China’s FX Reserves Fall

Anyone curious about whether China is intentionally allowing the RMB to depreciate, need look no further than the Central Bank's latest forex reserve figures, which registered a decline for the first time in nearly six years. At the same time, Chinese trade figures indicate that exports fell for the first time in seven years, which limits the government's ability to build up new reserves. As a result of the credit crisis, it's conceivable that the Central Bank will continue to spend down its reserves in order to provide a boost to its faltering economy. US President-elect Obama will have to deal with such forces if he wishes to successfully take on China's currency policy. Otherwise, the RMB currency could appreciate in 2009, bucking its trend over the last few years.
Read More: China's forex reserves fall

China’s FX Reserves Fall

Anyone curious about whether China is intentionally allowing the RMB to depreciate, need look no further than the Central Bank's latest forex reserve figures, which registered a decline for the first time in nearly six years. At the same time, Chinese trade figures indicate that exports fell for the first time in seven years, which limits the government's ability to build up new reserves. As a result of the credit crisis, it's conceivable that the Central Bank will continue to spend down its reserves in order to provide a boost to its faltering economy. US President-elect Obama will have to deal with such forces if he wishes to successfully take on China's currency policy. Otherwise, the RMB currency could appreciate in 2009, bucking its trend over the last few years.
Read More: China's forex reserves fall

Ruble to Depreciate Gradually

The perfect economic storm continues to brew in Russia; the financial crisis is sapping demand for Russian securities, and a decline in the price of oil (as well as other commodities) has turned the balance of trade from surplus to deficit. As a result, Russian banking officials seem resigned to a depreciation in the Ruble, but are understandably averse to a sudden devaluation, which could shock the economy into

Investors Uncertain about Fed Rate Cut

More than a week after America's Federal Reserve Bank slashed its benchmark interest rate to the historic (low) level of .25%, investors are still struggling to assess the implications. The immediate reaction was mostly positive, as Central Banks around the world (namely Hong Kong and Japan) quickly followed suit, and stocks rallied. In other words, investors were buoyed by the belief that Central Banks can and will

Japan: Intervention Unlikely

If ever there was a case for Japanese intervention in forex markets, it is now. The Yen has emerged as the unquestionable victor from the credit crisis, having appreciated against every major currency and notching a 13-year high against the Dollar. Japanese exports have plunged, inducing the country's first monthly trade deficit in almost three decades. Meanwhile, corporate profits are sagging as a result of forex conversion

Lower Pound a Mixed Blessing

The British Pound has fallen so sharply in 2008 that parity with the Euro isn't that far-fetched. The problem is that the UK economy now closely mirrors that of the US, minus the perceived "safe haven" aspects. In fact, the UK now has a twin deficits problem of its own, with a trade imbalance that exceeds 4% of GDP and government spending set to rise in response to the credit crisis. Meanwhile,

Fed is Debasing Dollar

Several years ago, Ben Bernanke earned the nickname "Helicopter Ben" by joking that the Fed would drop Dollars from helicopters if the American economic situation ever became desperate enough to warrant it. In hindsight, the bestowers of this nickname could not have been more prescient, as the Federal Reserve Bank has now officially pledged to do everything in its power to stimulate the flow of money, short of literally

Softening Risk Aversion Impacts Forex

The last two weeks have proved the old adage, "What goes up must come down." In other words, the year-long Dollar rally has begun to fade, as investors once again embrace economic reality. Previously, Dollar strength could be largely attributed to exit trades out of other currencies, rather than any substantive benefit of investing in the US. Now, risk appetite is slowly recovering, having received a boost from the just-completed government bailout of the US automobile industry. Less concerned about risk/volatility, investors have taken to re-assessing economic fundamentals. In the case of the US, unemployment is rising, the twin deficits continue to expand at a breakneck pace, and the interest rate disparity between the ECB and Fed will remain in place for the near-term. The Wall Street Journal reports:

Whether the dollar will continue to weaken is a matter of debate. Currency strategists caution that the dollar often is weaker toward the end of the year, particularly against the euro, as companies and investors adjust bets.

Read More: Less Panic Puts Pressure on Dollar

Central Banks Still Prefer Dollars

Since its introduction only ten years ago, the Euro has ascended at an incredible pace. Perhaps the best proxy for its respectability is its growing share (currently estimated at 27%) of Central Banks' foreign exchange reserves. Still, most analysts reckon that the Dollar will remain ascendant for the near-term. For one thing, the perception remains that the US is the safest place to invest, and in fact this attitude has been

Emerging Markets Poised for Recovery?

In a recent interview, three emerging market fund managers aired a common view: the asset class which comprises emerging markets represents a solid investment. Their reasoning is that the tremendous declines wrought in emerging market equities and currencies over the last six months were caused primarily by technical factors, rather than a substantive change in the long-term economic picture. In other words, this drop was effected by foreign investors that withdrew

Canadian Dollar Hurt by Economy, Politics

Having fallen well below parity with the USD, the Canadian Loonie is now being attacked on two fronts. First, there is the deteriorating economic situation. Prices for virtually all commodities, namely oil, have declined significantly this year, dealing a harsh blow to the natural resource-dependent Canadian economy. In

Canadian Dollar Hurt by Economy, Politics

Having fallen well below parity with the USD, the Canadian Loonie is now being attacked on two fronts. First, there is the deteriorating economic situation. Prices for virtually all commodities, namely oil, have declined significantly this year, dealing a harsh blow to the natural resource-dependent Canadian economy. In addition, its largest trade partner, the US, is suffering from

Investors Uncertain about RMB

Only a few weeks ago, investors had made significant bets that China would reverse its official policy of RMB appreciation. Futures prices indicated that investors collectively expected the currency to depreciate over 7% against the Dollar over the next year, as part of a comprehensive Chinese policy to boost the faltering economy. Since then, however, the RMB recorded its biggest one-day rise since the currency peg was abandoned three years ago, and investors subsequently scaled back their bets.

Investors Uncertain about RMB

Only a few weeks ago, investors had made significant bets that China would reverse its official policy of RMB appreciation. Futures prices indicated that investors collectively expected the currency to depreciate over 7% against the Dollar over the next year, as part of a comprehensive Chinese policy to boost the faltering economy. Since then, however, the RMB recorded its biggest one-day rise since the currency peg was abandoned three years ago, and investors subsequently scaled back their bets.

Emerging Markets Shed FX Reserves

According to the most recent monthly data, the foreign exchange reserves of most developing countries are disappearing faster than they can be replenished. As a result of the global credit crisis, central banks have taken to deploying vast sums of capital towards the dual ends of stimulating their economies and propping up their currencies. The latter can be especially expensive, as countries like Ukraine and South Korea can

AUD Continues to Dive

On the basis of technical factors, the Australian Dollar had halted its precipitous decline against most major currencies. As a result of an unbelievable 100 basis point interest rate cut, however, the currency has resumed its fall. That the rally was short-lived is not a mystery. The yield advantage enjoyed by Australia over the last few years has almost completely evaporated. Combined with lackluster Australian equity performance and tanking commodity prices, foreign investors have little reason to maintain capital in Australian holdings. On the plus side, the rate cut showed investors how serious Australian economic policy-makers are in dealing with the credit crisis. Unfortunately, diligence doesn't always translate into efficacy.
Read More: Dollar back under pressure

Will China Fund US Deficit?

When all is said and done, the US government will have injected trillions of dollars into the economy, in the form of bailouts, guarantees, economic stimuli, etc. Whether it will have the desired effect is debatable. The question that no one seems to be asking is, "How is the government going to finance such exorbitant spending?" It appears that China, which has become of of the largest holders of US government debt, will

Could the RMB Fall?

Since China revalued the Yuan in July 2005, it was considered a foregone conclusion that the currency would continue appreciating at a steady clip. The global credit crisis, generally, and the Chinese economic downturn, specifically, has turned that assumption on its head. Last week, the RMB declined by the biggest margin since the revaluation, prompting speculation that China will adopt a currency policy diametrically opposed to that which it has pursued over the last few years. The move also coincided with the annual

US Bailout Highly Inflationary

The Treasury Department’s most recent attempt to stabilize credit markets involves an injection of $800 Billion into the banking sector. According to one estimate, the total amount of Federal money committed so far (in the form of investments, guarantees, and loans) now exceeds $7 Trillion, and shows no signs of abating. In theory, the possibility exists that such investments could prove profitable, in which case the bailout wouldn’t end up costing taxpayers a cent. In all likelihood however, a significant portion of these investments will have to be written off, causing a net increase of trillions of dollars to the money supply. In the long-term, this is certain to be highly inflationary. It seems currency traders have finally begun to take note of this inevitability, and the Dollar rally has stalled accordingly. The New York Times reports:

The Federal Reserve and the Treasury… [are] sending a message that they would print as much money as needed to revive the nation’s crippled banking system.

Read More: U.S. Details $800 Billion Loan Plans

British Pound Under Pressure

The British Pound has already fallen 25% against the Dollar, since the credit crisis kicked off earlier this year. On a technical basis, therefore, it would seem that the Pound is due for a rally. From the standpoint of economic fundamentals however, the picture is quite bleak. While the Bank of England’s recent 150 basis point interest rate cut could help restore the UK economy to solid footing, it sent a massive shock to investors. UK interest rates now stand at a 50-year low, and futures prices suggest that the benchmark rate will fall another 1% in the next 12 months. In addition, the Bank of England has not ruled out ruling interest rates all the way to zero. As unlikely as this scenario may be, investors are now fully aware of the scope of Britain’s economic troubles. The next couple weeks could be make-or-break for the Pound, as a series of economic data releases, as well as the minutes from the latest BOE meeting, will help investors craft a more accurate forecast. Daily FX reports:

Housing, industrial trends, consumer spending and public borrowing readings…provide additional confirmation that this evolving recession will be far worse than the slump of 1992.

Read More: British Pound Could Forge New Lows As Rate And Growth Outlook Fail

British Pound Under Pressure

The British Pound has already fallen 25% against the Dollar, since the credit crisis kicked off earlier this year. On a technical basis, therefore, it would seem that the Pound is due for a rally. From the standpoint of economic fundamentals however, the picture is quite bleak. While the Bank of England’s recent 150 basis

UK Rate Cut Backfires

Last week, the Bank of England acquieced to the seriousness of the credit crisis by cutting its benchmark interest rate by 150 basis points- the largest margin in nearly two decades. While the move was intended to restore confidence in the UK economy and its financial markets, the opposite result obtained. In other words, investors interpreted the rate cut as an indication that the UK economic situation is even more precarious than was initially feared. In fact, this bearish sentiment is born out by economic data, which shows falling home prices and rising unemployment. Since peaking against the Dollar late last year, the British Pound has since declined 25%.
Read More: Sentiment still volatile despite rate cuts

UK Rate Cut Backfires

Last week, the Bank of England acquieced to the seriousness of the credit crisis by cutting its benchmark interest rate by 150 basis points- the largest margin in nearly two decades. While the move was intended to restore confidence in the UK economy and its financial markets, the opposite result obtained. In other words, investors interpreted the rate cut as an indication that the UK economic situation is even more precarious than was initially feared. In fact, this bearish sentiment is born out by economic data, which shows falling home prices and rising unemployment. Since peaking against the Dollar late last year, the British Pound has since declined 25%.
Read More: Sentiment still volatile despite rate cuts

All Signs Point to Down

Regardless of your preference, all economic indicators seem to be heading in the same direction: down. Home sales and home starts, as well as home prices, are way down and projected to fall further. Consumer spending is declining by double-digits (in annualized percentage terms), which is no surprise considering consumer sentiment recently touched an all-time low. The national

Hedge Funds Crush British Pound

The British Pound is perhaps one of the worst victims of the credit crunch, having fallen 25% against the USD in the year-to-date. According to analysts, hedge funds deserve much of the blame. Apparently, most hedge funds, including those that are based in the UK, denominate their portfolios in terms of Dollars. As a result of the exodus away from emerging markets, such funds have found themselves awash in cash, which they have promptly converted into Dollars. The reasoning behind this investment strategy is twofold: first, as the incredible strength of the Dollar has illustrated, the prevailing wisdom among investors is that the US is currently the least risky place to invest. Second, the interest rate gap between the US and the rest of the world looks set to narrow, which means the yields on US security will become relatively attractive. The Telegraph reports:

Worldwide interest rate forecasts are being revised downward, which has increased interest in the US where rates have already been slashed.

Read More: Sterling caught up in ‘currency market tsunami’

Forex Volatility Destabilizes Global Economy

Volatility in forex markets has surged to unprecedented levels. In the words of one analyst, "Moves in the currency markets witnessed during just a few hours of trading…’are typically what we see in a quarter.’ " The currencies of both emerging market countries and industrialized nations have been battered indiscriminately, as investors have fled to locations perceived as less risky, namely the US and Japan. On the one hand, a stronger Dollar has almost completely

Credit Crisis Pummels Australian Dollar

The Australian Dollar has lost nearly 1/3 of its value (relative to the USD) over the last few months, as the credit crisis continues to drive investors away from areas perceived as risky. In other words, the best (and perhaps the only reasonable) explanation for its fall has very little to do with Australian economic

China’s FX Reserves Near $2 Trillion

Last week, China revealed that in the most recent quarter, its economy grew at the slowest pace in nearly five years. It also revealed that its foreign exchange reserves crossed $1.9 Trillion, due to a record monthly trade surplus. How can this seeming contradiction in economic peformance be reconciled? In my opinion, the Chinese economy will continue to slow as a result of a generalized post-olympics slowdown and falling

Credit Crisis could Bring Deflation

Policymakers are once again uttering the dreaded D-word. Not "depression," but rather "deflation." Food and energy prices have retreated from record highs, and the economic downturn is threatening to crimp demand further. In addition, the deleveraging brought about by the credit crisis has sent asset prices (real estate, stocks) tumbling, and it’s not clear when they will

Inflation Will Dog the Dollar

That the credit crisis has been kind to the US Dollar is possibly the understatement of the century. In other words, despite the rapid drop in US equity prices and the impending economic recession, the Dollar has gained over 15% against its chief rival, the Euro. The cause of the Dollar bounce is a perception that the US is a safe place to invest during periods of economic

SA Rand Latest Victim of Credit Crisis

Over the last two months, the South African Rand has plummeted, losing nearly 20% of its value against the US Dollar en route to a five-year low. It seems the currency has become the latest victim of the credit crisis and the resulting widespread risk aversion. The sudden exodus away from the carry trade, for example, has

Fed is Ahead of the Curve

The rapid and insidious spread of the credit crisis to Europe and even farther afield is catching Central Bankers completely off guard. In fact, they have been forced to rapidly shift gears from fighting inflation to preventing recession. Depending on how you look at it, the Fed was actually ahead of the curve in this regard, having moved to adjust its monetary policy and facilitate

Bank of Canada Must Lower Rates

According to one index, commodity prices have risen 40% over the last twelve months. One would therefore expect the Canadian economy to be commensurately strong. According to the most current economic data, however, just the opposite is true. Wholesale manufacturing sales are down for the second straight quarter. Non-commodity exports are also trending downwards due to sustained economic weakness in the US, Canada’s most important trade partner.

Unpacking the Credit Crisis

In case you were asleep, US and global capital markets last week experienced unprecedented turmoil, followed by an unprecedented rebound. US stock market indices, for example, declined nearly 10% over the course of two days as it was revealed that three financial institutions (AIG, Merril Lynch, Lehman Brothers) were in deep trouble. Granted, the three scenarios managed to

Bank of Australia Lowers Rates

It would seem as if the world is conspiring against the Australian Dollar. In the last couple months, the currency has plummeted nearly 20% from the 25-year high it had reached against the US Dollar. A combination of global economic weakness, falling commodity prices, and a trend towards risk aversion have

Yen Unfazed by Dollar Rally

Over the last couple months, the Dollar has notched some impressive returns againstnearly all major currencies, including a 13% gain against its chief rival, the Euro. Nearly is italicized because the pack includes a lone stray-the Japanese Yen-which has managed to maintain most of its value during the Dollar rally. The Yen has benefited from the same trend towards risk aversion

Bad News for the UK, EU

The bad news is piling up in the US: Fannie Mae and Freddie Mac are in such dire shape that they will require the assistance of the US government merely to stay afloat. Meanwhile, Lehman Brothers, a large investment bank, is quickly crumbling a la Bear Stearns and could require a similar bailout. Fortunately for the US, the news across the Atlantic is just as bad, and getting worse. The median estimate for Eurozone GDP growth has been revised downward to an anemic 1.4% in 2008 and 1.2% in 2009. Analysts are speculating that the ECB will finally have to lower rates in order to prime the EU economy, and perhaps the Bank of UK will have to lower rates for a second time. It looks like this Dollar rally still has legs. Reuters reports:

Euro zone economic uncertainty was "particularly high," the European Central Bank president, Jean-Claude Trichet, said after the ECB left its interest rates at 4.25 percent on Thursday.

Read More: Dollar soars to highest level this year vs euro

Central Bank of China Battles Over Yuan

Over the last couple years, the Central Bank of China has built up a treasure trove of foreign exchange reserves ($1.8 Trillion at last count), as part of its effort to hold down the Yuan, or at least slow its appreciation. Unfortunately, these reserves have depreciated significantly-10% per year in real terms- as the Yuan has risen relative to the Dollar. These reserves may slide further in real terms, as the credit crisis diminishes the value of the mortgage securities that comprise almost 20% of its portfolio. In order to

China’s Fores Reserves Boost Dollar

Everyone has a theory to explain the Dollar’s explosive rally, which has yet to run out of steam. A recent one identifies a shift in China’s forex reserve policy as a driving force. Apparently, in an ostensible effort to clamp down on inflation, the Central Bank of China is resorting to draconian measures. One rule change, which was executed with both speed and lack of media coverage, requires commercial banks to hold a larger portion of

Australia, New Zealand to Lower Rates

I won’t lie; the Forex Blog is admittedly Dollar-centric, in that developments in forex markets are usually assessed relative to their projected impact on the US Dollar. Sometimes, we forget that their are other currency pairs that move irrespective of the Dollar. Take the Australian Dollar and New Zealand Kiwi, for example. As both currencies are backed by high interest rates, they have benefited equally from the carry trade and as a result, they behave quite similarly. Combined with the fact that they are practically neighbors, it’s easy to forget that there are unique circumstances that weigh separately on them.

Commentary: Dollar Rally- Fact or Fiction?

Over the last month, the Dollar has rallied tremendously, rising over 7% against its main adversary, the Euro. The price of gold, which serves as an inverse proxy for investor confidence in the USD, has fallen dramatically. As a result, many analysts have proclaimed that the Dollar has (permanently) bottomed out, and are busying themselves preparing projections for how high the Dollar will rise. But is the Dollar rally sustainable?

How will Bailout Impact Inflation?

In day 2 of our bailout coverage, let’s look at the potential impact on inflation. On one hand, the government is proposing spending $700 Billion to buy faltering mortgages. Combined with the funds that have already been spent to deal with the credit crisis, this brings the total expenditure $1 Trillion, which amounts to more than 10% of the current liquid money supply. On the other

Commentary: Dollar Rally- Fact or Fiction?

Over the last month, the Dollar has rallied tremendously, rising over 7% against its main adversary, the Euro. The price of gold, which serves as an inverse proxy for investor confidence in the USD, has fallen dramatically. As a result, many analysts have proclaimed that the Dollar has (permanently) bottomed out, and are busying themselves preparing projections for how high the Dollar will rise. But is the Dollar rally sustainable?

Yuan Could Fall

Almost all of the speculation surrounding the Chinese Yuan is aimed at predicting the point at which the currency will stop rising. Will it stop at 6.5? 6? 5? 1? But what if the currency has already peaked, at least temporarily? The Central Bank of China is now openly airing its concerns about a slowing economy, which it believes is more problematic than the country’s surging inflation rate. Accordingly, it will probably relax interest rates and slow the appreciation of the currency, in order to give businesses and exporters the

Yuan Could Fall

Almost all of the speculation surrounding the Chinese Yuan is aimed at predicting the point at which the currency will stop rising. Will it stop at 6.5? 6? 5? 1? But what if the currency has already peaked, at least temporarily? The Central Bank of China is now openly airing its concerns about a slowing economy, which it believes is more problematic than the country’s surging inflation rate. Accordingly, it will probably relax interest rates and slow the appreciation of the currency, in order to give businesses and exporters the

Parity Party for the AUD

Is the "parity party" on or off? That is the question on the minds of currency traders following the Australian Dollar. Last week, analysts indicated that the party had been postponed, if not cancelled entirely. This week, there are signs that perhaps some of the bearishness surrounding the AUD is overblown. To be sure, the Australian economy is slowing, and the Central Bank will almost certainly lower interest rates. At the same

Inflation Drives Latin American Currencies

While not yet in the same league as other popular emerging market currencies, the Brazilian Real and Mexican Peso are sure to join their ranks soon; both currencies have risen markedly over the last few years, and have performed especially well in the year-to-date. They have been propelled by interest rates that are generously high, especially compared to those of the US and EU.

Analysts: Loonie to Fall

The Canadian Dollar continues to lose its luster. Falling natural resource prices and the credit crunch have combined to exact a devastating blow on the Canadian economy, causing it to actually contract in the most recent month for which data is available. Now, the Central Bank is predicting that the economy will expand by only 1% in 2008. Most economists expect that Canadian Monetary Policy will soon lag US policy, especially if the Fed raises interest rates to combat inflation. Based on these developments, the consensus is that the Canadian Loonie is significantly overvalued, and will lose some of its value over the next few years, falling to a more sustainable level against the US Dollar. Bloomberg News reports:

The loonie will slide to C$1.05 by the end of December, and to C$1.09 by the start of 2010, according to the median estimate of 31 strategists surveyed by Bloomberg.

Read More: Loonie Loses Currency Wings as Canada Hurt by U.S.

Analysts: Loonie to Fall

The Canadian Dollar continues to lose its luster. Falling natural resource prices and the credit crunch have combined to exact a devastating blow on the Canadian economy, causing it to actually contract in the most recent month for which data is available. Now, the Central Bank is predicting that the economy will expand by only 1% in 2008. Most economists expect that Canadian Monetary Policy will soon lag US policy, especially if the Fed raises interest rates to combat inflation. Based on these developments, the consensus is that the Canadian Loonie is significantly overvalued, and will lose some of its value over the next few years, falling to a more sustainable level against the US Dollar. Bloomberg News reports:

The loonie will slide to C$1.05 by the end of December, and to C$1.09 by the start of 2010, according to the median estimate of 31 strategists surveyed by Bloomberg.

Read More: Loonie Loses Currency Wings as Canada Hurt by U.S.

China Adjusts Forex Rules

As the Chinese Yuan has appreciated over the last three years, and even in the decade leading up to the sudden revaluation, a tremendous amount of speculative "hot money" poured into China. Periodically, the government and Central bank have attempted to stem some of these inflows by creating deliberately unfavorable conditions for foreigners to invest in China. Witness the unnaturally low interest rates and the

AUD: So Much for Parity

The parallels between the Australian Dollar and the Canadian Dollar are remarkable! Both currencies are backed by economies highly dependent on natural resources. Both countries’ Central Banks are considering rate cuts in response to slowing growth. Finally, both currencies have slipped well below parity with the US Dollar. Unlike the Canadian Loonie, the AUD had never quite breached the mythical 1:1 level with the USD. Furthermore, given the deteriorating economic picture in Australia, parity is off the table for a long time.

AUD: So Much for Parity

The parallels between the Australian Dollar and the Canadian Dollar are remarkable! Both currencies are backed by economies highly dependent on natural resources. Both countries’ Central Banks are considering rate cuts in response to slowing growth. Finally, both currencies have slipped well below parity with the US Dollar. Unlike the Canadian Loonie, the AUD had never quite breached the mythical 1:1 level with the USD. Furthermore, given the deteriorating economic picture in Australia, parity is off the table for a long time.

Bumpy Road Ahead for Canadian Dollar

2007 was a momentous year for the Canadian Loonie, which rose 17.5% and even reached parity against the US Dollar. 2008 has been somewhat less kind to the Loonie; it has been battered repeatedly from falling commodity prices and the global credit crunch. Actually, even before the price of oil peaked near $140, the link between the Canadian Dollar and natural resources had begun to break down. The rationale among investors had shifted such that expensive commodities were now seen as a drag on global economic growth, and hence, bad for Canada in the long-term. Using this logic, the currency should have received a reprieve from falling prices, but this was interpreted as bad for Canada in the short-term. In other words, a lose-lose situation. Perhaps, the Loonie climbed too high too fast, and a simple technical correction is in order. The Guardian reports:

The Canadian dollar has been stuck in a tight range since the end of last November. If the Canadian currency eventually closes below the low end of that range, it would be considered a sign of U.S. dollar bullishness and likely open the door to further losses.

Read More: Canadian dollar feels heat of economic slowdown

Bumpy Road Ahead for Canadian Dollar

2007 was a momentous year for the Canadian Loonie, which rose 17.5% and even reached parity against the US Dollar. 2008 has been somewhat less kind to the Loonie; it has been battered repeatedly from falling commodity prices and the global credit crunch. Actually, even before the price of oil peaked near $140, the link between the Canadian Dollar and natural resources had

China May Dip Into Reserves

Yesterday, the Forex Blog reported that Central Banks and Sovereign Wealth Funds appear to be losing confidence in the Dollar. To follow up with a specific example, a high-ranking Chinese policymaker recently suggested that China should move spend some of its reserves since they are rapidly losing value in RMB terms. The official offered that a portion be used to purchase foreign energy assets, in order to mitigate against both the falling Dollar and rising oil. There is clearly a trend among institutional holders of Dollars to use the currency to purchase US assets. Witness the recent (separate) sales of the Chrysler and GM Buildings to Middle Eastern buyers. With nearly $2 Trillion in foreign exchange reserves, however, China is in a class by itself, and any indication of its frustration with the Dollar should be taken very seriously.
Read More: China Considering Using Forex Reserves

AUD: Closer to Parity

After a brief hiatus, the Australian Dollar has resumed its upward march against the Dollar; its next milestone will be a 25-year high against the Greenback. Of course, its continued strength is due to a combination of high domestic interest rates and high commodity prices. In fact, its performance seems to mirror the price of

AUD: Closer to Parity

After a brief hiatus, the Australian Dollar has resumed its upward march against the Dollar; its next milestone will be a 25-year high against the Greenback. Of course, its continued strength is due to a combination of high domestic interest rates and high commodity prices. In fact, its performance seems to mirror the price of gold, which is no coincidence since gold may be

Canada to Hold Rates

The economic picture in Canada is increasingly resembling that of the rest of the world: slowing growth and rising inflation. Likewise, the dilemma faced by the Bank of Canada mirrors that of the ECB and Fed. Even though Canadian inflation is only 2.2%, the Bank of Canada will probably err on the side of caution, by hiking rates rather than lowering them. Then again, analysts don’t expect the Central Bank to take any action for another six to twelve months, based on the expectation that a cooling economy will naturally bring down inflation. That makes this whole debate seem moot, given how much could happen in such a long time frame. Canada.com reports:

Canadians will get a better idea of the central bank’s thinking when it releases its monetary policy update and governor Mark Carney opens himself up to public questioning at a news conference later on its rate-setting decision…

Read More: Bank of Canada expected to steer a steady course on interest rates

Credit Crisis is “Ongoing”

Who’s familiar with the "song that never ends?" How about the credit crisis that never ends? Only a few months ago, the talking heads were trying to convince us that the worst of the credit crunch had already passed, and that analysts had overestimated the amount of the debt that would ultimately need to be written down. Congress was congratulating itself for its economic

Chinese Yuan Appreciation to Slow

In the year-to-date, the Chinese Yuan has already appreciated 6.5% against the USD, the fastest pace since the currency was famously revalued three years ago. This upward pressure has been built largely on the continuing inflow of speculative "hot money," which was itself built on the expectation of further interest rate hikes, ostensibly needed to tame inflation. However, the Central Bank of China recently indicated a slight shift in its monetary policy, backing away from fighting inflation in favor of promoting economic growth. At

Geopolitics Affect Dollar

The narrative in forex markets had recently become so cut-and-dried, that investors may have forgotten that in the long-term, a variety of factors weigh on currencies. Last week, they were sternly reminded of this fact when tensions in the Middle East boiled over and sent the Dollar racing downwards. An Iranian missile launch sparked the initial uproar, but was quickly followed by

UK Housing Crisis Could Affect Pound

When one hears the phrase "housing crisis" uttered, the US immediately comes to mind. Not without reason, of course, since the US housing market is the largest in the world, and the scope of any US housing crisis is sure to dwarf a comparable crisis in any other country, in absolute terms. At the same time, let’s not forget that prices in the UK, for example, began to decline earlier than in the US. In addition, as one columnist points out, the impact of the UK housing crisis may be relatively greater on the UK economy. While some of the statistics he quotes are dubious, housing and consumer debt (on a per capita basis)  may in fact be larger in the UK than in the US. As a result, the ongoing correction in housing prices would be expected to punish the UK more than the US. The story could be the same for the Pound, vis-a-vis the US Dollar. Money & Markets reports:

[One analyst] is…a long-term bear on the British pound and believes any rallies in the currency represent an opportunity to enter short at a better price. Selling the pound against the dollar with a 10-12 month time frame may present one of the best opportunities in the currency markets today.

Read More: UK Housing Bust Spells Trouble for Pound

Inflation or Economic Growth?

Global capital markets remain caught in a tug of war between inflation and economic growth. For most of 2008, the economic growth story prevailed as the Federal Reserve Bank cut interest rates aggressively to cushion the blow from the housing crisis. However, the pendulum soon swung to inflation and the Fed began to worry that perhaps it had lowered rates too far and may

Commentary: Anatomy of a Currency Trader

In the context of fundamental currency analysis, we usually talk about inflation, interest rates, economic growth, politics, etc. But perhaps these variables mask some deeper "truth" in forex, specifically that there is some ultimate "force" guiding the decision-making processes of forex traders. What we are really talking about here is comfort with risk. Especially in the medium-term (the short-term consisting of hours and defined by randomness and the long-term consisting of years and defined by relative changes in the money supply), investors are constantly re-evaluating the level of risk that they want to assume.

RMB may Accelerate Post-Olympics

The first half of 2008 has come to a dramatic end, and it’s official: China’s stock market was the world’s worst performer, finishing down 48%. Ironically, some analysts believe this may be a harbinger for a faster appreciation of the Chinese Yuan. While the global credit crisis cannot be completely disentangled from the Chinese macroeconomic picture, certain conclusions can be drawn that are specific to China. In a nutshell, the party may be over. Inflation has surged to a 10-year high, economic growth is slowing, and stocks are

Indian Rupee at 14-Month Low

The Indian Rupee has fallen to a 14-month low as a result of the sagging Indian stock market and surging inflation. Foreign investors have withdrawn $5.7 Billion from the Indian stock market in the first half of 2008, reinforcing the 30% drop in stock prices that occurred over the same time period. Meanwhile, the nation’s benchmark inflation rate has risen to the highest level in nearly 13

EU Inflation CounterBalances Oil

Forex analysts reckon the two most powerful forces weighing on the Dollar are commodity prices and European prices, so-to-speak. With regard to commodity prices, it seems plausible that rising commodity prices have contributed to a weaker Dollar, as much as vice versa. Thus, when Saudi Arabia announced recently that it would increase oil production, the Dollar received a nice boost. Conversely, European prices, or inflation, are important for traders to monitor because they

ECB, Unemployment Weigh on Dollar

In the near future, this day may be looked back on as important in the battle between the Dollar and Euro that is currently being waged. The previous month had been relatively kind to the Dollar, which had gradually clawed its way back from a record low against the Euro. Then came yesterday, when Jean-Claude Trichet, leader of the European Central Bank, surprised investors

China’s Forex Reserves Near $2 Trillion

When China’s foreign exchange reserves breached the $1 Trillion mark in November 2006, it was a momentous occasion. Over the following 18 months, however, analysts yawned as the reserves nearly doubled in size. In the month of April, alone, China added an astounding $75 Billion to its stockpile, bringing the total to $1.76 Billion. Analysts attribute this sudden increase to a massive inflow of hot money, as

Bank of Canada Must Lower Rates

According to one index, commodity prices have risen 40% over the last twelve months. One would therefore expect the Canadian economy to be commensurately strong. According to the most current economic data, however, just the opposite is true. Wholesale manufacturing sales are down for the second straight quarter. Non-commodity exports are also trending downwards due to sustained economic weakness in the US, Canada’s most important trade partner. Continued strength in the Canadian Dollar is also to blame. In addition, Canadians are traveling abroad in greater numbers, while international visitors to Canada have dwindled to record lows. As a result, Canadian GDP is expected to fall close to 0% for the second quarter, significantly below the Central Bank’s goal of 1%. The Bank will likely respond with a series of rate cuts, perhaps totaling as much as 1%, intended to reduce buying pressure on the Loonie and ignite the economy. Canada.com reports:

"The loonie is rising, boosted by last week’s energy and resource powered rise in the trade surplus as well as a positive
interest rates spread."

Read More: Deeper rates cuts expected as Cdn. economy slumps

Parity Party

Only last year, the idea that the Australian Dollar would ever reach parity with the USD was laughable. Then, earlier this year, it became plausible. Now, according to an informal poll of analysts, it is not only possible, but likely. AUD bulls should look no further than the rapid surge in commodity prices, which may boost the total value of Australian exports by 20%, including a 30% rise in its commodity exports. In short, the

EU Economy Weakens

While the credit crisis has ravaged the economies of the US and the UK, the EU has largely been spared. First quarter GDP grew at a healthy annualized rate of 2.8%, helped by a whopping 6% expansion in Germany. However, a number of economic indicators now suggest that all is not well on the European front. Business and consumer confidence indexes are trending downward. Manufacturing output is down. So are retail sales. Spain, which benefited the most during the credit boom, is now reaping the greatest losses during the crunch, and could put a drag on the entire Euro-zone. One prominent economist is predicting that the EU economy won’t expand at all in the second quarter.

US Treasury: China Still Not Manipulating RMB

In its semiannual report to Congress, the US Treasury Department once again did not cite China as a currency manipulator. For as long as the Forex Blog has been covering this issue, various interest groups have been pressing the Bush administration on this issue, since the label of currency manipulator would entitle Congress to level punitive trade sanctions. The premise of their argument remains that an artificially cheap RMB is responsible for the decline of the US manufacturing sector and the burgeoning trade deficit, which topped $250 Billion in 2007.

Fed is Downbeat on Economy

Yesterday’s release of the minutes from the Federal Reserve Bank’s April meeting sent shock waves through the investing community. The text revealed that the Fed Board of Governors has become significantly more bearish on the outlook of the US economy, as compared to sentiments expressed at the January meeting. The consensus forecast covering 2008-2009 worsened for all of the major economic indicators, including GDP growth, inflation, and employment. If the low end of the new GDP estimate ultimately obtains, the US economy will expand by only .3% for 2008.

UK: No rate Cuts for 2 Years

The US Federal Reserve Bank is known for ambiguity and vagueness. The Bank of England, it appears, is not trying to emulate this approach. The Bank put an end to speculation about its near-term monetary policy by announcing that it does not plan to cut interest rates for at least two years. Apparently, inflation has breached the Bank’s 2% target, and its internal models are forecasting that it won’t be until 2010 that price inflation returns to a more palatable rate. This is bad news for the British economy, which is in the throes of an economic downturn precipitated by the housing crisis and would surely benefit from a loosening of monetary policy. By extension, the British Pound should also suffer a "correction," as a combination of inflation and lack of suitable investment opportunities will send investors rushing for the exits. The Financial Times reports:

Mr King contrasted his position – and its focus on controlling inflation – with that of Ben Bernanke of the US Federal Reserve. “We did not fall prey to the sirens to cut interest rates further as some other central banks have done,’’ he said.

Read More: No interest rate cut for two years, Bank warns

Canadian Dollar Spurred by Oil

Just a few weeks ago, the Central bank of Canada aggressively cut interest rates in order to slow the spread of the US economic downturn to Canada. Accordingly, investors were quite bearish on the Canadian Dollar. With the price of oil surging, however, the Loonie has regained some of its luster, inching back towards parity with the Dollar. If commodity prices remain at current levels, Canada may avoid an economic recession. Economists have scaled back expectations that the BOC will have to continue cutting interest rates. Nonetheless, the median investor expectation is for a sustained decline in the Loonie, perhaps to $1.08 by year end. Bloomberg News reports:

The loonie, as the currency is known because of the image of the bird on the one-dollar coin, has traded near parity with its U.S. counterpart this year after climbing 17 percent in 2007.

Read More: Canada’s Dollar Reaches Two-Month High as Oil Surges to Record

Q1: Dollar Down 4%

Although the first quarter of 2008 ended on March 31, it wasn’t until last week that the Federal Reserve Bank finally finished tallying all of the data and released its obligatory report on the performance of the Dollar. On a trade-weighted basis, the Dollar declined 4%, a figure which accounts for a whopping 11% decline against the Japanese Yen and an 8% decline against the Euro. According to the Fed’s analysis, January was relatively kind to the Dollar, as traders

Chinese Exporters Dump Dollar

The anecdotal evidence that China is diversifying its forex exposure away from the Dollar continues to mount. To date, most of the focus has centered around the Central Bank of China, which is passively diversifying its reserves into European and higher-risk assets. Apparently, Chinese exporters are also getting nervous about the impact of a falling Dollar on their respective bottom lines. The RMB has risen 11% since the beginning of 2007, which means Chinese companies now receive 11% less on sales to destinations

Commentary: The Dollar Conundrum

The Dollar is currently teetering on the edge of a precipice.  Many analysts are predicting that, having recently retreated from a record low against the Euro, the Dollar’s best days are still in front of it. On the other hand, the economic data and interest rate pictures remain nuanced, and still favor the Euro on paper. In this article, we aim to sort through this morass, and produce a clear summation of the factors which bear on the Dollar in the short term.

Fed Lowers Rates

The Federal Reserve Bank recently lowered interest rates for the seventh, and perhaps final, time, bringing its benchmark federal funds rate to 2.0%. Since inflation is still hovering around the 4% mark, the Fed will probably be reluctant to lower rates further. Thus, the markets have been given all of the boost that they are likely to receive, and it is "fate" that will determine whether the economy will find its footing. (GDP growth clocked in at an anemic .6% for the last two

Turkish Lira Set for Decline

2007 was a banner year for the Turkish Lira, which appreciated 21% against the US Dollar. However, in the year-to-date, the currency has returned nearly 10% of this gain, making it the third worst performing currency in the world. Turkey generally, and the Lira specifically, are considered by investors as proxies for emerging markets. The global trend towards risk aversion,

April Marks Dollar Turnaround

Earlier this week, the Forex Blog speculated that the tide was turning on the Euro, which  had retreated from the $1.60 threshold. Sure enough, the month of April saw the best monthly performance by the Dollar in over two years. The sudden about-face by the Dollar stems from changes in interest rate expectations. Only a couple weeks ago, the consensus among investors was that the Fed would cut rates further at its next meeting; the only point of uncertainty was whether rates would be cut by 25 or 50 basis points.

Forwards Gain Retail Appeal

The anecdotal evidence for surging retail interest in forex is cropping up everywhere. Moreover, investors are no longer even limiting themselves to the spot market, utilizing derivatives to speculate on future exchange rates. In the UK, for example, 10% of investors intending to purchase real estate in the EU are utilizing forward agreements to hedge their exposure to the Euro, which has risen 10% against the Pound since the beginning of 2008. Evidently, prospective home buyers are hoping that the Euro returns to 2007 levels, which would significantly lower the cost of buying property there. However, if the Euro continues to appreciate, such investors could end up losing more than they bargained for. Homes Worldwide reports:

Even the movement in the markets over a couple of days can make the difference between owning a property and no longer being able to afford it.

Read More: Brits Gambling On Volatile Currency Markets

Chinks in the Euro’s Armor

2008 has witnessed a rapid appreciation in the Euro, which recently breached the psychologically important $1.60 barrier. Last week, however, the Dollar dramatically reversed course, leading many traders to speculate that the Euro’s best days may be temporarily behind it. There are two ideas underlying this theory. First, the Federal Reserve Bank is probably near the end of its

BOC Cuts Rates

The Bank of Canada has cut its benchmark lending rate by 50 basis points, to 3.0%.  The move was widely expected by analysts, although some of them had forecast only a .25% cut. Last week, economic data confirmed a mild rate of inflation in Canada, giving the BOC a green light to ease monetary policy without having to worry about the effect on prices.  Despite commodity prices that remain at stratospheric levels, Canada’s economy is sagging, due to the subprime crisis unfolding across the border. Some analysts have analogized Canada’s situation to the dilemma facing the European Central Bank, which is reluctant to cut interest rates for fear of stoking the fires of inflation. As a result, the Euro has surged 8.5% against the Dollar in the year-to-date, while the Canadian Dollar has fallen. If the BOC opts to cut rates further, the Dollar could retake some of the ground it lost last year. Marketwatch reports:

Against the Canadian dollar, the U.S. dollar is likely to hold support around par, gradually firming back toward C$1.03 ahead of the U.S. Federal Open Market Committee meeting on April 30.

Read More: Canada poised to cut after benign inflation data

BOC Cuts Rates

The Bank of Canada has cut its benchmark lending rate by 50 basis points, to 3.0%.  The move was widely expected by analysts, although some of them had forecast only a .25% cut. Last week, economic data confirmed a mild rate of inflation in Canada, giving the BOC a green light to ease monetary policy without having to worry about the effect on prices.  Despite commodity prices that remain at stratospheric levels, Canada’s economy is sagging, due to the subprime

Economists: Euro Correction Inevitable

In a research note, two economists from Morgan Stanley predicted that the Euro will soon come crashing down, failing in its bid to rival the Dollar as a viable reserve currency. They observed that in the beginning of the decade, the Euro was viewed as joke from an economic standpoint. Since long-term economic fundamentals can’t reverse themselves in only a few years, they

RMB at Record Low

The lack of fanfare not withstanding, the Chinese Yuan, or RMB, continues to appreciate against the USD. This week, it crossed the psychologically important barrier of 7 RMB/Dollar, a level last seen in the 1990′s. Since its revaluation nearly three years ago, the Yuan has risen 16% against the Dollar, a rate which appears to be growing exponentially given the 4.5% rise already notched in 2008. Due to the Dollar’s continued

Fundamentals Harm Emerging Market Currencies

Since the inception of the credit crunch, one of the themes in forex markets has been the surprising strength of the Dollar. Despite growing economic uncertainty, the US is still viewed as a relatively safe place to invest. On the other hand, emerging markets, especially those with current account deficits, have witnessed capital flight and subsequent currency depreciation.

Loonie in Trouble

In a recent article published in the Toronto Star, a Canadian columnist outlined five reasons why the Canadian economy is in trouble.  Only a couple factors are unique to Canada, and several can be subsumed under the credit crunch, but the pessimists are sounding broad alarm bells. First on the list is the looming drop in prices for commodities, the cornerstone of Canada’s economy. Oil recently sank below $100/barrel, and gold dropped 5% in one day! In addition, China is threatening to curb demand in order to rein in inflation. 

Loonie in Trouble

In a recent article published in the Toronto Star, a Canadian columnist outlined five reasons why the Canadian economy is in trouble.  Only a couple factors are unique to Canada, and several can be subsumed under the credit crunch, but the pessimists are sounding broad alarm bells. First on the list is the looming drop in prices for commodities, the cornerstone of Canada’s economy. Oil recently sank below $100/barrel, and gold dropped 5% in one day! In addition, China is threatening to curb demand in order to rein in inflation. 

BOC to Cut Rates Further

Ironically, the faltering US economy has induced the Dollar to appreciate against many of the world’s currencies. The reasoning is that countries whose economies are tied closely to the US will falter even more than the US during a recession. One of those countries is apparently Canada. As a result, the Bank of Canada has already moved to cut rates by 50 basis points in order to mitigate against a full-blown Canadian recession. All of the economic indicators are already pointing downwards and GDP growth is projected to be a paltry 1.8% in 2008.  In addition, exports to Canada’s largest trade partner, the US, have sagged noticeably, such that its current account recently slipped into deficit for the first time in nearly a decade. The Bank of Canada is busy plotting strategy, with additional rate cuts in the offing.  It looks like the monumental run of the Loonie has finally come to an end.  Bloomberg News reports:

Canada’s dollar will probably remain within the range it has held since the start of the year because investors are still avoiding risk amid the unsettled U.S. economic outlook. It has traded within about 4 percent of parity with its U.S. counterpart, after surging last year as high as 17 percent.

Read More: Canadian Dollar Falls on Speculation More Rate Cuts Are Coming

BOC Lowers Rates

Last week, the Bank of Canada lowered its benchmark interest rate by 50 basis points, to 3.50%.  Though the move was widely anticipated by analysts, whose only uncertainty was whether the bank would cut 50 bps or 25 bps, investors nonetheless punished the Canadian Dollar. The reason cited by the Central Bank in its press release accompanying the rate cut was a sagging economy, due in part to a more expensive Loonie and the concomitant decline in exports. In addition, the Bank indicated that it will likely have to cut rates further over the next few months in order to avoid recession.  In short, it doesn’t look like the Canadian Dollar will upstage its 17% rise in 2007. Bloomberg News reports:

The central bank "has some very dovish words for the Canadian economy.  Retaining the full easing bias and saying the risks to growth are intensifying have caught investors’ attention.”

Read More: Canada Dollar Falls as Bank Reduces Rate, Signals It’s Not Done

USD: What is the story?

Recent news reports have painted a downright bleak picture of the US economy. Home prices are now falling. Equity prices are also falling, at an annualized rate of 20%.  Meanwhile, energy and food prices are rising, dipping into what little purchasing power consumers can still claim.  Somehow, as DailyFX, recently reported, the Dollar has held its own. Their reasoning is that there is a struggle being waged in forex markets between yield and growth. On the one hand are

Fed in Lose-Lose Situation

Remember the expression "Goldilocks economy," used to to characterize the Fed’s perennial aim of simultaneously pursuing economic growth and price stability?  How about "stagflation," a term coined in the 1970s to describe a unique period in US economic history where low growth coincided with inflation.  Now, these two scenarios are being juxtaposed as the Goldilocks economy gives way to stagflation. The Fed is trying to delicately toe the line, as equity and home prices sink while prices rise; one index suggests prices have risen over 7% year-over-year.  The index more often cited, the CPI, reads 4.3%.  Both of these figures exceed current interest rate levels. 

Commentary: Yuan et al Must Appreciate

Although the Chinese Yuan is ostensibly allowed to fluctuate in value, the reality is that the size of its fluctuations and the pace of its appreciation are tightly controlled by China’s Central Bank.  Since its currency is still effectively fixed to the Dollar, China is severely curtailed in its ability to conduct monetary policy and must closely mirror US policy.  Same goes for the rest of Asia, excluding Japan. While US monetary policy was relatively tight, as it has been for the last five years, this necessity didn’t cause too many problems; most of these economies would have kept interest rates high irrespective of the US.

Canadian Loonie Defies Logic

Over the last few years, commodity prices, equity values, and interest rate differentials all favored Canada.  By no coincidence, the Loonie rallied to such an extent that it soon reached parity with the USD. The relationship between these trends and the Canadian Dollar seemed so cut-and-dried that few analysts paid attention to anything else.  In the last couple months, however, these relationships seem to have suddenly dissolved.  For example, as the price of oil has begun to rise again, the Loonie has unexpectedly lost value.  Meanwhile, the inverse correlation between risk aversion and the Loonie has lost all validity, such that if the S&P 500 increases, the odds that the Canadian Dollar will also appreciate is essentially an even money bet. The Canadian Economic Press reports:

"The breakdown is still quiet tentative but it’s weakened in the last few sessions. For Canada in particular there isn’t one story in the market. We have several different stories going on at the same time."

Read More: Breakdown of Forex Correlations Has Market Participants on Guard

China’s Trade Surplus Expands Further

China’s trade surplus grew 22.6% year-over-year for the month of January, on top of export growth of 26.7%.  If there is any silver lining to what many policymakers would consider bad news, it is that growth in imports is slightly outpacing growth in exports.  Unfortunately, that is unlikely to allay the critics, and there are still many of them. The argument remains unchanged- that China is not allowing its currency to rise fast enough.  On paper, however, the Yuan has

China’s Trade Surplus Expands Further

China’s trade surplus grew 22.6% year-over-year for the month of January, on top of export growth of 26.7%.  If there is any silver lining to what many policymakers would consider bad news, it is that growth in imports is slightly outpacing growth in exports.  Unfortunately, that is unlikely to allay the critics, and there are still many of them. The argument remains unchanged- that China is not allowing its currency to rise fast

Dollar Benefits from Risk Aversion

As talk and evidence of a US economic recession builds, the Dollar has witnessed a slight upswing.  How to explain these seemingly contradictory trends? The rationale is surprisingly simple.  While a US recession would predictably hit the US harder than other countries, it would still hamper growth abroad, especially in emerging markets that have come to depend on exports

China is Earning Negative Carry

China’s foreign exchange reserves currently approximate $1.5 Trillion, the majority of which is denominated in USD.  Moreover, the Central Bank of China earns interest on every Dollar it adds to its reserves but must also pay interest on every RMB note that it must issue to offset the Dollars. Since the Fed began easing

USD May Bottom Out

As far as Dollar bulls are concerned, all news is bad news. An economic recession seems inevitable. Interest rates are already negative in real terms, and are now the lowest in the industrialized world, save Japan.  It’s still unclear how much subprime debt will be written down by financial companies before all is said and done.  But analysts from Brown Brothers Harriman, an investment bank, think the Dollar’s multi-year decline is coming to an end.  There are two main

Why a Strong Dollar is Good for the US Economy

For at least the duration of the current administration, the official US stance towards its currency has been a "strong dollar" policy.  In hindsight, it appears that this policy was entirely baseless, since its was directly undermined by the simultaneous easy monetary policy, and thus it stands to reason that US policymakers did not actually believe that a strong Dollar policy was necessary to pursue.  In a recent op-ed piece published in the Wall Street Journal, one analyst outlines the case for a strong dollar, and by extension, why the depreciating Dollar is bad for the US economy. 

Why a Strong Dollar is Good for the US Economy

For at least the duration of the current administration, the official US stance towards its currency has been a "strong dollar" policy.  In hindsight, it appears that this policy was entirely baseless, since its was directly undermined by the simultaneous easy monetary policy, and thus it stands to reason that US policymakers did not actually believe that a strong Dollar policy was necessary to pursue.  In a recent op-ed piece published in the Wall Street Journal, one analyst outlines the case for a strong dollar, and by extension, why the depreciating Dollar is bad for the US economy. 

BOC Cuts Rates

Last week, the Bank of Canada cut interest rates by 25 basis points, bringing its benchmark lending rate down to 4%.  Fortunately for the Canadian Dollar, the rate cut paled in comparison to the 75 basis point move effected by America’s Federal Reserve Bank. While the Bank of Canada offered a hackneyed rationale of "keeping aggregate supply and demand in balance"  for the change in monetary policy, there is still some surrounding haze since Canadian inflation is rising and economic growth is strong. The currency had slipped below parity against its American counterpart, but is now slowly crawling its way back. If commodity prices remain high, the currency will likely push back across that psychologically important barrier of 1:1 with the USD.
Read More: Canadian dollar firms as BoC cuts rates

Foreign Investors Target US

So-called ‘Sovereign Wealth Funds’ are the talk of the town, stealing headlines as part of a multi-billion dollar buying spree.  Anecdotally, stories of these funds and other institutional foreign investors have made a big splash, epitomized by a few high-profile investments in struggling American investment banks.  It no longer appears these stories were isolated, as suggested by

Chinese Yuan Accelerates Upwards

When Henry Paulson was appointed Secretary of the US Treasury last year, he made China and its purportedly undervalued currency a cornerstone of his economic plan. Lo and behold, several months ago, the Yuan suddenly accelerated in its upward path against the Dollar, rising at an annualized rate of 14%. Currency futures are now pricing in an 8% rise in 2008, while several economists are forecasting a 10%

China’s Forex Reserves Roar Past $1.5 Trillion

On January 24 last year, the Forex Blog reported with great fanfare that China’s forex reserves had breached the epic milestone of $1 Trillion. [In hindsight, it turns out that the psychologically important barrier was broken several months earlier, but that is beside the point].  Less than one year later, China’s forex reserves reached another important threshold, soaring past $1.5 Trillion. It appears that new reserves are being accumulated at  an exponential rate, having increased $460 Billion last year and over $30 Billion in the month  of December alone. By no coincidence, China’s 2007 trade surplus of $262 Billion shattered the previous record and is expanding at a comparably supersonic pace.

China’s Forex Reserves Roar Past $1.5 Trillion

On January 24 last year, the Forex Blog reported with great fanfare that China’s forex reserves had breached the epic milestone of $1 Trillion. [In hindsight, it turns out that the psychologically important barrier was broken several months earlier, but that is beside the point].  Less than one year later, China’s forex reserves reached another important threshold, soaring past $1.5 Trillion. It appears that new reserves are being accumulated at  an exponential rate, having increased $460 Billion last year and over $30 Billion in the month  of December alone. By no coincidence, China’s 2007 trade surplus of $262 Billion shattered the previous record and is expanding at a comparably supersonic pace.

Central Banks in the News

As we wrote last week, the direction of the Dollar may be influenced more by external economic events rather than by internal activity.  Accordingly, it would behoove forex traders to direct their attention away from the Fed and towards the Bank of England and the European Central Bank, both of which face important monetary policy decisions later in the month. With regard to the Bank of England, futures markets have priced in a 2/3 chance that rates will be cut by 25 basis points. In the case of the ECB, the markets are expecting rates to be maintained at current levels. However, analysts will be scrutinizing the Banks’ respective press releases and monitoring other developments in this area due to the implications for the US-EU-Britain interest rate differential.  Reuters reports:

Some analysts think that hawkish comments from Trichet will be brushed aside with weaker economic data leading to the prospect of falling euro zone rates later in the year.

Read More: Pound down, others flat before ECB, BoE decisions

Forex Themes for 2008

Last week, the Forex Blog recounted what happened across forex markets in 2007, in all of its drama. Now, we would like to offer a nice counterpoint, in the form of the major themes expected to dominate forex headlines in 2008, courtesy of Dow Jones. The list includes eight distinct themes, though there is some overlap.  Three of the themes pertain directly to the USD, which is the currency most worth watching in the upcoming year.  The fundamentals bode well for the Dollar; the economy has not suffered from the credit crunch nearly as much as economists feared; the cheaper currency has boosted exports; foreigners have proven surprisingly willing to finance the twin deficits.

Forex Themes for 2008

Last week, the Forex Blog recounted what happened across forex markets in 2007, in all of its drama. Now, we would like to offer a nice counterpoint, in the form of the major themes expected to dominate forex headlines in 2008, courtesy of Dow Jones. The list includes eight distinct themes, though there is some overlap.  Three of the themes pertain directly to the USD, which is the currency most worth watching in the upcoming year.  The fundamentals bode well for the Dollar; the economy has not suffered from the credit crunch nearly as much as economists feared; the cheaper currency has boosted exports; foreigners have proven surprisingly willing to finance the twin deficits.

Loonie: All signs Point to Yes

When making predictions for 2008, it is useful to put things in perspective by assessing predictions made at this time in 2007.  With regard to the Canadian Dollar ("Loonie"), most  analysts predicted a rise, but all dismissed the possibility of parity with the USD.  Ultimately, the Loonie rose to 1.10 against the Dollar before ending the year just above parity. With this in mind, experts are predicting the Loonie will continue to appreciate in 2008, with forecasts ranging from modest to stellar.  Some analysts believe the Loonie will