2007: A Forex Review

As 2007 draws to a close, the Forex Blog would like to formally deliver its second annual ‘state of the markets’ address. While the picture in most capital markets was blurry and nuanced, the story for forex markets was relatively straightforward. Simply speaking, the story was all about the US Dollar, which followed up its worst year in recent memory in 2006 with an equally abysmal performance in 2007. In fact, over the last two years, the Dollar has fallen over 20% against the Euro, and even further against most of the world’s other important currencies.

2007: A Forex Review

As 2007 draws to a close, the Forex Blog would like to formally deliver its second annual ‘state of the markets’ address. While the picture in most capital markets was blurry and nuanced, the story for forex markets was relatively straightforward. Simply speaking, the story was all about the US Dollar, which followed up its worst year in recent memory in 2006 with an equally abysmal performance in 2007. In fact, over the last two years, the Dollar has fallen over 20% against the Euro, and even further against most of the world’s other important currencies.

The Record Rise of the Chinese Yuan

Earlier this week, the Chinese Yuan recorded its highest one-day increase in value in the two years since it was famously revalued against the Dollar.  The currency rose nearly .4% and prompted renewed speculation that China’s Central Bank will either widen the trading band to .8% or will generally allow the currency to appreciate faster.  In fact, the political and economic consensus continues to maintain that the Yuan is not appreciating rapidly enough.  While it rose over 6% against the Dollar, for example, it actually lost value to several of the world’s major currencies.  Furthermore, its decline against the Dollar is less impressive when China’s skyrocketing inflation rate and burgeoning trade surplus are taken into account.

Yen Buoyed by Exporters

The Yen has received a nice boost from Japanese exporters, which moved en masse to exchange Dollars for Yen to meet certain year-end financial obligations.  The logic is that exporters had owed money in arrears to domestic Japanese producers of the goods and services being exported

Interest Rate Story Hurts Pound

The British Pound has been reeling since the Bank of England cut rates at the beginning of this month, from 5.75% to 5.50%.  Last week, the minutes for the meeting were released.  They revealed that that members of the Bank were growing increasingly nervous about the state of the British economy and are worrying particularly about how fallout from the credit crunch will impact growth.  British interest rates are still among the highest in the industrialized world, behind only Australia and New Zealand.  Thus, it seems investors are punishing the Pound indirectly for the rate cuts, because of fears concerning the near-term prognosis for the British economy.  At the same time, the minutes indicated that members of the Bank were adamant about not lowering rates further, so some of the concerns may be overblown.
Read More:  Pound weakens after BoE minutes show concerns for growth

Commentary: The Future of the Dollar

Despite its multi-year decline, the US Dollar remains the world’s undisputed reserve currency, claiming a 65% share of total Central Bank reserves. However, the chorus of soothsayers proclaiming the apocalypse for the Greenback is growing louder by the day. Every week seems to offer a new piece of news confirming that the Dollar’s reign is coming to an end. Analysts are drawing parallels between the British Pound of 50 years ago and the Dollar today. China is threatening to diversify its reserves into Euros. Iran and Venezuela

Commentary: The Future of the Dollar

Despite its multi-year decline, the US Dollar remains the world’s undisputed reserve currency, claiming a 65% share of total Central Bank reserves. However, the chorus of soothsayers proclaiming the apocalypse for the Greenback is growing louder by the day. Every week seems to offer a new piece of news confirming that the Dollar’s reign is coming to an end. Analysts are drawing parallels between the British Pound of 50 years ago and the Dollar today. China is threatening to diversify its reserves into Euros. Iran and Venezuela are leading calls to price oil in terms of a basket of currencies, rather than in USD. The other members of OPEC are considering de-pegging their respective currencies from the Dollar. What does all of this mean? Is the Dollar truly in danger of being replaced as the world’s reserve currency?

China off the Hook…Again

Since even before the dawn of the Forex Blog, commentators have been speculating that the US Treasury Department would officially brand China as a "currency manipulator" in its semi-annual report to Congress.  Such a label is important because it would enable the US to levy tariffs and other economic penalties against China.  However, another report has been issued, and one more time the Treasury Department glossed over China’s de facto control over the Yuan. The report did criticize China for failing to appreciate the RMB

China Trade Surplus Sets New Record

Despite, or perhaps because of the appreciating Yuan, China’s trade surplus with the US is growing by 50% on an annualized basis, and is set to surpass $250 Billion for the year.  In theory, the more expensive Chinese currency should reduce US dependence on Chinese exports and narrow the trade imbalance.  In practice, the US is actually importing a greater quantity of goods and services from China and is also paying higher

Canada Dismisses Currency Peg

Unnerved by the tremendous appreciation in its nation’s currency, Canada’s Parliament is officially mulling the possibility of pegging the Loonie to the USD.  It’s unclear at what value the two currencies would be linked, perhaps at parity.  However, in testifying before Parliament, the future leader of the Bank of Canada argued staunchly against such an exchange rate regime.  Such a relationship, he warned, would cripple Canada’s ability to conduct monetary policy, independent of the US.  So long as the Loonie remained fixed to the Dollar, Canada would be forced into mirroring US interest rate movements.  Because of several fundamental differences in their respective economies, it seems unlikely that this policy will be implemented. The CanWest News Service reports:

"It would mean that, de facto, Canada would adopt U.S. monetary policy, despite the reality that the structures of our economies are very different and, as a consequence, often require different types of adjustments in response to global developments."

Read More: Carney under fire for role in income-trusts decision

Commentary: The PetroDollar Debate

Now that the furor over the US housing crisis/credit crunch has begun to subside in forex markets, investors have turned their attention to what is perhaps the second biggest threat to the Dollar’s long term health: the PetroDollar phenomenon.  In short, the price oil is denominated in Dollars and many oil-exporting nations peg their currencies to the USD. Having found themselves awash in cash, such nations are beginning to ponder greater financial independence from the declining Dollar.

Commentary: The PetroDollar Debate

Now that the furor over the US housing crisis/credit crunch has begun to subside in forex markets, investors have turned their attention to what is perhaps the second biggest threat to the Dollar’s long term health: the PetroDollar phenomenon.  In short, the price oil is denominated in Dollars and many oil-exporting nations peg their currencies to the USD. Having found themselves awash in cash, such nations are beginning to ponder greater financial independence from the declining Dollar.

EU Joins US in Calling for Yuan Revaluation

In the campaign to pressure China into revaluing the Yuan, the US has by far been the loudest voice.  However, the rapid decline of the USD may have unintentionally earned the US a new ally in its fight: the EU.  Since the Chinese Yuan is essentially pegged to the USD, and the USD has declined against the Euro, the law of triangular arbitrage is such that the Euro has actually appreciated significantly against the Chinese

Why China Should Not Dump the Dollar

In fact, China may have to increase its exposure to the dollar, according to the comments of Brad Setser of the Council of Foreign Relations: "In my mind, so long as China resists more rapid appreciation of the renminbi versus the dollar, it’s rather difficult for China to diversify in any meaningful way against the dollar. If China really started to diversify away from the dollar, I think it’s a big enough player that it would put downward additional pressure on the dollar."

ECB to Hold Rates

The European Central Bank (ECB) will likely maintain its benchmark interest rate at 4.00% at its meeting his week.  The Bank of England is also expected to hold its lending rate in place, at 5.75%.  While these two moves should be seen by Dollar bulls as acts of clemency, they are more akin to a stay of execution than to a commutation of its death sentence.  The reasoning is that it is inevitable that the US-EU interest rate difference will be bridged over the next few months, as the Fed continues to lower rates while the ECB is in the process of hiking them.  The only question is when.  Accordingly, analysts will be paying close attention to the language employed by the heads of the various Central Banks at their next meetings to get a sense of timing.
Read More: Dollar hovers above lows

China talks up Diversification

A high-ranking official in China’s government recently gave a speech urging the Central Bank to (continue to) diversify its vast holdings of foreign exchange, currently estimated at $1.4 Trillion and rising.  The speech was atypical in its level of directness, as Chinese officials tend to speak with a certain degree of circumspection if
they think there is any possibility that their comments will reach the public. Specifically, he advocated making

Loonie Set to Surge Further

The Canadian Dollar, or Loonie, recently cleared a 47-year high against the US Dollar.  Its next major milestone is crossing a level last seen in the late 19^th century! There are a few reasons for the Loonie’s continued strength, namely interest rate parity and economic strength.  As a result of the Fed cutting rates for the second time in as many months, the Canadian benchmark interest rate is now equal to the American federal funds rate, both at 4.5%.  In addition, record-breaking oil and commodity prices will ensure that Canada’s economy will expand further, perhaps as the same pace as its currency.  Reuters reports:

If the U.S. Central bank signals another rate cut in December, or if it goes against expectations and chops rates by 50 basis points, it could pull the rug out from under an already unsteady U.S. dollar and clear the way for the Canadian currency to shoot higher.

Read More: Loonie eyes 130-year high if Fed makes big rate cut

Chinese Yuan Reaches Milestone

The Chinese Yuan has crossed the psychological barrier of 7.5 RMB/USD, a level last seen nearly a decade ago.  The currency’s appreciation has been gradual but visible, not withstanding the cries of western bureaucrats.  By all accounts, the Yuan will continue rising, though not at the same pace as its trade surplus, which is projected to jump from $177 Billion in 2006 to $300 Billion in 2007.  Predictions regarding the

US Presses China to Revalue

You have to admire the US for its persistence in pressuring China to appreciate the Yuan, though it’s not as if anyone seriously expected it to back off. Fresh from the recent G8 conference and enjoying the spotlight of the media, US Treasury Secretary Hank Paulson called in China to put its money where its mouth is, and relax its hold on the Yuan. Paulson expressed dissatisfaction with the pace at which the Chinese currency has appreciated – approximately 10% since 2005.  He even insinuated that there would be repercussions for the

Commentary: Will the US Intervene on Behalf of the Dollar?

At last week’s G8 meeting in Washington, it was expected that currencies would be a hot topic of discussion.  With the Dollar retreating to record lows on a daily basis, the failure of China to allow the Yuan to appreciate, the Japanese Yen’s continued weakness despite its strong economy, and the recent parity of the Canadian Dollar and USD, there are certainly plenty of forex phenomena that deserve attention.  However, it is the Euro/USD relationship that probably received the most scrutiny, as the biggest contingent of the G8 uses the Euro.

Commentary: Will the US Intervene on Behalf of the Dollar?

At last week’s G8 meeting in Washington, it was expected that currencies would be a hot topic of discussion.  With the Dollar retreating to record lows on a daily basis, the failure of China to allow the Yuan to appreciate, the Japanese Yen’s continued weakness despite its strong economy, and the recent parity of the Canadian Dollar and USD, there are certainly plenty of forex phenomena that deserve attention.  However, it is the Euro/USD relationship that probably received the most scrutiny, as the biggest contingent of the G8 uses the Euro.

Emerging Currencies at Risk

Most of the world’s emerging economies link their currencies to either the Dollar, the Euro or a basket of currencies, through an outright peg or a so-called "dirty float."  These countries have attracted waves of foreign money, with the intent of buying cheap exports, foreign direct investment, and capital/forex market speculation.  As a result, while the upside of these pegs has been seemingly boundless economic growth, the downside has been inflation, since many of these

UK Pound Nears Plateau

The UK Pound has been on a tear recently, both against the USD and more surprisingly, against the Euro.  The currency has been given a boost by the
Bank of England’s reluctance to cut its benchmark interest rate, which at 5.75%, remains the highest among the world’s major currencies.  However, many economists feel the case for a rate cut is growing stronger every month, whether or not the Bank of England is willing to

UK Pound Nears Plateau

The UK Pound has been on a tear recently, both against the USD and more surprisingly, against the Euro.  The currency has been given a boost by the
Bank of England’s reluctance to cut its benchmark interest rate, which at 5.75%, remains the highest among the world’s major currencies.  However, many economists feel the case for a rate cut is growing stronger every month, whether or not the Bank of England is willing to acknowledge it.  Inflation is only moderately high, while the fall in housing prices-exacerbated by a prolonged period of tight money-threatens to drag down the entire economy.  The markets are still pricing in a rate cut by year-end, which would surely drag down the Pound should it obtain.  Dow Jones Newswires reports:

“We strongly suspect that market pessimism in this respect will continue to grow, in reverse proportions to its expectations of a further hike in U.K. interest rates,” said…a senior currency strategist.

Read More: Sterling’s Strength Can’t Last Much Longer

Europe Asks China to Revalue Yuan

Evidently frustrated by the Euro’s appreciation against the USD, a group of EU ministers has turned its attention to China, calling on it to allow the Yuan to appreciate against the Euro.  While the Yuan has appreciated nearly 10% against the USD over the last two years, it has actually decreased in value against the Euro.  As a result, the EU trade deficit has set a fresh record nearly every month. Unfortunately, the Yuan basically remains pegged to the USD, and since the USD is depreciating faster against the Euro than against

China Launches Forex Investment Arm

After much delay, China finally launched the bureau charged with diversifying its $1.4 trillion foreign exchange reserves. The agency will be capitalized with $200 billion and will invest in assets slightly more risky than US treasury securities. Most currency analysts view diversification as tantamount to the sale of dollar-denominated assets, but in practice, this may entail only the movement of funds into riskier dollar-denominated assets. In fact, the investment arm’s opening move was a $3 billion investment in The Blackstone Group, an American financial conglomerate. Dollar bulls can hold off on worrying just yet.

Read More: China‘s trillion-dollar kitty is ready

Bank of UK to lower rates

The Central Bank of the UK will likely lower interest rates at its next meeting, following the lead of the Fed. The most recent British economic data indicated that inflation has fallen to its lowest level in over a year.  Moreover, UK (and European for that matter) monetary policy prioritizes price stability over employment, by unofficially targeting an inflation benchmark.  Thus, without regard to economic growth, the Bank of UK will adjust interest rates accordingly.  While the Pound-Dollar exchange rate is less sensitive to relative interest rates, the Pound has already fallen against the Euro, since the two countries compete over foreign capital.  Bloomberg News reports:

"The move down is probably going to continue. Sterling will remain under pressure. If any major central bank is going to emulate the Fed and cut rates, it’s going to be the BOE.” 

Read More: U.K. Pound Falls for Third Week Against Euro on Rate Cut Views

Adjusting to Life at Parity

Over the last five years, the Canadian Dollar has slowly climbed to parity against the USD, finally reaching the mythical 1:1 exchange rate last week. Canadian shoppers and
American tourists have taken notice, gradually adjusting their behavior in accordance wit their changing purchasing power. For many Canadians, this has translated into more frequent shopping trips across the border, whether for gasoline or for clothing. For Americans, this has resulted in a decline in the number of tourists visiting Canada. It is also slowly redefining the US-Canada trade dynamic. However, as Canada has become the United States’ largest supplier of oil, it is likely Canada that will
benefit most in this relationship. The New York Times reports:

The weakness of the American dollar worries some Canadian investors as well as businesses that rely on American customers.

Read More: Currency Parity Brings Canadian Shoppers South

Adjusting to Life at Parity

Over the last five years, the Canadian Dollar has slowly climbed to parity against the USD, finally reaching the mythical 1:1 exchange rate last week. Canadian shoppers and
American tourists have taken notice, gradually adjusting their behavior in accordance wit their changing purchasing power. For many Canadians, this has translated into more frequent shopping trips across the border, whether for gasoline or for clothing. For Americans, this has resulted in a decline in the number of tourists visiting Canada. It is also slowly redefining the US-Canada trade dynamic. However, as Canada has become the United States’ largest supplier of oil, it is likely Canada that will
benefit most in this relationship. The New York Times reports:

The weakness of the American dollar worries some Canadian investors as well as businesses that rely on American customers.

Read More: Currency Parity Brings Canadian Shoppers South

Canadian Dollar Nears Parity

With its continued strong performance against its neighbor to the south, the Canadian Dollar is almost defying logic, having jumped to 99cents against the USD in a matter of days. In purchasing power parity terms, the Loony is already among the most
expensive in the world.  However, achieving parity (i.e. an exchange rate of 1:1) has a psychological value that can’t be cast in economic terms. Plus, it doesn’t hurt that high commodity prices have helped Canada to maintain years of strong growth and become America’s largest trading partner in process.  And after the Fed chopped 50 basis points off of the US Federal Funds Rate, the Canada-US interest rate differential is virtually non-existent. One commentator thinks a 1:1 exchange could provide a basis for more economic cooperation between the two nations.  The Globe and Mail reports:

“Parity is a very normalized level. Our [US and Canada] economies have become so closely intertwined that I think down the road what you’re thinking about is more of a North American bloc.”

Read More: A call for parity doesn’t look so loony now

Commentary: How far will the Dollar Drop?

When the US Dollar eclipsed its previous record low against the Euro last week, commentators immediately began painting doomsday scenarios for the beleaguered currency. On paper, the argument for a continued decline in the Dollar is quite strong, due to a sagging economy, surging current account deficit, the prospect of lower interest rates and turmoil in US capital markets. But, in practice, the Dollar remains the world’s de facto reserve currency, which begs the question: “how much-if at all-will the Dollar decline?”

Commentary: How far will the Dollar Drop?

When the US Dollar eclipsed its previous record low against the Euro last week, commentators immediately began painting doomsday scenarios for the beleaguered currency. On paper, the argument for a continued decline in the Dollar is quite strong, due to a sagging economy, surging current account deficit, the prospect of lower interest rates and turmoil in US capital markets. But, in practice, the Dollar remains the world’s de facto reserve currency, which begs the question: “how much-if at all-will the Dollar decline?”

Trade data supports Yuan appreciation

That the balance of trade between the US and China is becoming more and more lopsided in favor of China should come as no surprise to anyone.  In fact, economists yawned when the August trade data revealed a 33% jump in the Chinese trade surplus.  As a result, many are beginning to argue that China can allow the Yuan to appreciate at a faster pace against the Dollar, since it is obvious that China’s export sector will not be materially affected by a stronger Yuan.  In addition, China now exports more goods and services to the EU than to America, yet another statistic which supports the notion that China can allow its currency to appreciate against the Dollar (the implication here being that the Euro-Yuan exchange rate should be more

Trade data supports Yuan appreciation

That the balance of trade between the US and China is becoming more and more lopsided in favor of China should come as no surprise to anyone.  In fact, economists yawned when the August trade data revealed a 33% jump in the Chinese trade surplus.  As a result, many are beginning to argue that China can allow the Yuan to appreciate at a faster pace against the Dollar, since it is obvious that China’s export sector will not be materially affected by a stronger Yuan.  In addition,

US Job Slump Causes Dollar To Fall

August reports show that the US lost 4000 jobs in one month. The biggest employment slump in several years, it appears that problems with the subprime market are affecting more people than ever. The dollar fell to a 30-day low after these reports went public. According to Reuters:

The euro vaulted to a one-month high of $1.3768 <EUR=> after the report before easing to $1.3751, up 0.5 percent. The dollar was down 0.8 percent at 114.42 yen <JPY=>, near a session low of 114.31 yen.

Read more: Dollar tumbles as August U.S. payrolls contract

Canada Going Strong, Currency Gaining

Interest rates in Canada remained at 4.5 percent today, resulting in a gain for the Canadian dollar. A statement made by the Bank of Canada showed that the nation’s economy is doing better than expected. Amid credit problems from the neighboring US, it seems Canada remains somewhat unscathed. Forbes reports:

‘Canadian bank traders see little in the BoC minutes to suggest that future rate hikes are in the works, after today’s ‘no change’ decision,’ said Peter Wadkins at Thomson IFR Markets.

Read more: Canadian dollar gains slightly after BoC decision

Promising Survey Strengthens Pound

Although the British pound suffered earlier in the week from a large Bank of England loan, the currency has been lifted due to a survey taken by UK manufacturers. The results of the survey, which inquired about their order books, showed that manufacturers were more successful this month than they’ve been in over a decade. Analysts did not expect such a promising report, as it proved that the UK is handling global credit problems better than most countries. According to Forbes:

The Confederation of British Industry revealed that a balance of +9 pct of firms polled reported that their order books were above normal in August – the highest level for more than 12 years.

Read more: Pound boosted by buoyant UK manufacturing survey

Pound Weakened After Large BoE Loan

Although it is not known whether the Bank of England loaned £314 million to one borrower or many yesterday, the effects were still the same. A one-day loan of such magnitude weakened the domestic currency, if only temporarily. As experts point out, this isn’t entirely unusual and the economy has survived much larger Bank of England loans. Reports Forbes:

Significantly more than 314 mln stg this [sic] has been borrowed in one day in the recent past — for example nearly 4 bln stg on June 29 and 2 bln on July 2, he [George Buckley] added.

Read more: Pounds weakens as BoE confirms 314 mln stg use of its credit facility

Vietnam Sees Massive Forex Reserve Increase

Officials from the State Bank of Vietnam have confirmed that the country’s forex reserves have doubled, thanks to a solid investment in US dollars. What was once enough money to pay for 10 weeks of imports now buys 20. This windfall comes with a price, however, as inflation will now increase. Deputy Governor of the State Bank, Nguyen Dong Tien, hopes to keep the adverse effects to a minimum. Reports Daily Times:

Economists say double-digit inflation is a possibility, but Tien told the news conference that the central bank had stepped up its draining of inflation-fueling funds from the economy through open market transactions.

Read more: Vietnam doubles forex reserves

Euro’s Rise due to Optimism?

The Euro’s rise against the USD over the last year has been swift and unimpeded.  Many commentators have theorized that it is intense pessimism surrounding the US economy and economic conditions-namely the burgeoning twin deficits-that is responsible for the Dollar’s demise.  Now, a new theory is being batted around, one that is quickly gaining traction with analysts:

Economic woes plague Dollar

The story behind the Dollar’s decline contains two threads:
narrowing interest rate differentials and growing concerns surrounding the US economy. With most of the industrialized world’s Central banks not scheduled to meet again for a few weeks, the interest rate story can temporarily be placed on hold in favor of the economic story, which is becoming uglier every day. The centerpiece remains the US housing market, which many analysts believe will soon slide into a major rut. There is a great deal of uncertainty over whether homes can retain their value and if borrowers will be able to pay off their mortgages. Rising rates have squeezed many low-income, high-risk borrowers, causing a crisis of growing proportions in the market for mortgage-backed securities, which is at risk for spreading to other areas of securities markets. Forbes reports:

“Credit concerns, rating reviews, yields tumbling; it has been one-way traffic against the dollar in recent minutes and euro/dollar has rallied up a fresh all-time high.”

Read More: Dollar slump sends euro

Big Mac Index Offers Currency Valuations via PPP

The Economist just released its an updated iteration
of its famous Big Mac Index, underscoring growing disparities in currency valuations. For those of you that aren’t familiar, the Big Mac Index uses the price of a McDonald’s Big Mac sandwich in different countries as a proxy for measuring purchasing power parity (ppp), that perennial staple of economics that theorizes a country’s currency and its inflation rate should move in opposite

China to Float the Yuan?

Since it was freed from its fixed exchange rate regime two years ago, the Chinese Yuan has appreciated nearly 9% against the USD. While the Yuan’s exchange rate is clearly managed by the Chinese government, many commentators agree that its rise has given off the aura of a floating currency. One economist thinks China will cement this perception the conclusion of the Beijing Olympics-to be held in 2008-and allow the

US Economy Hit by Housing Sector

These days, the US economy seems to rise and fall on the wings of the housing sector.  Unfortunately, this sector is in a tailspin as higher interest rates have left many homeowners unable to pay their mortgages, causing a crisis in the oft-cited subprime market.  Already, several hedge funds have nearly collapsed due to subprime mortgage

Bank of England Raises Rates

The Bank of England raised interest rates for the second time in as many months yesterday, to 5.75%. As a result, the UK has widened its lead over the US as the country with the highest interest rates in the industrialized world, after New Zealand. Moreover,  the UK is becoming an increasingly viable alternative to the US as a target for risk-averse investors. The British Pound is hovering around a record high against the USD, which can probably expect to suffer prolonged decline against the world’s majors if it falls behind in attracting risk-free foreign capital. The Financial Times reports:

“The statement accompanying the rate hike gives few firm clues as to future interest rate movements, with the Bank of England…concluding that the risks to the inflation outlook are still tilted to the upside.”

Read More: BoE rate decision boosts pound

Commentary: Interest Rate Parity catches up with USD

Most commentators assume that the only thing currently keeping the USD afloat is high interest rates. While attractive rates have certainly encouraged an inflow of (risk-averse) foreign capital in the short term, they may ultimately be harming the currency in the long-term. In fact, the economic law of interest rate parity dictates that currencies and interest rates should move away from each other in the long term. Stated

Commentary: Interest Rate Parity catches up with USD

Most commentators assume that the only thing currently keeping the USD afloat is high interest rates. While attractive rates have certainly encouraged an inflow of (risk-averse) foreign capital in the short term, they may ultimately be harming the currency in the long-term. In fact, the economic law of interest rate parity dictates that currencies and interest rates should move away from each other in the long term. Stated

Canadian Dollar Reaches 30-Year High

The Canadian Dollar is making a run at forex history, having reached a 30-year high against the USD this week.  The currency has appreciated by over 50% since 2002, and is up 9.4% this year alone.  The Loonie is surging on a combination of high commodity prices and attractive interest rates.  It is no coincidence that the price of oil has more than tripled over the five year period that the Loonie also appreciated in value.  In addition, the Bank of Canada is expected to raise interest rates two more times in the near-term which would bring its interest rate levels close to parity with US rates. The last time the Canadian currency, itself, stood at parity with the USD was in 1976. While it now seems inevitable that the currency will soon return to that marker, there are still hurdles that need to be cleared.  Bloomberg News reports:

“A strengthening currency has started to adversely affect the country’s growth, especially the manufacturing sector, which may raise concern the BOC needs to keep rates on hold.”

Read More: Canada Dollar Reaches 30-Year High on Outlook for Rate Increase

How to Value a Currency

With the US government doggedly clinging to the notion that China is manipulating its currency and insisting that the communist country be punished accordingly, it bears asking “how can we determine that a currency (in this case the Yuan) is in fact undervalued, and if so, by how much.  One notable economist has laid out three general techniques for “valuing a currency,” which may prove useful to all of you amateur economists.

How to Value a Currency

With the US government doggedly clinging to the notion that China is manipulating its currency and insisting that the communist country be punished accordingly, it bears asking “how can we determine that a currency (in this case the Yuan) is in fact undervalued, and if so, by how much.  One notable economist has laid out three general techniques for “valuing a currency,” which may prove useful to all of you amateur economists.
First, there is the concept known as “purchasing power parity,” which suggests that a pair of currencies

Bank of England Mulls Rate Hike

Since the beginning of 2007, the Bank of England has raised Britain’s benchmark interest rate by 50 basis points, to 5.50%.  While the Bank voted earlier this month to maintain rates at current levels, many analysts are speculating that it will resume hiking rates again in July.  A recent spate of economic data has supported the notion that Britain’s economy is on stable ground.  As a result, the specter of inflation is once again looming, and the Bank, which has a reputation for monetary hawkishness, will be quick to act if inflation stays above the Bank’s comfort level.  While the rate hike could certainly put a damper on Britain’s economy, it is likely to feed continued short-term interest in the Pound, is a viable risk-free alternative to the USD.

Read More: King comments send sterling climbing

Loonie could Reach Parity against USD

Last week, the Canadian Dollar traded at 94 cents against the USD, its highest level in over 30 years. This event is even more unbelievable considering the Loonie’s all time low against the USD occurred less than five years ago, in 2002.  Now, many analysts are cautiously optimistic that the Loonie will be trading at parity with the USD by year-end, and perhaps continue appreciating past that point.  Rising natural resources prices and a strong economy may drive Canada’s Central Bank to raise interest rates, at the same time that its neighbor to the south is contemplating lower rates.  However, not all analysts are quite so optimistic. The Associated Press reports:

But with an expected dampening in the industrial and manufacturing sector on its way, other analysts predict the Canadian dollar will start to weaken because commodity prices will pull back a bit and Canada’s economy may start to struggle because of the strength of the loonie.

Read More: Canadian dollar no longer ‘a weakling’

Economic Data Gives USD a Boost

Since reaching record-highs against the British Pound and Euro in April, the USD has pulled back slightly, due in part to the perception that the US economy is back in track. Last quarter’s round of GDP and housing data revealed that by some measures, the US economy was expanding at the slowest pace in years.  However, that notion was contradicted by last week’s release of

Canadian Dollar Approaches Parity

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

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

Read More: Currency hits highs not seen since 1970s

Commentary: What to do about the Chinese Yuan?

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

Commentary: What to do about the Chinese Yuan?

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

Commentary: What to do about the Chinese Yuan?

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

China’s Forex Arm Begins Investing

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

China Increases Yuan Trading Band

In a sop to western policymakers, China recently announced that it would widen the Chinese Yuan’s daily trading band, from .3% to .5%.  In theory, this means the Yuan will now be permitted to fluctuate by up to .5% per day against the USD.  In practice, however, the Yuan’s daily rate of appreciation probably won’t exceed .05%, and only then on an especially volatile day.  Two years ago, China revalued the Yuan and since

Corporate Profits Buoyed by Forex Gains

While the American economy is sputtering, US corporations are earnings record profits and stock market capitalization is soaring.  These seemingly contradictory trends are being driven by the decline in the USD.  Multinational corporations, especially those based in the US, are conducting a growing portion of their business abroad and subsequently, their foreign sales are booming. 

Fed Tries To Maintain ‘Goldilocks’ Economy

Today, the US Federal Reserve Bank announced that it would hold the benchmark federal funds rate at 5.25% and will likely wait a few more months before nudging rates upward or downward.  In a press release that accompanied its monthly meeting, the Fed was unusually candid, indicating that it is receiving conflicting signals from economic data.  On the one hand, the

Commentary: Implied Volatility Explained

Technical analysts use a myriad of indicators and indices to
try to gauge where currencies are headed. Many seek insight in the prices of derivatives, where forwards, futures,
options, and swaps are used to make bets on the future movements of
commodities, securities, and even currencies. Let’s ignore swaps, which are more complicated and virtually
inaccessible to retail investors.  Currency

Commentary: Implied Volatility Explained

Technical analysts use a myriad of indicators and indices to
try to gauge where currencies are headed. Many seek insight in the prices of derivatives, where forwards, futures,
options, and swaps are used to make bets on the future movements of
commodities, securities, and even currencies. Let’s ignore swaps, which are more complicated and virtually
inaccessible to retail investors.  Currency

Carry Trade Beginning to Unwind

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

Euro hovers near all-time high

The Euro is currently hovering above its all-time high against the USD, and is flirting with levels never-before-seen in the Euro’s brief, eight-year history.  The Euro had
toyed with the record for the last couple of weeks, before finally breaching it upon last Friday’s release of US GDP data, which indicated the US economy had weakened to its slowest pace of growth in over four years. Investors are now waiting to see how the Fed responds to this latest development, as the bank has found itself in the unenviable position of navigating rising inflation and a slowing economy. Reuters reports:

Benign inflation data and modest growth in Midwest business activity provided more evidence of slowing U.S. economic growth, keeping sentiment bearish for the dollar, traders said.

Read More: Dollar stays near record low vs euro in quiet
trade

Dollar Hinges on Economic Data

This week witnessed a flurry of economic data, capped by tomorrow’s scheduled release of employment and GDP statistics.  At the beginning of the week, the perennially pointless monthly durable goods statistics indicated a rise in durable goods orders, which Dollar bulls interpreted as a good sign.  However, real estate data indicated a lower-than-expected rise in new home sales as well as a dramatic decline in the sale of existing homes.  Polled economists are predicting that tomorrow’s news will likely fall into the dovish category, painting a picture of an economy that has already peaked and making the case for the Fed to hold interest rates at current levels.  However, the bond markets are still pricing in 1-2 rate hikes over the near-term, which currency markets may use to prop up the Dollar.  The Daily Reckoning reports:

Money supply growth has a negative impact on the dollar. Inflation is a currency killer, and looking at the broadest measure (M3), money supply growth is out of control.

Read More: Currency Markets Take a Rollercoaster Ride

Commentary: USD will decline in long-term

In recent years, the performance of the USD has been dismal. The currency is near historic lows against most of the world’s major currencies (with the notable exception of the Japanese Yen), and in fact, just yesterday, the USD dropped to a 15-year low against the British Pound.  And yet, it is my belief that when all is said and done, the USD will have fallen much further in value.  You are probably wondering, ‘If the USD has already depreciated significantly, how could it still be overvalued.’

Commentary: USD will decline in long-term

In recent years, the performance of the USD has been dismal. The currency is near historic lows against most of the world’s major currencies (with the notable exception of the Japanese Yen), and in fact, just yesterday, the USD dropped to a 15-year low against the British Pound.  And yet, it is my belief that when all is said and done, the USD will have fallen much further in value.  You are probably wondering, ‘If the USD has already depreciated significantly, how could it still be overvalued.’

Pound Surges to 15-Year High

Since 1992, two macroeconomic events had not occurred in Britain: price inflation has no exceeded 3% annually and the British Pound has not surpassed the $2 barrier.  Both events were realized today, however, as an early-morning release of economic data indicated inflation in Britain was hovering around 3.1% and the British Pound quickly rose above 2 USD/Pound.  Interest rate futures also witnessed an immediate correction, to the extent that the markets are now pricing in a British benchmark interest rate of 5.75% 6 months from now, .5% above the current rate.  Meanwhile, US inflation statistics were dovish, suggesting the gap between British and US interest rates is set to widen, which should propel the Pound further upwards.  The Financial Times reports:

There is little that is inevitable about currencies moving in line with expected interest rates and nothing in long-term trends that allows people to predict currency movements in connection with inflation and other variables. But on Tuesday, the currencies moved exactly as if they were linked to the inflation figures by an umbilical cord.

Read More: Pound rises on prices and rates fears

China’s forex reserves surpass $1.2 Trillion

Last fall, China’s reserves officially surpassed the $1 Trillion mark, a watershed event that would have been nearly unthinkable several years ago.  This week, China announced that its reserves now exceed $1 Trillion, having grown by almost 40% year-over-year and showing no signs of slowing.  Most of the increase can be attributable to growth in China’s trade surplus, which now exceeds $40 Billion, on a quarterly basis.  China

Brazilian Real surges to 6-year high

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

BOJ spurs carry trade

To no one’s surprise, the Bank of Japan has announced that it would maintain Japanese interest rates at the current level of .25%.  Carry traders seized upon the opportunity to continue borrowing Yen at near-record lows, and selling the Japanese currency in favor of higher-yielding alternatives.  In fact, the news was met with such gusto that the Euro was almost immediately propelled to an all-time high against the Yen, which

USD to be driven by economic data

Most analysts reckon that the USD has resumed its downward path against the world’s major currencies, after a two month hiatus.  The fear is that the mess in the real estate market (via subprime mortgages) will spread to the rest of the economy, with loan defaults and a decline in consumption.  In such a case, the Federal Reserve Bank would be forced to cut interest rates dramatically in order to prevent the US from sinking into a full-fledged recession, which would decrease the relative attractiveness of US assets.  Traders will be eying a couple pieces of economic data this week for any indication as to the direction of the economy. 

The Wall Street Journal reports:
This week’s data parade is bracketed by two key releases: Monday’s national report on U.S. manufacturing activity in March from the Institute for Supply Management and Friday’s payrolls report.

Read More: U.S. Economic Reports Could Ease Dollar’s Woes

China reconsiders reserve diversification

China, which recently unveiled plans to set up an agency under the aegis of the state that would manage the country’s surging forex reserves, is having second thoughts of sorts.  While the plan to more actively manage its reserves remains on coarse, the likelihood that this result in diversification has been somewhat diminished.  Estimates of the fraction of China’s reserves held in USD-denominated assets fall in the 70% range, which

Get Started Investing in Forex: 37 Tutorials, Tools & Resources

Even if you’re an active trader in stocks, you may not be prepared to invest in forex, or the foreign exchange market. Forex trades 24 hours a day from 5:00 p.m. ET on Sunday until 4:00 p.m. ET Friday, so you won’t hear those opening or closing bells. And, there’s no central market like the New York Stock Exchange or Nasdaq. Instead, trade is conducted between participants through electronic communication networks (ECNs) and phone networks in various markets around the world. So, when you hear that the US dollar closed at a certain rate, it simply means that was the rate at market close in New York. But currency continues to be traded around the world long after New York’s close.

Get Started Investing in Forex: 37 Tutorials, Tools & Resources

Even if you’re an active trader in stocks, you may not be prepared to invest in forex, or the foreign exchange market. Forex trades 24 hours a day from 5:00 p.m. ET on Sunday until 4:00 p.m. ET Friday, so you won’t hear those opening or closing bells. And, there’s no central market like the New York Stock Exchange or Nasdaq. Instead, trade is conducted between participants through electronic communication networks

Markets await data, Fed for USD

While the USD appears to be trending downward these days, commentators note that the currency is actually traveling sideways, as market participants look for cues indirectly from economic data and directly from the Fed. Many pundits feel the economy is resting precariously on the back of the housing market, and are anxiously waiting for the data to provide guidance either way. Already, a spate of bad news surrounding one sector of the mortgage market coupled with disappointing data on new home sales are worrying investors. Ultimately, however, the USD will live or die by the Federal Reserve Bank’s reaction to this news. In fact, the Fed’s Open Market Committee is scheduled to meet today and tomorrow, during which point it is expected that interest rates will be held constant. The Wall Street Journal reports:

Analysts will also be watching for any changes to the Fed’s inflation outlook, particularly after Friday’s stronger-than-expected consumer-price report.

Read More: Dollar Treads Water, Waiting for the Fed

China raises interest rates

China’s Central Bank, in an effort to rein in the nation’s runaway economy, recently raised the country’s benchmark lending rate by 27 basis points. With most countries, an increase in interest rates would propel the country’s respective currency upward in value, as risk-averse investors would bring capital to that country’s bond markets. In the case of China, however, monetary policy tends to have a pretty negligible effect on the currency, primarily because the Yuan remains pegged to a basket, and its appreciation is being carefully managed by the government.
Read More: China announces 0.27 percentage point increase in key interest rates

US trade deficit not a concern

While the figures are still being calculated and confirmed, it looks like 2006 was the worst year ever for the US trade deficit, which is estimated to exceed $800 Billion. Economists have long argued that such an aberration is not sustainable in the long run and that the USD must fall in order to make goods and services relatively less expensive from the standpoint of foreigners. Now, however, economists are beginning to question this logic, by arguing that due to underdeveloped capital markets abroad, foreigners will continue to favor the US as a place to invest their assets. In hindsight, it looks like forex markets were ahead of the curve, since the failure of the USD to fall against other currencies despite its burgeoning deficits signals an utter lack of concern among forex traders that this is an important issue. The Economist reports:

If global imbalances are the result of such frictions, they are unlikely to unwind quickly. Financial systems, after all, do not mature overnight.

Read More: Sustaining the unsustainable

China FX Firm to Manage $200 Billion+

Several months ago, China announced that it would sponsor the creation of several state-owned investment firms that would be charged with managing China’s ever-growing stock of foreign exchange reserves. This week, China unveiled further details, indicating that the first one of these investment firms will be capitalized with $200-250 Billion in assets. This firm will use the proceeds of a bond offering for such an amount to buy forex reserves directly from China’s Treasury, with the explicit goal of earning a return in excess of the

UK may raise rates in March

Today saw the release of the ‘minutes’ from last month’s meeting of the UK Central Reserve Bank, revealing that members of the Bank’s monetary policy committee voted 7-2 to hold rates at their current levels. That there were two dissenting votes is confirmation to some economists that the Bank is planning to hike rates again in the near-term, perhaps as soon as March. British short-term interest rates, at 5.25% are already on par with American rates, and another rate hike would further lessen the appeal of risk-averse investment in America. Investors will be eying inflation data closely over the coming weeks, which could provide the impetus for a rate hike at the next meeting.
Read More: MPC voted 7-2 to hold rates

Canadian Dollar shows resilience

Since reaching a 14-month low earlier this month, the Canadian Dollar has rebounded, thanks to data which indicate the Canadian economy is emerging from a mild recession. The currency was also helped by surging prices for commodities, which account for more than half of the country’s exports. As the summer draws closer, the currency will likely accelerate upwards, helped by predictably strong energy prices. In short, it seems the Canadian Dollar’s recent sluggishness is probably just a seasonal adjustment rather than a long-term correction. Bloomberg News reports:

“The agency didn’t see any need for revising either the growth, or job numbers, which is the Canadian dollar positive development.”

Read More: Canada’s Dollar Rises a for Third Week as Economy Strengthens

Canadian Dollar shows resilience

Since reaching a 14-month low earlier this month, the Canadian Dollar has rebounded, thanks to data which indicate the Canadian economy is emerging from a mild recession. The currency was also helped by surging prices for commodities, which account for more than half of the country’s exports. As the summer draws closer, the currency will likely accelerate upwards, helped by predictably strong energy prices. In short, it seems the Canadian Dollar’s recent sluggishness is probably just a seasonal adjustment rather than a long-term correction. Bloomberg News reports:

“The agency didn’t see any need for revising either the growth, or job numbers, which is the Canadian dollar positive development.”

Read More: Canada’s Dollar Rises a for Third Week as Economy Strengthens

Commentary: What will it take to end the Yen carry trade?

Before I attempt to answer the following question, let’s examine where the Japanese Yen is today and more importantly, how it got there. The story begins around the establishment of the second Bretton-Woods agreement, which de-linked the USD from gold, and ushered in the modern era of freely floating currencies. In the 30 years that have elapsed since this period began, the Yen has never been less valuable. In fact, in trade-weighted terms, the Japanese Yen is at an all-time low!

Commentary: What will it take to end the Yen carry trade?

Before I attempt to answer the following question, let’s examine where the Japanese Yen is today and more importantly, how it got there. The story begins around the establishment of the second Bretton-Woods agreement, which de-linked the USD from gold, and ushered in the modern era of freely floating currencies. In the 30 years that have elapsed since this period began, the Yen has never been less valuable. In fact, in trade-weighted terms, the Japanese Yen is at an all-time low!

China to actively manage forex reserves

China recently announced plans to begin actively managing its foreign exchange reserves, currently valued at more than $1 Trillion. Concurrent with this announcement, China formally created The State Foreign Exchange Investment Company, which will initially be capitalized with more than $200 Billion. Another Chinese investment company will be given $100 Billion. These steps represent the culmination of several years of intense speculation that China would make more of an effort to manage its burgeoning reserves in order to maximize returns. Whether these two investment companies intend to diversify the reserves by investing in non-US assets is anyone’s guess, but at the very least, the US cannot be certain that China will continue to support the USD through its purchase of US Treasury bonds, which offer minimal yields.
Read More: China to set up firm for managing forex reserves

Relative EU exchange rates diverge

One technique for estimating the relative value of the Euro is to aggregate the value of all of the constituent EU currencies, using relative price movements as proxies for currencies. In Spain and Italy, for example, wages have skyrocketed over the past five years while productivity has lagged, which means these countries are relatively more expensive now. Germany, on the other

China’s reserves surpass $1 Trillion

The unthinkable has happened: China’s foreign exchange reserves have surpassed the historic level of $1 Trillion. Since the late 1990s, when China was continuously inundated with foreign direct investment, it has been forced to remove the foreign currency from circulation in order to mitigate the risk of inflation. Now,

New Index uses PPP to value currencies

The economic law of purchasing power parity (PPP) dictates that price levels and exchange rates should move in opposite directions. Stated another way, when a currency appreciates, its prices should decline proportionately so that the net effect on prices is zero. Methods for measuring PPP-let alone testing it- are imprecise. Recently, an Australian bank has capitalized on the

Declining Yuan hurts Chinese Exporters

Since China revalued the Yuan in July 2005, the currency has appreciated by over 6% against the USD. Having since moved past the Hong Kong Dollar, the currency is showing no signs of slowing down. American politicians and trade representatives could not be happier. Their Chinese counterparts, on the other hand, are peeved. Many Chinese exporters have been forced to lower their prices in order to offset the rising

Declining Yuan hurts Chinese Exporters

Since China revalued the Yuan in July 2005, the currency has appreciated by over 6% against the USD. Having since moved past the Hong Kong Dollar, the currency is showing no signs of slowing down. American politicians and trade representatives could not be happier. Their Chinese counterparts, on the other hand, are peeved. Many Chinese exporters have been forced to lower

Rate hike buoys British Pound

The British Pound received a boost today when the Central Bank of England raised interest rates to 5.25%, which represents parity with American interest rates. The move shocked investors and traders who expected the Bank to leave rates unchanged. Risk-averse investors are now fully incentivized to move funds to Britain

Canadian Dollar continues to slide

Since peaking in July, the Canadian Dollar has declined by over 6% against the USD, finishing the year down for the first time in five years. While movements in currency markets are often difficult to dissect, the reason for the fall of the loonie are not difficult to discern: falling commodity prices. Over the last few years, the Canadian Dollar has moved in near tandem with global commodity prices. Commodities now account for over half of Canadian exports, a figure which may grow further as Canada fine tunes its technique for squeezing valuable oil out of its now famous tar sands. Bloomberg News reports:

“The time to buy the Canadian dollar is nearing.” The currency will gain strength from a fast-recovering U.S. economy and the lack of a benchmark interest rate cut from the Bank of Canada in 2007, Citigroup predicted.

Read More: Canada’s Dollar Touches 11-Month Low as Commodity Prices Drop

Canadian Dollar continues to slide

Since peaking in July, the Canadian Dollar has declined by over 6% against the USD, finishing the year down for the first time in five years. While movements in currency markets are often difficult to dissect, the reason for the fall of the loonie are not difficult to discern: falling commodity

Commentary: 2006, the year that was

The books have been closed on 2006 for more than a week, which means it is time for the forex blogger to give his first-ever ‘state of the markets’ address. After a dull and static 2005, forex markets roared back into action in 2006, with several notable developments. On everyone’s radar screens, the world’s most important currency, the USD, declined by over 13% against the Euro and the British Pound. Analysts attributed the decline to narrowing interest rate differentials between the US and the rest of the developed world, as the US monetary cycle peaked while the rest of the world continues to raise rates.

Commentary: 2006, the year that was

The books have been closed on 2006 for more than a week, which means it is time for the forex blogger to give his first-ever ‘state of the markets’ address. After a dull and static 2005, forex markets roared back into action in 2006, with several notable developments. On everyone’s radar screens, the world’s most important currency, the USD, declined by over 13% against the Euro and the British Pound. Analysts attributed the decline to narrowing interest rate differentials between the US and the rest of the developed world, as the US monetary cycle peaked while the rest of the world continues to raise rates.

Yuan nears parity with HKD

Ignited by the threat of American trade sanctions and diplomatic pressure, the Chinese Yuan is now soaring against the USD. Last summer, it cleared through the psychological hurdle of 8 Yuan/USD and is now barreling towards 7.8. While this doesn’t strike most people as a significant milestone, the 7.8 barrier

FX markets punish hedge funds

As the markets ease into 2007, investors and money managers are beginning to think about how they want to (re)allocate their portfolios. While hedge funds will likely remain a popular investment vehicle, investors would be wise to avoid certain types of funds, namely those that utilize a “global macro” strategy. Technically, such hedge funds examine global economic