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January 10, 2006
Interest rate differentials weigh on Yen
While currency traders often discuss interest rate differentials in the context of the USD and Euro, the concept is more closely tied to movements of the Yen. Japanese interest rates remain at depressed levels; the annual yield on Japan’s 10 Year note is currently 1.3%, a full 3 percentage points below the US equivalent. Accordingly, Japanese investors continue to pour money into foreign assets, where yields are significantly higher. This may prove increasingly problematic for the Yen, as Japanese corporations and individuals have suddenly found themselves with more cash to invest, due to the recovery of Japan’s economy. That they are investing profits and savings, respectively, into foreign securities rather than into their home economy, is not a good sign for the Yen. Bloomberg News reports:
Japanese investors bought 16.6 trillion yen ($145 billion overseas assets last year, according to figures based on reports released by the Ministry of Finance.
Read More: Yen Drops on Speculation Japanese Investors Seeking Higher Returns Abroad
January 10, 2006 in Central Banks , Japanese Yen | Permalink
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January 09, 2006
Currency Traders Continue to Bet on USD
While the beginning of a new year is technically irrelevant to financial markets, the event wields enormous psychological power, in that investment strategists relish the opportunity to review the markets’ performance over the previous year and make predictions for the year ahead. This is especially true in forex markets, as currency strategists often make significant bets in the beginning of a new year. In January 2005, for example, traders believed the dollar would continue its multi-year slide against most major currencies. Accordingly, many such traders, notably Warren Buffet, made billion-dollar bets against the USD. One year later, the USD stands much higher against the Yen and Euro. Is there a lesson to be learned from this?
While the answer is unequivocally ‘yes,’ that forex markets are intrinsically unpredictable, many currency traders are once again making big bets. This time, however, most are betting that the USD will continue to appreciate. Unfortunately, Dollar bullishness appears nothing short of foolish at this point. The twin deficits are projected to continue soaring, and the US economy will likely slow in 2006. Moreover, the end to the Fed’s interest rate hikes is approaching fast, which will reduce the relative attractiveness of investing in public and private US securities. On paper, therefore, it looks like a repeat of 2005 for many wealthy investors, who are in position to get burned.
January 09, 2006 in Investing & Trading, US Dollar | Permalink
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Economic Data may drive ECB rate hike
In the last few weeks, the Euro finally broke through a level of resistance, against the USD, appreciating several cents. Whether the Euro continues to trade outside of its range will depend largely on whether the ECB raises interest rates in the next few months. Accordingly, Euro bulls are anxiously awaiting the release of German investor confidence data. While such data seems trivial and would not normally merit serious consideration, currency traders believe data supporting solid growth in Europe’s largest economy could be enough to tip the ECB in favor of hiking rates in the near-term, which would in turn, support the Euro. Bloomberg News reports:
“Amid the prevailing dollar-bearish sentiment, strong data in Germany could surely push up the euro again. Should the index rise more than expected, it will certainly raise expectations for ECB rate hikes,” said one currency strategist.
Read More: Euro May Advance on Speculation German Investor Confidence Rose
January 09, 2006 in Economic Indicators, Euro | Permalink
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January 06, 2006
China may diversify forex reserves
In a surprising revelation, representatives from the Bank of China publicly hinted that China may soon begin ‘diversifying’ its massive foreign exchange holdings. While currency strategists always pay heed when countries make such announcements, the case of China is especially noteworthy for the simple fact that China’s reserves total nearly $800 Billion, 70% of which are held in USD-denominated assets. Economists agree that it is unlikely will diversify much of its existing reserves, which play a central role in maintaining the de facto Yuan-Dollar peg. Instead, China will likely begin investing a portion of the $15 Billion in new reserves it accumulates each month into European or Japanese assets. Either way, in the context of China, any move towards diversification would make a big splash in forex markets.
Read More: China signals reserves switch away from dollar
January 06, 2006 in Central Banks , US Dollar | Permalink
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January 05, 2006
Change in Yuan trading rules may spur appreciation
Earlier this week, the Bank of China issued permits to several foreign and domestic banks, which enable them to serve as market-makers for the Chinese Yuan. Yesterday, the Bank of China further explained the new system, stating that the Yuan’s daily opening price would be calculated based on an average of spot rates offered by 13 market-makers. While the Bank of China, through its forex reserves, could still technically manipulate the value of the Yuan, this latest development makes it more likely that the Yuan will be allowed to appreciate in 2006. In fact, futures markets have priced in a 4.3% appreciation for the entire year. Some currency strategists are even more bullish, as the Financial Times reports:
We remain convinced further renminbi strength is highly likely,” said Thomas Stolper, global markets economist at Goldman Sachs, who sees the renminbi rising 9 per cent to Rmb7.34 to the dollar by the end of 2006.
Read More: Renminbi expected to rise after new trading rules
January 05, 2006 in Chinese Yuan (RMB), Investing & Trading, Politics & Policy | Permalink
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Canadian Loonie faces new challenges in 2006
In the last three years, the Canadian Dollar has appreciated over 35% against the USD! Most of those gains, however, took place in 2003 and 2004, as the Loonie only appreciated 3.5% in 2005. Accordingly, many currency strategists believe 2006 will be a flat year for the Canadian currency, due to declining commodity prices and a stagnant economy. In fact, recent economic data suggest that these two variables are closely related, as Canada relies heavily on commodity exports to drive its economy. Nonetheless, 2006 should witness hikes in Canadian interest rates, which could draw inflows of foreign capital. In short, there are competing forces tugging at the Loonie, which could conceivably be pulled in either direction. CBC Business News reports:
The central bank has raised its trend-setting overnight interest rate three times in recent months, to 3.25 per cent, to keep inflation from taking off. Analysts have said the bank could push the key rate as high as four per cent in 2006.
Read More: Canadian dollar falls more than full U.S. cent as commodity prices slip
January 05, 2006 in Canadian Dollar, Economic Indicators | Permalink
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January 04, 2006
China begins OTC Trading in Yuan
In a move that is sure to turn a few heads, China will soon allow over-the-counter trading in its Yuan currency. In addition, several domestic banks and a few foreign banks have been awarded market-maker status in the new system, which legally enables them to buy and sell Yuan to market participants. Previously, only large financial institutions were permitted to trade the Yuan, via the interbank market. While the Yuan will still be prevented from fluctuating by more than .3% per day, critics of China's fixed currency regime have hailed the move as a step towards a floating currency. The Financial Express reports:
Effective from Jan. 4, the central bank would authorise the China Foreign Exchange Trade System to announce the central parity of the yuan exchange rate against the dollar, the euro, the Japanese yen and HK dollar at 0115 GMT each day.
Read More: China to kickstart yuan OTC trade, market-maker system
January 04, 2006 in Chinese Yuan (RMB), Investing & Trading | Permalink
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January 03, 2006
Dollar records biggest daily loss in 4 years
On the first day of trading in 2006, the USD recorded its largest daily loss since September 11, 2001, falling nearly 2% against the Euro. On the first day of trading in 2005, in contrast, the USD rose significantly, as part of a broader trend of appreciation against the world’s major currencies. That the dollar fell in its first 2006 trading session has led many forex analysts to speculate that the year will not be kind to the USD. Specifically, the dollar fell due to a combination of weak economic data and the ‘minutes’ from the last Fed meeting, which suggest the Fed may slow its planned monetary tightening. Many analysts are pointing to the disappointing manufacturing data and the recent flattening of the Treasury yield curve as evidence that the US economy is faltering and will soon plunge into recession, leading the Fed to stop raising interest rates. Daily FX reports:
The FOMC minutes released today reflected the varying views on the degree of future rate hikes. Additional increases “probably would not be large” and “members thought that the policy outlook was becoming considerably less certain.”
Read More: Dollar Sees Largest One Day Slide in 4 Years
January 03, 2006 in Economic Indicators, Investing & Trading, US Dollar | Permalink
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January 02, 2006
Japan continues to avoid forex intervention
For the last few months, several American trade lobbyists have publicly accused Japan of calculated intervention in forex markets aimed at holding down the value of the Japanese Yen. Japan’s repeated declaration that these claims were groundless and untrue was born out recently by Japan’s Ministry of Finance. Data indicates that from January 2003 until April 2004, Japan spent almost $350 Billion USD to slow the appreciation of the Yen by purchasing USD on the open market. Since April 2004, however, Japan has refrained from any intervention, which means its current value (to the chagrin of American trade groups) reflects market fundamentals. AFX News Limited reports:
The absence of dollar-buying and yen-selling via the Bank of Japan was attributed to the orderly reversal of the dollar's weakness, reflecting the stronger fundamentals of the US economy compared with that of Japan.
Read More: Japan says it kept out of currency markets in 2005
January 02, 2006 in Japanese Yen, Politics & Policy | Permalink
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December 30, 2005
USD hurt by housing data
The USD composite index, which measures the value of the USD relative to the world’s major currencies, finished 2005 up 13%, marking the best year for the dollar in almost a decade. The USD might have recorded its best year since 1984 if not for weak housing data, which was released this week.
The data, which indicated sales of new and existing homes both declined in November, could be a harbinger for a downturn in the housing market. Over the last few years, the US economy has remained strong partly due to low interest rates, enabling consumers to borrow against the rising value of their homes. As the Fed has raised interest rates, consumers have predictably borrowed (and spent) less, which could spell trouble for the US economy. The Fed will certainly take this into account when it decides whether to raise interest rates next month. Reuters reports:
“What the market seems to be focusing on are U.S. home sales, which were quite a lot weaker than what people were hoping for. This is definitely weighing on the dollar via what people think that might mean for interest rates.”
Read More: Dollar slips as markets weigh soft US housing data
December 30, 2005 in Economic Indicators, US Dollar | Permalink
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