What determines the strength of a currency?

A currency’s strength is determined by the interaction of a variety of local and international factors such as the demand and supply in the foreign exchange markets; the interest rates of the central bank; the inflation and growth in the domestic economy; and the country’s balance of trade. Taking all factors into consideration, the currency strength can be evaluated in three dimensions:

• Value: the relative purchasing power for goods and services in comparison to foreign currencies
• Utility: the relevance as a financial valuation and exchange device in foreign economies
• Reserve: the acceptability in international trade, driving foreign central banks to hold reserves

As the local production activities add further value to the country’s economy, higher purchasing power encourages spending. The surge in the supply and demand stimulates import and export, flourishing the international trade volumes.

The national currency gains utility in the trade-partner countries, which, in turn, drive their central banks to create reserves for it. Such acceptability enables commerce via a direct exchange of currencies without the mediation of a stronger currency like the U.S. Dollar.

It also provides room for manoeuvre in case a trading partner’s currency value fluctuates due to external circumstances. As a result, the national currency strengthens in the money markets and gains value in the Forex pairs.

The U.S. Dollar is currently considered as the strongest currency in the world. The U.S. economy has the largest consumer market, and the USD serves as the primary trade and reserve currency all around the globe.

Around 60% of the world’s central bank reserves, 40% of debt, 90% of forex trades, and 80% of global trade is denominated in dollars. When the world experiences a crisis, everyone looks to the U.S dollar as a shelter from risks. However, many countries and foreign companies borrow in U.S dollars and earn revenue or taxes in their domestic currencies, therefore dollar strength increases default risk.

https://www.avatrade.com/education/trading-for-beginners/currency-strength#:~:text=A%20currency's%20strength%20is%20determined,the%20country's%20balance%20of%20trade

How to read Money Flows: Study the Balance of Payments, especially the Current Account

Money flows

If the currency feels cheap and the economy is healthy, bargain hunters will pour money in it.

If the currency feels cheap but money is still fleeing, something is wrong.#

Study the balance of payments, particularly the current account

All the legal channels for money flows can be found in the balance of payments, particularly the current account.  

Current account = net trade (mainly) + other foreign income.

The current account captures how much a nation is producing compared to how much it is consuming and it reveals how much a nation has to borrow from abroad to finance its consumption habits.  

If a country runs a sizable deficit in the current account for too long, it is going to amass obligations it cannot pay.  The trick is to identify the tipping point.

Persistently high current account deficit leads to economic slowdown

Testing for various sizes of deficits, over various time periods, confirmed that when the current account deficit runs persistently high, the normal outcome is an economic slowdown.  

If the deficit averages between 2% and 4% of GDP each year over a five-year period, the slow-down is relatively mild.  

If the deficit averages 5% or more, the slowdown is sharper, shaving an average of 2.5% points off the GDP growth rate over the following five years.  

The growth slowdown hit countries rich and poor.  

This is the danger zone

If a country runs a current account deficit as high as 5% of GDP each year for five years, it is consuming more than it is producing and more than it can afford.

Running sustained current account deficits of more than 3% or 4% of GDP can also signal coming economic and financial trouble - just less urgently.

In fact, some emerging-world officials have come to believe that when the current account deficit hits 3% of GDP, it is time to restrain consumer spending and prevent the country from living beyond its means.

Below the 3% threshold, a persistent current account deficit may not be a bad thing.  

• If money is flowing out of the country to import luxury goods, which do not fuel future growth, it will be harder for the country to pay the import bills.  
• If it is going to buy imports of factory machinery, the loans financing those purchases are supporting productive investment in future growth.

One quick way to determine whether the rising deficit is a bad sign is to check whether investment is rising as a share of GDP.   Such a rise at least suggests that money is not flowing out for frivolous consumption.

Appendix:

# In late 2014, the Russian ruble collapsed because of the falling price of oil.  Russians were still pulling tens of billions of dollars out of the c0untry every month, fearing that the situation would get worse.  Cheap was not yet a good sign, because the ruble was not yet cheap and stable.

Summary

The article's key points:

To understand money flows, focus on studying the balance of payments, especially the current account.

The current account reflects a nation's production versus consumption and reveals how much it borrows from abroad.

Persistent high current account deficits lead to economic slowdowns.

Deficits between 2% and 4% of GDP cause milder slowdowns; deficits of 5% or more cause sharper slowdowns.

Running deficits above 3% or 4% of GDP can signal economic trouble.

When a country has a 5% GDP deficit for five years, it is living beyond its means.

For deficits below 3%, it depends on whether the money is invested productively or wasted on non-essential imports.

Appendix: In 2014, the Russian ruble collapsed due to falling oil prices, and money continued to leave the country, showing that cheapness of currency wasn't a positive sign until it stabilized.

"In valuing currencies, nothing works." Why "FEEL" is the Best Measure.

Formal measures of valuing currencies are open to manipulation by politicians

The more formal measures are open to manipulation by politicians, who can make their currency, and thus their country, look competitive by cherry-picking data.  

To accurately value currencies, one has to correct for different inflation rates.  

• One common measure, the real effective exchange rate (REER), corrects for consumer price inflation in a country's major trading partners.  
• Competing measures correct for producer prices, labour costs, or per capita income.  
• The results, however, are often contradictory.  

The Economist's Big Mac Index

To improve clarity, experts have attempted to rank how expensive countries are by comparing prices for common items.   

• The granddaddy of these rankings is the Economist's Big Mac Index.  
• Others compare prices for Starbuck coffee, iPhones and other goods.  

All these approaches acknowledge that the only way to value a national currency is by how cheap it feels to buy goods in that country.

Judging a currency by how cheap it "feels" may sound vague, but there is no better way.  

In the absence of an accurate measure, outsiders need to trust that they will know an expensive currency when they feel it.  Of course, the feel of a currency will vary with the traveler. 

• Brazil may feel less expensive to Americans paying in dollars than to Europeans paying in euros.  
• In general, though a rising currency tends to be rising against most major currencies and the currency that matters most is the US dollar.

Is a strong currency a sign of a strong economy? Are we overlooking the risks of a strong currency?

1.   If currency starts appreciating too fast, foreigners will start buying local stocks or bonds not because they believe in the economy, but because they believe the rising currency will increase the US dollar value of those investments.  

2.  For a while this bet is self-fulfilling, as foreign money continues to drive up the value of the local currency.

3.  Eventually, though, an expensive currency makes the country's exports too pricey to compete in global markets.  

4.  The economy stalls, the currency crashes, and the country will be poised to grow only when it stabilizes again, at a competitive value.  

Summary

A cheap currency is good.  A currency that makes local prices feel affordable will draw money into the economy through exports, tourism and other channels.

An overpriced currency will encourage both locals and foreigners to move money out of the country, eventually sapping economic growth.

Successful nations feel cheap, at least to foreign visitors.  (The cars of some developed countries are so cheap relative to those of Malaysia.  The food and personal wears of some developed countries are so cheap relative to their incomes and also for visiting Malaysians too.)

To anticipate a currency crisis or recovery, follow the locals

The feel of the currency is the simplest real-time measure of how effectively a country can compete for international trade and investment.

"The currency feels too expensive"

If a currency feels too expensive, a large and sustained increase in the current account deficit can result, and money will start to flow out of the country.  

The longer and faster a current account deficit expands, the more risk there is of an economic slowdown and a financial crisis.  

Traditionally, that warning light flashed when the current account deficit had been growing at an average rate of 5% of GDP for five years.  

But the recent deglobalization of banking has made it more difficult to finance current account deficits, so the new red line may be around 3%.

Beginning or the end of currency trouble, follow the locals

To spot the beginning or the end of currency trouble, follow the locals.  They are the first to know when a nation is in crisis or recovery, and they will be the first to move.  If the local millionaires are fleeing, so should you.

Once a crisis begins, watch for the current account to bounce back to surplus, which usually means that a cheap currency is drawing money back into the country.  It helps if the financial environment is stable, underpinned by low expectations of inflation, which further encourages investors to return.

Meddling by the government to artificially cheapen the currency

If the government tries to artificially cheapen the currency, markets are likely to punish this meddling, particularly if the country has substantial foreign debt or does not manufacture exports that can benefit from a devaluation.  

Cheap is good only if the market, not the government, determines the feel of a currency.

You Can't Devalue Your Way to Prosperity

A cheap currency is an advantage in global competition.  It might seem smart for national leaders just to devalue the currency.  But this is a form of state meddling that has proved increasingly ineffective.

Since the crisis of 2008, many nations have tried to improve their competitive position by devaluing currencies, but none have managed to gain an advantage.

The central banks of the United States, Japan, Britain and the Eurozone have pursued policies that effectively amount to printing money, in part as a way to devalue their currencies.  But each has achieved at best a brief gain in export share, because rivals quickly match each other's policies.

The rise in 2016 of Donald Trump, who keeps a hawkish watch on the moves of foreign central banks, made it increasingly difficult for any nation to devalue its currency without being called to account for it.

By 2019, many emerging countries had seen sharp currency depreciation, but with little boost to growth.  

• One reason was foreign debt; since 1996, in the emerging world, the debt owed by private companies to foreign lenders had more than doubled as a share of GDP, reaching 20% or more in Taiwan, Peru, South Africa, Russia, Brazil and Turkey.   For these countries, devaluation made it more expensive for private companies to service foreign debt, and forced them to spend less on hiring workers or investing in new equipment.

• Another factor that can derail devaluations is heavy dependence on imported food and energy.  In this case, a cheaper currency will make it more expensive to import these staples, driving up inflation, further undermining the currency and encouraging capital flight.  This is a recurring syndrome in nations like Turkey, which imports all its oil, but the problem is spreading.

• These days, even manufacturing powers are mere cogs in a global supply chain, relying heavily on imported parts and materials.  They thus find it harder to capitalize on a cheap currency because devaluation raises the prices they pay for those parts and materials.

A rare occasion when devaluation worked

China, in 1993, was one of the rare devaluations that worked.  

China had little foreign debt, it did not rely too heavily on imported goods, and its already strong manufacturing sector grew faster after Beijing devalued the renminbi.  

But this was an exception that proves the rule in general you cannot devalue your way to prosperity.

Devaluation is increasingly less likely to work

Moreover, devaluation is increasingly less likely to work, even in China, which has grown to command 13% of global exports, the largest share any economy has reached in recent decades.  It is just simply too big to expand much further and if it does devalue, others retaliate.  

In late 2015, China devalued the renminbi by 3%, and many emerging nations responded immediately, erasing any competitive gain that Beijing hoped to achieve.

China is also making increasingly advanced exports, which are less price sensitive and gain less from a cheap currency.  

In Korea, Taiwan, and China, technology and capital goods make up a rising share of exports.  

The more advanced the economy, the less of a boost it gets from devaluations.

Weak ringgit to impact 5 sectors

Weak ringgit to impact 5 sectors

BY INTAN FARHANA ZAINUL

Clearer picture: A money changer worker counts US dollar notes for a customer in Kuala Lumpur. CIMB Research expects the ringgit’s volatility to contrinue until there is greater clarity on the new US administration’s economic and trade policies

PETALING JAYA: Exporters are back on investors’ radars, following the recent steep decline in the value of the ringgit against the greenback after the United States presidential election last week.

However, there is no rush yet to pick up bargain stocks on Bursa Malaysia.

The FBM KLCI took another big hit yesterday after falling by more than 1% for the second consecutive day amid heavy foreign sell-off.

“Fundamentally, we think markets may be overreacting to the ‘Trump risk’ in the near term, as speculative positioning takes hold,” said CIMB Research in a note to clients

On the volatility of the ringgit, it expects the trend to remain until there is greater clarity on the new US administration’s economic and trade policies.

The ringgit strengthened marginally yesterday to 4.33 against the US dollar.

CIMB Research said HeveaBoard Bhd, Top Glove Corp Bhd and Evergreen Fibreboard Bhd are among the companies that would gain the most from the weak ringgit in terms of earnings.

“Share prices of YTL Power International Bhd, Genting Plantations Bhd and Inari Amertron Bhd fell 1%-3% last Friday despite being beneficiaries of a weak ringgit. We have ‘add’ calls on these stocks and the selldown could present buying opportunities for investors,” it added.

The banking sector was also among the beneficiaries of the weaker ringgit on the back of overseas operations, CIMB Research said.

Among the banks that are set to benefit are Malayan Banking Bhd, RHB Bank Bhd, Hong Leong Bank Bhd and Public Bank Bhd.

On the other hand, CIMB Research reckoned that companies that have exposure to the automotive and airline industries, namely, Tan Chong Motor Holdings Bhd, Bermaz Auto Bhd, UMW Holdings Bhd, AirAsia Bhd and AirAsia X Bhd, would be negatively impacted from the stronger US dollar and yen.

“AirAsia will be impacted by the weaker ringgit, although this is buffered to some extent by the low oil prices. About 60%-70% of AirAsia’s costs are US dollar-denominated,” it added.

On the contrary, although many research houses are bullish on the export counters to benefit from the weak ringgit, Hong Leong Investment Bank (HLIB) Research said that the sector is vulnerable from president-elect Trump’s anti-trade views.

“While the market may continue to react to the strong US dollar, we caution that export stocks may still be affected by Trump’s anti-trade sentiment.

“The technology sector is more vulnerable to any trade policy change compared to resource-based sectors,” it said.

HLIB Research said the strong US dollar would be positive for sectors such as rubber product manufacturers, the gaming industry as well as technology companies.

It is negative for sectors such as automotive, aviation, telecommunications, consumer and power.

While the cheaper ringgit does not necessarily translate to higher exports for Malaysian products, companies such as rubber glove makers, semiconductors and furniture-related companies are expected to benefit from the weaker ringgit, according to analysts.

“Naturally, beneficiaries of the strong US dollar are exporters and companies with significant US-dollar assets,” said UOB KayHian in a report yesterday.

The research house prefers the electric and electronic manufacturers such as Inari, VS Industry Bhd and EG Industries Bhd on the back of revenue growth and margin improvement as compared to exporters.

“We are less enthusiastic on the loftily-valued rubber glove manufacturers, as the supply-demand dynamics for nitrile glove remain unfavourable.

“Hence, continuing downward pressure on the US dollar pricing of nitrile gloves could mostly offset the positive US dollar effect,” it said.

UOB KayHian reckoned that the stronger ringgit would not have a huge impact on exporters compared to in 2015.

“Since a strong US dollar is now a consensus view (unlike in 2015), buyers have actively squeezed down the US dollar pricing on Malaysian exporters, which reduces the quantum of the exporters’ windfall margins and hence the exporters’ ability to positively surprise on earnings,” it said.

http://www.thestar.com.my/business/business-news/2016/11/15/weak-ringgit-to-impact-5-sectors/

Currency speculation takes on a life of its own in a floating exchange system.

A floating exchange rate system is based on the notion that market forces, as opposed to government policy, determine currency exchange.

Buyers and sellers of a currency determine the price.

Buyers and sellers can include

• traders, 
• fund managers, 
• banks, 
• multinational corporations and 
• governments.

Although a floating system leaves the process of determining exchange rates to market forces, those forces can force a currency to collapse.

If a major fund assumes a short position in a particular currency, it can push that currency, and in turn the underlying economy, to the verge of collapse.

It does this through a series of large trades distributed over several days.

Other traders sense economic doom on the horizon as they witness these trades and decide that they too must unload positions in that currency.

The currency drops 1%, 3%, 5%, ...

The businesses in this country are forced to contend with decreased buying power as a result of the declining currency.  

The goods and services, they are buying from their trading counterparts overseas (e.g. U.S.) became a lot more expensive thanks to the currency speculators.

The currency drop continues and soon everyone is panicking.

Before long, major corporations and individuals must cut spending as foreign-produced items are more expensive than before.

This can prove disruptive and in extreme cases disastrous.

Such examples are far from regular occurrences.

Government imposed exchange limits will prevent complete currency collapse caused by speculation.

The above illustrates what could happen when currency speculation takes on a life of its own in a floating system.

Currency Trading

Currency can be traded much like securities or as derivatives.

The purposes for trading vary but generally can be distilled down to either:

• speculation or 
• hedging.

Currency Speculation

Currency speculation can be a lucrative pursuit for skilled traders.

By analyzing macroeconomic variables such as inflation, interest rates, income levels, and governmental policies, currency traders can place bets on a currency with the hope of profiting from them.

Currency speculation can be complicated by the combination of market forces, the outcome of which can be difficult to predict.

Currency trading is complicated.   

[For example:

• A trader decides he wants to bet on the euro because he believes the European Central Bank will raise interest rates.
• At the same time, countries across the European Union are reporting substantial increases in inflation.
• This trader learns that one of the largest currency hedge funds is selling its position in the euro.]

There is no foolproof algorithm for predicting what will happen to a particular currency as a result of movements in influential variables.

No one can predict the direction currency will take 100 percent of the time.

Currency Hedging

Currency hedging is a practice that can be employed 

• by anyone taking a relatively large speculative position in a currency or 
• by a business seeking to manage risk.

Here are several protective hedging strategies:

• Options
• Forwards
• Futures

[Suppose Company X starts buying parts from a supplier in Europe.

Part payments are made in euros and are due 30 days after receipt of the parts

The euro seems to be rising against the dollar, which leaves Company X rather vulnerable.

In fact, if the euro rises significantly by the time payment is due, it could wipe out a good portion of Company X's expected profits.

What can the company do?

Here are several protective hedging strategies:

1.  Options.  

Buy calls on euros.

If the euro rises, the call becomes worth more, offsetting the increased payment amount owed to the supplier.

The downside of this strategy is that calls come at a price.

2.  Forwards

Company X can structure a forward contract to lock in a specific exchange rte, thus hedging from any exchange rate fluctuations.

The forward rate would be the specified exchange rate at which the currency will be exchanged.

3.  Futures

Company X can purchase a currency future requiring a standard amount of currency to be exchanged at a specific exchange rate on a specific settlement date.

Company X could purchase the future on an exchange, enabling the company to sell the future if rates hold or reverse. ]

[Now, suppose Company X sells its products in Europe and payments are made in euros.

The company stopped buying parts from Europe and now merely exports its products to Europe.

Sales are often credit-based, leaving the company with hefty accounts receivable.

What happens if these credit payments are owed 30 days after the customer takes possession?

If the euro fell against the dollar, the company would see its profits erode.

Hedging strategies can be employed by using the tools mentioned previously:

1.   Options

Buy puts on euros.

If the euro falls, the puts become worth more, offsetting the decreased payment amount owed to the company by its customers.

2.  Forwards

Just as before, Company x could create a forward contract to lock in the rate received from its customers.

3.  Futures

Company X could purchase dollar futures.  

If the euro declines against the dollar, the dollar future will increase, off-setting any loss of value on the receivable.]

Currency Arbitrage

Arbitrage allows an investor or trader to capitalize on pricing discrepancies.  

Arbitrage is used widely in the currency markets and usually takes on the following forms.

Locational Arbitrage

Locational arbitrage is based on the idea that one can buy currency at one location and sell it immediately at another location, instantaneously locking in a profit.  

A pricing discrepancy in the market allows for this.  

Arbitrage opportunities are generally short-lived, so you have to act fast, and usually the market corrects itself quickly.

Triangular Arbitrage

What if you could buy dollars with pounds, exchange the dollars for euros, and then exchange the euros back to dollars, earning a tidy profit during this round trip?

To determine whether a triangular arbitrage opportunity exists, you first would determine the cross exchange rate for dividing the USD to euro rate by the USE to GBP rate.

This would give you a cross exchange rate, GBP to euro.

This tells you that the bank is offering too many euros for pounds, which means the arbitrage opportunity does indeed exist.

You earned a profit because the bank overstated the cross exchange rate.

You were able to capitalize on this and earned a profit in the process.

The Biggest Problem in Currency Trading

The BIGGEST PROBLEM currency market players face is not understanding why currency exchange rates move in a particular direction when the factors affecting currency indicate something else

Unfortunately, the driving forces behind currency do not always indicate a definitive outcome; that is why currency trading is not for the faint of heart.

How to manage currency fluctuations and how to profit from them?

Nearly identical products sold in different countries can have major price differences when currency exchange is factored into the equation.

Directional shifts in currency exchange rates could allow one to hedge against or even profit from those shifts.

In a global economy, currency plays a pivotal role in the way transactions are structured.

From investment banking to corporate management, currency is involved in nearly all international financial decisions.

As the global economy becomes more complex, currency issues will continue to evolve.



Currency Exchange Rates

With the advantages of selling to the world come the challenges of managing global finance.

Currency plays a prominent role in the way businesses conduct their business and to whom they sell.

Financial managers must develop currency strategies to manage their receivables and payables.


For example, if the US dollar drops against the Malaysian Ringgit, it could hurt a Malaysian exporting company whose receivables are denominated in US dollar.

If the Malaysian Ringgit increases in value against the US dollar, it could raise the Malaysian foreign  owned company's manufacturing costs and perhaps cause management to consider moving its manufacturing facilities abroad.

Shifts in currency exchange rates can affect how much a company ultimately earns; therefore, a solid understanding of currency will allow management to craft an effective strategy to address unexpected shifts.



Determining the Exchange Rate

The exchange rate of any currency is its price.

It indicates how much of one currency is needed to buy one unit of another currency.

Suppose it takes 1 US dollar to purchase MR 3.50.  The value of 1 US dollar would be MR 3.50.

The value of 1 MR in US dollars therefore would be 0.2857 US dollar (1 US dollar/ MR 3.50).



How is this value determined?

What causes that 1 US dollar to equal MR 3.50 and 1 MR to equal 0.2857 US dollar?

Currency is no different from anything that is bought or sold, and therefore, economic principles determine its price.

A currency price is based on the price at which demand for that currency equals supply of that currency.  This is known as the equilibrium exchange rate.

Changes in supply and demand affect the exchange rate.



Currency Supply and Demand Curve:  

The supply curve for the currency is upward-sloping.  The supply of the currency increases when the value of the currency is strong.

The demand curve for the currency is downward-sloping.  The buyers tend to demand more of something when its price is lower.

For example, Americans would be more likely to exchange their dollars for yen when the value of the yen is lower.  This enables American consumers and corporations to buy more Japanese products at lower price.

When the value of yen is higher, demand for yen will be lower as Americans are less likely to exchange their dollars for yen as Japanese products are now more expensive.


Factors That Affect Currency Exchange Rates

The following factors have a direct impact on exchange rates.

Relative Inflation

If the US experiences higher inflation relative to Japan, U.S. goods become more costly than Japanese goods.

As a result, American consumers will demand Japanese substitutes.

This will increase the demand for Japanese yen needed to purchase Japanese products.

At the same time, the supply of yen for sale probably will decrease as Japanese holders of yen are less likely to buy American products, which are now more expensive.

The increased demand for yen and the decreased supply of yen will push the price of yen higher.


Interest Rates

If U.S. interest rates rise relative to Japanese interest rates, the supply of yen for sale will increase as more holders of yen will want to purchase dollars to earn more interest in dollars.

As a result, the value of yen will decrease.

Furthermore, the demand for yen should decrease because investors would rather deposit their money in American banks and therefore will demand dollars more than yen.

The decrease in demand combined with the increase in supply will cause a drop in the value of yen as a result of rising interest rates in the United States.


Income

If income levels in the United States increase while income levels in Japan remain unchanged, demand for Japanese goods should increase along with yen.

The shift in relative income is not likely to affect the supply of yen as a change in U.S. income levels will do little to incentivize Japanese yen holders to exchange more yen for dollars.

The increase in demand therefore should raise the exchange rate as American consumers probably will buy more Japanese products overall.

Speculation

Speculators can cause dramatic movements in currency prices.

They may base their trades on economic predictions or in some cases on expectations of what other high-volume traders will do next.

As more market participants move in tandem, currency values are often driven less by economic fundamentals and more by momentum traders.


Government

By imposing trade barriers and foreign exchange barriers, governments can affect currency values indirectly.

They do this by making it more difficult for foreign businesses to engage in import and export activity, which in turn will affect supply and demand for currency.

At the same time, a government can buy or sell its country's currency, which will affect its supply and ultimately its value.

Government policy changes, however, may not achieve the desired outcome when it pertains to currency .... or anything else for that matter.


Interaction of Factors

Any combination of these factors can affect currency in unpredictable ways.

If you could predict precisely how a combination of factors will affect currency values, you would be busy trading currency from your private island!

Chinese central bank under pressure to weaken yuan further

Sources say China's move to devalue its currency reflects a growing clamour within government circles for a weaker yuan to help struggling exporters, ensuring the central bank remains under pressure to drag it down further in the months ahead. – Reuters pic, August 12, 2015.

China's move to devalue its currency reflects a growing clamour within government circles for a weaker yuan to help struggling exporters, ensuring the central bank remains under pressure to drag it down further in the months ahead, sources said.

The yuan has fallen almost 4% in two days since the central bank announced the devaluation yesterday, but sources involved in the policy-making process said powerful voices inside the government were pushing for it to go still lower.

Their comments, which offer a rare insight into the argument going on behind the scenes in Beijing, suggest there is pressure for an overall devaluation of almost 10%.

 "There have been internal calls for the exchange rate to be more flexible, or depreciated appropriately, to help stabilise external demand and growth," said a senior economist at a government think-tank that advises policy-makers in Beijing.

"I think yuan deprecation within 10% will be manageable. There should be enough depreciation, otherwise it won't be able to stimulate exports."

The Commerce Ministry, which today publicly welcomed the devaluation as an export stimulus, had led the push for Beijing to abandon its previous strong-yuan policy.

Reuters could not verify how much influence Commerce Ministry officials had wielded in the decision to drive the yuan lower, but the sources said its officials were claiming victory after a long lobbying campaign against what some of them regarded as over-zealous reform led by the central bank.

The People's bank of China (PBOC) had been keeping the yuan strong to support the ruling Communist Party's goal of shifting the economy's main engine from exports to domestic demand.

A stronger yuan boosts domestic buying power, helps Chinese firms to borrow and invest abroad, and encourages foreign firms and governments to increase their use of the currency.

Until the devaluation, the currency had appreciated overall by 14% over the past 12 months on a trade-weighted basis, according to data from the Bank for International Settlements.

Premier Li Keqiang had repeatedly ruled out devaluation, but increased risks to economic growth, exacerbated by recent stock market turmoil, increased pressure to reverse course, the sources said.

At the weekend, China posted a shock 8.3% slump in July exports.

"Exporters face very big pressure, and China's economy also faces very big downward pressure," said a researcher at the commerce ministry's own think-tank, which recommended earlier this year that the government should unshackle the yuan.

"The yuan depreciated only slightly versus the dollar, but it has gained sharply against other currencies. China's economy and trade are no longer strong; why should the yuan be strong?"

He said he believed the yuan could fall to 6.7 by year-end, which would represent a near 9% decline since the eve of the devaluation. It traded around 6.43 against the dollar today, its lowest since August 2011.

The PBOC described its devaluation as a one-off move designed to make the currency more responsive to market forces.

The central bank guides the market daily by setting a reference rate for the yuan, from which trade may vary only 2%. Yesterday, it said it was setting the midpoint based on market forces, which have been willing the yuan lower.

Beijing is determined to achieve its economic growth target of 7% for this year. Top leaders will chart the course for the next five years at a meeting in October, and they are likely to continue targeting annual growth of around 7%.

"They (top leaders) are determined to hit 7% target. The downward pressure is big (but) so is the determination," said an economist inside the cabinet's think-tank.

Beijing prefers a gradual devaluation because a single, big move could spark capital flight and undermine its goal of fostering global use of the yuan in trade and finance, sources said.

China has been lobbying the IMF to include the yuan in its basket of reserve currencies, known as Special Drawing Rights, which it uses to lend to sovereign borrowers. This would mark a major step in terms of international use of the yuan.

The IMF said today that the central bank's new way of managing the exchange rate appeared to be a welcome step.

"There is definitely downward pressure on the economy, but we cannot rely (alone) on currency depreciation," said Zhu Baoliang, chief economist at the State Information Centre, a top government think-tank. – Reuters, August 12, 2015.

- See more at: http://www.themalaysianinsider.com/business/article/chinese-central-bank-under-pressure-to-weaken-yuan-further#sthash.dx7bFam1.dpuf

Future of the Ringgit

The exchange rate of the currency in which a portfolio holds the bulk of its investments determines that portfolio’s real return. A declining exchange rate obviously decreases the purchasing power of income and capital gains derived from any returns. Moreover, the exchange rate influences other income factors such as interest rates, inflation and even capital gains from domestic securities. While exchange rates are determined by numerous complex factors that often leave even the most experienced economists flummoxed, investors should still have some understanding of how currency values and exchange rates play an important role in the rate of return on their investments.

“There are positive factors that still support the ringgit: decent economic growth expected for 2015, low Government external debt and a credible monetary authority that has led to relatively low inflation over the years,’’ said Zahidi.

From a yield perspective in 2015, the US dollar will continue to sustain its appeal as the Federal Reserve is preparing to normalise the prolonged ultra low interest rates, albeit in baby steps in the months ahead.

“While the ringgit is expected to stabilise once negative sentiment towards it fades, investors will be focusing on Malaysia’s medium-term growth prospects and also assess whether the ringgit will continue to provide attractive returns from both a yield and appreciation standpoint in the face of higher US interest rates, going forward.

In another report, CIMB Investment Bank did a study in March 2004 when the ringgit was still pegged to the US dollar and at that time, found the ringgit to be undervalued by around five per cent.

‘’Since then, Malaysia’s fundamentals have strengthened further. As such, I would think that the ringgit deserves a much higher value from current levels,’’ said CIMB Investment Bank director/regional economist Julia Goh.

Negative perception and sentiment can really damage the value of a currency, which would cause concern among businesses and investors.

While those businesses that receive their payment in US dollars may celebrate, the net effect may not be that great as there could be high import costs of components and raw materials.

The current depreciation of the ringgit should remain for a year. However due to low debt to GDP ratios and high saving rates the immediate effects are on exports and inflation.

For a country with a depreciated currency, exports will increase in relation to imports as exports become cheaper and imports become more expensive.

Fortunately Malaysia’s trade surplus is RM2.86 billion and it is going to increase due to currency depreciation. The depreciation of the ringgit might increase the inflation rate and raise the cost of living somewhat, but the good news is that Malaysia has been maintaining a ‘safe-side inflation level’ of below two per cent for quite some time.

The exchange rate, whether appreciating or depreciating, was not the issue but volatility of the currency which rendered conduct of business extremely difficult and affected the capital market and the banking sector when it came to mortgages and shares.

Read more: http://www.theborneopost.com/2015/04/11/impact-of-the-depreciating-ringgit/#ixzz3YDDZ7qX2

How to approach international stocks?

The examination of these stocks for your international investing are the same.  Follow the QMV approach.

1.  Look at the QUALITY of the company (the existence of competitive advantages)
2.  Its MANAGEMENT must be of integrity and smart (and not suspicious management)
3.  The VALUATION of the company (and not an outrageously high valuation)

However, you need to add other risks to your due diligence process too.

1,  Country risk 
What's the political environment?
Is corruption a problem?
How is the country's debt structured?
What are its plans for economic development?

2.  Political risk
This is a subset of country risk.
Is there a real threat of nationalization?
Is there a real threat of rebellion or military action?

3.  Currency risk
This is a risk unique to foreign investing.
Pay attention to the level of exposure a company has to weak currencies.
Be reminded, Zimbabwe's insane inflation rate hit 66,000% in the early months of 2008.

4.  Investability risk
Are you able to buy shares of a company.
Do you have access to one of the exchanges it trades on?


So, to summarise, look for countries with:
1.  Respect for rule of law, strong rights of appeal, and low levels of corruption.
2.  Political stability and a government that doesn't dominate the local economy.
3.  A stable currency
4   Investability

Also, apply the bottom up search for the best companies with the brightest prospects.  

Be reminded once again.
-  Your top priority is to invest in your best ideas - ignoring country, sector, or number of vowels in the ticker.
-  Your secondary concern should be ensuing that you're not overexposed to any specific geographic region or industry sector.

With the U.S. market moving in lockstep with overseas markets (high correlation) - a trend that certainly doesn't seem to be reversing itself- diversification is no longer the reason to consider foreign equities for your portfolio.  

The reason to look overseas is much simpler:  opportunity.   

A look at a currency table

Now, let's take a look at a currency table:

Row 1 & Column 1: Currency Name (or symbol) The currencies are exactly the same in both the column and the row. This table allows you to compare the value of a currency in relation to another. The only exception on this table is gold, which is commonly quoted in currency tables because it is considered to be an alternative currency that anyone can purchase.

If you are reading this table the values are in the following context:

$1 in currency of row #1, is worth $___ in column #1 dollars.

For example, 1 euro is worth $1.3926 in Canadian dollars. If you were in Canada and you wanted to exchange your 1 euro for Canadian dollars, you would get $1.3926 in return. On the other side of the equation, if you had $1 Canadian and you wanted to convert it to euros, you would get 0.7181 in return. Both of these numbers are circled in red on the table.

It is also important to note that 1/1.3926 = 0.7181. If you only have the currency rate for one direction, then all you need to do is divide one by that number to find the value in the other country's currency.

Read more: http://www.investopedia.com/university/tables/tables5.asp#ixzz28JIVJCza

Currency Trading for DUMMIES (Getting Started Edition)

Currency Trading for DUMMIES


GETTING STARTED EDITION


by Mark Galant and Brian Dolan




https://secure.efxnow.com/forex2/eng/ct-dummies.pdf

What Is the Proper Risk and Reward Ratio in Forex Trading?

Risk/Reward Ratio in Forex - What Is the Proper Risk and Reward Ratio in Forex Trading?

The solution is in moving the stop loss. You should not let your stop loss remain at its initial position. To have a 1:3 trade, the distance of your entry and your final target should be splitted into 3 parts (at least), while each part is equal to your original stop lossvalue. For example if you have a 50 pips stop loss, you should have a final target for 150 pips which should be splitted into three 50 pips levels. Then you should move your stop loss in three stages (in this example I assume that you take a 3% risk in each trade):

1. If the price reaches to the first 1/3 level, you should move the stop loss to breakeven. At this stage, if the price goes against you and hits the stop loss, you will get out without any profit/loss, BUT you should consider that you had an initial risk of 3%.

2. If it reaches the 2/3 level, you should move the stop loss to 1/3 level. At this stage, if the price goes against you and hits the stop loss, you will get out with a profit which equals your initial risk. For example if your stop loss has been 3% of your account, you will get out with a 3% profit. Therefore, such a trade will be ended as a 1:1 risk/reward trade.

3. If it becomes so close to the final target, you should move the stop loss to 2/3 level. Then you have to wait until it hits the finaltarget or returns and hits the stop loss. At this stage, if it goes against you and hits the stop loss, you will get out with a profit which is twice of your initial risk. For example if your stop loss is 3% of your account, you will get out with a 6% profit. Therefore, such a trade will be ended as a 1:2 risk/reward trade. If the price hits the final target, your trade will be closed with a 9% profit and so you will have a 1:3 risk/reward trade.

So, to have a 1:3 trade, you will have some -3% trades which are those trades that hit the stop loss at its initial position. You will also have some 0% trades that are those trades that hit the stop loss at breakeven. Some of your trades will be +3% trades which are those that hit the stop loss at 1/3 level. Some will be +6% trades which are those that hit the stop loss at 2/3 level. And finally, some trades will be +9% trades which are those that trigger the final target.

Now the question is what percent of your trades will be -3%, 0%, +3%, +6% and 9% trades?

It is impossible to answer the above question, because it depends on many things including the trading strategy and market condition. 

Read more here:

http://www.forexoma.com/what-is-the-proper-risk-and-reward-ratio-in-forex-trading/

Please note that forex and other leveraged trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved.

Vietnam: Gold and dollar prices escalating, no one benefits

Last update 09/11/2010 04:59:02 PM (GMT+7)

Gold and dollar prices escalating, no one benefits

VietNamNet Bridge – The gold and dollar prices have been increasing continuously, threatening businesses. Especially, the weaker dong does not benefit exporters, even making their business worse.

At 9:45 am of November 9, the gold price jumped to 38.2 million dong per tael, increasing by 2.5 million dong per tael compared with the opening prices (one tael is equal to 1.2 oz). Meanwhile the dollar price soared to 21,250 dong per dollar, the highest level so far.

The dollar prices quoted by commercial banks have been stable, at 19,495-19,500 dong per dollar at Vietcombank, and 19,470-19,500 dong per dollar at Eximbank.

The Japanese yen has also appreciated against the dong. At 8:20 am, the yen price was quoted at 246.63 – 253.99 dong per yen, an increase of three dong per yen in comparison with the week’s opening price. The euro is now trading at 28,101.00 dong per euro.

In principle, the dollar appreciation will benefit exporters, because the weak local currency will make domestic products cheaper, thus more competitive in the world market. But in fact, export companies are now like cats on hot bricks. 

Tran Quoc Manh, Chair and General Director of Sadaco, said the dollar price increases have pushed the prices of input materials, transport fees and labour costs high up.

Manh admitted that the company has earned more money thanks to the dollar appreciation, but the profit is not big enough to cover the higher production costs. Especially, Sadaco, like many other producers in Vietnam, have to import input materials to make final? products in Vietnam. Therefore, they now have to pay more money for the import materials due to the more expensive dollar. Manh stressed that when policy makers think of the monetary solutions to encourage exports, they should consider of the fact that Vietnamese producers have to pay for imported input materials in dollars.

Besides, export companies complain that though they sell foreign currencies to banks, when they need money to make payment for material imports, they cannot buy foreign currencies from banks at the prices at which they had sold themto banks before.

Nguyen Thi Cuc, Deputy General Director of Phu Nhuan Jewellery Company (PNJ) said in September, her company earned $300 million from gold exports and sold the sum to banks. However, her company now cannot buy dollars from banks at the quoted prices.

“The banks, though admitting that PNJ is a loyal client who should get priority in dollar purchases, still refuse to sell dollars to us, saying that they cannot sellat such low prices,” Cuc complained.

In fact, banks still have dollars to sell, but at the prices set by banks, not the prices quoted by clients. 

Le Dang Minh, Managing Director of Gimeno, a fashion company, said that he has just bought dollars from a bank. Though the quoted price was 19,500 dong per dollar, in fact, Minh had to pay 20,100 dong per dollar. Minh said that he still does not know how to “legalise” the gap of 600 dong per dollar. As the input materials cost 70 percent of the values of his products, the dollar price increases have made the company suffer losses.

However, Minh believes that those who suffer the most now are labourers, whose salaries do not increase in proportion with increases in the goods prices.

Minh does not think that export companies deliberately refuse to sell dollars to banks, thus causing the dollar shortage. He said that only the companies which have profuse capital can keep dollars on their accounts. Meanwhile, small companies like his have to sell dollars to banks right after they earn the money, because they need money to continue production.

Thanh Van

http://english.vietnamnet.vn/en/business/1282/gold-and-dollar-prices-escalating--no-one-benefits.html