Archive for the ‘FOREX’ Category

Dollar drops over the board

Sunday, September 16th, 2012

The bearish dollar trend continues. On Friday the euro settled above $ 1.31, its highest level since May, taking advantage of the weakness of the greenback after the announcement of a raft of emergency measures yesterday by the Fed.

The euro also continued to strengthen against the Japanese currency to 102.90 yen against 100.61 yen Thursday after hitting 103.02 yen earlier on Friday – its highest since mid-May. The dollar, however, comforted its gains against the Japanese currency to 78.37 yen against 77.48 yen Thursday. This is an exception as the dollar has weakened against the British Pound and Canadian Dollar among others.

The measures announced by the U.S. central bank were truly amazing and operators continue to enjoy the show proposed by Ben Bernanke, boosting financial markets and commodities. Describing a gloomy economic environment and continued high unemployment rate, the Fed has announced a new program to repurchase mortgage-backed issued by agencies of mortgage refinancing products. It is committed to redemptions of $40 billion per month, it will continue as long as necessary until the situation in the labor market improves clearly. It will also keep interest rates near zero until at least mid-2015. Quantitative easing in fullness.

Indeed, injections of liquidity by the Fed in the economy contribute to create money and therefore dilute the value of the dollar, while low interest rates make it less attractive against other major currencies. In addition, the weakening of the dollar is amplified by improved investor confidence in the eurozone, which has reduced their appetite for safe-haven currencies. The euro, which had greatly benefited from the measures of the European Central Bank last week and ahead of the German Constitutional Court for relief mechanisms in the euro area was strengthened by hopes of imminent request by Spain of a backup plan.

Positive signals have increased this week for the euro area, allowing finance ministers meeting in Cyprus to resume breathing before October when major decisions are expected for Greece and a possible rescue of Spain. The main reason for satisfaction within the monetary union was the green light Wednesday by the German Constitutional Court on the European Stability Mechanism (ESM), the permanent firewall future of the euro zone.

A momentous decision, which paves the way for the launch of the fund, with a lending capacity of 500 billion euros, which entered into force at the beginning of the summer and will be fully operational in late October. Through the firewall and the new debt purchase program of the European Central Bank, the euro area is better equipped to help members in need and deal with the debt crisis that still threatens to extend.

Considerable progress has been made at the national level. Enthusiasm by German Chancellor Angela Merkel and Italian Prime Minister Mario Monti have been acknoledged. As proof, the European stock markets ended the week in the green and the euro is back above $ 1.31, its highest level since May. The reasons for rejoicing were not limited to the green light for the firewall in the euro area. Liberal victory in Dutch legislation has also been interpreted as a positive sign, showing that the rhetoric of populist Geert Wilders Europhobic attracted less than expected.

All this opened the way for Greece to be granted additional time to recover its public accounts. Despite this lull, the eurozone is far from having turned the page of the crisis: the nightmare scenario of an exit by Greece may resurface quickly, knowing that the country’s creditors must decide in October on payment of a new tranche of loans to the country. For this vital aid, Athens must adopt new austerity measures to get more than 11.5 billion euros.

The fate of Spain also remains a source of concern. Madrid is under pressure to seek a bailout for its economy but fears the imposition of drastic measures. The country must also cope with the pressure of the street, as demonstrators coming from all over Spain poured into the streets of the capital shouting their anger against austerity. Also tens of thousands of people are expected on Saturday afternoon in Portugal. Greece and Spain are on the menu for the next meeting of finance ministers of the euro area in early October in Luxembourg and are likely to monopolize the European leaders who will meet at a summit on 18 and 19 October.

The more it changes, the more it is the same

Saturday, November 5th, 2011

The euro exchange rate is probably the most important FX number to follow. The Yen is not as prominent as it used to be given the relative decline of the Japanese economy. The Reminbi will certainly become the leading currency but we are not there yet. The British Pound, Swiss Franc or Australian dollar are indeed interesting pieces of the FX puzzle but with a more local flavor. By default this leaves the EUR has the main currency to monitor (unless you think Gold is a currency).

And it is amazing how stable the euro has been in the past few years. If you have a look at the chart of the past five years of data, it is clear that we have a range [1.20-1.60] with an attraction value of 1.40. You can run all statistical tests you wish, but here the eye ball analysis tells a clear story of a mean reverting asset, with a mean around 1.40. The market tested 1.60 in a double top formation, but failed and collapsed steeply from there. A few years later it was time to attempt 1.20 and here again the V-shaped reversal was swift.

The chart shows an oscillation around 1.40 and it seems that for once the PPA is working. PPA in other words parity of purchasing power is a fundamental theory for valuing currencies. It simply says that physical assets, and in particular consumption goods, should have about the same value in various currencies otherwise arbitrage opportunities will arise that will bring back the forex level to a more realistic level. Of course this theory is just a framework for thoughts as currencies have a tendency to derail from it. To take 2 examples from the currencies previously mentioned, the Yuan has beem undervalued for a few decades (based on PPA), while Swiss products and cost of living remain consistently pricey.

The PPA is better illustrated by following ‘The Economist’s Mac Donald Index’ which compiles the value of a Big Mac all over the world. Back to the euro, Western Europe and the USA have many similarities, both are large, stable and developed economies with a lot of commerce and exchange between the two. So when the euro reached 1.60, it seemed like Europeans became undeservingly rich compared to Americans and anyone could fly to New York and have the time of their life. Conversely at 1.20 it was Americans who found themselves with a bargain.

These economies are similar with respect to their modest growth and to their large middle class and retired population. Europeans like to buy retirement homes in Spain or Marocco, but it the euro got too strong their may opt for a nice beach property in Florida. Likewise Americans would love to have a house in Europe if they can afford it. This type of supply demand equilibrium is part of what keeps the euro in check.

The above description was somehow the rosy scenario. Of course this assumes that the euro can survive its internal tensions, after all it is not a real currency issued by a sovereign state, so there is always the risk that it collapses. So far the Greeks have not yet killed the euro, but the battle is not over.

Another $600 billion injected into the system

Thursday, November 11th, 2010

The dollar continued its rebound in Asia on Wednesday morning on the eve of the opening of the G20 in Seoul. The greenback continues to benefit from the unwinding of some short positions before the summit, which brings a high risk of volatitility. The dollar now trades at 1.3755 / euro between banks.

The G20 meeting comes in the wake of the announcement last week of an additional $600 billion dollars injected in the U.S. financial system by the Federal Reserve. This leads some to say that the U.S. policy of competitive devaluation threatens more than ever the global monetary equilibrium, starting with the German Finance Minister Wolfgang Schäuble, who accused the Fed and its chairman Ben Bernanke of undermining the credibility of U.S. financial policy.

On the eve of the G20 summit on Thursday and Friday in South Korea German Chancellor Angela Merkel said in an interview that the euro should not bear alone the weight of monetary policies designed to maintain some currencies at artificially low levels. “A stable currency like the euro should not bear alone the burden of such adjustments,” she told the German daily Die Welt. This statement appears as a thinly veiled criticism against China and the United States in particular.

The Federal Reserve has raised outraged reactions from Europe especially in Germany by deciding once again to flood the market with liquidity, which could weigh on the dollar and thus harm European exports. “A policy that is based on a currency kept artificially low and the resulting benefits for exports, is shortsighted and undermines all,” said Merkel.

A Chinese official has also recently stepped into the breach to denounce “a shock to the global financial markets”. This is the Chinese Vice Minister of Finance Zhu, who said there will be frank discussions about it at the G20: “The United States must assume its role and responsibilities in the global economy” added the official from China has the merit of clarity.

As for Ben Bernanke, the Fed chief has tried to justify himself by saying that it was vital to global stability that the economy of the United States found some strength. A position criticized even internally as the chairman of the Federal Reserve Bank of Dallas said that he was opposed to this last decision of the U.S. central bank, arguing that the strategy is bad for savers, it will push up commodity prices, add to financial speculation and could prove very costly if interest rates rose suddenly.

One thing certain is that the financial crisis is not over and this G20 summit might be the place of intense debate among the political leaders of the major economies.

The rise of China and the Yuan

Monday, September 13th, 2010

Our strong belief is that China will take over the United States as the dominant power sometime this Century. This is becoming more apparent every day.

Note that in the image of the top of this blog, there is a Chinese woman holding some Renminbis. And you can also see on the left side of the same picture the exchange rate which was 7.31 when the photo was taken. China does not think like America, never did and probably never will. And a perfect example of that is their currencies.

Below is the exchange rate of the Chinese Yuan versus the US dollar for the past twenty years.


What is not always obvious when you read some recent newspapers articles talking about the Yuan moving in this or that direction is that for the most part the Yuan is not moving anymore with any significant degree. As they say one image reveals more than one thousand words. So let’s look at this graph.

First the chart makes it obvious that the Yuan has never been a freely floating currency, and it still is not. Whatever the official statements, the exchange rate is very much controlled by Beijing, with an iron hand in a velvet glove.

Long time ago, during the beginning of China’s modernization, the rate was at 5.50 (1992). The rate was even lower earlier (not on the plot). The Yuan was traditionally pegged at 2.46 fifty years ago, but it appreciated to a maximum rate of 1.50 in 1980.

As China opened up, they orchestrated a series of devaluations. The last one appears on the chart in 1994, when the Chinese made the last massive devaluation from 5.50 to 8.50. The rate then almost did not change for over ten years. Going from 1.50 to 8.50 gave a formidable competitive advantage for Chinese exports compared to other Asian or non-Asian nations, an advantage still felt today.

It is only at a much later time when the Han nation had achieved years after years of ten percent growth that they agreed to let the Yuan rise a bit, and it came back to about 6.7 in 2008. But from that point on, it has once more remained inside a tight range. As the picture clearly shows.

The red arrow leads to a zoom of the past 6 months range. So if you only see the range from that scale, it may seem that the exchange rate is moving. But indeed the recent movements are negligible.

The lessons to be learned. China differs from the USA for many reasons, two noteworthy are democracy and floating rates. So as China is rapidly dominating the world due to its economic success, it could very well be the case that the old democratic values from Europe may become vulnerable to a more controlled type of Government.

The stronger dollar

Friday, May 21st, 2010

My last post was titled “the strong dollar”, and there is no better title than “the stronger dollar” for this post. As the dollar has kept on getting stronger in the past few weeks.

After many years watching markets, the only fundamental truth that summarizes how markets move goes as follows: currencies are mean reverting and the extraneous shocks necessary to bring values closer to parity will occur. In other words when a currency is too pricey like the euro used to be, something will happen to make it cheaper like the current Hellenistic crisis.

And what is the best way to assess if a currency is too pricey beyond all sophisticated models created by erudite Doctors in Economics. Simply ask tourists who visit Europe from the USA or vice versa, and they will tell you when the God of Currencies has lost its mind, like when he had the euro at or over 1.50 to the dollar for a long period of time. This was so absurd that Paris was determined to be the most expensive city in the world for the cost of living according to a prominent European magazine.

Yes Paris was ahead of New York, Tokyo or Hong Kong. And given the relative wealth available in the 4 cities in question, this was simply a ludicrous bogus statistic stemming from an exaggerated value of the euro. Now back to a 1.25 FX rate, I bet you Paris is not number one anymore.

So often the highly complex econometric models from Ivy League educated Professors of Economics will equate with what all the talkative taxi drivers of the big cities in the world know from talking to travelers. Assuming such models are correct.

If there is a positive consequence from the Greek debacle, it is to bring the value of European assets back to more a reasonable level, starting with its currency the euro. The purchasing-power parity is what rules currencies at the end of the day and this is getting truer if economic players are given the opportunity to arbitrage geographical locations.

One such PPA model by the OECD said 6 months ago that the euro was 21% overvalued. Nice evaluation and it is now approximately correctly valued versus the green back. Another similar model by the IMF says that the Chinese Yuan is 75% undervalued and we all know this one. This is the reason why China is getting so strong with its cheap exports. And the Greek crisis is given them a new reason not to let their currency appreciate at this point.

USA: 0; Europe: -1; China: +1.

The strong dollar

Friday, February 26th, 2010

It is interesting to see how the FOREX market moves in waves and trends.

Not that long ago everyone was talking and blogging about the weak dollar, the end of America’s economic hegemony and its unsolvable deficit, deflation and the search for a replacement to the greenback.

Just a few months later the dollar has appreciated by 10% and the same bloggers are starting to worry if this dollar strength will have dire consequences. Here this discussion is focused on the USD versus Euro rate, a good summary of dollar strength or weakness.

This is all a matter of perspective. In my mind the EUR fluctuates in a big range [1.20-155] and this is where it belongs. Parity of purchasing power is a concept that traders and short-term investors tend to forget, but this is truly what defines the exchange rate. There are arbitrages from real good markets that guarantee that the dollar cannot stay too strong against the euro for  a prolonged period of time, and vice versa.

This fundamental truth is getting truer and truer and this is what guarantees that PPA theory will have its moment of glory. This is truer because the world is more integrated and arbitrages in real goods are easier and more predominant.

For example retired people in Europe may decide to buy their second home in Spain or in Florida. In the upper middle class this is common and the level of the exchange rate will be a significant determinant in their choice. As flying is easy and cheap, it does not make much difference to fly from Budapest to Barcelona or Miami.

The Internet facilitates the buying of all kinds of products that will be manufactured on the continent with the more favorable exchange rate. If one of the currencies were to diverge too much, natural commerce adjustments will occur that will modify supply demand to reverse the imbalance and the trend.

America and Europe are getting more alike, culturally and commercially, hence their currencies will stay in line for the most part. So expect the EUR to stay within [1.20-1.55] in the foreseeable future. But of course play the small trends and swings for short-term trading profits.

The demise of the US dollar

Thursday, October 29th, 2009

The theme of the weakening dollar is heralded in all news media.

This is nothing new to be honest and this was said years ago, even decades ago, until the dollar strengthened and then weakened ago.

Abandoning the dollar as the main international currency is a topic probably older than most currency traders nowadays. But years after years the dollar remains the main currency for forex trading, real goods trading, commodity trading in particular crude oil, currency reserves, etc. And if you travel and believe me I have traveled, and if you can only carry one currency with you, which one do you think it is going to be? Ok, ok sometimes the euro is more accepted such as in old French colonies in Africa, but this is by far the minority.

So why do people keep on writing thousands of pages and blogs about the demise of the dollar? The short answer I guess is people do not learn. Anyway the slightly longer answer is you need a currency to replace the dollar. It is not going to be the euro, because the euro is still a new currency (ten years old!) and even a large portion of Europeans do not like the euro, and it would be hard to convince the rest of the World to make it the reference currency. Yes one reason they do not like it is that it has induced concealed inflation.

You see, you need one currency to replace the dollar, and that currency has to be strong. The dollar will not be replaced by a smaller currency. Using a basket of currency to replace the dollar will never happen either. Why? Because a basket is not a currency in itself, it is an artificial creation with no relation to a real physical reality. The dollar is the dollar because it is backed by the power of the United States economy and population and army. Three not small backers. Baskets never have and never will be trusted and be able to compete with a true currency. Historically they have never worked. Just take the example of the predecessor of the euro, the ECU. It failed like all baskets, because the weaker elements in the basket make the basket fail.

So the point is only a currency can replace the dollar and it has to be strong. I just explained that the euro is not ready, far from it. What are the other strong currencies. The British Pound and Swiss French are way too small and local currencies to be even considered. The real serious contender is the Japanese Yen, and here again it cannot and will never replace the US dollar. First Japan is less than half the size of the US economy. Japan has no military. The Japanese Yen is not use as a currency for trading, unless one Japanese counterpart is involved in the transaction as buyer or seller.

So here we are, keep on printing pages after pages saying that crude oil will soon be traded in another currency like you have been saying for over ten years, and I am still waiting.

Wait, wait. So that is it? The truth is yes that is it. I hear someone say the Yuan. Please do I need to answer that? It is not even a freely traded currency please.

Summary: the dollar will remain the dominant world currency as long as there is no candidate for its replacement.

Dollar weakness persists

Monday, June 1st, 2009

As mentioned in my previous post about the dollar, the current financial theme in the Forex market is dollar weakness.

As most bad economic news have already been priced into financial markets, and as these markets were created to anticipate, or speculate depending on whom you ask, the bullish market is continuing full steam at the start of June. The Dow Jones is up 211.11 points today.

The idea is that with so much Government intervention and liquidity creation by Central Banks globally, low interest rates and asset prices at much more affordable levels than they used to be, all is set for the next bull market.

This is not exactly a new bull market, but rather a current bull market as it started nearly three months ago. Only time will tell how powerful this rally is, but for now the bulls are dictating the direction of financial markets, with many new 6 months highs or lows reached today.

Rallying stock and bond markets, lower rates and liquidity injections make the dollar less attractive as an asset and this is the reason why a corollary of the current financial paradigm is dollar weakness.

Today’s rally was fueled by numbers showing that the US manufacturing sector was contracting at the lowest pace in recent history in addition to indications that commodity demand was strong in Asia.

The euro broke 1.42 in European time, to settle later around 141.60. The dollar was weak across the board and reached new 6 months intraday lows against most other currencies.

Based on the momentum theory, I forecast further dollar weakness in the near term.

Euro at a 2009 High on Dollar

Saturday, May 23rd, 2009

Since the end of 2008, the Euro has traded in a range 1.25-1.40, moving back and forth.

In the pas few weeks, the Euro has rallied steadily and crossed 1.40 for the first time in 2009. What is also apparent is the correlation with the rally of the U.S. stock market.

The U.S. market has been rallying smoothly (with lower volatility) as of late, and for now momentum players are ruling the Euro. This is a standard type of trade with a mini trend started from a strong low (as the recent low is stronger than previous lows), plus the possibility to test a 6-month and a 9-month ranges, and to go all the way to the next magnet price of 1.50.

With respect to fundamental news, one reason for the rally is the recent decision by Standard & Poor’s to take a negative outlook on the triple-A rating of the U.K. This led to the belief that the triple-A rating of the U.S.A. could or should also be put on the same watch list.

Between you and me, this is ludicrous, as there is no better credit in the World than the U.S. Government. This is why it is called risk-free rate in Economics and Finance classes. Downgrading such rating is totally meaningless, as it just means all other credits should be shifted down as well. So this sounds more like an excuse to justify the rally than anything else, and confirms the momentum play theory.

In the other main currency pair, the Yen has also being very strong lately, confirming the scenario of overall medium-term U.S. dollar weakness, even though it corrected by late Friday. The dollar has also been weak versus the British Pound and the Swiss franc.

How is this dollar weakness playing in the bigger picture? For many months, part of the financial and forex business community has been concerned with the massive influx of liquidity created by World Central Banks, especially the Federal Reserve.

Printing money in times of crisis is not a new medicine, but the Obama’s administration is using it like there is no tomorrow. Creating money has always led to inflation since the first King of Antiquity started it. Only the future will tell us if this time is a different time. Or if this time there are strong enough counter forces such as a globalization induced deflationary wave to eradicate this mounting inflation.

For now, most economic indicators show inflation insouciance, such as the spread between the yield on the 10-year inflation-protected Treasury and the regular 10-year Treasury, which suggests inflation at 1.78%. But a number of smart money and well informed investors have been piling into Gold this year, betting that inflation will pop its ugly head at some point.

What is the most stable currency vs. US dollar?

Wednesday, April 22nd, 2009

Do you know what the most stable currency versus the USD is, in the past one year, five year or twenty years?

Of course if you are a currency trader or if you are from that country, it is easy for you to answer. It is a currency which has almost always stayed within a 1% band versus the greenback in the past 20 years.

It is the Hong Kong dollar.

Before I start, note that the Hong Kong Dollar (HKD) dollar is the currency of Hong Kong which is part of China, whilst the Chinese Yuan or Renminbi (RMB) is the currency of mainland China. They do not have the same value (but they are close) and do not follow the same fluctuations.

The HKD’s target rate set by the Hong Kong Monetary Authority has been 7.8 HKD/USD since 1983. And since then, this “pegged rate” has almost never moved away by more than a percent; very rarely was the rate below 7.72. At the time of writing, it is at 7.75. It is always less than 7.8, usually around 7.77.

So who cares?

I care and I hope you too if you are still reading. The point is that if you are here you must be interested in currencies. And what is so special about all pegs is that they are made to be broken. An unbroken peg for 26 years is certainly almost a miracle.

Hong Kong is a relatively small country. It is “bigger” now, indeed it is part of China, but in 1983 it was small and it was not on such friendly terms with its big brother in the North as it is now. No other country, small or big, has been able to maintain a USD peg that long. The Singapore dollar also had a loose peg, but it has been shaken by wild financial crises more than once.

Hong Kong also faced financial crises, and not just the recent one. Do you remember the so-called Asian financial crisis in 1997? Then all the currencies from the “Asian Dragons” collapsed: Singapore, Taiwan and Korea, but not the 4th Dragon, Hong Kong. Other lesser dragons such as Thailand, Indonesia saw their currencies lose as much as 75% of their value against the US dollar.

Malaysia, like Hong Kong, had pegged its currency. But the consequence of the financial meltdown was truly dramatic as the convertibility of the Malaysian Ringgit was suspended, the Prime Minister took drastic measures and sent his successor to jail under accusations of sodomy.

I take off my hat to the courage and determination of the HKMA during all these years. 1998 was particularly tough, as Soros and other hedge funds took positions against HKD, but it never broke. Certainly Hong Kong has and continues to have large currency reserves and abundant wealth, but without its political firmness, it could not have sustained all these emergencies.

If you are interested in making money using forex trading systems, please cross the HKD/USD pair from your list, as the chart is a near perfect flat line. Thank God, there are many other currencies to play with.