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