Currency traders who have done their homework are no doubt well aware that one of the countervailing forces to the Dollar’s decline is the so-called petrodollar phenomenon. In short, because oil contracts are settled in USD, the global demand for USD is held artificially high. However, due primarily to the rapid decline of the Dollar, the members of OPEC are studying the feasibility of pricing oil in terms of a basket of currencies, rather than solely in terms of Dollars. This proposal is still in the earliest stages of planning, and it’s not yet clear exactly how it would work. One thing is certain: if such a change were implemented, the decline of the Dollar would accelerate. OPEC is scheduled to hold several high-level meetings over the next month, which should produce further developments. Reuters reports:
Thursday, November 29, 2007
The End of Petrodollars?
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.
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.
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.
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.
Friday, August 31, 2007
President Bush Announces Plan That Boosts Risky Currencies
President Bush Announces Plan That Boosts Risky Currencies
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.
Yen Bounces Back From Wednesday's Drop
Yen Bounces Back From Wednesday's Drop
Investors, confident that the US mortgage situation could be weathered, pulled money out of the yen on Wednesday and put it back into risky carry trades. However, things did not look so promising for the US on Thursday. As a result, the yen was once again strengthened by nervous investors. Reuters reports:
The yen brushed off a rebound in European and Asian stocks and climbed after British newspaper The Times reported that the co-head of RBS Greenwich Capital's collateralised debt obligations unit had left the bank along with six colleagues.
Investment in European Stocks Weakens Yen
Investment in European Stocks Weakens Yen
While the US had a rough day yesterday, European stocks performed well enough to tempt investors away from the yen. Though a stable currency, the yen is a low-yielding investment and traders are ready to try their hand at a riskier venture with European stocks. There is no word yet on how this may affect Wall Street. According to Forbes:
This has pushed the yen down as investors make tentative steps back to engaging in the risky carry trade - where investors sell low-yielding currencies such as the yen to buy higher-yielding ones elsewhere. With no US data due this afternoon, how equities fare on Wall Street is likely to determine whether the rise in risk appetite can be sustained.
Credit Problems Strengthen Yen
Credit Problems Strengthen Yen
Once again, fear of US mortgage problems has led investors back to arms of the reliable yen. A low-yield, low-risk currency, the Japanese yen has become a safe haven for skittish traders in recent weeks. Investors are right to be concerned, as the US housing market hasn't been in this kind of shape in two decades. Reuters reports:
The yen extended gains against the dollar after a measure of U.S. home prices reflected the biggest year-on-year decline in the second quarter since 1987.
US Dollar Strong in Monday Asian Trade
US Dollar Strong in Monday Asian Trade
Reports from Tokyo indicate that the US dollar is holding steady in Asia as of Monday morning. After receiving promising reports from the west, recent fears about the US credit problems have alleviated and risky trades have resumed in Asia. Since then, the dollar has strengthened considerably. The Philippine Star reports:
The better US economic news slightly pared back market expectations that the US Federal Reserve will cut its benchmark interest rate next month, dealers said.
US Dollar Steady in Japan
US Dollar Steady in Japan
Bank of Japan governor, Toshihiko Fukui, has expressed a desire to keep credit rates low in Japan. His aspiration to stabilize interest rates has had a positive effect on the US Dollar in Japan, reports from Tokyo are showing. While many global markets are reeling from the subprime credit problems in the US, Japan is remaining calm and forgoing a reactionary rate hike. Forbes reports:
'I understand that global credit markets are now in the process of re-pricing risk, and we need to see if the current re-pricing proceeds in an orderly fashion, or if it develops in a disorderly manner,' Fukui said.
Promising Survey Strengthens Pound
Promising Survey Strengthens Pound
Although the British pound suffered earlier in the week from a large Bank of England loan, the currency has been lifted due to a survey taken by UK manufacturers. The results of the survey, which inquired about their order books, showed that manufacturers were more successful this month than they've been in over a decade. Analysts did not expect such a promising report, as it proved that the UK is handling global credit problems better than most countries. According to Forbes:
The Confederation of British Industry revealed that a balance of +9 pct of firms polled reported that their order books were above normal in August - the highest level for more than 12 years.