Posts Tagged ‘Currency Market’
A Sound & Credible Currency
As a currency, the Euro doesn’t have to do much to equal its peers…
“SILVER HITS new all-time highs in Euro” proclaimed Zero Hedge on Monday.
Regular readers of the blog site won’t choke to know it was wrong, this time by only one third. Mistaking (and showing) a chart of month-end prices for a chart of daily silver prices, Zero Hedge’s pseudonymous host, Tyler Durden, missed the true Euro-equivalent spike to €32.80 per ounce of 18 January 1980 – hit in what was then the Deutsche Mark the very same day that silver priced in Dollars also hit its all-time high to date…some 44% above this week’s top.
Still, the point is near-enough made. Because silver, like gold, isn’t just about the Dollar, even though its latest surge coincides with the latest plunge in the US currency. Instead, silver has also caught a strong and growing bid over the last 5 years against the Dollar’s upstart challenger too. And since the Euro debt crisis really got started 12 months ago, the silver price has scarcely looked back…rising 108% from the start of 2010.
“The Euro as a currency is not in crisis. The single currency is sound and credible,” said European Central Bank president Jean-Claude Trichet in an interview with Paris newspaper L’Espresso earlier this month. Which, a little like Zero Hedge, is both premature and misleading. Because the Euro “as a currency” doesn’t have to achieve very much to retain the same credibility as its modern-day competitors.
Against the older monetary measures of gold and silver, on the other hand, the Euro looks just as weak as the other three “big four” reserve currencies – the Dollar, Sterling and Yen.
Adrian Ash
Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK’s leading financial advisory for private investors, Adrian Ash is the editor of Gold News and head of research at BullionVault – winner of the Queen’s Award for Enterprise Innovation, 2009 and now backed by the World Gold Council market-development and research body – where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.
(c) BullionVault 2011
Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.
Tags: adrian ash, Bullionvault, Currency Market, EU, euro, Gold, Silver, sound currency, sound money, the euro
Currencies: The Quickest Way to Grab Profits from Emerging Markets
By Evaldo Albuquerque
Dear Sovereign Investor,
In 1989, Stanley Druckenmiller, former money manager for George Soros, made millions off the German deutschemark after the Berlin wall fell.
In 1992, Soros did even better. He became an overnight legend when he grabbed a sweet $1 billion in a single day just by shorting the British pound.
What do these two traders have in common?
You could argue they applied their big macro themes to the currency market. But in reality, it’s even simpler.
They just followed the investment money. They knew the countries with the strongest fundamentals would attract the most investors – and the most cash. And the weakest countries would chase investors (and their money) away.
So they simply bought the currencies from the fundamentally strong countries and shorted the currencies from the fundamentally weak countries.
Simple, but brilliant.
Years later, it’s still embarrassingly easy to copy this killer strategy. But you need to know where the investment money is flowing. Today, it’s flowing straight into emerging markets like never before.
A New Era of Emerging Markets Has Already Begun
It’s no secret that emerging markets have done a complete 180 over the last decade. Take Brazil for example.
When I was growing up in Brazil, the country was a mess. We had very high unemployment rate, hyperinflation, political instability, you name it.
Today, Brazil has an all-time low unemployment rate, record consumer confidence, and an uncontested thriving economy.
Brazil is not alone. Many other emerging market nations are going through the same experience. What happened to them? They simply learned from their past mistakes.
During the 1990s, there was no better place to find economic turmoil than emerging markets. The Mexican peso crisis in 1994, the Asian crisis in 1997, and the Russian debt default in 1998 were some of that decade’s highlights.
Surviving a crisis is a harsh lesson for everyone involved.
Naturally after enduring a crisis, most emerging markets wanted to ensure it never happened again. So leaders started making some serious reforms.
Today most emerging markets are collecting the fruits of those reforms. Most are sitting on piles of cash.
That’s one of the reasons most emerging markets recovered so quickly from the recent global recession especially compared to the big developed nations like the U.S. and E.U.
Emerging Markets: Where The Action Is
The contrasting situation between emerging market and developed nations creates a mixture of push and pull factors.
Developed nations are plagued with very high levels of debt, weak economic growth, and rock bottom interest rates. This bad scenario doesn’t attract investors. Instead it pushes investment cash outside the country.
Emerging markets have low levels of debt, very healthy economic growth, and rising interest rates. That’s why more and more investors are turning to emerging markets.
In the last few quarters investors have been pouring billions of dollars into emerging market nations. The graph below shows how these countries’ stronger growth is attracting investment cash, according to the estimates from the Institute of International Finance.
As you can see, these emerging markets are becoming little cash cows for investors from all around the world…
The Best Way to Profit From These
Incredible Opportunities
It’s amazing how much money is flowing into these emerging markets. These capital flows are very important to currency traders because it practically guarantees these countries’ currencies will rise against the dollar.
They create very profitable trends for those who are trading in the spot market, especially when there’s a well defined trend in the dollar. And that’s exactly what we have right now.
Thanks to Bernanke’s new $600 billion quantitative easing plan, you know the dollar is heading no place but lower.
As a currency trader, you can simply pair these stronger emerging market or “exotic” currencies with the weak dollar for some decent gains.
During the last weak dollar trend over the summer, I helped my Exotic FX Alert subscribers pair the weak dollar with the stronger Mexican peso and Polish zloty for gains of 46% and 108% (among others).
It’s a simple strategy. But it really is as easy as watching where the capital flows will head next and being ready to jump on these opportunities in the spot Forex market.
Bottom line: Emerging markets are where the money is heading.
Best Regards,
Evaldo Albuquerque, Editor
Exotic FX Alert
Europe WANTS a Lower Euro
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The euro is in devaluation mode … in a sharp 17 percent decline against the dollar over the past five months. And I’ve written extensively on why, and why it still has further to go.
Now I believe a covert policy decision has been made by the European Central Bank (ECB) to use currency devaluation as a tool for the European monetary union (Emu) to survive.
Of course, each individual country within the Emu doesn’t have the luxury of devaluing their currency when times are tough. They’re locked into a monetary union of sixteen countries. And monetary and currency policy decisions are made by the ECB.
That puts countries like Portugal, Ireland, Italy, Greece and Spain (the PIIGS) at a competitive disadvantage when trying to salvage themselves from debt burdens and feeble economic activity.
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| The Emu will do whatever is necessary to save the floundering euro. |
But now, it’s becoming evident that the Emu as a whole is prepared to take such drastic measures to keep the euro intact!
I think we’ll find that the ECB will aggressively reverse course on exiting from the emergency monetary policies they put in place to deal with the financial crisis of 2008 … returning to emergency mode, and in a big way. They’ll likely be forced to openly buy up the government debt of the weak economies to keep them breathing — i.e. print money, and a lot of it.
The plan requires that Germany, the core of the euro, participate in serving the interests of the lowest common denominator in Europe: The PIIGS. Of course, they’ve already done so by agreeing to provide bailout funds to Greece. But the next moves in the playbook will likely drag Germany headlong into it.
Germany: Swimming with the Fishes
Germany is the biggest, most robust country in the euro zone. It was among the first major economies to emerge from recession. Its economy is expected to grow by 1.5 percent this year, and 1.8 percent next year. So things are going relatively well for the Germans following the harsh recession.
Why, then, would Germany agree to be dragged down by the weak and expose themselves to potential inflation problems in the process? Why not just hit the eject button and remove themselves from the euro?
Here in a nutshell lies the problem: Germany has a lot to lose if other euro countries end up in shambles. It’s exposed on two fronts …
First, Germany is on the hook for $668 billion in PIIGS sovereign debt. Not to mention the fresh $30 billion they’ve agreed to give Greece.
A default, or worse, a string of defaults would be disastrous for German banks and European banks in general. European banks bought about half of the general government bond market last year.
And second, if these countries continue their downward spiral, Germany’s intra-Europe exports (10 percent of total exports) promise to dwindle with it.
So what does Germany gain from sacrificing for the weak?
For one, it averts the problems mentioned above. And two, it will enjoy a much weaker euro in the near future, thus providing a nice kicker for its exports outside of continental Europe.
ECB Already Taking the Plunge
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| ECB President Trichet would not discuss the euro’s value in his recent press conference. |
Europe, the IMF and the ECB demonstrated this week that it’s ready to go all out to keep monetary union intact. They announced a massive multi-year bailout for Greece. And perhaps in a bigger move, the ECB is now accepting Greek junk bonds for collateral — jeopardizing the credibility and independence of the central bank.
As I was watching the ECB press conference following its monetary policy meeting this week, central bank President Jean-Claude Trichet looked flustered and measured his words very carefully. And two things gave me a sense that they had a plan, which included a much weaker currency:
- He adamantly said a Greek default is “out of the question.”
- And a biggie … he ignored all questions about the value of the euro, despite its slippery slide!
The Swiss National Bank must have sensed something, too. This week it chose to back away from buying euros as an intervention tactic to curtail the strength of the Swiss franc. Perhaps, the SNB knows that gobbling up euros at current prices is a recipe for losing money.
In sum, financial crises and sovereign debt crises typically go hand in hand. As do sovereign debt crises and currency devaluations. So be prepared to see a continued decline in the euro and other global currencies … and more capital flowing into the U.S. dollar in search of a safe haven.
Regards,
I Found a Forex LIVE Trading Room that did 1,000 Pips in February
You probably already know that 90% of Forex Traders do NOT profit consistently, or even close to it.
And if you can’t profit consistently in Forex, what’s the point of throwing your money away over and over again?
So, most people therefore eventually do one of two things:
A) Spend thousands for a “professional” trader to show them how to trade properly and still be clueless in the end.
OR
B) Buy junk ebooks, robots, and signal programs that prove to be worthless over and over again!
Needless to say, these bogus services all turn out to be junk. But what about all of the so-called Forex “pros” out there? Well, not very many of them will actually trade in-front of you everyday in a live Webinar…
However, this guy I recently found, is the real deal…
Mr. Colin Atkins started trading Forex about 10 years ago, and is now one of those mysterious 5% of hugely successful traders unlike the other 95% of us.
What he’s done, is created a LIVE trading room where members may log-in 5-days a week, 3-sessions daily and can simply watch him trade (a few trades per session, nice and simple) and duplicate what you see him doing. It’s truly simple stupid.
He averages around 60+ Pips a day (plus his long term trades he emails us) , and managed to do over 15,000 pips in the in these first 9 months of opening up the room! Yes, I know… Insane.
So really, anyone who can simply watch this guy trade can duplicate his winning trades!
No more “signals” or “systems” that never work for any of us. This guy is going to be in the same trades with you, and talking to you live. It doesn’t matter what your Forex experience is, you can finally achieve what you’ve been trying to do…
Stop wasting your money on junk, or thinking that one day you’re going to magically win all your trades.
You’re never going to achieve the results you want. You need to trade with a true professional… Become a professional trader by Colin’s next live trading session and start trading successfully the way you’ve always wanted to…
The link to his site is:
Good Trading!
Fed’s Currency Swap Lines: A BIG deal for the Dollar
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The Fed met this week on monetary policy. It was a bit of a snoozer. What wasn’t a snoozer, however, was what they’ve included in their recent monetary policy statements regarding currencies.
Most market participants have been entranced by the Fed’s language about their target interest rates …
Will they say they’ll keep rates low for an “extended period” or not?
But the real story was buried in the last paragraph of the December Fed statement and reiterated in their latest statement.
Here’s what it said …
“The Federal Reserve will also be working with its central bank counterparties to close its temporary liquidity swap arrangements by February 1.”
Following the Fed’s statement this week, there was a coordinated release of comments from the European Central Bank, the Bank of England and the Swiss National Bank confirming that the swap lines were no longer needed.
For the currency markets, this is a big deal. Yet, few have thought the juicy details of the Fed’s plans on currency swaps are of interest.
But I do. I suspected it was a game changer for the dollar when I was studying the statement last December. And so far, the price action in the currency markets is confirming that.
Here’s a bit of background …
In September and October of 2008, the Fed announced that it would be opening temporary currency swap lines with central banks around the world in fixed amounts through April of 2009. As that expiry date neared, the Fed extended the period to October, and then extended it again until February of this year.
Here’s what that means: The Fed agreed to give foreign central banks U.S. dollars at a determined exchange rate for the currency of the respective foreign counterpart. And when the swap ends, the two central banks simply repay the same quantity of currency back. There’s no exchange rate risk and no impact on the demand for currency in the open market.
Why Did the Fed Offer Dollars to the Rest of the World?
When the credit crisis was at its peak, banks around the world were hesitant to do any short-term lending with other banks. As a result foreign bank-to-bank lending rates for dollars, the world’s primary business currency, shot up. That restricted access to dollar borrowing and pushed a lot of consumer interest rates higher in the U.S. and abroad.
By providing these currency swaps with other central banks, the Fed helped to inject dollar liquidity into banks around the world. And it was well needed.
In short, it was good for the global financial system because it helped reduce the fear premium that was causing market interest rates to soar.
You can see this clearly in the chart below. In panel A, while the Fed and other central banks were cutting benchmark interest rates to the bone (the white line), the Libor rate (the orange line), or the rates at which banks make short term loans between themselves, was going in the opposite direction.
Subsequently, when the dollar swap lines were rolled out, you can see in panel B how this divergence was reversed.
The Implication for Currencies
Most importantly for currencies, what these currency swaps did was increase the supply of U.S. dollars in the global markets — a negative drag on the value of the dollar.
So with the Fed announcing that it will close its currency swap lines with foreign central banks by February 1, the unlimited access to dollars by foreign central banks has come to an end.
This development is easily a positive for the dollar.
Let’s take a look at the timeline of these developments and the respective performance of the dollar …
As you can see from the chart, following the Fed announcement that the swap lines would be extended through October, the dollar has gone through a period of decline. Since December, when the Fed announced these facilities would be ending in a little more than a month’s time, the dollar has been on the rise.
When they opened these massive swap lines in late 2008, the goal was to alleviate the dollar liquidity crunch at banks around the world. However, in the process they increased the supply of dollars around the globe — a negative consequence for the value of the dollar. But now that these lines will be closed, it’s clearly a dollar-positive development.
And with the weight of evidence leaning in favor of the dollar at this stage, as I laid out here in my article last week, this latest announcement by the Fed provides more reason to believe in this dollar rally.
Regards,
What Could Lift the Dollar?
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The most recent employment data in the U.S. came in significantly better than what was expected. And the financial markets reacted in a different way this time. Interest rates went screaming higher, the stock market surged, gold fell and the dollar shot up.
In a normal environment a stronger dollar following better U.S. economic data sounds perfectly reasonable, but in the current “risk-centric” environment good news has been bad news for the dollar. That’s because it has emboldened risk appetite, which has translated into investors selling dollars in exchange for higher yielding/higher risk currencies.
This time the improving data gave investors the idea that the Fed could begin reversing its zero interest rate policy sooner. That got the dollar moving higher. And that got the wheels turning for a bounce in the weak dollar trend.
The dollar has continued to show strength following that turn in sentiment, but the prospects of a sooner move on rates has now been dismissed. The knee-jerk reaction in the markets that priced in an earlier hike in rates was subsequently fully reversed.
What is now underpinning dollar strength is a shift in market focus toward some of the headwinds facing the global economic environment. That’s swinging the risk appetite pendulum back toward safety, which is positive for the dollar.
So what can keep this momentum going in the dollar?
Answer: Growing risks to the global economy.
Let’s take a look at some of the specific catalysts that could fuel more demand for dollars …
Catalyst #1: Rising Prospects of a Sovereign Debt Crisis
First it was Dubai that stoked fear in the financial markets over the Thanksgiving Day holiday. Now, Greece has been called on the carpet over concerns that the nation will struggle to meet debt commitments. Fitch downgraded Greece to just three notches above the lowest investment grade status.
Debt problems in a global crisis have the ability to be contagious. And that can destroy investor confidence in the capital markets of such countries, and in the global economy. And when confidence wanes, capital flees. That’s a recipe for falling dominoes.
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| First it was Dubai that rattled the markets. Now Greece’s debt has investors worried. |
Catalyst #2: Problems for the Euro
The recent downgrade in Greece turns the market focus back to the problems that exist in the Eurozone, and that’s putting downward pressure on the euro … which means upward pressure on the dollar.
The European Union’s growth and stability pact limits all member countries to a budget deficit of 3 percent of GDP. But Greece is running a budget deficit of 12.7 percent of GDP, over four times the limit.
In fact, on average, the 16 member states of the single currency are running a budget deficit more than twice the 3 percent limit!
So the uneven performance in Europe will likely call into question the viability of the euro currency again. Another bout of speculation of a break-up of the euro is hugely dollar positive.
Catalyst #3: Growing Uncertainty Surrounding Economic Recovery
Now that sovereign debt problems are surfacing, investors are getting concerned about the sustainability of this recovery. After all, the unprecedented global fiscal and monetary response was an experiment. The outcome is unknown. And the underlying problems related to the crisis still exist: Bad debt, reduced wealth and tight credit to name a few.
Moreover, when you answer a liquidity crisis with more liquidity, you’re bound to create more bubbles. While ground zero for the credit crisis was the U.S. housing market, new bubbles in real estate are developing in the areas that were relative outperformers in the downturn (such as China, India and Canada).
In Shanghai, housing prices were up 40 percent in October from the same period a year earlier. And in a story about the Canadian housing market this week, Bloomberg quoted a real estate agent as saying, “Where else in the world do you have agents lining up overnight to buy a condominium?”
To someone here in the U.S., that sounds familiar.
Catalyst #4: Protectionism
We’ve already seen evidence of restrictions on global trade and capital flows. Considering protectionism was a key accomplice in fueling the Great Depression, this activity represents a major threat to global economic recovery.
After the lessons from the Great Depression, the leaders from the top 20 countries of the world vowed to avoid protectionist activity. But actions from the G-20 countries are speaking louder than words. New trade restrictions have been erected by most of them since the pledge was made.
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| Trade restrictions could derail global economic recovery. |
Perhaps the biggest factor in the protectionism threat is China’s currency policy. Even after recent tour stops in China by U.S. President Obama and European Central Bank President Jean-Claude Trichet to lobby for a stronger yuan, the Chinese have remained steadfast on keeping their currency weak. As this issue with China’s currency gains in intensity, expect protectionist acts to rise in retaliation. And expect collateral economic and political damage.
Bottom line: If sovereign debt problems and the prospects of a double dip grow, you can expect investors to pull in the reins on risk. And this time, they might not be as eager to turn the risk appetite switch back on. That could give the buck a strong lift … a lift that might last longer and rise further than many expect.
Regards,
Grab this free trade system
Are you a forex trader like me? Do you want to get into Forex?
If you said yes to either question, please read on.
This time of year you’re bombarded with sales, holiday specials,
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I just got wind of a total giveaway that has *NO CATCH* seriously!
A friend of mine sent me this link for a trade system. Being a bit
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This system is designed for the forex market (and can be applied to
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The developers bring 13 years experience to the table, from what
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Check out this free trade system:
Why pass this up? If you’ve been looking for clear and precise
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get out, this is the simple system that spells it out for you.
Happy Trading!
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P.S. As with any too good to be true offer, I’m not sure how long
this will be around before they put some stipulation on it or make
you pay for it.
So get it today:
The Fed’s Perfect Scenario
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If you consider all of the structural problems in the U.S. economy, there has not been a lot of progress toward getting things back on track. The root causes of what created the near debilitating financial and economic crisis still remain:
Banks are still saddled with toxic assets,
Housing prices are still 30 percent lower,
Foreclosures are still hitting new record levels,
Credit is still tight and demand for credit is still contracting sharply,
And now …
The U.S. government has thrown trillions of dollars at the problem. And the actions they’ve taken, for the time being, have helped to avoid a collapse of the financial system that would have caused a massive run on banks, a standstill of economic activity and a worldwide economic depression.
There are plenty of areas to question and debate the decisions made by the U.S. Treasury, the Fed and other government types. But the stabilizers and backstops, to this point, have managed to avert an economic freefall. Of course, the ultimate outcome of policy actions has yet to be determined.
But it’s clear that the U.S. and economies around the world remain fragile.
Even so, people are grasping tightly to the idea that a sharp bounce back is in progress and that a return to normalcy is near.
For the Fed, it’s this type of optimism that is driving a perfect operating scenario.
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| Government action has averted financial disaster, but global economies remain fragile. |
What Is the Fed’s Perfect Scenario?
If the Federal Reserve and the U.S. Treasury could have scribbled out a wish list for financial market conditions last March when global economies and global markets were in freefall, it might have looked something like this …
Wish #1: Please give us rising stock prices.
Rising stock prices improve the sentiment of investors and consumers. They replenish some lost paper wealth and make companies feel better about the future. It’s amazing what a 64 percent rise in stock prices can do for confidence.
Wish #2: Please give us stable interest rates.
Demand is massively depressed by things like evaporated consumer wealth, tight credit, and high unemployment. And deflation has been, and remains, the immediate problem.
The Fed’s answer: Zero interest rates and “printing money.” These tools are at work to prevent a deflationary spiral and to influence low mortgage rates to curb the housing implosion.
But consumer credit and mortgages are priced based on market-driven interest rates, not rates set by the Fed. So a move higher in market interest rates, like interest on 10-year Treasury notes and Libor, would create a big problem for the Fed. It would drive up interest rates on consumer credit and mortgages, which would create even bigger problems for consumers and for the housing market. But that hasn’t happened.
Wish #3: Please give us stable commodity prices, especially oil.
Crude oil is down 50 percent from its high a year ago. In a period where consumers are more inclined to save, not spend … stable gas prices are critical.
Wish #4: And a gradually declining dollar wouldn’t hurt …
This is the icing on the cake. Even if global demand for everybody’s exports is still in the gutter, the effect of a weaker currency on GDP is a nice kicker. A weaker dollar means we import less and perhaps we export a little bit more … but most importantly, the net value that comes from importing less and exporting a little more is a key positive contribution to GDP.
Despite all of the fear about the future of the dollar, it’s important to realize that a weaker currency is actually good for an economy when economic growth is depressed. Our trade balance is narrowing and our current account balance has diminished dramatically.
Now, when the economy is growing at a healthy rate, then a stronger currency is preferred because it helps improve quality of life.
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| A weaker dollar is actually good for a depressed economy because it helps narrow trade and account balances. |
A Gift Without Staying Power
By coincidence, or not, all the Fed’s wishes have come true. And this confluence of gifts from the financial markets has bought some time to address some of the structural economic problems. But the structural problems haven’t been repaired.
Financial markets are rarely compliant to wish lists, especially when the performance defies fundamentals. At some point, the markets will find fundamental equilibrium.
The key question is: When will markets revert to reality?
That’s the hard part.
The U.S. stock market continues to be the gauge of how investors feel about the prospects of a sustainable recovery. Higher stock prices equal more optimism. And more optimism equals higher risk appetite.
But at this stage, the idea of chasing returns that are not supported by fundamentals is a high-risk, low-reward proposition. And it’s not hard to find a reference point of the type of pain that can be associated with the divergence between market prices and fundamentals.
It was only twelve months ago that currencies, commodities and stock markets made sharp and abrupt collapses.
As for the Fed and the Treasury’s wish list … when the rise in stocks ends, so will confidence and any hopes for a sharp economic recovery. And when confidence wanes, investors feel more risk averse.
What Does That Mean for Currencies?
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| Fears of the dollar’s demise may be premature when compared to other currencies. |
Despite all of the ugly issues surrounding the U.S. economy, it will have among the smallest of economic contractions in 2009 compared to other G-7 countries, second only to Canada. And for 2010, the U.S. is expected to outperform all other major developed market economies.
That says something about the state of the rest of the world.
And when it comes to the dollar, and currencies in general, you have to respect the relative nature of currency values. Currencies don’t operate in a vacuum.
A country’s currency is never valued based on how well or how poorly its particular economy is doing in isolation. It’s always measured against another country’s currency. So it is always valued based on how a particular economy is doing relative to another economy.
For those that are fearing darker days for the dollar, remember that the least ugly currency can still win the beauty contest. Also, any rise in risk aversion is a positive for the dollar.
Regards,
Is Intervention for the Yen on the Horizon?
by Bryan Rich
In the summer of 2007, Bear Stearns confessed it had spent $3.2 billion bailing out two of its funds that were exposed to the sub-prime market. At the same time, the yen carry trade marked its top. Soon thereafter, Bear Stearns went belly up, and the needle on the world’s sentiment shifted towards risk aversion.
Investors who had enjoyed a handsome return from borrowing cheap yen and using that yen to buy high-yielding currencies like the New Zealand dollar, the Indonesian rupiah and the Australian dollar went running for cover! They quickly found that the yen carry trade was like picking up pennies in front of a steamroller …
The success of this trade was highly correlated to the world’s dependency on easy credit. So when the warning signs started flashing that the credit bubble was bursting, the yen soared as investors fled those higher-yielding investments and bought yen to exit their trades.
As a result, since June 2007, the yen has gone up 28 percent against the dollar, its main trading partner.
Adding to that disadvantage, the yen has been exceptionally strong against the currencies of Japan’s key Asian competitors …
Since the middle of 2007, the yen has climbed:
- 20 percent against the Chinese renminbi (or yuan),
- 21 percent against the Singapore dollar,
- 25 percent against the Thai baht,
- 31 percent against the Indonesian rupiah,
- And 43 percent against the South Korean won.
That’s a distinct position of weakness for the Japanese because it makes their exports significantly more expensive than their Asian competitors’. Of course, this is horrible news for an economy where exports make up 16 percent of total output! And even with improvements in the global economy, Japan’s exports are still down 37 percent from this time a year ago.
This is why Japan has experienced the worst contraction of all major economies and is expected to have the weakest recovery. And that’s why there is speculation that Japan could return to recession — as soon as the fourth quarter of this year.
Will a New Ruling Party in Japan
Strengthen the Yen?
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| Hirohisa Fujii revised his initial remarks about the yen. |
Japan’s new ruling party, the Democratic Party of Japan, entered office last month. And the newly-appointed finance minister, Hirohisa Fujii, was happy to publicly comment on exchange rates.
But his initial remarks that a strong yen could actually be good for the economy caught the markets by surprise and sent the yen soaring even further …
Japanese exporters strongly disagreed with him. So the finance minister was reminded that when he said “good” perhaps he should have said “bad.”
Since then, Finance Minister Fujii has done an about face, joining other major countries with verbal threats against the strength of their respective currencies (in relation to a weakening dollar).
This means that as the U.S. dollar continues to give back its gains from last year’s crisis-driven flight to safety, the possibility of currency intervention by countries like Japan increases.
Japan’s Previous Yen Intervention
Japan has a reputation for being sensitive to movements in the currency markets and for taking action. Its heaviest periods of intervention tended to coincide with slower economic growth rates — like it’s experiencing now.
The last time Japan intervened to weaken the yen was between 2003 and 2004 …
Over the course of 126 days the Ministry of Finance purchased $315 billion and sold yen in the open market. These steps ultimately sent the yen 11 percent lower.
But the overall success of interventions in changing the long-term path of a currency is not great. A lot depends on how it’s done …
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| Manufacturers and exporters would welcome an intervention weakening the yen. |
Changing the path of a currency tends to have a higher success rate when countries act together in support of (or against) the same currency. These coordinated interventions also have a greater spillover effect on other currencies.
Last weekend, leaders from the G-7 met in Istanbul. Although all G-7 members have made increasingly frequent individual statements about currencies, the G-7′s collective message on currencies didn’t change! It was identical to its communiqué of April that said:
“Excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability. We continue to monitor exchange markets closely, and cooperate as appropriate.”
So when you consider the theme of coordination in the policy responses to the global crisis, if a major currency intervention takes place, the probability of a coordinated response in currencies is high.
And for Japanese exporters dealing with a yen near 14-year highs against the dollar … that would spell relief.
Regards,
Bryan
Brought to you by Alan’s Forex Blog
Arab States to Ditch U.S. Dollar-based Oil Pricing
Associated Press
Tuesday, October 6, 2009
The dollar fell Tuesday towards year lows against the euro and the yen after a report that Arab states and other countries were contemplating an end to the U.S. currency’s role in the pricing oil.
By early afternoon London time, the dollar was down 0.5 percent at 89 yen, while the euro was up by 0.6 percent to $1.4729.
Further sustained falls could see the dollar fall below its multi-year low of 87.11 yen, and the euro break above its two-year high of $1.4842, achieved last month. Story continues below ?advertisement | your ad here
The selling was stoked by an article in Britain’s “Independent” newspaper from respected journalist Robert Fisk.
Citing unnamed Gulf Arab and Chinese banking sources in Hong Kong, the article said ‘secret’ meetings were taking place between Arab states, China, Russia, Japan and France, to end dollar dealings for oil and moving instead to a basket of currencies, including the euro, the yen and the Chinese yuan.
Officials in several countries either denied talks or said they had no knowledge.
Kuwait’s oil minister, Sheik Ahmed Al Abdullah Al Sabah, said there have been no talks on the topic among Gulf oil ministers. “At our level, no,” he said. “I didn’t even dream about it.”
Feeding skepticism
Despite the denials, the report fed market skepticism about the U.S. currency in favor of the euro and the yen as the dollar’s future as the world’s reserve currency continues to be openly discussed.
Last week, figures from the International Monetary Fund showed that the dollar’s share of total reserves has fallen to its lowest level since 1995. Meanwhile, Robert Zoellick, a former U.S. trade representative who now heads the World Bank, warned that the currency’s status as the world’s leading reserve currency should not be taken for granted.
“Some stories will run and run and this morning’s report regarding a possible replacement of the dollar as the exchange currency for oil is another chapter in the plot against the dollar as the world’s most dominant reserve currency,” said Jane Foley, research director at Forex.com.
The worries are in part based on much larger U.S. budget deficits and expansive monetary policy at the Federal Reserve, including rock-bottom interest rates and expansion of the money supply. Those are all policies that can undermine a country’s currency.
The dollar’s role as a reserve and pricing currency supports its value because it obliges governments and companies to hold or obtain dollars.
Bank of New York Mellon currency strategist Neil Mellor said the notion that Gulf states may look to reduce their dependence on the dollar is “potentially very significant indeed,” particularly as they share the dilemma with China over the value of their dollar holdings. Any move that undermines the dollars’ value would reduce the value of those extensive holdings.
‘Not even serious’
Over the last five years, the dollar has broadly fallen against many of its main competitors, leading to calls in dollar surplus countries, such as China and the Gulf states, for a greater diversification in their currency reserves.
As a result, talk of the dollar losing its price function is nothing new — in 2003, Russia moved its ruble peg to a two-currency basket of the dollar and the euro. During the oil price boom in recent years, Russia built up big dollar reserves because of its status as one of the world’s major producers.
Dimitry Peskov, spokesman for Russian Prime Minister Vladimir Putin, dismissed the newspaper report as “not even serious” but did reiterate Russia’s recent policy of multiplying the amount of reserve currencies “to ease the burden on a single world currency and save ourselves from another crisis.”
Meanwhile, China has taken stakes directly in energy and commodity producers in an attempt to diversify its dependence on the dollar.
Hans Redeker, global head of foreign exchange strategy at BNP Paribas, said Saudi Arabia, which has the biggest oil reserves, will be the key country when discussing which currencies oil should be factored in.
“What investors should not forget is that Saudi Arabia has an interest to keep the U.S. strong and involved in the region,” he said.
“Switching the dollar for a basket of currencies for commodity factoring would weaken the U.S. additionally, which would be against the interest of Saudi Arabia,” he added.
SOURCE: http://money.cnn.com/2009/10/05/markets/thebuzz/index.htm?section=money_markets.php
