Korean Won Headed Up, Despite Unwinding of Carry Trade

The Korean Won is up 32% since March, and 8.2% on the year. At the same time, it is 20% below is 2007 year-end level, as well as 13% weaker than the 2006 average of 955 and 15.5% weaker than the 2007 average.

Pause in Rate Hikes Threatens AUD

In October, the Reserve Bank of Australia (RBA) became the first industrialized Central Bank to raise interest rates. It followed this up with two additional hikes in November and December, bringing its benchmark rate to the current level of 3.75%, by far the highest among major currencies.

“Logic” Returns to the Forex Markets, Benefiting the Dollar

Many analysts are pointing to Friday, December 4, as the day that logic returned to the forex markets. On that day, the scheduled release of US non-farm payrolls indicated a drop in the unemployment rate and shocked investors. This was noteworthy in and of itself (because it suggests that the recession is already fading), but also because of the way it was digested by investors; for the first time in perhaps over a year, positive news was accompanied by a rise in the Dollar. Perhaps the word explosion would be a more apt characterization, as the Dollar registered a 200 basis point increase against the Euro, and the best single session performance against the Yen since 1999.

“Logic” Returns to the Forex Markets, Benefiting the Dollar

Many analysts are pointing to Friday, December 4, as the day that logic returned to the forex markets. On that day, the scheduled release of US non-farm payrolls indicated a drop in the unemployment rate and shocked investors. This was noteworthy in and of itself (because it suggests that the recession is already fading), but also because of the way it was digested by investors; for the first time in perhaps over a year, positive news was accompanied by a rise in the Dollar. Perhaps the word explosion would be a more apt characterization, as the Dollar registered a 200 basis point increase against the Euro, and the best single session performance against the Yen since 1999.

“Logic” Returns to the Forex Markets, Benefiting the Dollar

Many analysts are pointing to Friday, December 4, as the day that logic returned to the forex markets. On that day, the scheduled release of US non-farm payrolls indicated a drop in the unemployment rate and shocked investors. This was noteworthy in and of itself (because it suggests that the recession is already fading), but also because of the way it was digested by investors; for the first time in perhaps over a year, positive news was accompanied by a rise in the Dollar. Perhaps the word explosion would be a more apt characterization, as the Dollar registered a 200 basis point increase against the Euro, and the best single session performance against the Yen since 1999.

“Logic” Returns to the Forex Markets, Benefiting the Dollar

Many analysts are pointing to Friday, December 4, as the day that logic returned to the forex markets. On that day, the scheduled release of US non-farm payrolls indicated a drop in the unemployment rate and shocked investors. This was noteworthy in and of itself (because it suggests that the recession is already fading), but also because of the way it was digested by investors; for the first time in perhaps over a year, positive news was accompanied by a rise in the Dollar. Perhaps the word explosion would be a more apt characterization, as the Dollar registered a 200 basis point increase against the Euro, and the best single session performance against the Yen since 1999.

Indian Rupee’s Rise is Sustainable

While the Indian Rupee has risen more than 10%, since bottoming in March, it has increased only 4.3% in value in the year-to-date. Still, given how turbulent the first few months of 2009 were (a continuation of 2008, really), this modest appreciation was actually the third highest, among Asian currencies, behind only the Indonesian Rupiah and Korean Won.

Dollar Could Go Either Way, Depending on the Carry Trade

As I outlined in my last two posts, the Dollar could witness a rapid appreciation if/when the Fed finally raises interest rates. Given Chairman Bernanke’s frequent erring on the side of inflation, however, it could be months (at the earliest) before the Fed actually pulls the trigger. With forex markets guided by interest rate differentials, and traders’ uncertainty about the timing of interest rate hikes, its fair to say that the Dollar is at a crossroads.

Pound’s Demise Will not be Hard to Time

I’d like to follow up on my last post (Timing is Everything in Forex, Especially in this Environment) by looking at how to time one specific currency: the Pound. As I noted tongue-in-cheek with the title of this post, timing the Pound will not be difficult, since it is likely headed downward in both the short term and long term.

Playing Chicken with the BOC

The Canadian Dollar has been one of the world’s top performers this year, especially relative to the Dollar. The Bank of Canada is less than thrilled about this distinction, which is why it takes advantage of nearly every opportunity to remind the markets that it will do everything in its power to prevent the Loonie from rising further. The markets are beginning to wonder, however, whether the BOC is actually prepared to put its money where its mouth is, if push comes to shove.

Euro: It’s Still Mostly About the Dollar

It’s been a while since I last wrote about the Euro (October 26: Euro Optimism (And not just Dollar Pessimism)). That’s because my perspective recently has been mainly Dollar-centric; I continue to believe that much of the recent movement in forex markets (with the exception of certain cross rates) can best be explained by the Dollar. Nowhere is this more evident than the Euro, whose rise should really be thought of in terms of the depreciation of the Dollar. It’s no surprise then that yesterday’s Euro decline – the steepest in months – was the result not of internal European developments, but rather of the US jobs report.

Debunking the Myth: The Dollar and the Deficit

Last week, I opined on the official US forex policy (“Strong Dollar” Policy is a Joke). Most of my analysis was directed towards the lackluster efforts of US policymakers in failing to execute this policy, and I paid short shrift to the policy itself. With this post, then, I would like to address whether a Strong Dollar is, on balance, actually good for the US economy, specifically as it bears on the balance of trade.

Everyone Thinks the Yuan is Undervalued….Except for China

Subtle title, right? I couldn’t resist, considering that literally all economists and government officials (outside of China, of course) have sounded off on the Chinese Yuan in the last month. Recent additions to this list include President Obama, Chiefs of the IMF and World Bank, President of the Asian Development Bank, US Commerce Secretary Locke and Treasury Secretary Geithner, Nobel Laureate Paul Krugman, ECB Chief Jeane-Claude Trichet, Harvard University Professor Martin Feldstein, Japan’s finance minister…not to mention the thousands of others that didn’t make international news for their denunciation of China’s currency policy.

Emerging Markets Bubble Continues to Inflate, but for How Long?

Yesterday, emerging markets (proxied by the MSCI Emerging Markets Index) recorded their biggest fall since July, ending a week of solid gains. Still, this one-day slide of 1.4% pales in comparison to the nearly 100% gain that the index has achieved since bottoming last March. In other words, while investors might be starting to pull back, the direction of asset prices is still upward.

Forex Implications of China-US Economic Codependency

The Economist recently published a special report on China and America (“Round and round it goes“). As the title suggests, the article described the increasing interdependency between the economies of the US and China. In a nutshell, China maintains an undervalued currency, in order to stimulate exports. The resulting overseas (American) demand puts upward pressure on the RMB, which China defuses by buying US Treasury securities. This results in artificially low US interest rates, causing American consumers to import more, putting even more pressure on the RMB, which is further defused by buying more US Treasuries. And the cycle continues ad nauseum.

How will Foreign Investment Tax Affect the Real?

On October 20, the executive office of the government of Brazil enacted an emergency measure, calling for a 2% tax on on all foreign capital inflows. And with one foul swoop, this year’s 35% rise in the Real had come to an end, right?

The tax certainly took investors by surprise, with the Brazilian stock market falling by 3% and the Real falling by 2%, the largest margins for both in several months. The tax is comprehensive and applies to essentially to all foreign capital deployed in Brazilian capital markets, whether fixed income, equities, or currencies. While the tax doesn’t apply to those currently invested in Brazil, the possibility that it would cause potential investors to stay away was enough to cause a sell-off.

How will Foreign Investment Tax Affect the Real?

On October 20, the executive office of the government of Brazil enacted an emergency measure, calling for a 2% tax on on all foreign capital inflows. And with one foul swoop, this year’s 35% rise in the Real had come to an end, right?

The tax certainly took investors by surprise, with the Brazilian stock market falling by 3% and the Real falling by 2%, the largest margins for both in several months. The tax is comprehensive and applies to essentially to all foreign capital deployed in Brazilian capital markets, whether fixed income, equities, or currencies. While the tax doesn’t apply to those currently invested in Brazil, the possibility that it would cause potential investors to stay away was enough to cause a sell-off.

On October 20, the executive office of the government of Brazil enacted an emergency measure, calling for a 2% tax on on all foreign capital inflows. And with one foul swoop, this year’s 35% rise in the Real had come to an end, right?

The tax certainly took investors by surprise, with the Brazilian stock market falling by 3% and the Real falling by 2%, the largest margins for both in several months. The tax is comprehensive and applies to essentially to all foreign capital deployed in Brazilian capital markets, whether fixed income, equities, or currencies. While the tax doesn’t apply to those currently invested in Brazil, the possibility that it would cause potential investors to stay away was enough to cause a sell-off.

On October 20, the executive office of the government of Brazil enacted an emergency measure, calling for a 2% tax on on all foreign capital inflows. And with one foul swoop, this year’s 35% rise in the Real had come to an end, right?

The tax certainly took investors by surprise, with the Brazilian stock market falling by 3% and the Real falling by 2%, the largest margins for both in several months. The tax is comprehensive and applies to essentially to all foreign capital deployed in Brazilian capital markets, whether fixed income, equities, or currencies. While the tax doesn’t apply to those currently invested in Brazil, the possibility that it would cause potential investors to stay away was enough to cause a sell-off.

Bank of Canada Still Mulling FX Intervention

The Canadian Dollar fell from parity with the US Dollar in July 2008. For a minute, it looked as though it would return to that mark in October 2009. Alas, it was not to be, as the currency that had risen 20% since March wasn’t able to rise another 3% to close the elusive gap that would once again bring it face-to-face with the Greenback.

Prospects for Chinese Yuan Revaluation Improve

In its semi-annual report to Congress, the Treasury Department once again failed to officially label China (or any country for that matter) a currency manipulator. No surprise there. While it’s self-evident that China manipulates the RMB (via the peg with the US Dollar), the political implications of such a label prevent it from being used except in the most extreme cases. Nonetheless, there is mounting pressure on China, both

Brazilian Real Nears Record High Against Dollar

The Brazilian Real has been the world’s best-performing currency against the Dollar in the year-to-date, having risen 32% through the beginning of October. At this point, a mere 8% rise would send it crashing through the high that it touched last summer, prior to the collapse of Lehman Brothers.

Pound, Dollar are ‘Sick’ Currencies

A theme in forex markets (as well as on the Forex Blog) is that as the Dollar has declined, virtually every other asset/currency has risen. The rationale for this phenomenon is that the global economic recovery is boosting risk appetite, such that investors are now comfortable looking outside the US for yield. However, this market snapshot may have to be tweaked slightly, in accordance with a recent WSJ article (Sterling Looks Ready to Join the Sick List).

Dollar’s Role as Reserve Currency in Jeopardy

I concluded my last post by promising to discuss the implications of a change in the status quo, regarding the Dollar’s role as the world’s reserve currency. As it turns out, the last few days have witnessed a few developments on this front.

First of all, the G7 concluded its latest round of talks. Despite previous indications to the contrary, the

Bank of Canada Versus the Loonie

I toyed with the title of this post for a while, and ultimately settled on the current iteration, because it reflects the battle that is being waged between the Bank of Canada and the forex markets. Simply, the Loonie is moving in one direction (up!), while the BOC would prefer that it moves in the opposite direction.
Let’s start with some context: the Canadian Dollar’s performance this year has been impressive, to say the

China’s Economic Recovery and the RMB

By now, the notion that the nascent global economic recovery is being and will continue to be led by China has become cliche. The NY Times summarized: “In past global slowdowns, the United States invariably led the way out, followed by Europe and the rest of the world. But for the first time, the catalyst is coming from China and the rest of Asia, where resurgent economies are helping the still-shaky West recover from the deepest recession since World War II.”

China’s Economic Recovery and the RMB

By now, the notion that the nascent global economic recovery is being and will continue to be led by China has become cliche. The NY Times summarized: “In past global slowdowns, the United States invariably led the way out, followed by Europe and the rest of the world. But for the first time, the catalyst is coming from China and the rest of Asia, where resurgent economies are helping the still-shaky West recover from the deepest recession since World War II.”

China’s Economic Recovery and the RMB

By now, the notion that the nascent global economic recovery is being and will continue to be led by China has become cliche. The NY Times summarized: “In past global slowdowns, the United States invariably led the way out, followed by Europe and the rest of the world. But for the first time, the catalyst is coming from China and the rest of Asia, where resurgent economies are helping the still-shaky West recover from the deepest recession since World War II.”

Carry Trade Still Popular, but Doubt is Growing

It’s safe to say that the inverse correlation observed between the Dollar (and also the Yen) and global equities is largely a product of the carry trade. “The U.S. stock market bottomed and the U.S. Dollar Index peaked almost simultaneously in March. While U.S. stocks are up more than 50% in that time, the Dollar Index (which measures the greenback’s value against the euro, the yen, the British pound, the Canadian dollar, the Swedish kroner and the Swiss franc) is down nearly 12%,” observed one analyst.

Forex Markets Indifferent to Bernanke Nomination

Earlier this week, President Obama officially nominated Ben Bernanke to a second four-year term as Chairman of the Federal Reserve Bank’s Board of Governors. The reaction was relatively muted, perhaps because most pundits had already anticipated the news. Bernanke himself probably sealed his own re-appointment with the public relations campaign he embarked on last month, ostensibly to offer a rationale

Australian Dollar Rises, Remains Closely Correlated with Stocks

The performance of the Australian Dollar over the last six months has been nothing short of incredible: “Since the end of February, the Australian dollar has risen 29% against the U.S. currency,” and a still-impressive 18% if you backtrack to January, when the Aussie was still in free-fall.

Dollar Reverts Back to Former Self

Only two weeks ago, analysts were singing about a new day for the Dollar, which had risen on the basis of good news for the first time in months. In hindsight, it looks like such talk was premature, as the Dollar has returned to its old ways. Good news once again causes the Greenback to fall, while bad news causes it to rise.

Record Rise in British Pound comes to an End

From trough to peak (March 10 – August 5), the British Pound appreciated by a whopping 25%, its strongest performance in such a short time period since 1985. The Pound has fallen mightily since then, and most factors point to a continued decline.

Record Rise in British Pound comes to an End

From trough to peak (March 10 – August 5), the British Pound appreciated by a whopping 25%, its strongest performance in such a short time period since 1985. The Pound has fallen mightily since then, and most factors point to a continued decline.

All Eyes on Central Banks

While Central Banks have always featured heavily in the minds of forex traders, their actions have taken on a whole new significance of late. Financial reporters have also been generous in doling out space to stories about Central Banks, writing stories with headlines like “Central bankers add to equities’ momentum” and “Currency Traders Hold Fire, Await Central Banks.”

Euro retreats from 2009 Highs

In forex, timing is everything. If I had written this post a couple weeks ago, the headline would read “Euro Touches 2009 High.” Perhaps if I had waited another week, it would have read, “Euro Approaching 2009 High.” But alas, I chose today to write about the Euro, and the headline I chose is probably the most appropriate under the circumstances.

Euro retreats from 2009 Highs

In forex, timing is everything. If I had written this post a couple weeks ago, the headline would read “Euro Touches 2009 High.” Perhaps if I had waited another week, it would have read, “Euro Approaching 2009 High.” But alas, I chose today to write about the Euro, and the headline I chose is probably the most appropriate under the circumstances.

The Force is With the Yen

Just when it looked like the carry trade was back for good and all signs pointed to a Yen depreciation, out of nowhere came a series of surprise developments, propping the Yen back up. Spanning finance, economics, and politics – a Forex Trifecta – these developments moved swiftly through the markets, creating optimism for the Yen where before there was only pessimism. Of course, it’s possible that this bump will prove temporary, and a reversal could transpire just as quickly.

Brazil Real Edging Up, Despite Efforts of Central Bank

The Brazilian Real has been one of the world’s best performers in 2009, having risen by a solid 25%. The currency is now close to pre-credit crisis levels, and is even closing in on an 11-year high. When you consider that only six months ago, most analysts were painting doomsday scenarios and predicting currency devaluations and bond defaults for the entire continent, this is pretty incredible!

Brazil Real Edging Up, Despite Efforts of Central Bank

The Brazilian Real has been one of the world’s best performers in 2009, having risen by a solid 25%. The currency is now close to pre-credit crisis levels, and is even closing in on an 11-year high. When you consider that only six months ago, most analysts were painting doomsday scenarios and predicting currency devaluations and bond defaults for the entire continent, this is pretty incredible!

Brazil Real Edging Up, Despite Efforts of Central Bank

The Brazilian Real has been one of the world’s best performers in 2009, having risen by a solid 25%. The currency is now close to pre-credit crisis levels, and is even closing in on an 11-year high. When you consider that only six months ago, most analysts were painting doomsday scenarios and predicting currency devaluations and bond defaults for the entire continent, this is pretty incredible!

Korean Won Rebounds Strongly

Last year the Korean Won was one of the world’s weakest currencies- and that’s saying a lot when you you consider how many currencies tanked at the onset of the credit crisis. The Won lost nearly half of its value, driven by concerns that Korean creditors would be unable to pay their foreign debts. Since March, however, the currency has rebounded by an impressive 25%, as the government took action: “To avert a crisis, South Korea forged a dollar-swap agreement with the U.S., pumped money into the banking system, boosted fiscal spending, set up funds to replenish bank capital and cut rates.”

Korean Won Rebounds Strongly

Last year the Korean Won was one of the world’s weakest currencies- and that’s saying a lot when you you consider how many currencies tanked at the onset of the credit crisis. The Won lost nearly half of its value, driven by concerns that Korean creditors would be unable to pay their foreign debts. Since March, however, the currency has rebounded by an impressive 25%, as the government took action: “To avert a crisis, South Korea forged a dollar-swap agreement with the U.S., pumped money into the banking system, boosted fiscal spending, set up funds to replenish bank capital and cut rates.”

Korean Won Rebounds Strongly

Last year the Korean Won was one of the world’s weakest currencies- and that’s saying a lot when you you consider how many currencies tanked at the onset of the credit crisis. The Won lost nearly half of its value, driven by concerns that Korean creditors would be unable to pay their foreign debts. Since March, however, the currency has rebounded by an impressive 25%, as the government took action: “To avert a crisis, South Korea forged a dollar-swap agreement with the U.S., pumped money into the banking system, boosted fiscal spending, set up funds to replenish bank capital and cut rates.”

Korean Won Rebounds Strongly

Last year the Korean Won was one of the world’s weakest currencies- and that’s saying a lot when you you consider how many currencies tanked at the onset of the credit crisis. The Won lost nearly half of its value, driven by concerns that Korean creditors would be unable to pay their foreign debts. Since March, however, the currency has rebounded by an impressive 25%, as the government took action: “To avert a crisis, South Korea forged a dollar-swap agreement with the U.S., pumped money into the banking system, boosted fiscal spending, set up funds to replenish bank capital and cut rates.”

Fed to Hold Rates for the Near Term

Over the last week, the markets have been abuzz with chatter about how the US recession will soon come to and end, followed by a quick and healthy recovery. According to investor logic, the result would be a rise in inflation and interest rates. This optimism was partially deflated today, as the Federal Reserve bank conducted its annual monetary policy meeting.

British Pound due for Correction, Thanks to BOE

The British Pound’s rise since the beginning of March has been nothing short of spectacular: “Improving economic data have helped the pound advance 14 percent against the dollar this year and 12 percent against the euro.” Due primarily to a recovery in risk appetite and the concomitant belief that the Pound had been oversold following the onset of the credit crisis, investors began pouring hot money back into the UK. As recently as two weeks ago, one analyst intoned that, “Longer term, we are in part of an uptrend for the pound. I don’t think this is over.”

British Pound due for Correction, Thanks to BOE

The British Pound’s rise since the beginning of March has been nothing short of spectacular: “Improving economic data have helped the pound advance 14 percent against the dollar this year and 12 percent against the euro.” Due primarily to a recovery in risk appetite and the concomitant belief that the Pound had been oversold following the onset of the credit crisis, investors began pouring hot money back into the UK. As recently as two weeks ago, one analyst intoned that, “Longer term, we are in part of an uptrend for the pound. I don’t think this is over.”

The British Pound’s rise since the beginning of March has been nothing short of spectacular: “Improving economic data have helped the pound advance 14 percent against the dollar this year and 12 percent against the euro.” Due primarily to a recovery in risk appetite and the concomitant belief that the Pound had been oversold following the onset of the credit crisis, investors began pouring hot money back into the UK. As recently as two weeks ago, one analyst intoned that, “Longer term, we are in part of an uptrend for the pound. I don’t think this is over.”

Dollar Reverses Course

A recent WSJ headline reads, Good Economic News Threatens the Dollar, and summarizes the Dollar’s trading pattern as follows: “Demand for the U.S. currency continues to erode amid a tide of more encouraging economic data and corporate earnings that have fed a thirst for riskier assets such as stocks, commodities, and growth-sensitive currencies.”

Dollar Reverses Course

A recent WSJ headline reads, Good Economic News Threatens the Dollar, and summarizes the Dollar’s trading pattern as follows: “Demand for the U.S. currency continues to erode amid a tide of more encouraging economic data and corporate earnings that have fed a thirst for riskier assets such as stocks, commodities, and growth-sensitive currencies.”

Bank of Israel Steps up Intervention on Shekel

Over the last year, Israel has quietly amassed one of the world’s largest repositories of foreign exchange reserves. On average, the Central Bank of Israel has purchased $100 million worth of Dollars every day since July 2008, bringing its total reserves to $52 Billion. The Bank’s goals are twofold: to sterilize the inflow of speculative money pouring into Israel in order to mitigate inflation, and to stem the appreciation of the Shekel.

The US Housing Market and the Dollar

As reported today by the Mortgage Calculator and other sources, the US housing market could be in the early stages of recovery. “Nationwide, home resales in June are up 9 percent from January, on a seasonally adjusted basis. Sales of new homes have climbed 17 percent during the same period. And construction, while still anemic, has risen almost 20 percent since the beginning of the year. Even home prices, down one third from the top, edged up in May, the first monthly increase since June 2006.” While the data is certainly susceptible to overly optimistic interpretation, these represent positive developments by any standard.

Canadian Dollar Volatility could Spur Intervention

Since the Forex Blog last covered the Canadian Dollar – on July 29 – the Canadian Dollar appreciated another 2% against the US Dollar, reinforcing the perception that the currency is both too volatile and appreciating too rapidly. This concern is harbored by the Central Bank officials and policymakers, which fear that the rising currency represents the proverbial wrench in the Canadian economic recovery.

Central Banks’ Mandates Expand to Include Asset Price Stability

There was never much doubt about the underlying causes of the credit crisis. Basically, combination of low interest rates and lax regulation fueled a leveraged credit expansion, which exploded spectacularly last fall. The main issue has always been how to ensure such a crisis doesn’t ever happen again- at least not on the same scale. Towards that end, policymakers around the world have been busy over the last few months conducting hearings and soliciting expert testimony, and are now close to passing sweeping overhauls of their countries’ respective financial systems.

Canadian Dollar Slated to Outperform Other Commodity Currencies

In the same vein as Monday’s and Tuesday’s posts (covering the New Zealand Dollar and Australian Dollar, respectively), I’d like to use today’s post to look at another commodity currency – the Canadian Dollar. The Loonie, it turns out, has also benefited from the a recovery in risk appetite and concomitant boom in commodity prices; it has appreciated by 7% against the USD in the last month alone, en route to a ten-month high. “All in all, with almost everything going its way these days (besides the crummy weather and the impact on tourism), a return trip to parity – last visited nearly one year ago – doesn’t seem far fetched,” chimes one optimistic analyst.

Reserve Bank of Australia Could be the First to Hike Rates

Based on the chart below, which plots the Australian Dollar against the New Zealand Dollar over the last two years, one might be tempted to conclude that the two currencies are identical for all intents and purposes. Rather than suffer the inconvenience of separately analyzing the Australian Dollar, why not just read yesterday’s post on the New Zealand Dollar, and leave it at that?

But this chart belies the fact that while the two currencies, have risen and fallen (in near lockstep) in sync with the ebb and flow of risk aversion, this could soon change. While the near-term prospects for the New Zealand economy are dubious, sentiment towards the Australian economy is more consistently optimistic.  “Central bank Governor Glenn Stevens said the nation’s economic downturn may not be ‘one of the more serious’ of the post-World War II era.” In addition, “Stevens said the nation’s economy may rebound faster than the central bank had predicted six months ago on improving confidence among consumers and businesses alike.” The latest projections are for a fall in .5% contraction in GDP in 2009 followed by a 1% rise in 2010.

Meanwhile, government spending is surging: “The Australian government forecast its largest budget deficit on record of A$57.6 billion for fiscal year 2009-10, or 4.9% of GDP.” Combined with the steady recovery in commodity prices and the resumption of residential construction, this could soon trickle down through the Australian economy in the form of inflation. It’s no wonder, then, that the Reserve Bank of Australia (RBA) could begin tightening interest rates as early as December, in order to mitigate against the possibility of inflation in 2011 and 2012.

In fact, Governor Glen Stevens has been raising eyebrows with his unequivocal comments about raising rates. “I’ve never seen written down … I’ve never heard in discussion in the institution, some rule of thumb that says we wait until unemployment’s peaked before we lift the cash rate…I think it depends what else is happening, and also depends how low you went. We eased very aggressively,” he said recently. As a result, traders are betting that rates will be 1.13% higher one year from now than they are today.

This development should be of especial interest to forex traders. Australian interest rates are already the highest in the industrialized world. When you consider “the market’s expectations that the RBA is likely to be the G-10 central bank which is likely to hike first,” it goes a long way towards explaining the 18% rise in the Aussie that has taken place in 2009 alone. Compare a hypothetical 4% RBA benchmark rate to the .1% in Japan and ~0% in the US, and carry traders will start to salivate.

Reserve Bank of Australia Could be the First to Hike Rates

Based on the chart below, which plots the Australian Dollar against the New Zealand Dollar over the last two years, one might be tempted to conclude that the two currencies are identical for all intents and purposes. Rather than suffer the inconvenience of separately analyzing the Australian Dollar, why not just read yesterday’s post on the New Zealand Dollar, and leave it at that?

Japanese Yen: Exports Versus Carry

Plot the Japanese Yen against almost any “major” currency over the last few months (or few weeks for that matter) and you get a pretty consistent picture. Moreover, when you graph most Yen currency pairs against the S&P 500 (I like the AUD/JPY), the correlation is uncanny! Sure enough, it was reported recently that “Japan’s currency also fell the most in a week against the euro as futures on the Standard & Poor’s 500 Index rose 0.5 percent.”

ECB to Hold Rates Until 2011

The next rate-setting meeting of the European Central Bank (“ECB”) is rapidly approaching (August 3), and analysts are stepping up to offer their opinions on the direction of EU monetary policy. At its last meeting, on July 2, the ECB voted to hold rates at the current record-low level of 1%, and all indications are that the August meeting will yield the same result.

Brazilian Real Surges Ahead

In the last three months alone, the Brazilian Real has risen by an impressive 15% against the Dollar alone. What’s driving this impressive importance? The lead paragraph for one article offered the following encapsulation: “Brazil’s real climbed to the highest in more than nine months as stronger-than-estimated corporate earnings, rising equities and higher metal prices bolstered the outlook for Latin America’s largest economy.”

China’s Forex Reserves Cross $2 Trillion, but Still No Signs of Diversification

After a brief pause, China’s foreign exchange reserves have resumed their blistering pace of growth: “The reserves rose a record $178 billion in the second quarter to $2.132 trillion, the People’s Bank of China said today on its Web site. That dwarfs a $7.7 billion gain in the previous three months.” Considering that the global economy remains embroiled in the worst recession in decades, this is frankly incredible. [Chart below courtesy of WSJ].

Swiss National Bank Still Committed to FX Intervention

When the Swiss National Bank (SNB) intervened three weeks ago in forex markets, the Swiss Franc instantly declined 2% against the Euro. Since then, the Franc has risen slowly, and it’s now in danger of touching the “line in the sand” of 1.5 EUR/CHF that analysts have ascribed to the SNB.

Pound: All Indicators Point to Down

If an investor only read the story, Pound a Buy Before ‘Steep’ U.K. Recovery, they could be forgiven for assuming that the fundamentals underlying the Pound must be strong enough to just such a bold claim. In fact, virtually all economic indicators are trending downward, and most analysts (with the exception of the source behind the above story) are revising their Pound forecasts proportionately.

Pound: All Indicators Point to Down

If an investor only read the story, Pound a Buy Before ‘Steep’ U.K. Recovery, they could be forgiven for assuming that the fundamentals underlying the Pound must be strong enough to just such a bold claim. In fact, virtually all economic indicators are trending downward, and most analysts (with the exception of the source behind the above story) are revising their Pound forecasts proportionately.

Chinese Yuan Poised for Appreciation

I toyed with today’s headline for a while, given that an equally cogent case could be made for either “Chinese Yuan Poised for Significant Appreciation” or “Chinese Yuan Poised for Stability.” Let’s face it- when it comes to to the Chinese Yuan, it’s a complete guessing game, since you’re not only dealing with the normal factors that affect currencies, but also with the whims of China’s Central Bank. Still, I think that the Yuan will continue to appreciate slowly and steadily, because such is in the best interest of China.

Chinese Yuan Poised for Appreciation

I toyed with today’s headline for a while, given that an equally cogent case could be made for either “Chinese Yuan Poised for Significant Appreciation” or “Chinese Yuan Poised for Stability.” Let’s face it- when it comes to to the Chinese Yuan, it’s a complete guessing game, since you’re not only dealing with the normal factors that affect currencies, but also with the whims of China’s Central Bank. Still, I think that the Yuan will continue to appreciate slowly and steadily, because such is in the best interest of China.

Inflation Update: US Prices Creep up in May

The debate over US inflation continues to be waged- in academic circles, among economists, and in the financial markets. There is no still no clear consensus as to the likelihood that the inflation will flare up at some point, as a result of the Fed’s easy monetary policy and the government’s record budget deficits. While the unprecedented nature of this crisis means that such a debate is still a matter of theory, that hasn’t stopped both sides from weighing in, often vehemently.

Inflation Update: US Prices Creep up in May

The debate over US inflation continues to be waged- in academic circles, among economists, and in the financial markets. There is no still no clear consensus as to the likelihood that the inflation will flare up at some point, as a result of the Fed’s easy monetary policy and the government’s record budget deficits. While the unprecedented nature of this crisis means that such a debate is still a matter of theory, that hasn’t stopped both sides from weighing in, often vehemently.

Forex Reserve Growth Could Slow

Most of the recent discussion surrounding foreign exchange reserves has focused on the allocation of those reserves; specifically, whether or not these reserves will be invested in Dollar-denominated assets to the same extent as before. But what if this discussion fails to see the forest through the trees? In other words, this issue is built on the implicit premise that Central Banks will continue to build their forex reserves, and hence they need a place to invest them. With this post, I will examine whether this is indeed the case.

Canadian Dollar Volatility could Spur Intervention

Since the Forex Blog last covered the Canadian Dollar – on July 29 – the Canadian Dollar appreciated another 2% against the US Dollar, reinforcing the perception that the currency is both too volatile and appreciating too rapidly. This concern is harbored by the Central Bank officials and policymakers, which fear that the rising currency represents the proverbial wrench in the Canadian economic recovery.

Forex Reserve Diversification Builds Slowly

With this week slow for news and other economic developments, some forex traders are taking a step back to look at the long-term picture. The US Dollar, in particular has come into focus, because of the uncertain consequences of its current economic policy and the related talk of central bank diversification away from the Dollar. “The United States’ expansionist fiscal and monetary policies, which are raising fears of inflation down the road that could erode the value of the dollar, is surely driving diversification out of dollar-denominated asset…The dollar has weakened whenever talk about an alternative reserve currency makes the headlines.”

British Pound “Pauses for Breath” [Part 2 of 2]

By coincidence, today’s release of final GDP data confirms – rather than negates – the economic picture that I painted yesterday. “The economy slumped a downwardly revised 2.4% in the first quarter, which was narrowly the largest decline since the second quarter of 1958. The annual decline in output was 4.9%, the largest since records began in 1948.” The news didn’t affect the Pound, given that it refers to a period that ended a few months ago. At the same time, it revealed the seriousness of UK economic troubles and the depth of the hole that it must climb out of in order to achieve recovery.

British Pound “Pauses for Breath” [Part 2 of 2]

By coincidence, today’s release of final GDP data confirms – rather than negates – the economic picture that I painted yesterday. “The economy slumped a downwardly revised 2.4% in the first quarter, which was narrowly the largest decline since the second quarter of 1958. The annual decline in output was 4.9%, the largest since records began in 1948.” The news didn’t affect the Pound, given that it refers to a period that ended a few months ago. At the same time, it revealed the seriousness of UK economic troubles and the depth of the hole that it must climb out of in order to achieve recovery.

British Pound “Pauses for Breath” [Part 1 of 2]

After a nearly 20% rise against the Dollar, the British Pound has been rangebound for nearly the entire month of June, with one columnist likening the situation to a “pause for breath.” For him, this amounts to a temporary cessation on the Pound’s inevitable upward path: “Compared to long term levels, the pound was still better value than its peers. He said: ‘It’s still cheap – about 10% below it’s trade-weighted average at present.’ ” For others analysts, however, the picture is not so cut-and-dried.

British Pound “Pauses for Breath” [Part 1 of 2]

After a nearly 20% rise against the Dollar, the British Pound has been rangebound for nearly the entire month of June, with one columnist likening the situation to a “pause for breath.” For him, this amounts to a temporary cessation on the Pound’s inevitable upward path: “Compared to long term levels, the pound was still better value than its peers. He said: ‘It’s still cheap – about 10% below it’s trade-weighted average at present.’ ” For others analysts, however, the picture is not so cut-and-dried.

Interest Rate Differentials Turn Against Dollar

For those of you that make a living (i.e. trade forex) from interest rate differentials, consider that the US Treasury yield curve is now steeper than at any point in recent memory. Short-term rates are still close to zero, while long-term rates just passed 4% and are still rising. The theoretical implication is that one can borrow at a low short-term rate and reinvest at a higher long-term yield. The question is: would you want to?

SNB Intervenes on Behalf of Franc

Back on March 12, the Swiss National Bank issued a stern promise that it would actively seek to hold down the value of the Swiss Franc (CHF) as a means of forestalling deflation. The currency immediately plummeted 5%, as traders made a quick determination that the SNB threats were made in earnest. Over the months that followed, however, investors became complacent and the Franc slowly crept back up.

Can the Fed Control Inflation?

This week, the Federal Reserve Bank is scheduled to meet for two days, during which it will debate not only whether or not to adjust its benchmark interest rate but also whether to tweak its Quantitative-Easing program, which is slated to end in August. Futures prices indicate an expectation of nil that the Fed will tighten its monetary policy. Still, there is a definite possibility that the Fed will vote to continue injecting liquidity into credit markets: “Market watchers want to hear if the Fed will announce a plan to buy more than the original $300 billion in long-term Treasurys in order to help tamp down interest rates and keep credit flowing.” In this context, it’s worth asking: Is the Fed focusing on growth at the expense of inflation?

Reserve Diversification Gains Momentum, but Still a “Distraction”

The Dollar’s status as global reserve currency was a subject of discussion at two multilateral meetings this week: G8/G20 and BRIC. At the first ever BRIC meeting of the four largest developing economies (Brazil, India, Russia, China) the result was a consensus decision to explore reserve diversification further, while “developments at the Group of Eight meeting of finance ministers helped reinforce the currency’s status as global reserve currency. The statement that emerged from the meeting in Lecce, Italy did not specifically mention currency markets.”

BOC Nervous about Loonie Appreciation, but Not Enough to Take Action

Canada right now seems to typify the contradiction between political posturing and economic reality. GDP dropped by a whopping 5.3% in the first quarter- less than what the Central Bank had predicted but greater than thr 3.7% drop in the previous quarter. “The economy will shrink by 3 percent this year, the central bank predicts. That would be the biggest drop since 1933, according to Statistics Canada. The unemployment

BOC Nervous about Loonie Appreciation, but Not Enough to Take Action

Canada right now seems to typify the contradiction between political posturing and economic reality. GDP dropped by a whopping 5.3% in the first quarter- less than what the Central Bank had predicted but greater than thr 3.7% drop in the previous quarter. “The economy will shrink by 3 percent this year, the central bank predicts. That would be the biggest drop since 1933, according to Statistics Canada. The unemployment rate has also been at a seven-year high of 8 percent the last two months.” The most grim statistic is that “Canadian exports fell an annualized 30.4 percent in the first quarter, led by the automotive industry.” This is particularly problematic for Canada, whose economy is 30% depending on such exports.

Chinese Yuan Inches Towards Reserve Currency Status

The last week brought a few more developments in China’s quest to turn the Yuan into a viable reserve currency. Don’t get me wrong – I used the term “inches” in the title of this post for a reason – the Yuan will not supplant the Dollar anytime soon, if ever. Still, China deserves credit for their resolve on forcing the issue, as well as for providing an alternative to the Dollar monopoly.

Chinese Yuan Inches Towards Reserve Currency Status

The last week brought a few more developments in China’s quest to turn the Yuan into a viable reserve currency. Don’t get me wrong – I used the term “inches” in the title of this post for a reason – the Yuan will not supplant the Dollar anytime soon, if ever. Still, China deserves credit for their resolve on forcing the issue, as well as for providing an alternative to the Dollar monopoly.

Chinese Yuan Inches Towards Reserve Currency Status

The last week brought a few more developments in China’s quest to turn the Yuan into a viable reserve currency. Don’t get me wrong – I used the term “inches” in the title of this post for a reason – the Yuan will not supplant the Dollar anytime soon, if ever. Still, China deserves credit for their resolve on forcing the issue, as well as for providing an alternative to the Dollar monopoly.

Imminent Crisis in Forex Markets?

The only thing predictable about currencies these days is that they will remain unpredictable. Forgive me for speaking in cliches, but when you consider that the last twelve months have seen both record rises and record falls, I think a cliche might be justified in this case. We’ve seen the Dollar soar, only to collapse again. On the other side, we’ve seen the bottom fall out from emerging market currencies, before rising 20-30% in a matter of weeks.

British Pound Rises to Seven Month High, but Holes are Beginning to Appea

You may have noticed that the phrase “seven month high” appears quite frequently in recent Forex Blog posts, regardless of the currency being discussed. I offer this preface as context for Pound’s recent rally because it suggests that the factors driving the Pound are hardly unique from the factors driving other

British Pound Rises to Seven Month High, but Holes are Beginning to Appear

You may have noticed that the phrase “seven month high” appears quite frequently in recent Forex Blog posts, regardless of the currency being discussed. I offer this preface as context for Pound’s recent rally because it suggests that the factors driving the Pound are hardly unique from the factors driving other currencies. In other words, “It’s a mixture of a dollar-weakness story and a global-growth story.”

British Pound Rises to Seven Month High, but Holes are Beginning to Appear

You may have noticed that the phrase “seven month high” appears quite frequently in recent Forex Blog posts, regardless of the currency being discussed. I offer this preface as context for Pound’s recent rally because it suggests that the factors driving the Pound are hardly unique from the factors driving other currencies. In other words, “It’s a mixture of a dollar-weakness story and a global-growth story.”

Carry Trade Sends Brazilian Real Skyward

The rally in emerging markets that has unfolded over the last couple months has been especially kind to Brazilian investments, as well as to its currency, the Real, which “has gained 26 percent since March 2, the biggest advance among the six most-traded Latin American currencies. In May, the real climbed 11.2 percent, the strongest advance since April 2003.” The currency has already touched a seven-month high, returning to a level last seen before the collapse of Lehman Brothers send a shock wave through global financial markets.

Foreigners Continue to Fund US Trade Deficit

Economists generally and Dollar bears specifically both love to harp on the perennial US trade imbalance. Despite the halving of the trade deficit (reported by the Forex Blog last week), the gap between exports and imports remains sizable; it is projected at about a $350 Billion for 2009.

Foreigners Continue to Fund US Trade Deficit

Economists generally and Dollar bears specifically both love to harp on the perennial US trade imbalance. Despite the halving of the trade deficit (reported by the Forex Blog last week), the gap between exports and imports remains sizable; it is projected at about a $350 Billion for 2009.

Russia Leads World in Declining Forex Reserves

During the global economic boom and concomitant run-up in energy prices, Russia’s foreign exchange reserves exploded. The subsequent bursting of the bubble, however, proved the maxim, what goes up must come down. “After reaching a record high of $597.5 billion in early August, reserves have declined

Canadian Dollar Inches Closer to Parity

After finishing 2008 on a low note and getting off to a disastrous start in 2009, the Canadian Dollar (“Loonie”) is slowly clawing its way back. It has now risen over 14% since the beginning of March, and is up 7 cents in May alone, en route to a seven-month high. Circumstances have changed so rapidly that no one could have seen this coming. “The rising Canadian dollar has taken some forecasters by surprise; recent predictions by some Canadian banks said the dollar would be in the high 70-cent US to mid-80-cent range by June.”

Euro Rises Despite EU Economic Malaise

Their is no way to sugarcoat it; the EU economy is in poor shape, and is steadily worsening. In the most recent quarter, it contracted by 2.5%, most in at least 13 years. [It very well could have been the worst quarter in 50 years, but Eurozone economic data was only compiled beginning in 1996].

Euro Rises Despite EU Economic Malaise

Their is no way to sugarcoat it; the EU economy is in poor shape, and is steadily worsening. In the most recent quarter, it contracted by 2.5%, most in at least 13 years. [It very well could have been the worst quarter in 50 years, but Eurozone economic data was only compiled beginning in 1996].

US Trade Deficit Nears 10 Year Low; Good News for USD?

Over the last year, declines in imports and commodity prices have contributed to a veritable collapse in the US trade imbalance. While the deficit increased to $27 Billion last month, the general trend is definitely still downwards.

Asian Currencies Rally for Third Straight Month

According to a recent Reuters poll, investors are increasingly bullish on emerging market Asian currencies, including the Taiwan dollar, Indonesian rupiah, Singapore dollar, Malaysian ringgit, Philippine peso, South Korean won, and Indian rupee. The Thai Baht wasn’t covered by the poll, but given its strong performance over the last few months, it seems safe to include it in the bunch.

Asian Currencies Rally for Third Straight Month

According to a recent Reuters poll, investors are increasingly bullish on emerging market Asian currencies, including the Taiwan dollar, Indonesian rupiah, Singapore dollar, Malaysian ringgit, Philippine peso, South Korean won, and Indian rupee. The Thai Baht wasn’t covered by the poll, but given its strong performance over the last few months, it seems safe to include it in the bunch.

Outlook is Positive for Australia, but Less so for Australian Dollar

The economic outlook continues to improve for Australia. Most recently, both the government and the Central Bank released five-year growth forecasts, both of which show a modest recovery in 2010. “By 2011-12, the commodity-rich economy will again be firing on all cylinders with growth of 4.5%, well above the long-term growth rate of around 3%.”

Outlook is Positive for Australia, but Less so for Australian Dollar

The economic outlook continues to improve for Australia. Most recently, both the government and the Central Bank released five-year growth forecasts, both of which show a modest recovery in 2010. “By 2011-12, the commodity-rich economy will again be firing on all cylinders with growth of 4.5%, well above the long-term growth rate of around 3%.”

Deflation: Worst-Case Scenario or Already Here?

In following up on last week’s post (“Inflation or Stimulus: An In-depth Look At the Fed’s Response to the Credit Crisis“) on the possibility of inflation, I want to focus today’s post on the opposite phenomenon: deflation.
As evidenced by the huge expansion of government borrowing and Fed Quantitative easing, it is deflation which is currently the paramount concern of policymakers. While falling prices would seem to represent an ideal solution to the current economic downturn, deflation is actually quite pernicious if left unchecked. To

Deflation: Worst-Case Scenario or Already Here?

In following up on last week’s post (“Inflation or Stimulus: An In-depth Look At the Fed’s Response to the Credit Crisis“) on the possibility of inflation, I want to focus today’s post on the opposite phenomenon: deflation.

Carry Trade Lifts Hungarian Forint

The rally in emerging markets and accompanying revival of the carry trade can be seen clearly in the Hungarian Forint, which can now claim the distinction of being the world’s best performing currency. You’re probably scratching your head and/or rolling your eyes, but bear with me.
Beginning last July, shortly before the peak of the credit crisis, the Forint began to fall rapidly. It quickly lost more than half of its value against the Dollar, but then again so did a bunch of other currencies. The more relevant comparison is with the Euro, against which the Hungarian currency also fared quite poorly. Despite a 13% rally over the last two months, the Forint is still down 27% from its high last summer.

Central Bank Mulls Intervention to Hold Down Singapore Dollar

While the Singapore Dollar hasn’t been punished to the same extent as its counterparts, the currency was nonetheless dealt a strong blow by the credit crisis, falling 20% in a matter of months, after peaking in 2008. For its part, the Monetary Authority of Singapore (MAS)- which functions as the Central Bank- couldn’t have been happier. The currency had fallen just enough to almost completely offset its rise during the leadup to the crisis.

Inflation or Stimulus: An In-depth Look At the Fed’s Response to the Credit Crisis

These days, The Federal Reserve Bank seems to have very few supporters. A recent poll showed that “Twenty-six percent of Americans said they were ‘a lot less’ confident in the Fed…now than five years ago.” Some people think the Fed is doing too much in responding to the economic downturn, others accuse it of doing too little, and everyone agrees the Fed is culpable for lax regulatory efforts under Alan Greenspan. One of the biggest criticisms being levied at the Fed is that its current policies are sure to generate massive inflation in the medium-term, as a result of the massive liquidity being pumped into the financial system now. In this post, I will attempt to provide some clarity on this aspect.

Pound Sterling Trends Downward as BOE Expands QE

The Pound is holding its own against the USD, even touching a four-month high last week. But against other major currencies, the story is just the opposite. While managing to avoid parity against the Euro, for example, the Pound has nonetheless remained range-bound against the common currency. The Australian Dollar, meanwhile, has risen to $2 against the Pound for the first time in 13 years.

Pound Sterling Trends Downward as BOE Expands QE

The Pound is holding its own against the USD, even touching a four-month high last week. But against other major currencies, the story is just the opposite. While managing to avoid parity against the Euro, for example, the Pound has nonetheless remained range-bound against the common currency. The Australian Dollar, meanwhile, has risen to $2 against the Pound for the first time in 13 years.

Swiss National Bank Renews Threat of Intervention

When the Swiss National Bank (SNB) announced oln March 12 that it would intervene in forex markets for the first time since 1994, the Franc immediately plummeted up to 5% against select currencies. Since then, the currency has largely clawed back some of its losses, prompting talk of round two: “Speculation about an imminent intervention in the foreign-exchange markets was rife…after the euro fell to CHF1.5031, the lowest level seen since March 12 when the SNB began selling Swiss francs against euros.”

Australian, New Zealand Currencies Benefit from Risk Aversion

Against each other, the New Zealand Kiwi and Australian Dollar have traded in a pretty tight range for the last year (except for a “blip” in the fall of 2008). This makes sense, as both currencies rise and fall in accordance with exports and interest rates.

Despite “Reality,” Fed Optimistic about the Economy

Last week, the Fed opted to maintain its benchmark Federal Funds Rate close to zero, and indicated in its press release that it “anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” [Chart courtesy of CNN].

Spike in Treasury Yields is Good News for US Dollar Bulls

By no coincidence, the Dollar’s best day in April was a mirror image of its worst day in March. Recall what happened when the Fed initially announced its quantitative easing program: “The dollar plunged a record 3.4 percent against the euro on March 18 as traders speculated the Fed’s purchase Treasuries would debase the currency.” On April 29, meanwhile, “The dollar rose the most against the yen this month after the Federal Reserve refrained from increasing purchases of Treasuries and mortgage securities.”

South Africa Hikes Rates, but Interest Rate Differential is Preserved

Yesterday, the South African Reserve Bank (SARB) lowered its benchmark interest rate by 100 basis points to 8.5%. Since December, the Central Bank has now cut rates by 3.5%, from a high of 12%. [As an aside, the SARB uses a repo rate to conduct policy, as opposed to a discount rate. In theory, a repo rate is slightly unique in that it reflects the rate at which the Central Bank will repurchase government securities from

China’s Gold Holdings Surge 76% over Six Years

Based on the title, you’re probably groaning: ‘Wait, I thought this was supposed to be a forex blog?” Bear with me, however, as this subject is extremely pertinent to forex.
Last week, it was revealed that China has been clandestinely adding to its gold reserves since 2003, to the extent that its holdings increased by 76%, to approximately 1,050 tons. The news initially sent a ripple through forex and commodities markets, which were overwhelmed by the figures involved. After analysts had a chance to gather some perspective, however, the markets relaxed. You see, although the increase seems tremendous in size, it is quite small in relative terms.

China’s Gold Holdings Surge 76% over Six Years

Based on the title, you’re probably groaning: ‘Wait, I thought this was supposed to be a forex blog?” Bear with me, however, as this subject is extremely pertinent to forex.
Last week, it was revealed that China has been clandestinely adding to its gold reserves since 2003, to the extent that its holdings increased by 76%, to approximately 1,050 tons. The news initially sent a ripple

China’s Gold Holdings Surge 76% over Six Years

Based on the title, you’re probably groaning: ‘Wait, I thought this was supposed to be a forex blog?” Bear with me, however, as this subject is extremely pertinent to forex.

Last week, it was revealed that China has been clandestinely adding to its gold reserves since 2003, to the extent that its holdings increased by 76%, to approximately 1,050 tons. The news initially sent a ripple through forex and commodities markets, which were overwhelmed by the figures involved. After analysts had a chance to gather some perspective, however, the markets relaxed. You see, although the increase seems tremendous in size, it is quite small in relativeterms.

Euro Resumes Decline After Brief Pause

The one-year chart of the EUR/USD depicts a general downward trend, punctuated with steep “blips.” Every couple of months or so, it seems traders are temporarily jarred loose from their mindset of Euro bearishness, and find an excuse to bid up the common currency. Invariably, the Euro then resumes its downward course a few weeks later.

Investors Bullish on Canadian Loonie Despite Record Interest Rate Cut

Today, the Bank of Canada followed up on an earlier promise by formally clarifying its position on quantitative easing. Suffice to say that the markets breathed a huge sigh of relief when it was revealed that the BOC was not committing itself to such a program. ” ‘The market has always had great trepidation about the idea of printing money…As the Bank of Canada has pushed back at that notion, the Canadian dollar is having a little party of its own,’ ” quipped one analyst.

Investors Bullish on Canadian Loonie Despite Record Interest Rate Cut

Today, the Bank of Canada followed up on an earlier promise by formally clarifying its position on quantitative easing. Suffice to say that the markets breathed a huge sigh of relief when it was revealed that the BOC was not committing itself to such a program. ” ‘The market has always had great trepidation about the idea of printing money…As the Bank of Canada has pushed back at that notion, the Canadian dollar is having a little party of its own,’ ” quipped one analyst.

Australian Dollar Rises Despite Unwinding of Carry Trade

When two weeks ago the Royal Bank of Australia (RBA) cut interest rates, one would have expected the Australian Dollar to suffer proportionately. Instead, the currency continued its steady upward rise, and touched a six-month high, before falling back slightly. One surprised analyst lamented, “These types of inconsistencies can make trading forex difficult or down right frustrating at times.”

British Pound Rises as Real Estate Market Improves?

The British Pound recently touched a 3-month high against the US Dollar, and market players are betting the currency’s run will continue: “Traders are paying a 0.25 percentage-point premium for one- week call options on the pound relative to puts, according to data compiled by Bloomberg.” In other words, more investors believe the Pound will rise than believe it will fall.

Is the Bear Market Rally Temporary?

The stock market rally that has unfolded over the last month is nothing short of incredible; stocks have now risen 25% since bottoming on March 9. Unsurprisingly, the rally has been deeply intertwined with an ebb in volatility. “The VIX, which measures options trading sentiment on the S&P 500 Index has crashed from a high of 80.86 to 38.85 ahead of Thursday’s trading, a 52% decline.” [Chart below courtesy of DailyFX]

China is Still Not a Currency Manipulator

There was tremendous speculation surrounding today’s release of the US Treasury’s semi-annual report to Congress on exchange rates. Considering that Treasury Secretary Geithner accused China unequivocally of currency manipulation during his confirmation hearing in January, it would seem that an official condemnation was inevitable.

Last week marked the beginning of earnings season, as corporations release the results from the first quarter of 2009. The season got off to a strong start with financial heayweights Goldman Sachs and Wells Fargo both smashing analysts’ expectations with large profits. Over the next few weeks, most listed companies will report earnings, which could collectively set the pace for financial markets for the next couple months. “Markets will continue to watch the corporate earnings data very closely in the short term with company comments on prospects also very important for sentiment with any optimism liable to curb defensive dollar demand.”

Emerging Market Currencies Receive Boost from IMF

Only two months ago, the Wall Street Journal published an article under the headline “Slowdown hits Emerging Markets.” Buttressed with economic data and testimony from economists, the piece underscored the notion that “The global downdraft is hitting the world’s emerging economies with a speed and ferocity few imagined possible.” On Monday, the same newspaper published an article entitled “Emerging Markets Go on a Tear,” exploring how emerging markets have outperformed in 2009.

Yen Continues to Drop Despite Government Stimulus Plan

This week, the Yen continued its decline against the Dollar and Euro, dipping well below 100 Yen/Dollar en route to a six-month low. Most analysts attribute this trend to a pickup in risk aversion: “Some kind of optimism is returning to the market and that’s putting pressure on the yen,” explained one analyst succinctly.
An ongoing rally in stocks and commodities is reinforcing investor attitudes that the economic recession is under control, and is stimulating risk-taking. In other words, the same forces that contributed to the

Yen Continues to Drop Despite Government Stimulus Plan

This week, the Yen continued its decline against the Dollar and Euro, dipping well below 100 Yen/Dollar en route to a six-month low. Most analysts attribute this trend to a pickup in risk aversion: “Some kind of optimism is returning to the market and that’s putting pressure on the yen,” explained one analyst succinctly.

IMF Currency Could Threaten Dollar’s Reserve Status

Last week, SDR became the latest addition to the growing list of forex acronyms. So-called Special Drawing Rights are a unit of account used by the IMF, “defined as the value of a fixed amount of yen, dollars, pounds and euros, expressed in dollars at the current exchange rate. The composition of the basket is altered every five years to reflect changes in the importance of different currencies in the world’s trading system.”

Canadian Dollar Edges Down on Quantitative Easing Fears

Despite an ebb in risk aversion, the Canadian Dollar is once again falling. Since touching a high of $1.18 in January, the Loonie has zigzagged its way downwards and hovered around $1.25. March 31 marked the end of its third straight quarterly decline.

Euro Gains after ECB Rate Cuts

Yesterday, the European Central Bank delivered a surprise to the forex markets; instead of cutting rates by the consensus expectation of 50 basis points, the ECB knocked down its benchmark lending rate by only .25%. The Bank also opted against certain non-standard measures that would accompany a change in monetary policy. At this point, all investors can do is wait until the next meeting to see if the ECB will finally intervene in credit markets as well as on behalf of beleaguered Eastern European currencies.

Yen Falls Below 100 as Risk Aversion Fades

This week marked a couple milestones for the Japanese Yen. First, the Yen fell below 100 JPY/USD for the first time in five months. Second, the Central Bank of Japan “celebrated” five years of not having intervened in forex markets. Of course, the relationship between these two events is not difficult to ascertain; as the Yen retreats from the stratospheric highs of 2008, intervention is becoming progressively less necessary (and hence less likely).

Chinese Yuan Vies for Reserve Status

Having appealed unsuccessfully to the G20 to create a viable reserve currency, China is now taking matters into its own hands, by pushing the Chinese Yuan as a viable alternative.
Earlier this week, it signed a $10 Billion+ swap agreement with Argentina, involving an exchange of

Chinese Yuan Vies for Reserve Status

Having appealed unsuccessfully to the G20 to create a viable reserve currency, China is now taking matters into its own hands, by pushing the Chinese Yuan as a viable alternative.
Earlier this week, it signed a $10 Billion+ swap agreement with Argentina, involving an exchange of Argentine pesos for RMB. The agreement is ostensibly designed to benefit Argentina, whose economy has been hit hard from the global credit crisis: “The peso has been weakening slowly but consistently since

Is Gold a Hedge Against Inflation and Currency Weakness?

Until the Fed announced an expansion of its quantitative easing program two weeks ago, gold had begun to fade into relative obscurity. Sure, gold had risen in value from a low of $710/ounce back up to $900/ounce, but prices were still off 10% from the highs reached in 2008. Meanwhile, risk aversion had begun to decline and the stock market had begun to rise, such that pundits were talking more about stocks and less about gold.

Led by China, Central Banks Seek Alternative to Dollar

“China is a hostage. China is America’s bank and America basically says there’s nothing you can do to me. If I go down you don’t get paid.”
While the Obama administration has pledged the kind of fiscal responsibility that would secure its government obligations, its actions haven’t been so responsible. The Fed recently announced purchases of $1 Trillion in government debt, while the government is set to rack up Trillion-Dollar deficits over the next decade, even by the most conservative estimates.

USD/EUR: Conflicting Signals Make Predictions Difficult

If you read analysts’ coverage of the Dollar decline (and consequent Euro rally), there is an even divide over whether it is sustainable. Economic data and technical indicators paint a nuanced picture, such that this kind of uncertainty is understandable.

Despite Shrinking Forex Reserves, China will Continue to Hold US Treasuries

Since Chinese Premier Wen Jiabao (as the ForexBlog reported here) expressed doubts about China’s US loans and investments two weeks ago, the markets have been awash in speculation. In hindsight, it seems that the announcement was a political ploy, rather than a harbinger for a policy change. With a few qualifications, therefore, it seems to safe to conclude that China’s foreign exchange reserves will not undergo any serious changes in the near-term.

Despite Shrinking Forex Reserves, China will Continue to Hold US Treasuries

Since Chinese Premier Wen Jiabao (as the ForexBlog reported here) expressed doubts about China’s US loans and investments two weeks ago, the markets have been awash in speculation. In hindsight, it seems that the announcement was a political ploy, rather than a harbinger for a policy change. With a few qualifications, therefore, it seems to safe to conclude that China’s foreign exchange reserves will not undergo any serious changes in the near-term.

China Maintains “Stable” Yuan, at Least Against USD

China seems to have fulfilled its promise of a stable currency, given that the Yuan/Dollar exchange rate is one of the few bastions of stability in forex markets. One Dollar trades for approximately 6.83 CNY, about the same as it did last summer. Futures prices, meanwhile, reflect a mean expectation that one year from now, the exchange rate will dip only slightly, to 6.86 CNY/USD. [The inverse is depicted in the chart below].

Fed Turns on Printing Presses, Dollar Crashes

Having already lowered interest rates essentially to zero, the Fed has announced that it will now focus on ‘quantitative easing,’ a fancy way of saying that it intends to turn on the printing presses. It will purchase over $1 Trillion in credit instruments, split between Treasury securities and Mortgage-backed debt, expanding its balance sheet to $3 Trillion. This should (temporarily) put an end to speculation over whether foreign Central

Swiss Bank Fulfills Promise of Forex Intervention, Franc Collapses

Last week, the Forex Blog concluded a post on the Swiss Franc by suggesting that the Swiss National Bank (SNB) could artificially depress the value of its currency, which had “not just posted strong gains against the euro since late August but has gained 8% on a trade weighted basis.”
The very next day, the SNB followed its widely anticipated rate cut by announcing that it would indeed

Swiss Bank Fulfills Promise of Forex Intervention, Franc Collapses

Last week, the Forex Blog concluded a post on the Swiss Franc by suggesting that the Swiss National Bank (SNB) could artificially depress the value of its currency, which had “not just posted strong gains against the euro since late August but has gained 8% on a trade weighted basis.”

Korean Won Continues to Plummet as a Result of Acute Dollar Shortage

The Korean Won is among the biggest losers of the credit crisis, excluding Iceland of course. The currency has fallen 40% against the Dollar over the last year, even adjusting for a 10% rise in the last week. South Korean Finance Minister Yoon Jeung-hyun blames currency speculators, pledging that “The government will not sit idle when the foreign exchange rate is excessively tilted toward one direction or when there are

Central Banks Maintain Holdings of US Treasury Securities, but For How Long?

Yesterday, Chinese Premier Wen Jiabao aired his country’s growing concerns about continuing to lend money to the US. Within the context of the US economic stimulus plan and other related US spending initiatives, Mr. Wen is understandably anxious about China’s vast holdings of US Treasury securities:

Swiss Franc Rises on a Trade-weighted Basis, but Down against the Dollar

Most of the “safe haven” talk in forex circles has focused on Japan and the US. Switzerland, meanwhile, has also attracted is fair share of risk-averse investors, who are piling into Franc-denominated assets, despite the deteriorating Swiss economic situation. In fact, February witnessed an inflow of $4 Billion, most of which was targeted towards gold and money-market funds. The Swiss Franc, as a result, has appreciated by 9% (on a trade-weighted basis), since the summer.

UK, EU Central Banks Follow the Federal Reserve

Yesterday, both the European Central Bank (ECB) and the Bank of the UK cut their benchmark interest rates to record lows. This is especially incredible in the case of the UK, whose Central Bank over 300 years old! You can see from the following chart that both Central Banks have more than made up for their respectively slow starts in easing monetary policy by effecting several dramatic rate cuts, following the example of the Federal Reserve. The baseline UK rate now stands at .5%, only slightly higher than the Federal Funds rate, and slightly lower than the 1.5% ECB rate.

UK, EU Central Banks Follow the Federal Reserve

Yesterday, both the European Central Bank (ECB) and the Bank of the UK cut their benchmark interest rates to record lows. This is especially incredible in the case of the UK, whose Central Bank over 300 years old! You can see from the following chart that both Central Banks have more than made up for their respectively slow starts in easing monetary policy by effecting several dramatic rate cuts, following the example of the Federal Reserve. The baseline UK rate now stands at .5%, only slightly higher than the Federal Funds rate, and slightly lower than the 1.5% ECB rate.

UK, EU Central Banks Follow the Federal Reserve

Yesterday, both the European Central Bank (ECB) and the Bank of the UK cut their benchmark interest rates to record lows. This is especially incredible in the case of the UK, whose Central Bank over 300 years old! You can see from the following chart that both Central Banks have more than made up for their respectively slow starts in easing monetary policy by effecting several dramatic rate cuts, following the example of the Federal Reserve. The baseline UK rate now stands at .5%, only slightly higher than the Federal Funds rate, and slightly lower than the 1.5% ECB rate.

UK, EU Central Banks Follow the Federal Reserve

Yesterday, both the European Central Bank (ECB) and the Bank of the UK cut their benchmark interest rates to record lows. This is especially incredible in the case of the UK, whose Central Bank over 300 years old! You can see from the following chart that both Central Banks have more than made up for their respectively slow starts in easing monetary policy by effecting several dramatic rate cuts, following the example of the Federal Reserve. The baseline UK rate now stands at .5%, only slightly higher than the Federal Funds rate, and slightly lower than the 1.5% ECB rate.

Will Mexican Peso Crisis of 1994 repeat itself?

Having risen to a six-year high against the Dollar in late 2008, the Mexican Peso seemed to have firmly distanced itself from the devastating financial and economic crisis suffered in the early 1990′s. However, all of the factors that were blamed for the earlier crisis have since re-emerged, leading some analysts to question whether a repeat is possible. According to a report published by the Atlanta Fed shortly after the 1994 crisis:

China Looking to Buy Oil & Diversify from US Treasuries

US Treasury yields have been held low across the short-term and long-term due in part to a lack of appealing investment opportunities in a deflationary period, while the Federal Reserve announced in January the possibility of buying long-term US government Treasury bonds to help hold down long-term interest rates (and thus mortgage rates), hoping for a slow controlled decent in housing prices.

China Looking to Buy Oil & Diversify from US Treasuries

US Treasury yields have been held low across the short-term and long-term due in part to a lack of appealing investment opportunities in a deflationary period, while the Federal Reserve announced in January the possibility of buying long-term US government Treasury bonds to help hold down long-term interest rates (and thus mortgage rates), hoping for a slow controlled decent in housing prices.

Fundamentals Catch up with Yen

In hindsight, it is now clear that the Japanese Yen’s dramatic rise in 2008 was mostly due to financial, rather than economic factors. In other words, a decline in risk aversion led to the unwinding of the Yen carry trade and a subsequent inflow of capital into Japan. Unfortunately, the recession and inflated currency have since taken their toll on the Japanese economy, resulting in an annualized 13% contraction in GDP for the latest quarter. The balance of trade has also shifted, to such an extent that Japan actually recorded a trade deficit in the most recent month. Having concluded, for the moment at least, that forex intervention is no longer necessary, the Central Bank has announced plans to deploy some of its $1 Trillion+ forex reserve hoard to help ailing companies. Barron’s reports:

A reversal of the yen, from strength to weakness, will have “major global implications…” Perhaps beleaguered Japanese authorities already have begun reacting to the “carnage” the yen’s rise has wrought.

Read More: An Odd Decouple

Asia Forms Forex Pool

After nearly six months of currency depreciation, the nations of Asia have finally been spurred to action. Japan, China, and South Korea have joined together with the 10 ASEAN economies to form a $120 Billion pool of foreign exchange reserves, which contributors can tap into to protect their currencies. The goal is to prevent capital flight and currency weakness from engendering the same kind of financial crisis that only 10

Asia Forms Forex Pool

After nearly six months of currency depreciation, the nations of Asia have finally been spurred to action. Japan, China, and South Korea have joined together with the 10 ASEAN economies to form a $120 Billion pool of foreign exchange reserves, which contributors can tap into to protect their currencies. The goal is to prevent capital flight and currency weakness from engendering the same kind of financial crisis that only 10

Yuan Revaluation is in China’s Interest

While China remains committed, in rhetoric at least, to a flexible Chinese Yuan that rises and falls in accordance with market forces, its actions suggest otherwise. Beginning in the second half of 2008, China stopped allowing the Yuan to appreciate, for fear that a more expensive currency would exacerbate the domestic effects of the credit crisis by making exports less competitive. What China fails to realize however,

Yuan Revaluation is in China’s Interest

While China remains committed, in rhetoric at least, to a flexible Chinese Yuan that rises and falls in accordance with market forces, its actions suggest otherwise. Beginning in the second half of 2008, China stopped allowing the Yuan to appreciate, for fear that a more expensive currency would exacerbate the domestic effects of the credit crisis by making exports less competitive.

Yuan Revaluation is in China’s Interest

While China remains committed, in rhetoric at least, to a flexible Chinese Yuan that rises and falls in accordance with market forces, its actions suggest otherwise. Beginning in the second half of 2008, China stopped allowing the Yuan to appreciate, for fear that a more expensive currency would exacerbate the domestic effects of the credit crisis by making exports less competitive. What China fails to realize however, is that a more valuable Yuan is not only conducive to global economic stability, but also to its own economic

Japanese Yen Braces for Intervention

After months of speculation, it appears that forex markets have finally concluded that the Central Bank of Japan is now prepared to bring down the Yen. On the one hand, the Finance Minister of Japan very publicly denied that the overvalued Yen and the consequent need for forex intervention was discussed during either his personal conversation with US Treasury Secretary Geithner or at the most recent G7 conference. At the same time, he pledged the willingness of Japan to fight “excessive swings” in forex and capital markets.