Major Currencies

As the Japanese Yen continues to enjoy the carry trade limelight, another currency fulfilling a similar role has been largely overlooked: the Swiss Franc.  While not quite as low as rates in Japan, Swiss interest rates are still extremely modest by international standards. As a result, many carry traders have used the Swiss Franc in much the same way as the Japanese Yen, selling it short in favor of higher-yielding currencies. And, just as the Japanese Yen has begun climbing over the last few months, so has the Swiss Franc.  The volatility in capital markets caused by the credit crunch is just as prevalent in forex markets, and is leading currency traders to eschew yield (high interest rates) in favor of stability, which benefits currencies like the Franc. The Economic Times reports:

Another trader with a multinational bank said with carry trades now coming under heavy pressure and banks being reluctant to fund investors entering into such trades, risk aversion seems to be taking over the global currency markets.

Read More: Swiss franc safe haven for carry trade

Original post by Jimmy Atkinson and software by Elliott Back

Yesterday, I posted about how market volatility could spell the end of the carry trade, bringing down the Australian Dollar in the process. Today, I will explore the opposite side of the debate, by looking at the factor(s) which support a continued appreciation of the AUD.  A rise in global commodity prices have provided a windfall to Australia, which is rich in natural resources. Unfortunately, the boom in exports and the surge in domestic demand has trickled down in the form of inflation.  As a result, the Central Bank of Australia recently embarked on a campaign of tightening monetary policy.  While this may curb domestic demand, it may attract more foreign capital in the form of carry trades. The gap between US and Australian interest rates is now 2.25%, and looks set to widen further. The Australian Business reports:

The [Australian] dollar’s trade-weighted value rose by 20 per cent between late 2002 and early 2004 but was much slower to respond in the 1970s boom, when the exchange rate was set by government.

Read More: Action needed as current boom echoes overheating of 1970s

Original post by Jimmy Atkinson and software by Elliott Back

Advocates of the carry trade have long argued that the only thing that could possibly put an end to their fun would be a significant rise in Japanese interest rates, which seems quite unlikely at this point.  However, a new threat to the carry trade has emerged: volatility. Global capital markets have see-sawed over the last few months as credit concerns have surfaced, often related to America’s housing bubble.  This month, the Australian Dollar and New Zealand Kiwi have been the two worst performers among the world’s 17 most actively-traded currencies.  This is notable because these two currencies are most likely to be on the long end of carry trades.  Bloomberg News reports:

The currencies also slid against the U.S. dollar as Citigroup Inc. said it will report as much as $11 billion in additional writedowns, reducing demand for so-called carry trades.

Read More: Australian, New Zealand Dollars Fall on Renewed Credit Concerns

Original post by Jimmy Atkinson and software by Elliott Back

Australia’s
benchmark interest rate, at 6.50%, is already the highest in the industrialized
world, after New Zealand.
Ignoring the pleas of the Treasurer, the Central Bank of has all but decided to
hike rates even further into the stratosphere at its next meeting.  The country is in a bit of a pickle, since a
booming economy and the consequent inflation seems to demand a rate hike.  At the same time, this rate hike will ensure
that Australia continues to
be on the receiving end of Japanese carry trades, and this is precisely what irks
Peter Costello, Australia’s
Treasurer. In other words, the world’s
massive economic imbalances will only be exacerbated by an Australian rate
hike, but this may be a moot point as far as the Central Bank is concerned.  The Sydney Morning Herald reports:

Instability on global financial markets between now and the
next Reserve Bank board meeting on Melbourne Cup day is seen by economists as
the only force that could stay the bank’s hand from raising rates to the
highest level in a decade.

Read More: Look out for the tsunami, says Costello

Original post by Jimmy Atkinson and software by Elliott Back

Over the last few months, the Australian Dollar has risen over 15% against the USD, bringing the currency to a 23-year high. With parity (1:1 exchange rate) in sight, some analysts are beginning to draw parallels between the Australian Dollar and the Canadian Dollar, which skyrocketed to parity against the USD just last month.  Both economies are rich in natural resources, relying heavily on them to drive exports.  In fact, more than half of Australia’s exports are comprised of natural resources.  It is no surprise that as oil, gold, and a host of other raw materials have surged to record highs, the Australian economy has outperformed even the rosiest of expectations.  With China’s economic boom promising to keep raw material prices high for the near future, the prospects for Australia’s economy, and hence its currency, are brighter than ever.

What’s more, the basic divergence in growth is clearly tipping towards the momentum underlying the Aussie economy with consumer spending, business investment and export income promising strength for the economy and currency in the months to come.

DailyFX reports: Australian Dollar: The Next to Reach Parity?

Original post by Jimmy Atkinson and software by Elliott Back

The Australian Dollar recently touched a 20-year high against the USD, having risen 15% in the last month alone.  In fact, the currency has proved to be one of the top performers against the USD in 2007, having benefited from continued weakness in the US economy.  It has also been one of the chief beneficiaries of the Yen carry trade, in which investors have sold Yen in favor of higher-yielding currencies, which also include the Swiss Franc and New Zealand Dollar.  Meanwhile, Australia’s economy is surging, as Chinese demand for raw materials is unabated.  Many analysts are asserting that the Australian Dollar can go no higher, citing technical factors.  However, there seems to be just as many analysts who expect the AUD to test the outer limits of parity with the USD.  The Sydney Morning Herald reports:

The chief equities economist at CommSec, Craig James, said the dollar was now likely to enter the “nervous nineties.”

Read More: Australian dollar the strongest in 20 years

Original post by Jimmy Atkinson and software by Elliott Back

Credit problems in the US have been the source of much turmoil throughout the global markets in the past few months. Tuesday was good for the US dollar, which held strong against both the yen and the euro. However, forthcoming economic reports from the US may or may not tip the scales. According to Reuters:

"The panic is almost over, but the market has lost its direction and is
waiting for more news, especially any good news," said Kikuko Takeda, a
currency strategist at Bank of Tokyo-Mitsubishi UFJ.

Read more: Dollar drifts as U.S. data awaited for direction

Original post by Amy Cottrell and software by Elliott Back

Friday is looking up for risky currencies, as President Bush will announce a plan to help US  homeowners who are at risk of defaulting on their mortgage loan. This has eased the concerns of many forex traders who have been resting their money in low-yield currencies like the yen. Now, with the subprime mortgage issues being addressed by the US government, high-risk investments will resume. Reports Reuters:

"There is some reaction to Bush’s plans to help out people
who are in trouble with their mortgage payments and markets are
also expecting some comments from Bernanke this afternoon
regarding rate cuts. Both these factors are helping the carry
trade," said Carsten Fritsch, currency strategist at Commerzbank
Corporates & Markets in Frankfurt.

Read more: High yielders recover ahead of Bush, Bernanke

Original post by Amy Cottrell and software by Elliott Back

It has been a while since forex markets have been as focused
on interest rate differentials as they are now. With the exception of the Canadian Loonie and Australian Dollar,
all of the world’s major currencies are rising and falling almost entirely on the
basis of interest rates. Until
recently, the USD had forestalled its inevitable decline because interest rate levels
were significantly higher than in other countries, and foreigners remained
willing to finance the US trade deficit. Since the respective Central Banks of Britain and the EU began hiking
rates, however, the Euro and British Pound have risen while the Dollar has plummeted. 

Meanwhile, the Japanese Yen is near historic lows because
carry traders are borrowing at low Japanese rates and investing abroad. On the flipside, the New Zealand Dollar has
surged, and the country is having a difficult time keeping investors away
because its interest rates are so high. Interest rates have achieved such force that even changes in expectations,
rather than changes in actual rates, are now more than capable of moving the
market significantly.

Read More: Back to Interest Rate
Expectations

Original post by Jimmy Atkinson and software by Elliott Back

2008 is still in its infancy, which means the self-proclaimed forex experts can be excused for offering their projections on what the year has in store for the Dollar.  If currencies were traded in a vaccum, the Dollar would probably trend upward, since many technical factors suggest it is oversold.  From a fundamental standpoint, however, it is probably overvalued, per the laws of interest rate parity and purchasing power parity.  Relative to other countries, though, it may be undervalued.  From this standpoint, argue some analysts, the biggest impetus for a Dollar upswing will come not from good news emanating from the US, but rather from bad news emanating from the rest of the world.  For example, the British economy, balance of trade, and monetary policy outlook is even more bleak than the US.  The CEO of Airbus, one of the EU’s most important companies, has threatened to shift production away from the EU if the Euro remains expensive.  Finally, the Central Bank of China is allowing the Yuan to appreciate at a faster pace against the Dollar.  As far as Dollar bulls are concerned, it might be best if the US government simply sits tight. The BBC reports:

"A lot of bad news is already priced into the dollar.
It’s elsewhere that the shocks could come from, perhaps from the
European Central Bank, or the Bank of England."

Read More: 2008 - the return of the dollar?

Original post by Jimmy Atkinson and software by Elliott Back

Forex Forecast- try saying that three times fast! The Market Oracle, an online financial publication, has done even better, preparing a one-year forecast for all of the major currencies along with a detailed analysis of the major factors driving each currency in the month of February. The Dollar and Yen are projected to be the strongest performers in this time frame, benefiting from a trend towards risk aversion.  It should be noted that this prediction is consistent with news reported by the Forex Blog earlier this week. On the other hand, currencies that have been propped up by the Yen carry trade, namely those of Australia, New Zealand, Canada and South Africa, will face selling pressure.  The British Pound is projected to underperform slightly, due to an easing of British monetary policy, which will narrow the interest rate advantage claimed over the US.

Finally, the Euro is something of a wildcard.  On the one hand, the EU economy is stagnating, and the ECB has hinted that rate cuts are a possibility. On the other hand, the Euro theoretically stands to inherit a significant amount of risk-averse capital, especially from foreign investors looking for a stable alternative to the Dollar.  Accordingly, the Market Oracle forecasts a short-term decline in the value of the Euro but a long-term appreciation.

Read More: Currency Market Strategy and Forecasts for February 2008

Original post by Jimmy Atkinson and software by Elliott Back

Together with a consortium of large banks, Merrill Lynch recently formed ELEMENTS, which unveiled five new currency Exchange Traded Notes (ETNs).  Before ML entered the market via ELEMENTS, there were only two banks offering currency ETF products: Barclays Capital and Rydex, whose funds are branded CurrencyShares and iPath, respectively.  ETNs differ from ETFs in that the former represent a debt obligation whereas the latter represent a form of equity.  In practice, however, since the risk of default is relatively low, the two types of securities are functionally equivalent.  Both pay interest slightly below the benchmark interest rates of the currencies to which they are connected. The five new ELEMENTS ETNs are separately tied to the performance of the Canadian Dollar, Euro, Swiss Franc, British Pound, and Australian Dollar. Index Universe reports:

Why would anyone choose the new ELEMENTS ETFs? Because they make semiannual cash dividend payments to noteholders based on the interest income. The iPath ETNs, in contrast, incorporate that income into the value of the note … a kind of "virtual interest" that is only realized when the noteholder sells.

Read More: Currency Market Gets More Competitive 

Original post by Jimmy Atkinson and software by Elliott Back

The word "parity" is becoming a mainstay of traders in the forex markets.  In 2007, it applied to the Canadian Dollar, which had rallied 70% over the course of five years to reach the mythical 1:1 level against the USD.  This year, it is the Australian Dollar that is threatening to surpass the Dollar in value. The AUD has always benefited from general USD weakness, but now the focus is shifting to the AUD, itself. The most recent Australian price data suggests that inflation in Australia remains problematic, which could force its Central Bank to raise the benchmark lending rate to 7.5%.  In addition, high commodity prices and consequently strong exports should provide demand for the currency. As always, analysts are divided over the likelihood of parity, but that hasn’t stopped them from bandying the term about. The Australian Age reports:

Parity was never a "ridiculous suggestion." "But it’s probably a bit
tougher going because the Australian economy is slowing," says one analyst. "Then again, if you saw a reacceleration in growth, that might be a
different story."

Read More: Our dollar on a roll…

Original post by Jimmy Atkinson and software by Elliott Back

The Australian Dollar is rapidly approaching parity with the USD, having risen 12.8% in the year-to-date. In fact, it recently notched a 24-year high against the Dollar. The currency’s strength is connected closely with the US-Australia interest rate differential, which currently measures a whopping 5%. While the Australian Dollar has always been a favorite target of carry traders, it has received a special boost from the easing of US monetary policy, which has turned the Dollar into a funding currency. The New Zealand Kiwi has also performed well, thanks to a benchmark interest rate of 8.25%. However, New Zealand rates are probably headed downwards, whereas the consensus for Australia is for rates to remain at current levels, or even to rise, depending on inflation. Bloomberg News reports:

Board
members decided to leave the rate at 7.25 percent because of "the substantial tightening" in financial conditions since
mid-2007 and "uncertainty surrounding" the outlook for
economic growth and inflation.

Read More: Australian Dollar Rises to 24-Year High on RBA Meeting Minutes

Original post by Jimmy Atkinson and software by Elliott Back