world wide currencies

Brazil Continues to Intervene

For nearly two months, the Central Bank of Brazil was content to sit on the sidelines and watch its currency, the Real, appreciate rapidly against the Dollar. Beginning on October 8, however, the Central Bank has intervened in forex markets every day as part of a targeted effort to depress the Real. Its efforts have been relatively straightforward; rather than issue currency stabilization bonds, the Central Bank has opted to purchase massive quantities of Dollar-denominated assets in the open market, bringing its foreign exchange reserves to $168 Billion. Moreover, its efforts have been largely successful, as the Real has fallen slightly against the Dollar during this period of intervention. However, logic (and past experience) dictate that as soon as it stops intervening, the Real will resume its previous (upward) course against the Dollar. Bloomberg News reports:

Foreign flows into Brazilian financial markets and booming commodity exports have made the real the best performer against the dollar this year among the 16 most-actively traded currencies tracked by Bloomberg, gaining 20 percent.

Read More: Brazilian Currency Falls After Central Bank Buys U.S. Dollars

Posted to Central Banks , Emerging Currencies | Permalink

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November 21, 2007
Carry Trade Continues to Suffer

The carry trade is officially unwinding, if not coming to an outright end; the result is that the Yen is belatedly joining the ranks of the rest of the world's major currencies, which have risen tremendously against the Dollar. The reason for the sudden weakness in the carry trade (i.e. Yen strength) is volatility. The US "credit crunch" began to significantly effect US bond and stock market valuations almost four months ago, but the full impact still hasn't been felt. The latest development concerns the quarterly earnings release for Freddie Mac, an American company whose main purpose is to provide liquidity to the US mortgage market, through the buying and selling of mortgage-backed securities. However, Freddie Mac is now bleeding money, and while it is unofficially guaranteed by the federal government, investors are seriously questioning its ability to prop up the ailing market for housing CDOs. And this uncertainty is causing investors to eschew risk, in short, to abandon the carry trade in favor of more traditional forex strategies. Reuters reports:

The low-yielding Japanese currency tends to do well in times of risk aversion because investors unwind carry trades that use cheaply borrowed yen to buy higher-yielding currencies.

Read More: Dollar sinks to 2-year low vs yen, euro hits highs

Posted to Investing & Trading, Japanese Yen | Permalink

November 20, 2007
Swiss Franc Benefits from Volatility

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

Posted to Investing & Trading, Major Currencies | Permalink

November 19, 2007
Fed to Hold Rates?

In a recent speech, a prominent Federal Reserve Board governor strongly hinted that the Fed would maintain US interest rates at current levels at the Fed's next meeting. The Fed is caught in the delicate position of trying to balance economic growth with the specter of inflation. While technically the Fed is always trying to meditate between these two outcomes, its current position is especially tenuous since the US economy is trending downward while inflation trends upward. Despite the emphatic claims to the contrary, futures markets are still pricing in a rate cut, setting the stage for a showdown with the Fed. As usual, the Dollar's fate hangs in the balance. The Financial Times reports:

Mr Kroszner said that in the near term "the economy will probably go through a rough patch" with falls in house prices, home construction and subdued consumer spending. He did not rule out a future cut in rates.

Read More: Fed and markets set to clash

Posted to Central Banks , US Dollar | Permalink

November 16, 2007
Yen Carry Trade: Going Strong or Coming to an End

Yesterday, the Financial Times ran two stories on the Japanese carry trade, painting a seemingly contradictory picture. The first article profiled the rise in the number of retail forex accounts in Japan, projected to reach 1 million by year-end. More amazing is the fact that many of these traders are actually quite sophisticated, taking long and short positions in multiple currencies, though of course the most popular bet remains the carry trade, which involves going short the Yen and long a higher-yielding currency. Meanwhile, as the second article expounded, the Yen carry trade is under pressure, having appreciated nearly 5% against the US Dollar, Euro and Australian Dollar. The cause is certainly volatility in global capital markets, precipitated by what has been termed a "credit crunch," itself caused by the slump in housing prices. The hoard of Japanese retail investors may have to reverse their positions...

Read More: Pressure grows on yen carry trades and Forex Lures Japanese Investors

Posted to Investing & Trading, Japanese Yen | Permalink

November 15, 2007
Why China Should Not Dump the Dollar

In fact, China may have to increase its exposure to the dollar, according to the comments of Brad Setser of the Council of Foreign Relations: "In my mind, so long as China resists more rapid appreciation of the renminbi versus the dollar, it's rather difficult for China to diversify in any meaningful way against the dollar. If China really started to diversify away from the dollar, I think it's a big enough player that it would put downward additional pressure on the dollar."

And additional downard pressure on the USD should be what China is trying to avoid. China, being the largest exporter to the U.S. does not want to see appreciation of its currency against the USD, as that would make its goods more expensive (and therefore less competitive) in America.

In fact, Setser goes on to say that in order to prevent the USD from sliding even further downward against the RMB, China would have to not only retain its present stock of USD, but in fact buy even more.

Read more: Can China Dump the Dollar?

Posted to Chinese Yuan (RMB), US Dollar | Permalink

Central Banks Prop up Dollar

Yesterday, we posted about the Central Bank of Australia, which intervened on behalf of its currency over the summer. In fact, several Central Banks have either intervened or are in the process of intervening, all with the goal of holding their currencies down (against the US Dollar) rather than lifting them up, as Australia had effected to do. Columbia has already imposed strict rules governing the inflow of foreign capital, intended to discourage speculation, which is driving up the South American nation's currency. Indian regulators have since followed suit with similar rules. South Korea's Central Bank, meanwhile, is using slightly different tactics, undertaking a review of forex forward contracts, which it believes (probably erroneously) are interfering with its ability to hold down the Korean Won. Bloomberg reports:

"Central banks are trying noninterest rate methods to stabilize growth and capital flows. It's something extraordinary. They haven't used these venues for a long time. It's sort of the last resort the central banks would like to tap."

Read More: Currency Controls Return as Central Banks Fight Gains