forex news

India's Forex Reserves Top $250 Billion
Among the so-called BRIC developing countries (Brazil, Russia, India, China), India is probably the second hottest economy at the moment, after China of course. And following in the footsteps of other developing countries, it is quickly building a massive stock of foreign exchange reserves in order to hold down inflation. Previously, I resisted covering India, because its reserves were small compared to those of China and Japan and hence its potential impact on the Dollar was limited. However, having set another record, India's forex reserves now top $250 Billion, which rank the country among the highest in the world in this regard. In fact, India is accumulating reserves at the blistering rate of $3 Billion/week! The breakdown of the reserves (in terms of foreign currency) is unclear, but it seems reasonable to believe that it is dominated by Dollar assets.
UK Pound Nears Plateau
The UK Pound has been on a tear recently, both against the USD and more surprisingly, against the Euro. The currency has been given a boost by the Bank of England’s reluctance to cut its benchmark interest rate, which at 5.75%, remains the highest among the world’s major currencies. However, many economists feel the case for a rate cut is growing stronger every month, whether or not the Bank of England is willing to acknowledge it. Inflation is only moderately high, while the fall in housing prices-exacerbated by a prolonged period of tight money-threatens to drag down the entire economy. The markets are still pricing in a rate cut by year-end, which would surely drag down the Pound should it obtain. Dow Jones Newswires reports:
“We strongly suspect that market pessimism in this respect will continue to grow, in reverse proportions to its expectations of a further hike in U.K. interest rates,” said…a senior currency strategist.
Bank of Japan Leaves Rates Alone
As expected, the Bank of Japan left its benchmark interest rate unchanged at its latest meeting. The current rate of .5% remains the lowest in the industrialized world and thus will continue to fuel the Japanese carry trade. The Bank fended off the criticism of several European Ministers, wary of the Yen’s continued appreciation against the Euro, including a 5% increase in the last month alone. The EU has insisted that Japan should hike rates immediately both to avoid global economic imbalances and to prevent its own economy from overheating. Japan defended its decision by pointing to certain small business indicators, which suggest the sector is still underperforming. Carry traders, rest easy. Bloomberg News reports:
“The Bank of Japan will probably need to put off a hike at least until December to nail down its assessment of global growth as well as the performance of small companies,” said Masaaki Kanno, a former central bank official.
Europe Asks China to Revalue Yuan
Evidently frustrated by the Euro’s appreciation against the USD, a group of EU ministers has turned its attention to China, calling on it to allow the Yuan to appreciate against the Euro. While the Yuan has appreciated nearly 10% against the USD over the last two years, it has actually decreased in value against the Euro. As a result, the EU trade deficit has set a fresh record nearly every month. Unfortunately, the Yuan basically remains pegged to the USD, and since the USD is depreciating faster against the Euro than against the Chinese Yuan, the law of triangular arbitrage dictates the Euro must be appreciating against the Yuan. It appears China’s hands are tied. Bloomberg News reports:
“I can assure you China will continue to adopt a reform oriented policy on its exchange-rate mechanism,” said a Chinese Foreign Ministry spokesman. “But these adjustments have to be done gradually and in line with the market.”
How to Profit from a Falling Dollar
The Dollar has been sliding steadily for close to a year, and Wall Street has been rushing to introduce a spate of new investment products to help investors profit accordingly. For those who do not want to trade currencies directly, Exchange Traded Funds (ETF’s), probably represent the best alternative. The typical currency ETF tracks a basket of currencies and most ETFs are characterized by low fees. In fact, over $2.7 Billion is currently invested in such ETF’s, which have risen from virtually nothing over the last 7 years. Another option is to buy CDs or other money market instruments denominated in other currencies. Online banks such as Everbank offer such products. Yet another option is to buy shares in mutual funds that aim to mimic the returns offered by investing directly in foreign money market instruments. Finally, one can simply buy shares in foreign companies or in American multinational companies that do significant business abroad.
IMF Comments on Currencies
Rodrigo Rato, outgoing president of the International Monetary Fund ("IMF") recently offered his two cents on developments in the forex markets. He began by cautioning against "excessive volatility," or the rapid fluctuations which have recently afflicted many of the world's major currencies. Next, he suggested that the Dollar has moved from being massively overvalued to being massively undervalued. In other words, it is his assessment that the Dollar has depreciated far too rapidly over the last few years. Finally, he suggested that a tightening of Japanese monetary policy would be in the best interest of global economic stability. As Rato is no doubt aware, higher Japanese interest rates would put an end to the carry trade, and drive the Yen upwards in value. The Financial Times reports:
The outgoing IMF chief also hints at unease about Japan's yen, which remains weak in part because of ultra-low interest rates. “Normalisation of monetary policy in Japan is an important medium-term objective.”
Japanese Forex Reserves Near $1 Trillion
Japan's Central Bank now controls over $950 Billion in foreign exchange reserves, second only to those of China. While Japan is not accumulating significant new reserves, its existing reserves have appreciated in value due to the Euro's recent ascent. Analysts are keeping a close eye on the reserves of both countries, which represent close to 50% of the world's foreign exchange reserves. In addition, analysts will be watching China, which may take a cue from Japan and diversify some of its reserves into Euro-denominated assets in order to offset the effect of the declining Dollar. AFX News Limited reports:
Japan's reserves are closely watched for evidence of how the country is managing its foreign currency holdings. Its actions are seen as having a significant impact on exchange rates and bond markets around the world, particularly the US government bond market.