Wednesday, October 13, 2010

Japan plots next Yen intervention

Almost a month has passed since the Bank of Japan (BOJ) in forex markets on behalf of the Japanese Yen appealed. In a trading session a record you spent to get a 3.5% jump in yen 2.1249 trillion yen ($ 25.37 billion). Since the yen has continued to appreciate know and now it seems like it's only a matter of time before the BOJ is intervened again and again.

USD JPY Forex Intervention

Before surgery Japan's main concern was that there would be a bitter backlash from the rest of the world.Japan fears of allegations were validated on the one hand, it was participation in "Currency war."It received a mild rebuke from U.S. decision makers who know annoyed would cause his intervention, China to reconsider, allows to appreciate the Yuan.

Others were more tolerant, go as far to Japan's actions as a necessary response to Korean and Chinese intervention to entschuldigen.Nach everything, since that competes directly with these two countries of export market share Japan, could tell it how idle how you actively their currencies depreciated.U.S. Treasury Secretary Timothy Geithner let Japan completely off the hook by told reporters he doesn't think Japan "set fire" of the current dynamic in forex markets.

Deutsche Bank (which created the chart below) added "must always way with such persistent intervention, be it frustrating for Japanese makers to other Asian economy to see their currencies to weaknesses."» " «Perhaps the last straw was Chinese purchases of JGBS [Japanese Government bonds] that some Japanese officials to argue, played a prominent role in the recent JPY appreciation.» In other words, not only China was down its currency against the dollar, but now it had started the CNY/JPY exchange rate target.

Forex Reserves in Asia, Japan Forex Intervention

"G7 meeting in the next week will try Japan achieving a formal permission slip for his program with the argument that" "our intervention isn't the kind of large-scale operations, aimed, achieving certain rate levels in the long run." "September's intervention only 'aimed reducing excess fluctuations' in the yen rates." Depending on how the G7 (via his official statement) responds it can likely more intervention affect.

From an economic perspective, not Japan have to worry about too much. The only disadvantage of wholesale printing money and use it to the U.S. dollar to buy is the risk of inflation. Japan, however, this would be considered a positive development, and is hardly a limitation more intervention: "Japan's economy still in the grip of deflation, the authorities have the ability and the incentive to prevent more WINS in the yen." In fact, the Bank of Japan recently "truncated and pledged, fresh his overnight rate target to virtually zero 5 trillion yen ($ 60 billion) worth of assets in a dose of economic stimulus to buy."As the Fed is the same [more on that later this week] to do is's BOJ hope that this time around "the yen reflexively investors bearish turning the greenback favouring is not."

The only question then is really, if the BOJ will intervene.The Japanese yen has fallen already, 82 USD/JPY, disappointing analysts, who predicted the point of intervention 83 / 84, in the next point of the last month intervention würde.Dass take place the yen continues to slide it has allowed is somewhat confusing that it makes the futility of their previous efforts available.The BOJ claims that it is not entering a program on continuous intervention, but that is really the only chance that did it successfully for any length of time.The Swiss National Bank (SNB) established a "line in the sand" of 1.50 EUR per SWF and $200 billion defend ausgegeben.Wo is the BOJ "Line in the sand?"82? 80?

In theory this should mean the Japanese Yen appreciation to come to an end soon wird.Angesichts of the fact that any other major currency (with the exception of the euro) is either indirectly or competitive devaluation, but this by no means sure do Japan about holding Yen is serious, may it formally declare war.

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Saturday, October 9, 2010

Passive currency rises in popularity investing

Those who read Central Bank survey of foreign exchange and derivatives market activity know the recent Bank for International Settlements (bis) three-year daily Forex turnover rose to 20% in the last three years to $4 trillion. According to the official data financial institutions and the like, who committed the impression that the trade would be the overwhelming majority are the vast majority of participants for speculative purposes. However anecdotal research suggests that it is "passive" behind the scenes Forex trading, is making its presence known.

"Flows account for more than 50 percent of currency to Deutsche Bank, - such as corporate Treasurer looking not benefit hedge currency risk or your core business - facilitate"passive"players."By definition, these passive players not out a profit, and exchange of currencies only, because it is simply necessary shops.

This is not surprising since the approved exporter in the United States increased 10% over the past year, which is available for the data. It is almost a given that the number of exporters in emerging markets increase, is a faster clip.As a result, are corporate banking departments struggle to keep pace with the demand for currency exchange/backed by such companies that simply want to know whether their own profit margins, and set prices accordingly. can belong to the most reliable hedgers great companies: "companies raised the amount of estimated forward 12 month earnings to 34.3 per cent on average in September…boosted 22 percentage point rise in U.S. companies hedge ratio to 55.7 per cent, the highest secured to record." Even sovereign wealth funds are reportedly interested in securing your Forex reserves.

If not for the enormous pool of passive participation in Forex, it might difficult for speculators to make a profit. "" "The streams of passive players limited factors have direct sensitivity to broader market and macro so that you as counterparts to topic-driven investment flows, can be used" ", reported the financial times. Since these participants disinterested in actual Forex variations are - as long as you in return rates with spot and futures transactions can - disable passive dynamic currency movement creates, and also opportunities for speculators (including retail Forex traders), to make a profit.

In a sense, speculators is a free lunch.On the one hand, two-digit currency have been moved up to almost banal with some currencies routinely rise or fall in recent years of more than 5% per month are Forex volatility fallen geworden.Auf of the other hand, is so common time in the course (except during the financial crisis) and is low compared to other asset classes.For example, "Annualised is average daily volatility of the euro/dollar pair in the last decade, such as 140 percent lower than the volatility in the EuroStoxx 50 at the same time."In addition "deleted to jump JPMorgan's index of implied volatility on options for the Group of seven currencies 13 percent in the third quarter, according to 22 percent in the previous three months."This is amazing, because it implies as increased uncertainty, risk (aka volatility) has fallen.

"Interested in Forex increases with the indirect investors such as pension funds, mutual funds and retail investors to seek exposure to currency by investment products.""In July, RBC capital markets has published a survey of 102 Asset Managers…which revealed that 38 per cent currency leads the list of asset classes most likely say are in equities and commodities to move, do in the next 12 months."On a related note, the recommend most investment advisors that currencies 2-7% of each investment portfolio regardless of objective and risk tolerance include sollte.Die number of Forex investments "Specialists" and the related investment products seem to rise to demand different strategies-based wear, momentum and value.

At this rate, it looks like Forex volume a fresh record sets in 2013, when the next round of data is released.

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Thursday, October 7, 2010

Currency war: who are the winners and losers?

On September 27, "Currency war", used the term to describe Brazilian Finance Minister, Guido Montega, the series of recent Central Bank intervention in the currency markets. While he may not have intended, put the term, and financial journalists everywhere have run with it.

In the current cycle (dating back a few years) Central more than a dozen banks holding foreign exchange markets with the intention of entered your respective currencies against each other and against the US dollar. What makes it a war is the central banks struggling financially to outdo each other. It is a war of attrition, inasmuch as the central banks will fight, until exhausted all your media, have been conceding defeat for their currencies. On the other hand, in contrast to a conventional war no alliances, still there it much in the way of little strategy. Central banks simply buy large blocks of counter currencies and hope that their own currencies are then depreciated on the spot market.In addition, because the counter currencies almost always dollars or euros, competing participants in this war even not directly against one another, but against one enemy who is much to do.[Chart Belowcourtesy of der Spiegel].

Unequal Competition- Global Trade and Currency Wars

The Swiss National Bank (SNB) was the first intervene and staged a year campaign in the course of 2009 to keep the Swiss franc against the euro to 1.50. Ultimately it could if the sovereign debt crisis sales of Euro caused an exodus. The Bank of Brazil was following, although its activities 14th modest; it seems the ultimate futility of their efforts have accepted, and will seek, slow down the real's appreciation rather than to stop it. Last month, the Yen's appreciation of the markets spent the Bank of Japan 20 billion dollars in a session to show how serious it is on the fight. In fact, it was this intervention that triggered Montega's comments about currency war.(The BOJ has no yet since appealed) .all together, the people's Bank of China has continued their war chest reserves - currently $ 2.5 trillion - as part of the ongoing Yuan dollar peg Add. And of course there were a handful of smaller interventions (Republic of Korea, Singapore, Taiwan) and no shortage of rhetorical (Canada, South Africa) interventions, as well as act as indirect (US, UK).

The law - forget caused to weaken you not, that the fed and the Bank of England, have injected billions in the financial markets through their respective quantitative easing programmes and their currencies. In a sense all have the following interventions have been made to restore the balance in the currency markets who lost, gone if these two central banks deflated currency printing money it wholesale. Since much of this cash his way in emerging markets (see table below) has found, can your central banks from trying some of the upward pressure on the their currencies to mitigate blame.

It is still too early too early to tell how far the currency war go location.the G7/G20 has announced that it discusses the issue at the next Summit, although it probably too much in the way of the action is not. Ultimately politicians can try not much more than shake your finger at the countries that pressed their currencies. In the case of the Yuan-dollar peg, American politicians have tried, this a step further to take by threatening to beat China punitive trade sanctions, but won't likely this beta, and as a problem may total disappears after the elections in November. As I announced on Friday, Brazil, has matters into own hands taken by all foreign capital inflows taxation, but this had not much effect on the real.

Emerging Market Capital Inflows 2009-2010

This brings me to my final point that is, that all currency in vain because most central banks can only capacity limited intervention in the long run over to intervene.If you are printing too much money to keep their currencies, risk, stoking inflation.China is the exception to this rule, of course, but this is exchange-rate system less because of the size of his war chest and more because the mechanics of his.Successfully to manipulate their currencies on the spot market for central banks to the trillions of dollars in Forex daily fights.Finally this truism must expect each Central Bank.

In determining winners and losers the war currency (as I promised in the title of this post to do the euro will probably lose (read: appreciate) because the ECB not ready same applies required.the Swiss francs, the SNB basically intervention provisionally left currency spam.messages of Japan has deep pockets Bank and if the markets which secure Yen over 85 Yen / dollar, I wouldn't be surprised to see it again to intervenieren.Mit fed ponder a push, extending its quantitative easing program now continue the dollar probably sinken.Und as for the countries that do the actual intervene succeed them may temporarily estimate their respective currencies capital long-term shifts gedrückt.Als emerging economies, their currencies but rise soon again.)

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Friday, October 1, 2010

Brazilian real 2-year high despite "Currency war"

Brazil is the drums of war hit. The Forex diversity that is. Accordingly to the Finance Ministers "we are an international currency war, a general weakening of the currency in the middle." "This threatens us because it takes our competitiveness." According to own statements, Brazil will sit on the sidelines of this war. Rather it is for your currency, the real fight.

Brazil's concerns are perhaps justified since the Brazilian real strong, a 2-year high risen, and amazing value more than before the collapse which is Lehman Brothers and the ignition of the global financial crisis. (If anything, this shows how far we have come upon the return to stability).According to Goldman Sachs is the real now most overrated main currency in the Welt.Dies confirmed the Economist's Big Mac index, which shows that in terms of PPP (purchasing power parity) Brazil now the third country in the world behind only Norway and Switzerland.

Economist Big Mac Index July 2010

It is not difficult to understand why the real is growing. His benchmark Selic rate is 10.75% in Government, so that one nor increased 12%. After inflation, this is the highest among the major currencies. Its economy is booming; projected GDP in 2010 to 10%. Consequently, tributaries have returned cash flow levels pre-credit crisis: "Net foreign exchange inflows totaled $ 11.14 billion in the period September 1 17 to 2.11 billion $ in the first ten days of the month according to the data released Tuesday by Central Bank of the country."The tributaries have driven by a 70-billion dollar shares, the issuance of PetroBras, the (former) State-owned oil company. "It is a record sum, and 3 the agricultural times Bank greater than the eye-popping $ 23 billion of China raised only a few months ago.""If the Petrobras deal had never happened, the actual somewhere around 1.75 per dollar, trade could be" compared to 1.70 today. With other companies, noise with fremd-to follow and equity still offered cash probably casting.

As I said at the beginning of this post, the Bank of Brazil has several tools petto. It has already started, "surprise daily auctions to purchase excess dollars in the spot market" (in the 2006 suspended), in which investors can trade dollars for Brazilian government debt. "" It beats also reverse currency swaps that would serve a similar purpose."""The order is to buy, buy, buy", ", said a government source. It has purchased in the month of September alone almost $ 1 billion in foreign currency and is committed to provide its 10 billion dollar sovereign investment funds if necessary. Finally there is the tax rate (currently 2%) on all foreign capital inflows conversation of raise, but no real schedule for such a step is.

Oh, while keeping the Government of Brazil in its intentions the real is certainly sincere, lacking the necessary Kleingeld.Die was 1 billion dollar intervention in September by the 20 + billions of dollars spent by the Bank of Japan on a day to hold Yen dwarfed.Even controlling for the differences in the size of their respective economies, Brazil still thoroughly outspent was.His $ 10 billion investment pales compared to the ~ $ 1 trillion foreign exchange reserves of Japan.Kurz said Brazil would be wise to avoid full commitment in currency war.

Real USD 5-Year Chart

Also the real can better to strength the weakness in the US dollar and other currencies of G4 werden.In seen Brazil lean purchases of US dollar on the spot market related growth probably not much to the gradual exodus of cash from safe havens again currencies entgegenzuwirken.vielleicht it may take solace in the fact that so overrated real is that it seems, have no place to go, but down.

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Wednesday, September 29, 2010

Bullish on the euro?

Life would be a little easier if you stick the EUR/USD that importantly pair of Forex and bellwether which could currency market, simply choose a direction and with it. It appeared during the financial crisis only during the recovery phase apparent increase, fell during the sovereign debt crisis and rose during the shift, then fell as risk appetite disappeared, only to again increase in September, en route to a 5-month high.

Euro Dollar 5 Year Chart 2006-2010
There are a handful of factors of euro strength currently based are all generally can explain the risk by the fact is "on" at the moment and the markets are moving way so-called safe haven currencies and back towards growth investments. Of course, that could change tomorrow (or even 5 minutes from now!), but at the moment the risk-taking is high and Euro symbolizes danger.It doesn't matter how ironic projected growth in the EU for the year at 1.8%, while the rest of the world (ROW) GDP probably top wird.Alles what counts is 5% when compared the dollar and Yen, pounds, Swiss francs to a lesser extent) euro as currency perceived risk.

Of the euro cause is helped by the ongoing "currency wars," heated last week with Japan's entry into the game. Basically on central banks around the world now in competition with each other, to their currencies depreciate.On the other hand has the European Central Bank (ECB) decided to continue on the sidelines (in favor of fiscal austerity) that force up to the euro, is (or rather all other currencies down) .Zu questions worse, "the Federal Reserve indicates this summer that it... often can facilitate monetary policy further as printing money to pump up the economy." As a result set, "the euro looks on in a trend to keep climbing that looks increasingly entrenched."

There are certainly those who claim that reflects recent rise of the euro to renewed confidence in the euro-zone economy and prospects for the solution to the debt crisis of the EU. Finally, most euro members to reduce their budget deficits, in 2010 and auctions new bonds are once again over-subscribed. On the other hand, the interest rates on the pigs (Portugal, Italy, Greece and Spain) have risen multi-year highs as investors finally try serious efforts at pricing the possibility to make standard.

Eurozone sovereign debt interest rates graph 2007-2010
Moreover, the credit markets in the EU hardly work and large institutions remain the ECB credit facilities for financing depends on. Finally should be forgotten it, the only reason crisis due to the massive support (€ 140 billion), which was extended to Greece. When this program expires in less than three years, the tax problems of Greece (and the other PIGS) exposed again and a new (temporary solution) have suggested solution.

Each analyst has pointed out, are not the EU resolved worden.EU members have sent certainly proved fiscal problems to solve in the acute crises and keep the ECB certainly deserved recognition for the credit markets are functioning but none has proposed a viable solution for the repair of the Member States tax and economic health.Devaluation of the currency is impossible.Sovereign default is prevented.That leaves pay cuts and higher productivity than only two paths to balance.The former could be achieved, inflation, but the ECB seems reluctant to allow.

Eurozone Budget Deficits, GDP

For better or worse seems that these problems on the road have urged the EU and if everything according to plan, you must be for 2-3 years checks be. for now the euro is probably safe, and can even gedeihen.Short positions in the euro furious speed carried out and data show that it is still plenty of room for more entladen.Inflation dampened economic growth is stable, and so far have not any opposition to the euro expressed the ECB rise. while I promote this optimism with the caveat that "traders willingness euro lower from time to time on the slightest news or rumor downgrade to the eurozone sovereign or Bank ratings smack showed", the general trend of the euro is now indisputable.

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Tuesday, September 28, 2010

RMB appreciation, but speeds up dollar peg remains in place

The Chinese Yuan has a new record and USD/CNY touches. Especially the Yuan only increased approximately 2%, as the chip is officially in June - to put the most this esteem, has been eased, in the last couple of weeks is more intense pressure on China to do more.

Last week intervention by the Bank of Japan redirect an enormous amount of attention to the Yuan. In fact, many analysts have argued that it only because of the Yuan-dollar peg (even as the Chinese purchases of Yen assets that it generates is) that Japan was forced to act: "countries see entering the currency manipulation is a way, getting a advantage '...'"China to give affected their actions Japan and Japan hits us. '"The yen intervention could also force that the G20, his attention to the Yuan realignment and at least some discussion to dedicate it to the next Summit.

CNY USD 1 Year Chart 2010

It should be noted that the two soundbites on both from US Congressman, is what's important emerged, because currently, action on the Yuan currency peg ist.Politiker breed the U.S. Government are getting tired by the Treasury Department's repeated error China call a "currency manipulator," requiring the diplomatic discussions and even trade sanctions would. Have the Ministry of finance option in your next report about Forex, given from 15 October, redeem, but it is expected that the report will either be delayed or released without sufficient addressing of the undervalued Yuan.

In fact, Treasury Secretary Geithner said before Congress last week, and at least admitted that something had to be done: "the pace of appreciation was too slow, and the extent of appreciation too limited." "We need to figure out ways to change behavior."However, this was only in response to the harsh criticism-(Senator Schumer told him, "I come increasingly to the view that the only person in this room who believes it is not manipulated China its currency.") - and it ultimately failed a timetable/blueprint for action to sketch. Despite the consensus among politicians (and President Obama) that the currency peg hurts the US economy Geithner also made clear, that the Ministry of finance unilateral action towards dealing with problem without Congressional intervention to promote. For now, politicians are then probably banned on saber rattling and insults.

China's response to this farce was predictable. Trade representatives indicated that China would not bow to pressure from outside, and everyone at the "punishment attempt" would comply with countervailing duty actions. China questioned the economics between arguments that contributes to the trade imbalance, calling such claims the dollar peg "groundless".This position is actually from the idea that actually widened during the Yuan by 20% compared to the dollar from 2005-2008 USA estimated supported / China trade deficit.

In practice, China is expected to its policy of gradual appreciation of the Yuan, or a few reasons to keep.First of all, while Chinese policy makers know that you don't need to completely placate U.S. politicians, they must claim at least that you hear.It is true that the United States Chinese products and its purchases of Treasury depending on ist.jedoch, it is probably only so dependent on the United States its exports to buy bonds will promote the employment and social stability, and it is keen to avoid a trade war if possible.

Secondly, a long-term appreciation of the RMB is actually in China's interest.If it spur domestic consumption and promote more value added manufacturing will have a more valuable Währung.Ausgehende M & A, especially with natural resources companies, be cheaper when the Yuan more value ist.Auch if China has serious ambitions to transform the Yuan in a global reserve currency, it must create capital markets, are deep and liquid, which is currently unmotivated to do it, so it spur demand for Yuan of foreign institutional investors.

Should finally China would like to appreciate the Yuan as financially I mentioned it labor to do ist.Wie has its trade surplus with the USA wachsen.Preise of imports and the prices for raw materials expanded in recent years, as the prices for its exports along with amount and abgelehnt.deshalb have now paid other natural resources in Yuan conditions I think China probably continue to keep your current policy and enable the RMB still slowly inch.

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Monday, September 27, 2010

The Trend is Your Friend

Raise your hand if you’ve ever heard that expression before? Well, now there’s proof that this well-worn phrase is more than just a pointless platitude: “Royal Bank of Scotland Group indexes that track the performance of four of the most popular currency strategies show that the so-called trend style was the best-performing method, returning 7.3 percent this year through August.”

“Trend-Style” trading is also known as trend-following, and is just as it sounds. Traders identify one-way patterns in specific currency pair(s), and attempt to ride them for as long as possible. Given all of the big movements in currency markets this year, it’s no wonder that trend-following is the most popular. If you look at the 52 week trading ranges for the six most popular USD currency pairs, you can see that highs and lows are often as far as 20% apart. The EUR/USD pair, for example, fell 20% over a mere 7 months. Anyone who sold in December 2009 and bought to cover in June 2010 would have earned an annualized return of 35% without leverage! Even if you had captured only a couple months of depreciation would have yielded impressive returns. In addition, you could have traded the Euro back up from June until August and reaped a 60% annualized return. Best of all, both of these trends (down, then up) unfolded very smoothly, with only minor corrections along the way.

The Trend is Your Friend- USD/EURI’m sure serious technical analysts are rolling their eyes at the chart above, but the point stands that trend-following has never been easier and rarely more profitable than it is now. One fund manager summarized, “Trend-following investors are capturing the momentum in several big currency moves. You have so much uncertainty in the world now with regard to inflation or deflation, which typically makes currency markets and interest rates move. That is good for trend followers as it causes volatility, which typically creates good profits.” In other words, there is a tremendous amount happening in forex markets at the moment, and this is reflected in protracted, deep moves in currency pairs, which can change direction without notice and yet continue moving the opposite way for just as long. If you think this sounds obvious, look at historical data (5-10 years) for the majority of currency pairs: while trends have always been abundant, it was only recently that they began to last longer and became more pronounced.

The other three strategies surveyed by the Royal Scotland Group (”RSG”) were the Carry Trade, Value Trade, and Volatility Trade. Unfortunately, data was only offered for the carry trade strategy (confusingly referred to by RSG as the volatility strategy), which is down 5.9% in the year-to-date. The carry trade strategy involves selling a currency with a low yield and favor of one with a high yield, and profiting from the interest rate spread. In order for this strategy to be profitable, however, the long currency must either appreciate or remain constant. Thus, when volatility is high – as it has been over the last 2-3 years – this is a losing strategy.

We can only guess that a true volatility strategy probably would have been the second most profitable strategy. This strategy can be implemented through the use of long and short spot positions, as well as through trading in options and other derivatives. As I said, there is no shortage of volatility at the moment: “Since the collapse of Lehman Brothers in 2008, the dollar has seen record volatility against the euro…including six moves of at least 10%.” For traders that profit from volatility, the current uncertainty has created a windfall situation.

Volatility 2006-2010

However, it has made value trading – based on fundamentals and the notion of Purchasing Power Parity (PPP) – risky and unpopular: “The volatility also has made what would appear to be a straightforward bet against the dollar fraught with risk. Three factors tend to move currencies: the pace of growth, debt levels and interest rates. By those standards, the dollar should be falling against the currencies of emerging-market and commodity-producing nations.” Not only is this not the case (a decline in risk appetite has turned the Dollar into a safe-haven), but even betting on a protracted Dollar decline is itself risky because of surging volatility. One way around this is to trade a Dollar Index (by way of an ETF, for example) which is inherently less volatile (half as volatile, to be exact) than individual currency pairs.

That’s not to say that value trading isn’t profitable over the long-term. “Empirical evidence suggests that currencies…show a tendency to revert back toward PPP in the longer run.” Given current volatility/uncertainty, however, this strategy is unlikely to be profitable in the short run. Fortunately, uncertainty doesn’t negate opportunity, and traders should plot strategy accordingly.

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