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In October, I wrote about a “separation” that had taken place in currency markets between the “sick” currencies and the “healthy” currencies. At the time, I argued that the former category was comprised mainly of the Dollar and the Pound, with most other currencies healthy by comparison. While I still stand by this paradigm, I would like to revise it slightly. Specifically, I would like to add the Euro and the Yen to this list.

The recent blow-up surrounding the downgrade of Greece’s debt and subsequent explosion in the price of credit default swaps (which insure against default), have shined a spotlight on the fiscal problems of many of the EU’s member states, including Spain, Italy, Portugal, Ireland, and others. The situation in Japan, meanwhile, has been much more gradual, though equally dangerous: “In 1990, Japan’s total national debt load was 390% of GDP. Now it’s 460%. In the interim, the country has suffered sub-par growth and routine recessions.”

The fiscal problems of the US and UK governments as well as the debts of their citizens and companies have long been famous. For that reason, when the sick/healthy paradigm was first proposed, they were the two most obvious candidates. Having conducted some additional analysis, it’s now patently obvious that the same problems affect the EU and Japan. Given that their economies are also in weak shape, it doesn’t really make sense to group them in with the healthy currencies. Canada (and the Loonie, by extension) is also looking sickly, with its surging national debt and record budget deficits. The only reason it is being spared from the list is because of its richness in natural resources; in other words, it has something tangible that it can use to pay its debts.

Among the so-called majors, then, only the Swiss Franc, Canadian Loonie, Australian Dollar, and New Zealand Dollar get clean bills of health. A re-casting of the paradigm, then, would put the super-majors (Euro, Yen, Pound, and Dollar account for more than 75% of all foreign exchange activity) on one side, and virtually every other currency on the other. Given that national debt ratios and interest rate differentials diverge across the same boundary, it’s not hard to conjure a basis for this partition. “The IMF forecasts that gross government debt among advanced economies will continue to rise until 2014, reaching 114% of GDP, compared to just 35% for developing nations.” Adds another analyst: “If you look at currencies as a proxy for growth, then you can anticipate that emerging-market currencies will appreciate against the dollar.”

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There is also a correction that is taking place within the group of sick currencies. Investors have come to realize belatedly that a Dollar sell-off doesn’t make any sense against the Euro and Yen, whose economic and fiscal situations could hardly be characterized as healthy. “Against the majors, we’re pretty close to the end, if we haven’t already reached the end of a bear market in the dollar,” asserted one analyst. Given that the Dollar’s demise had all but been taken for granted, this reconsideration isn’t coming natural. Volatility has surged to a 3-month high, and investors are responding by moving funds back to the US. Among the majors, then, it looks like the Dollar is still the “least worst” currency.

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Posted on January 30, 2010
at 7:03 pm
Written / posted by: Simon
Filed under: News, Sharp Observations, forex trading

President Barack Obama trumpeted his message of change all the way to the White House, but when it comes to the U.S. tone on China and its yuan, economists say that message might not apply. U.S. manufacturers have long claimed that the Chinese currency is undervalued, giving its goods a competitive edge. A weaker currency helps exporters by making their goods more attractively priced in overseas markets, and boosting the value of their repatriated profits. While Bush administration officials sometimes called for greater yuan appreciation, their pressure was relatively light. “As Treasury Secretary, [Henry] Paulson has favored the buddy-vs.-bully approach to China. Although the Chinese yuan has appreciated 15% over the past two years, it is still considered undervalued,” said Kathy Lien, director of currency research at GFT in New York.

In the first half of 2008, the Chinese currency appreciated about 6% against the U.S. dollar, but it was largely flat in the second half. Some investors are fearful that the new administration will step up the pressure on China to allow its currency to strengthen further, and that this will lead to deteriorating trade relations between the two countries.

Whether the Obama administration will change the U.S. tone on China “is a matter of concern. I do believe that the new administration may take a more protectionist approach, which may include pushing for a more favorable currency position,” said Rob Lutts, the chief investment officer of Cabot Money Management, a Salem, Mass.-based independent wealth-management firm. “There is a real danger in this new administration that they may abandon the free-market approach that we have all become reliant on in our analysis. We may find an administration that becomes tough on trade and sets barriers to global trade,” he added.During the campaign, Obama focused his attention elsewhere. But his Democratic rival Hilary Rodham Clinton the incoming secretary of state sometimes took aim at China’s trade surplus and product-safety record. Some politicians have even warned that Obama could not only step up the rhetoric, but back up tougher words with action. “I don’t think just jawboning will be the approach of this administration,” Rep. Sander Levin, a Michigan Democrat who chairs a trade subcommittee in the House of Representatives, said Wednesday, according to media reports.

Domestic priorities
In fact, China itself has every reason to avoid both depreciation and appreciation of its currency. The latter could further weigh on already drooping exports, and the former could lead to capital outflows from the country, at a time it can least afford this. Chinese authorities, like their U.S. counterparts, are giving priority to domestic economic challenges, as their country’s economic growth slows. Gross domestic product eased to 9% on the year in the third quarter of 2008, after growing by 11.9% in 2007. Reflecting the weak global demand, China’s exports contracted in December at their fastest pace in almost a decade. Shipments fell 2.8% to $111.16 billion from a year earlier, their biggest contraction since April 1999. See full story on China’s export slowdown. But so far, China does not appear to be poised to export its way out of the global downturn. Instead, it is pinning its recovery hopes on stimulus and steps aimed at boosting domestic demand, which bodes well for those betting on stable foreign exchange.

China has committed $586 billion in stimulus spending during the next two years to offset the effects of the global slowdown, with the bulk of the outlays expected to go toward infrastructure projects.
The People’s Bank of China has cut interest rates five times and reduced banks’ reserve requirements three times, since it embarked on a monetary-easing cycle in September in response to the deepening global economic crisis.
“While pressure is rising from slowing exports and GDP growth, we believe China will opt for exchange-rate stability in the near term,” said Stephen Schwartz and Ting Lu, Hong Kong-based analysts at Merrill Lynch.
“The authorities’ response to slowing growth has been an aggressive easing of fiscal and monetary policies to stimulate domestic demand, consistent with their stated longer-term goal of rebalancing growth toward domestic consumption and away from external demand,” they wrote in a research note.

Manipulator, or not
Last month, the outgoing Bush administration passed up its last chance to label China as a currency manipulator.
In its biannual report to Congress on the foreign-exchange market, the Treasury said that no major trading partner, including China, met the standards to be labeled a manipulator. “There is some speculation that Obama will reverse this and cite China, which would open the door to possible retaliation” if subsequent negotiations were to fail, according to Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York.. “But there is little basis to believe this talk has merit.”
He said that Obama’s picks for the Treasury Department are heavily weighted in the free-trade wing of the Democratic Party. Therefore, Chandler added, Obama’s team — as well as the media — should “focus on the broad relationship with China and not allow the bilateral nominal-currency relationship to dominate his message.”

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Posted on January 22, 2009
at 10:02 pm
Written / posted by: Piere
Filed under: Currency Trading, News, Sharp Observations, forex trading

As 2008 comes to a violent end, forex analysts are releasing their predictions for 2009. Most believe that risk aversion and interest rate discrepancies will cease to weigh on forex markets, especially compared to 2008, when investors unwound carry trades and parked their money in low-yielding (but apparently less risky) US and Japanese securities. Instead, investors will probably begin to focus more on economic fundamentals. With regard to the Dollar, this approach could work either way. On the one hand, it is conceivable that the US will outperform (this could translate into a milder recession) the EU and Japan, since the Fed’s interest rate cuts were implemented at such an early stage. On the other hand, the US twin deficits continue to expand, which suggests the possibility of long-term inflation as well as a potential reluctance in foreigners to continue to lend to the US.

Marketwatch reports:
To be sure, the dollar’s 2009 trajectory depends a lot on what the U.S. and global economies do, and when they do it. The U.S. recovery could begin midyear, or the clouds could linger until the fourth quarter or even longer.

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Posted on December 30, 2008
at 1:12 pm
Written / posted by: Simon
Filed under: Currency Trading, Sharp Observations, forex trading

That banks are vulnerable organizations, has become clear to all of us. Frankly, banks are by definition unstable. The system has never been “perfect” and everybody, really everybody who was paying attention saw this crash coming. The post-Bretton Woods system in which debt (future prosperity) was going to serve as cover was doomed to fail from day one. Banks have always been insecure and now the monetary is jammed it will never really be safe to put your money on a bank account.

At this moment the situation is so that if a large bank falls, no ‘rescue plan’ will be good enough to save that bank. Each ‘rescue plan’ could lead to hyperinflation. Fortunately, it is also quite possible to bank without banks!

The Basic banks were a kind of market that mediated between borrowers and savers and we need to go back to that principle. A modern bank with its FRACTIONAL reserve principle, is unnecessary and dangerous. Ultimately, the fractional reserve principle was created so that banks could issue more loans and thus make more profit. Our banks can and are receiving interest on money they don’t have or own because they switched to this fractional reserve principle. A central bank is completely unnecessary, such institution solely exist in the grace of inflation and deflation.

Anyway, eventually, if you look trough all misleading constructions of modern banking its quite simple. Is it not high time for something new?

With the advent of modern means of online communication and collaboration, Web 2.0, it is very easy to continue without banks.

An alternative way of getting a loan: Social Banking.

Characteristic of Web 2.0 communication and collaboration means is that the facilities allow users themselves to produce results. Think of Wikipedia, Youtube, Digg, and so on. They are all so-called crowd-sourced systems with user-generated content, which means that visitors will do all the work. The concept I’m trying to get to is called Peer-to-Peer banking. At this time quite a number of successful Peer-to-Peer social banking systems have already been set up and and the conditions are better than normal banks. A peer-to-peer banking system is a market place where people directly borrow and lend money to each other. People can operate on mutually desired conditions. The best-known peer-to-peer bank is Zopa which already claims their safer than banks.

“There’s no smoke and no mirrors – unlike at a bank. Because banks use your money to make even more money for themselves. They lend some of it out, some gamble on the price of tin or the depreciating yen, and invested the rest in any other money-making schemes they can think of.“

Starting with social banking is simple. Its not harder than selling or buying stuff on Ebay. When you sign up for social banking your reliability and  identity will be checked carefully and you can only lend or borrow money when you have passed these tests perfectly. There are mechanisms to indicate how long you want to lend money and at what rates, in order to estimate reliability and to spread risks. When you don’t pay back lenders, just like any other defaulter, will get you an angry-looking team Yugoslavia’s in front of your door.

The benefits are enormous. Everyone knows exactly where his money goes and where it comes from. The return on savings is higher, partly because there are no expensive banks involved. 

At this moment, Peer-to-Peer banks have the disadvantage users will not be protected from the massive devaluation of the currencies, but In principle, the concept itself is very suitable for on the basis of a new currency to replace traditional banks. 

With its own currency and a smart implementation of the peer-to-peer banking concept, we could now do without banks. Think about it people and spread the word.

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Posted on December 15, 2008
at 8:20 pm
Written / posted by: John
Filed under: Credit Crisis, Sharp Observations

Concerns about the dollar and the largest owner and recipient of the dollar have been set to a higher level. China more and more often reports that they might drop their dollar reserves. If these signals are to be taken seriously or not you decide.

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Posted on December 13, 2008
at 11:00 pm
Written / posted by: Simon
Filed under: Sharp Observations