s comments sent the dollar reeling, as investors feared a significant drop in future demand for US Treasury securities. The Central Bank made similar comments last month, only to retract them later in the week.

Once again, the Central Bank has erred: it will not stop buying US treasuries, in an effort designed to prevent the Won from appreciating too rapidly. Apparently, the official’s comments had been "distorted" by the Financial Times, which originally reported the development. To prove its intentions were genuine, South Korea immediately bought a bundle of US treasury notes. The announcement and its subsequent denial are not significant developments, in and of themselves. What is more interesting is the way in which currency traders responded to the news, without first stopping to question its authenticity. Perhaps, this proves that investors are not confident about the dollar’s future. The Wall Street Journal reports:

But beyond dispute is how jittery the currency market has turned- and how eager many traders are to pull the trigger- on any news or market talk related to Asian Central banks and a Chinese Yuan revaluation. "The market has become very sensitive to these themes right now," said a director from Barclays Capital.

Read More: More ‘Distorted’ Comments Roil Markets

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Brazil raises interest rates

May. 23rd 2005

Brazil has raised its interest rate to 19.75%, which in real terms, is the highest in the world. Brazil’s Central Bank bank is determined to avoid the hyperinflation of the early 1990’s, which peaked at 2500%.  It has set an inflation target of 5% for the year, 3% below the current rate of 8% and will stop at nothing to hit this target. The Central Bank includes many goods which are regulated by the government in the models it uses to forecasts inflation. This approach is flawed because the government is unlikely to respond to interest rate pressures when setting prices for certain goods, namely utilities. Moreover, inflation has become a self-fulfilling prophecy as foreign investors have flocked to Brazil en masse, lured by sky-high interest rates. The Wall Street Journal reports:

A number of economists think Brazil needs to readjust its inflation targets and also better control government spending. Brazil’s debt is so huge that interest expenses put the country deeply in the red. Indeed, when interest expenses are factored in, the country runs a deficit of 2.6% of GDP.

Read More: Brazil raises interest rate to 19.75%

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Hong Kong liberalizes currency

May. 19th 2005

The Hong Kong Dollar is similar to the Chinese Yuan, in that both are effectively pegged to the dollar. Many speculators suspect a more profound relationship between the two currencies, and have begun using the HKD as a vehicle for betting on the Yuan’s revaluation, because the HKD is more convertible than the Yuan. The massive inflow of ‘hot money’ in Hong Kong is driving down interest rates and causing putative bubbles to form in various asset markets. In a move designed to thwart the efforts of speculators, Hong Kong has announced that it will float the HKD. Sort of. Currently, the HKD is allowed to trade within a tight band, much like the Yuan. Hong Kong banking officials have decided to raise the upper limit on the band, while leaving the lower band fixed. Hong Kong simply wants to remind speculators that betting on the Yuan’s revaluation is not a sure thing. However, this move is more symbolic than anything, as the HKD is unlikely to appreciate against the USD. The Financial Times reports:

While the move does re-introduce an element of downside risk…this decision could simply herald increased speculation as the market tests the limits of the new trading band. “This is a trial balloon. What is happening in Hong Kong is not separate and distinct from China’s programme of moving towards greater flexibility,” said a senior currency strategist.

Read More: Hong Kong moves to deter speculation on its currency

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South Korea renounces forex intervention

May. 18th 2005

At $206 billion, South Korea’s foreign exchange reserves are currently the fourth largest in the world. However, this distinction may be short-lived. The Bank of Korea announced today that it will no longer intervene in forex markets, which it had done previously to prevent the Won from appreciating against the USD. This reversal in policy is sensible, as its previous intervention efforts were all in vain. The Won has appreciated 17% against the dollar this year alone. Banking officials indicated that the profitability- or lack thereof- of its reserves is behind the decision. When measured in terms of Won, South Korea’s dollar-denominated forex reserves depreciate in value every day. Some analysts reacted to the news with mixed feelings, fearing that South Korea would begin diversifying its reserves, after foreswearing intervention. The Financial Times reports:

Mr Park said he did not envisage changing the currency mix of the reserves, about two-thirds of which is thought to be in dollar-denominated assets. In February the dollar recorded its biggest drop in five months when a Bank of Korea report said it would diversify its foreign exchange reserves.

Read More: South Korea rules out further currency intervention

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India raises rates to neutral level

May. 5th 2005

India’s central bank recently raised interest rates to 5%, in a focused effort to contain inflation. India’s economy has been nothing short of impressive, and it is expected to grow by 7% this year. This is despite a below-average monsoon season, which is a perennial driver of Indian economic growth. Unfortunately for India, high economic growth has also been accompanied by high inflation, which India is now fighting to reign in. Indian central bankers also commented on the imminent revaluation of the Yuan. India has over $200 Billion in foreign exchange reserves, some of which is held in Chinese Yuan. Nonetheless, India is optimistic, asserting that the revaluation will actually benefit its economy, by making its own exports more competitive with Chinese exports. Reuters reports:

"We will have a look at it, watch it carefully. Our exposure to the Chinese economy is mainly through trade and there is nothing for us to be concerned about a trade effect," Reserve Bank of India (RBI) governor Yaga Venugopal Reddy told reporters.

Read More: Any yuan revaluation unlikely to hurt India

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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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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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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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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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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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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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Indonesia intervenes on behalf of Rupiah

Mar. 29th 2005

The Central Bank of Indonesia admitted that it has been intervening on behalf of its domestic currency, the Rupiah. However, it is not trying to depreciate its currency like other developing countries in the region. Rather, it is fighting to prop up its currency to stem recent declines, caused by two distinct phenomena. First, when the Federal Reserve raised interest rates, many investors moved money back into American treasuries. Second, many Japanese firms have unexpectedly begun to repatriate more of their profits earned in Indonesia, which have been substantial of late. In response, Indonesia’s Central Bank has been selling off USD, and buying Indonesian bonds in bulk. AFX News Financial reports:

A sell-off by foreign investors in the stock market has also led to increasing demand for dollars.  "In fact dollar supply was limited. It was just about 300-400 million dollars per day. So even a small increase in demand could trigger a big volatility," a bank official said.

Read More: Bank Indonesia confirms forex market intervention

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Malaysia experiences economic slowdown

Mar. 24th 2005

Malaysia announced that it expects its economy to grow at only 5-6% this year, down from 7%. Economists attribute the slowdown to a decline in exports. As an emerging economy, Malaysia is heavily depend on exports (especially technology related exports) to fuel economic growth. However, a global decline in IT and technology spending has hit Malaysian exporters especially hard. Even with the artificially favorable exchange rate, maintained at value which experts estimate to be 20% below fair value, exports are declining.

Malaysia will be forced to rely on the other factors of GDP if its economy is to grow. The first factor is government spending, which on outlays such as education, agriculture, and health care, looks to remain constant this year. Consumption, on the other hand should drive Malaysia’s economy. Consumption and growth effect each other in a circular manner. As the economy grows, consumers are left with more disposable income which they typically use to purchase more goods and services. This increases aggregate demand which increases GDP growth, which then increases consumption, until the process diffuses. Finally, investment in Malaysia continues to strengthen. as speculators pour money into Malaysian capital markets. Such speculators anticipate a revaluation in the exchange rate, which Malaysia insists will not happen. Reuters reports:

Bank Negara indicated speculation and short-term capital flows would not spark a change in currency policy. "The basis for any change would therefore be made on long-term structural considerations and not short-term movements in capital flows or transient shifts in exchange rate expectations," it said, adding that it could continue to absorb foreign inflows through money market operations.

Read More: Malaysia GDP growth seen slowing to 5-6 pct in ’05

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Won strength “unavoidable”

Mar. 23rd 2005

Analysts are increasingly calling on South Korea to accept a strong Won as unavoidable, regardless of its desirability. They say the strong Won is not driven by factors that South Korea can control; rather, it is a product of a weaker dollar. South Korea should accept that the effects of any intervention to stabilize the USD-Won exchange rate will be ephemeral at best, and South Korea will be stuck with more USD reserves. South Korea has recently asserted that the Won’s weakness is a result of hedge fund speculation, which may or may not be true. Regardless, analysts call on South Korea to identify new markets outside of the US for their products. They argue the value of the Won has not changed relative to other nations’ currencies; therefore, they could just easily increase market share in those countries, instead of relying on the USD to strengthen.  The Korea Times reports:

“At the same time, we must realize that this appreciation is only relative to dollar-based currencies, and it has not affected our competitiveness in other markets such as the euro area and the British pound,’’ one insider stressed. “So, strategically it’s time to try and protect our market position in dollar-based markets to avoid losing market share, while actively using our continuing competitiveness in non-dollar markets to continue building successful market positions in other currency areas like Europe.’’

Read More: Strong Won: Undesirable, But Unavoidable

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New Zealand’s economy slows

Mar. 23rd 2005

New Zealand economists have revised the country’s growth prospects downward by .6%. Despite the forecasted change, New Zealand’s economy is still growing at an annualized rate of 3.9%, which is nothing to scoff at. In fact, it now has the fastest growing economy in the developed world. Economists attributed the slowdown to decreased milk production and new construction. New Zealand actually welcomed the news, which forced the New Zealand dollar downward against the USD. This will give New Zealand’s exports a prayer at remaining competitive, after the NZD has risen by double digits against the USD. Yesterday’s rise in US interest rates should help to prevent the NZD from rising in the short term. It is worth noting however, that New Zealand offers the highest interest rates in the developed world, despite having the strongest economy. Thus, we shouldn’t expect investors to start taking capital from New Zealand just yet. The Financial Times reports:

The slowdown in the economy, which has been tipped for some time, follows a sharp tightening in monetary policy. Earlier this month the central bank raised rates for the seventh time in just over a year, to 6.75 per cent.

Read More: New Zealand sees unexpected slowdown in growth

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Brazil’s monetary policy called into question

Mar. 22nd 2005

Despite raising interest rates to 19.25% this month, Brazil’s Central Bank is drawing increasingly harsh criticism from economists around the world. Their complaints are contrary to what you would expect, as many think interest rates are still too low! Under pressure to contain aggregate demand and inflation, the bank has raised rates by over 3% in less than a year. Last year, critics chastised the bank for not dropping rates quickly enough, when Brazil’s economy began to spiral into recession. This year, they have argued the bank’s monetary policy has had no discernible effect on Brazil’s economy.

Analysts have observed a few factors which may diffuse the effect of interest rates. First, borrowing rates are actually decreasing despite an increase in federal funds rates. Second, there are still too many loans made below the prevailing interest rate. Brazil’s government makes many exceptions for those who cannot afford to pay such high rates of interest on housing loans, for example. What should Brazil’s Central Bank do? Some say it should continue to raise rates at a pace consistent with inflation. Other say it should wait until the effects of previous rate hikes trickle down through the economy, and run their course. Morgan Stanley reports:

Brazil’s economy has long shown that it is responsive to interest rates.   If there is an anomaly in the Brazilian case, it is not the limited potency of monetary policy or the lag between monetary tightening and the slowdown in the economy, but the starting point for interest rates.  Brazil has only briefly seen real interest rates in the single digits twice in the past decade.

Read More: Brazil: The Monetary Policy Blame Game

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India’s FOREX reserves hit new highs

Mar. 21st 2005

India’s forex reserves set a new record. At $140 Billion, the reserves are now the 6th largest in the world. The record is due mostly to foreign capital inflows, which also continue to set records. Foreigners are pouring money into Indian stocks and bonds, in search of the typically high returns that emerging markets offer. Not only have share prices reached new highs, but so has the value of the Indian Rupee.

India derives much of its economic growth from growth in the export sector. Thus, the Reserve Bank of India has been working overtime to ‘sterilize’ the exchange rate, and prevents India’s exports from becoming too expensive. This sterilization typically assumes the form of buying bonds from the public, which increases India’s money supply. However, this increase in the money supply can spur inflation, and India cannot afford this. Nonetheless, India will likely continue to sterilize for as long as it can, taking cues on exchange rate manipulation from its neighbor to the North. Reuters reports:

They say signs China is still reluctant to allow its tightly pegged currency to strengthen had hardened the resolve of countries like India to keep their currencies under check.

Read More: India’s forex reserves peak to $140 billion

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South Korean Won subject to manipulation?

Mar. 17th 2005

Some people believe foreign exchange markets are too big to be manipulated. Not so, says South Korea. It believes American hedge funds are responsible for the Won’s recent appreciation. South Korea has experienced net positive foreign capital inflows for quite some time. Hedge funds have been pouring capital into South Korea, hoping to simultaneously profit from the Won’s appreciation and the appreciation of South Korean equities. The hedge funds have also increased their purchase of non-deliverable forward contracts of Won. According to South Korea, this proves that speculators are the main culprit in the Won’s strengthening.

To prevent further appreciation, South Korea announced that it will intervene, by selling $5 Billion worth of special foreign exchange stabilization bonds. However, economists fear this will only accelerate the Won’s appreciation. The reason is investors will probably not be deterred from buying Won, expecting that it will continue on its tear after the effects of the stabilization effort wear off. The Korea Times reports:

The government is trying to control the foreign exchange rate by intervening in the market to enjoy short-term economic growth, which leads foreign investors to believe that the won-dollar rate will further decline.

Read More: Korean Won Falls Prey to Foreign Hedge Funds

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Central European currencies enjoy sudden strength

Mar. 11th 2005

Central European currencies have been aberrantly strong of late.  The Polish zloty has appreciated more than 20% against the Euro this year alone. Additionally, the currencies of Hungary, Slovakia, and Czechoslovakia have each appreciated more than 8% against the Euro, a currency that has itself appreciated by over 10% against the dollar. What is responsible for the sudden strength of Central European currencies? The answer is a combination of low interest rates and high economic growth.

Investors have been pouring money into Central European equities, which offer the high returns characteristic of a developing economy. If this were not enough, creditors have been all too eager to lend money to buy Central European government bonds. Investors have been looking for an alternative to EU debt, which pays interest at a negative rate, adjusted for inflation. Spurned by interest rates of over 8%, creditors have sold EU bonds and snatched up ‘CU’ bonds.  Moreover, investors do not regard Central European debt as incredibly risky, as EU is soon expected to extend membership to these nations.

Subsequent cuts in interest rates have not had any effect on deterring foreign capital inflows. Central European governments have begun to worry that the sudden strength of their domestic currencies, could have a stultifying effect on their respective economies, which are largely driven by exports. They will most likely accelerate the pace of interest rate drops, to prevent any such slowdown.

Read More: Central European currencies: Too strong for comfort

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South Korea: To sell or Not to Sell USD

Mar. 4th 2005

South Korea’s behavior with regard to its USD reserves has been nothing short of erratic. A few weeks ago, rumors that South Korea was planning to ‘diversify’ a large portion of its reserves (mostly into Euros), began to circulate.  Economists and traders, alike, feared the worst. Would the rest of Asia, which collectively holds over $2 trillion in USD reserves, follow suit?

Later in the week, South Korea publicly announced that it had no intention of diversifying its reserves. What was responsible for the sudden about-face?  One must look no further than the dollar’s recent decline. Asian central banks are in a bind- they are damned if they do and they are even more damned if they don’t. If they sell USD en masse, they will probably send the dollar spiraling downward, as the market would not be big enough to support the surplus of USD. However, if they maintain their reserves in the form of USD, they run the risk of a further devaluation of reserves. A slight deprecation in the dollar would significantly stunt the unbelievable growth occurring in the region. Bloomberg Reports:

The current system is looking more and more like a huge pyramid scheme. As long as Asian central banks stick together and buy dollar-denominated securities, things are fine. Once they start selling, virtually everyone loses — central banks experience capital losses and economies become less competitive.

Read More: Is Kafka Running Korea’s Currency Policy?

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Crisis in Lebanon could affect currency

Mar. 4th 2005

Lebanese bankers are starting to worry that the nation’s spreading political crisis will affect the value of its currency. Political instability has racked Lebanon for several decades, and with the resignation of its current administration, the situation is likely to get worse before it gets better. Each time there is a crisis, many Lebanese citizens move to convert their savings into dollars as quick as possible. Such is the case now. Lebanon’s central bank has pledged to maintain full convertibility, but it is quick to acknowledge it cannot create a liquid market for Lebanese dollars forever. Its USD reserves have fallen by almost 20% in the last week. If a new government is not formed soon, the country could witness a run on its currency which would irrevocably destabilize its economy. The Financial Times reports:

"It’s not a monetary problem, it’s a political problem," said a finance official on Thursday. "Economic sectors are urging politicians to come up with a solution [as fast as] possible. The more the crisis lasts, the longer the pressure."

Read More: Bankers urge swift end to Lebanon crisis

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Canada suffers capital outflow

Mar. 2nd 2005

The Canadian Dollar has been losing ground to the USD of late, as Canadians are rushing to invest in foreign capital markets. Canadian law previously forbade pension funds from investing more than 30% of their assets in foreign securities. After the rule was scrapped, Canadian pension funds rushed to invest capital in foreign (US) debt and equity markets, which caused the Canadian Dollar to depreciate. Nonetheless, most experts remain bullish on their CAD forecasts. Rising commodity prices and a loosening of foreign ownership restrictions, will more than offset the outflow of CAD. BMO Nesbitt Burns reports:

For instance, 2004 saw portfolio capital inflows of $53.2 billion into Canada compared with a mere $16.2 billion outflow from domestic investors.

Read More: Greenback Treading Water

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Malaysia considers floating exchange rate

Feb. 24th 2005

Malaysia’s currency, the Ringgit, is currently pegged to the dollar. Some officials feel it may be undervalued by as much as 12%; accordingly, it may soon allow the currency to float. Economists are forecasting the dollar could decline an additional 30% in the short-term, which would actually leave the Ringgit overvalued, relative to the rest of the world’s currencies. To make matters worse, it looks like the global economy will recede in 2008, which gives Malaysia only a few years to un-peg the Ringgit. Failure to do so, could exacerbate the effects of such a global recession on the Malaysian economy. At this point, Malaysia has two options. It could either un-peg the currency and allow to float completely, or instead gradually adjust the peg until the Ringgit stabilizes at its fair value. Forexmarkets.com reports:

"We still have a lot of reserves to defend the peg because it is undervalued. But this will not work well if the currency is overvalued. As such, the ringgit must be allowed to appreciate gradually," said the executive director of the Malaysian Institute of Economic Research.

Read More: Earlier de-pegging of ringgit will avoid painful adjustment in 2008

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India’s currency closely correlated to stock market

Feb. 18th 2005

The Reserve Bank of India (RBI) has been working overtime recently to hold down the value of the Rupee. The RBI has been buying dollars for over two weeks in order to make sure exports remain competitive. Nonetheless, the Rupee may still be overvalued by as much as 3%, reckon some analysts. This is largely due to foreign capital inflows, as foreigners have poured money into Indian equities at an astounding rate. Investors are anxiously awaiting the presentation of India’s federal budget, on Febrary 28. If the budget conforms to investor expectatations, India’s stock market should continue to hit new highs. Reuter’s reports:

India’s coalition government will present its second budget a week from Monday, in what analysts expect to be an expansionary package, focused on farms, healthcare, education and sanitation along with major tax reforms.

Read More: India Markets-Rupee near 6-wk low, shares flat pre-budget.

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South Korea’s dollar reserves reach all-time high

Feb. 16th 2005

South Korea’s dollar reserves have hit an all-time high of $200 Billion, eclipsing the previous record of $199 Billion, set last month.  South Korea attributed the increase in reserves to interest paid by the United States on outstanding Treasury securities. However, analysts wonder if the increase in South Korea’s reserves is actually an attempt by the Korean central bank to hold down its currency. The South Korean Won appreciated 15% against the USD last year, which could potentially harm its economy by eating into exports.   Reuters reports:

Analysts say South Korea has not abandoned a long-held policy of curbing the won in a bid to keep its exports competitive, especially since exports have been the main driver of economic growth over the past two years.

Read More: S.Korea FX reserves edge above $200 bln by mid-Feb

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Brazil’s Central Bank tries to curb inflation

Feb. 14th 2005

Brazil’s once-battered economy is finally showing strong signs of economic growth. The central bank and ministry of finance intend to keep it this way, by controlling inflation and reining in government spending. The Central Bank has pursued an aggressive policy of tight money, in order to prevent the rate of inflation from returning to the double digit levels it breached as recently as 2 years ago. If the central bank follows through on plans to raise interest rates, Brazil could witness the appreciation of its currency, as investors from other countries flock to Brazil in search of higher returns. Some analysts, however, are worried that the central bank may be acting too agressively in its rate hikes. The Economist reports:

[The central bank’s] friends worry not that it is misguided, but that it may now become over-zealous… [Some analysts believe] the central bank should accept a bit more inflation this year—say 5½-6%—rather than aiming to hit the target precisely.

Read More: Brazil’s central bank: Risks, new and old

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