Currency - General News

Currency - General News

Postby winston » Sun Jun 01, 2008 10:25 am

17.1% - Appreciation of the Paraguayan guarani against the U.S. dollar so far this year. The guarani is the third-best performing currency against the greenback, after the Israeli shekel (19.2%) and the Slovakian koruna (17.9%).
It's all about "how much you made when you were right" & "how little you lost when you were wrong"
User avatar
winston
Billionaire Boss
 
Posts: 118527
Joined: Wed May 07, 2008 9:28 am

Re: Currency - General News

Postby LenaHuat » Wed Jul 16, 2008 10:45 pm

The USD upsets the Holy See's accounts too:
The Vatican has blamed the weak dollar for pushing it into its first loss in four years.

Annual accounts published yesterday showed that the Holy See dipped into the red last year, recording a loss of €9.1m (£7.25m). It said this was "due mainly to sharp and very pronounced trend reversal in fluctuation of exchange rates, particularly the US dollar".

The US currency has fallen sharply against the euro since the start of last year, hitting the Holy See in the pocket as its expenses are incurred in euros. Much of the Vatican's income comes from donations from Catholics around the world. The US was the largest single contributor to Peter's Pence – the collection used by the Pope for charitably donations - sending almost $19m (£9.5m).

But the shortfall was mitigated by a rise of €4m in property income. The Holy See is a major owner of property across Rome and was criticised last year for raising rents and threatening to evict tenants. Some even formed an association
Please be forewarned that you are reading a post by an otiose housewife. ImageImage**Image**Image@@ImageImageImage
User avatar
LenaHuat
Big Boss
 
Posts: 3229
Joined: Thu May 08, 2008 9:35 am

Re: Currency - General News

Postby millionairemind » Mon Jul 28, 2008 1:00 pm

I am sure many of us have heard of the Big Mac Index measured by The Economist... interesting findings again below in this week's edition. Singapore could soon see 1.15 to the USD (just postulating and taking it at face value). If that happens, our manufacturing sector would be hardest hit.

The Big Mac Index
Sandwiched

Jul 24th 2008
From The Economist print edition

Burgernomics says currencies are very dear in Europe but very cheap in Asia


EVER since the credit storms first broke last August, the prices of stocks, bonds, gold and other investment assets have been blown this way and that. Currencies have been pushed around too. Did this buffeting bring them any closer to their underlying fair value? Not according to the Big Mac Index, our lighthearted guide to exchange rates. Many currencies look more out of whack than in July 2007, when we last compared burger prices.

The Big Mac Index is based on the theory of purchasing-power parity (PPP), which says that exchange rates should move to make the price of a basket of goods the same in each country. Our basket contains just a single item, a Big Mac hamburger, but one that is sold around the world. The exchange rate that leaves a Big Mac costing the same in dollars everywhere is our fair-value yardstick.

Only a handful of currencies are close to their Big Mac PPP. Of the seven currencies that make up the Federal Reserve’s major-currency index, only one (the Australian dollar) is within 10% of its fair value. Most of the rest look expensive. The euro is overvalued by a massive 50%. The British pound, Swedish krona, Swiss franc and Canadian dollar are also trading well above their burger benchmark. All are more overvalued against the dollar than a year ago. Only the Japanese yen, undervalued by 27%, could be considered a snip.

The dollar still buys a lot of burger in the rest of Asia too. The Singapore dollar is undervalued by 18% and the South Korean won by 12%. The currencies of less well-off Asian countries, such as Indonesia, Malaysia and Thailand, look even cheaper. China’s currency is among the most undervalued, though a bit less so than a year ago.

The angrier type of China-basher might conclude that the yuan should revalue so that it is much closer to its burger standard. But care needs to be taken when drawing hard conclusions from fast-food prices. PPP measures show where currencies should end up in the long run. Prices vary with local costs, such as rents and wages, which are lower in poor countries, as well as with the price of ingredients that trade across borders. For this reason, PPP is a more reliable comparison for the currencies of economies with similar levels of income.

For all these caveats, more sophisticated analyses come to broadly similar conclusions to our own. John Lipsky, number two at the IMF, said this week that the euro is above the fund’s medium-term valuation benchmark. China’s currency is “substantially undervalued” in the IMF’s view. The dollar is sandwiched in between. The big drop in the greenback’s value since 2002 has left it “close to its medium-term equilibrium level,” said Mr Lipsky.

If that judgment is right, the squalls stirred up by the credit crises have moved at least one currency—the world’s reserve money—closer to fair value. Curiously the crunch has not shaken faith in two currencies favoured by yield-hungry investors: the Brazilian real and Turkish lira. These two stand out as emerging-market currencies that trade well above their Big Mac PPPs. Both countries have high interest rates. Turkey’s central bank recently raised its benchmark rate to 16.75%; Brazil’s pushed its key rate up to 13% on July 23rd. These rates offer juicy returns for those willing to bear the risks. Those searching for a value meal should look elsewhere.

Image
"If a speculator is correct half of the time, he is hitting a good average. Even being right 3 or 4 times out of 10 should yield a person a fortune if he has the sense to cut his losses quickly on the ventures where he has been wrong" - Bernard Baruch

Disclaimer - The author may at times own some of the stocks mentioned in this forum. All discussions are NOT to be construed as buy/sell recommendations. Readers are advised to do their own research and analysis.
User avatar
millionairemind
Big Boss
 
Posts: 8183
Joined: Wed May 07, 2008 8:50 am
Location: The Matrix

Re: Currency - General News

Postby millionairemind » Sat Nov 22, 2008 6:17 pm

Fresh worries over Asia’s sliding currencies
By Peter Garnham in London, Song Jung-a in Seoul and John Aglionby in Jakarta

Published: November 20 2008 19:03 | Last updated: November 20 2008 19:03

Emerging market currencies in Asia came under renewed pressure on Thursday, with the South Korean won and the Indonesian rupiah falling to their lowest levels since the Asian financial crisis of 1998.


Analysts said that fears over a sharp slowdown in global growth prompted a renewed downward shift in risk appetite. This drove wary foreign investors into repatriating funds from the region, piling pressure on local currencies.

Emerging market currencies were hit hard last month as interbank lending seized up. This had led foreign investors to sell emerging market assets as they scrambled for dollar liquidity. However, the announcement that the Federal Reserve had established currency swap lines with four emerging market central banks, including South Korea, helped ease liquidity concerns and pulled emerging market currencies away from their lows at the end of October.

But David Hauner at Bank of America said it was clear that the move was just a bear market rally and that the downward trend in emerging market currencies remained in place.

The Korean won plunged 3.5 per cent to a 10-year low of Won1,496.00 against the dollar as foreign investors continued to dump Korean shares. On Thursday foreign investors sold a record amount of Korean shares, pushing the main Kospi index 6.7 per cent lower. The Korean currency has lost 37 per cent of its value so far this year including a 13 per cent drop this month alone.

Meanwhile, the Indonesian rupiah fell on fears that Indonesia might become the next global victim of the ongoing turmoil. The rupiah slid 2.3 per cent to a 10-year low of Rp12,475 to the dollar, taking its fall so far this month to 13.6 per cent.

Financial instruments were indicating the market expects the rupiah to weaken another 12 per cent within the next month. Meanwhile credit default swap spreads over US Treasuries, an indicator of perceived sovereign risk, rose to 950 basis points. This compares to 510 basis points on November 4.

Fauzi Ichsan, of Standard Chartered Bank, said: “I reckon [the falling rupiah] is 80 per cent global factors and 20 per cent domestic ones. The main local issue is drying up dollar liquidity as demand is rising – but that’s happening across the region too.” Analysts say Jakarta’s refusal to give a full guarantee on bank deposits, unlike Singapore and Hong Kong, is prompting demand for dollars.

Elsewhere in the region, the Thai baht traded as low as Bt35.17 to the dollar, its weakest level in 20 months, the Philippine peso eased 0.2 per cent to 49.978 pesos while Taiwan dollar dropped 0.4 per cent to T$33.405.
Copyright The Financial Times Limited 2008
"If a speculator is correct half of the time, he is hitting a good average. Even being right 3 or 4 times out of 10 should yield a person a fortune if he has the sense to cut his losses quickly on the ventures where he has been wrong" - Bernard Baruch

Disclaimer - The author may at times own some of the stocks mentioned in this forum. All discussions are NOT to be construed as buy/sell recommendations. Readers are advised to do their own research and analysis.
User avatar
millionairemind
Big Boss
 
Posts: 8183
Joined: Wed May 07, 2008 8:50 am
Location: The Matrix

Re: Currency - General News

Postby winston » Sun Jan 11, 2009 11:09 am

Morgan Stanley Recommends Won, Yuan, Mexico’s Peso By Judy Chen and Patricia Lui

Jan. 9 (Bloomberg) -- Morgan Stanley recommended buying the Chinese yuan, the South Korean won and the Mexican peso as an easing in the global shortage of dollars causes the U.S. currency to weaken.

Emerging-market currencies tumbled last year as Lehman Brothers Holdings Inc. filed for bankruptcy, deepening a freeze in credit markets and prompting investors to turn to the safest, dollar-denominated securities. The dollar “loses major pillars of support” as the fund shortage eases and investors regain appetite for riskier markets, Yilin Nie, a New York-based strategist, wrote in a Jan. 8 report.

“Among the currencies that bore the brunt of the dollar rally last year, the won stands out now as a potential top performer,” Nie wrote. “Also, despite the hard landing that may face the Chinese economy, the yuan is still likely to continue a modest path of appreciation.”

Nie said investors should buy three-month non-deliverable forwards, forecasting the won will appreciate 16 percent to 1,150 per dollar and the yuan will rise 2.8 percent to 6.65 this year. Forwards indicate China’s currency will decline 1.1 percent to 6.9125 and the won will be little changed at 1327.1 in three months.

Forwards are agreements in which assets are bought and sold at current prices for delivery at a later specified time and date. Non-deliverable contracts are settled in dollars.

Trade Surplus

“China’s current capital controls will likely restrict the pace and severity of the swing in the financial account, leaving the trade surplus to continue to dominate China’s balance of payments,” Nie wrote.

China’s 2008 trade surplus was about $290 billion, up from $262 billion for all of 2007, the General Administration of Customs said in a report on Jan. 4. The surplus reached a record $40.09 billion in November.

China won’t weaken the yuan even as exports decline amid the global recession, wrote Ben Simpfendorfer, a Hong Kong-based economist at Royal Bank of Scotland in a note yesterday. China’s exports contracted 2.2 percent in November from a year earlier, the first decline in seven years.

“Yuan devaluation cannot be ruled out entirely but the authorities recognize that currency stability is an important deterrent to capital outflow,” he wrote. “They also recognize that a weaker currency will not support export manufacturers.”

Won, Peso

South Korea’s vulnerability to a shortage of dollars has been “significantly reduced” as the nation’s current account returned to a surplus and the government arranged an increased supply of the U.S. currency, Morgan Stanley wrote.

South Korea will seek to increase the size of its $30 billion currency swap agreement with the U.S. Federal Reserve and extend its maturity, Deputy Finance Minister Shin Je Yoon said in an interview yesterday. The U.S. arrangement “was a turning point” for the won, Shin said.

The Mexican peso will end the year at 12.8 per dollar from 13.67 now because of its attractive interest rates, Morgan Stanley predicted. Economists surveyed by Bloomberg expect the central bank to reduce its benchmark rate to 8 percent from 8.25 percent on Jan. 16.
It's all about "how much you made when you were right" & "how little you lost when you were wrong"
User avatar
winston
Billionaire Boss
 
Posts: 118527
Joined: Wed May 07, 2008 9:28 am

Re: Currency - General News

Postby millionairemind » Mon Jul 06, 2009 8:52 am

Currency Funds Crushed as Lack of Market Trend Hits FX Concepts
Share | Email | Print | A A A

By Ye Xie and Liz Capo McCormick

July 6 (Bloomberg) -- FX Concepts Inc., the world’s largest currency hedge fund, says it lost 5.4 percent in this year’s first five months. John W. Henry & Co.’s foreign exchange fund told investors it lost 2 percent, after 2008’s 76 percent gain, the best since its 1986 launching.

Both use computer models to spot currency trends and, along with other momentum chasers, are getting hammered by this year’s lack of clear direction as the markets are pulled in opposing directions. Deflationary pressure from the first global recession since World War II is being countered by the inflationary forces of record stimulus spending and currency printing across the globe.
http://www.bloomberg.com/apps/news?pid= ... OvYT4LTxJI
"If a speculator is correct half of the time, he is hitting a good average. Even being right 3 or 4 times out of 10 should yield a person a fortune if he has the sense to cut his losses quickly on the ventures where he has been wrong" - Bernard Baruch

Disclaimer - The author may at times own some of the stocks mentioned in this forum. All discussions are NOT to be construed as buy/sell recommendations. Readers are advised to do their own research and analysis.
User avatar
millionairemind
Big Boss
 
Posts: 8183
Joined: Wed May 07, 2008 8:50 am
Location: The Matrix

Re: Currency - General News

Postby winston » Sat Oct 03, 2009 10:13 pm

The Best Currencies for Diversifying Your Savings
By David Galland, Casey Research

Last month, I faced a difficult question: "What are the best foreign currencies we can park cash in?"

At Casey Research, we strongly believe no foreign currency is worth much more than the intrinsic value of the paper it's printed on.

Most governments have followed the lead of the U.S. when it abandoned the gold standard. All of these governments like the flexibility of being able to print money freely and use inflation as a hidden tax on their citizens.

Even conservative Switzerland has progressively uncoupled its currency from the gold that used to back it up (up until 2000, the Swiss central bank had a legal requirement to hold gold reserves equal to 40% of its currency).

That said, in a world where one needs to have access to cash quickly, it makes sense to park one's cash in a basket of currencies as opposed to having it all in U.S. dollars.

While one may speculate on specific currencies, it is very important to remember that short-term volatility is all but impossible to predict.

In the short run, exchange rates are more likely to be affected by government policies than by fundamentals. To anticipate these is a fool's game we would not want to play. And in the long term, the only form of money we want to hold is gold (and silver).

Our recommendation for those who want to diversify their cash holdings is to park a higher percentage of their cash in currencies that have stronger fundamentals than the U.S. dollar, the British pound, or the euro.

We generally like the Canadian dollar and the Australian dollar, as both countries have had relatively more conservative monetary policies than the U.S., the EU, or the UK.

In addition, their economies are strongly dependent on natural resources, which we see as the best hedge against inflation. Canada, for instance, is the United States' largest foreign oil supplier. Australia is full of gold, copper, uranium, and natural gas... all of it easily transportable to China. Over the coming years, these "commodity currencies" will hold up much better than the dollar. So consider these when looking for a dollar alternative.

Another choice would be the Swiss franc, as that country is still conservative and still apparently committed to hold 20% of the value of its paper currency in gold. Over the past three decades, the Swiss franc has held more of its value than most other major currencies in the world; no future guarantees, but a good track record.

Another prudent strategy could be to hedge against short-term volatility and to build a portfolio of currencies that would spread across all major denominations.

The million-dollar question is "Where can I park my cash?" The answer is, "Park it in several different places."

Make sure to keep a good portion of your savings in gold and silver. How much you hold really depends on who you are and what your tolerance for risk is. At this point, almost everybody should have 15% of their money in gold, up to as much as 30%. Importantly, don't chase the price. Inflation won't make itself known for some time, but there will be a lot of volatility in the financial markets, periodically pushing gold back. So, buy on the dips. But buy.

And consider getting diversified into the currencies listed above.

Source: Daily Wealth
It's all about "how much you made when you were right" & "how little you lost when you were wrong"
User avatar
winston
Billionaire Boss
 
Posts: 118527
Joined: Wed May 07, 2008 9:28 am

Re: Currency - General News

Postby winston » Tue Oct 13, 2009 11:27 pm

Two Ways to Profit on a Huge New Currency Trend By Tom Dyson

The Reserve Bank of Australia hiked its interest rate this week...

This was a big piece of financial news. Central banks around the world have been cutting rates for two years, and interest rates are as low now as they've ever been.

When a company raises its dividend, its stock becomes more attractive to investors. Its share price rises. When a bank raises interest rates on its savings accounts, people deposit more money in the bank. It's the same way in the currency markets. Rising interest rates make a currency more attractive and it rises against other currencies with stable interest rates...

The governor of Australia's central bank hinted there would be more interest rate rises on the way. This could be the start of a new trend of rising interest rates around the world. Analysts say Canada, New Zealand, South Korea, and Norway are likely candidates to follow Australia's lead.

If this is the start of a new trend of rising world interest rates, you can expect big new trends in the currency exchange markets, too. That's because interest rates are the single most important driver of exchange rates in the currency markets.

Australia's currency has risen this week as investors celebrate the higher interest rates they'll receive for owning it.

On the other hand, the dollar has fallen 15% in the last seven months. Newspapers will say it's because the Saudis want to price oil in euros or because the Fed prints too much money. This is garbage. The real reason is, it has the lowest interest rate of any major currency in the world except Japan, and speculators expect these low rates to remain indefinitely.

So how do you make money from a new global trend of rising interest rates?

While other central banks are considering raising rates, the Fed has so far refused to join the party. The dollar is the worst-performing major currency in the world this year as a result.

Two weeks ago, the Bureau of Labor released its monthly unemployment report. The report showed that somewhere close to 6 million jobs have vanished from the American economy in the last 18 months. As I write, jobs are still disappearing, albeit at a slower pace.

The employment situation hasn't been this bad since World War II ended and defense contractors eliminated 4.3 million jobs no longer needed for the war effort. With the ongoing unemployment bloodbath, rate hikes in America are unlikely until next year.

First, this gives you a great opportunity to buy the dollar right now, while it's cheap and no one is anticipating rate hikes from the Fed. For regular investors, UUP is the best way of profiting if the dollar rises. It's a fund that replicates the performance of the dollar against a basket of the euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc. By the time Bernanke announces his first rate hike next year, the dollar will have already rallied 10% or more.

Second, a trend of rising interest rates on currencies is great for people looking to buy gold at lower prices. Gold has no interest rate. So when interest rates rise on world currencies, they become more attractive – and they rise – relative to gold. This is especially true with the dollar. It's the world's reserve currency and gold is incredibly sensitive to movements in its interest and exchange rates.

As long as unemployment keeps rising, there's no way the Fed raises interest rates and gold prices will stay high. But next year is a different story. The first hint of rate increases by the Fed will send shockwaves into the gold market. If you're looking to buy gold, wait until Bernanke starts raising interest rates. By then the market will have already discounted the rate hikes and gold will be forming a low point.

Source: Daily Wealth
It's all about "how much you made when you were right" & "how little you lost when you were wrong"
User avatar
winston
Billionaire Boss
 
Posts: 118527
Joined: Wed May 07, 2008 9:28 am

Re: Currency - General News

Postby winston » Mon Nov 30, 2009 2:59 pm

Positions in SIN, AUD, USD, HKD and EUR

=========================================

DJ MARKET TALK:USD To Stay Weak In 2010-11, CNY Rise Gradual -UBS

0624 GMT [Dow Jones] USD likely to remain weak over 2010-11, says UBS. Notes, combination of modest U.S. fiscal tightening, still-accommodative Fed policy is one reason. "So, too, is the persistence of a still-large U.S. current account deficit, reflecting in part in a large U.S. structural fiscal deficit."

However, says EUR, JPY yen not now undervalued; "hence, further currency appreciation in Europe or Japan presents a risk to their respective recoveries."

Says China, many other emerging economies continue to resist stronger local currencies, building large foreign exchange rate reserves as consequence. "So, despite a fundamentally weak dollar environment, we expect only a moderate 5%-7% rate of trade-weighted U.S. dollar depreciation over the next two years."

Expects dollar-yuan exchange rate to be kept steady until 2Q 2010, when gradual rise in CNY ought to resume on positive Chinese export growth, strong GDP growth, rising international pressure; tips move to be gradual, "not more than 8%-10%, even in 2011."

By Dec 2011 tips EUR/USD at 1.60, USD/JPY at 85.00, AUD/USD at 0.95, NZD/USD at 0.73, GBP/USD at 1.69, USD/CAD at 1.00.

Source: Dow Jones Newswire
It's all about "how much you made when you were right" & "how little you lost when you were wrong"
User avatar
winston
Billionaire Boss
 
Posts: 118527
Joined: Wed May 07, 2008 9:28 am

Re: Currency - General News

Postby millionairemind » Wed Feb 10, 2010 12:34 pm

How does a currency crisis spread? What's the attack mode? This article was written shortly after the AFC. I tot it might be good reference while we watch how the euro-drama unfold :P

98-25; August 28, 1998

How Do Currency Crises Spread?

The world has experienced three waves of speculative attacks on fixed exchange rate regimes recently: the European Monetary System (EMS) crisis of 1992-93, the Mexican meltdown and "Tequila Hangover" of 1994-95, and the "Asian Flu" of 1997-98. These currency crises generally involved countries in the same region. Why?

One explanation is that currency crises tend to spread through a region because countries are linked by trade, and trade tends to be regional. Once Thailand floated the baht, its main trade competitors (Malaysia and Indonesia) were suddenly at a competitive disadvantage, and so were themselves likely to be attacked. Thus the spread of currency crises reflects international trade patterns. Countries who trade and compete with the targets of speculative attacks are themselves likely to be attacked

Our explanation of the regional nature of currency crises might seem obvious. But most economists think about currency crises using macroeconomic models. They think of crises as resulting from conflicts between incompatible internal and external macroeconomic objectives. This apparently reasonable view has a simple problem: macroeconomic phenomena do not tend to be regional. So it is hard to understand why currency crises would be regional from a strictly macroeconomic perspective.

In this Letter we summarize empirical evidence by Glick and Rose (1998) that systematically assesses the role of trade linkages as a channel for contagion. Using data for a number of different currency crisis episodes, we show that currency crises affect clusters of countries tied together by international trade. This linkage is important in understanding the regional nature of speculative attacks. Currency crises spread along the lines of trade linkages, even after accounting for the effects of macroeconomic and financial factors.

Currency crises have been regional

This decade has witnessed three important currency crises. In the autumn of 1992, a wave of speculative attacks hit the EMS and its periphery. Before the end of the year, five countries (Finland, the U.K., Italy, Sweden, and Norway) had floated their currencies. Despite attempts by a number of other countries to remain in the EMS by devaluing their currencies (Spain, Portugal, and Ireland), the old system was ultimately unsalvageable. The bands of the EMS were widened from ± 2.25% to ± 15% in August 1993.

The Mexican peso was attacked in late 1994 and floated shortly after an unsuccessful devaluation. A rash of speculative attacks broke out immediately. The most prominent targets of the "Tequila Hangover" were Latin American countries, especially Argentina and Brazil, but also including Peru and Venezuela. Not all Latin countries were attacked -- Chile was the most visible exception -- and not all economies attacked were in Latin America (Thailand, Hong Kong, the Philippines, and Hungary suffered brief speculative attacks). While few countries actually devalued, the Tequila attacks were not without effect. Argentine macroeconomic policy in particular tightened dramatically, precipitating a sharp recession.

The "Asian Flu" began with the flotation of the Thai baht in July 1997. Within days speculators attacked Malaysia, the Philippines, and Indonesia. Hong Kong and Korea were attacked somewhat later on; the crisis then spread across the Pacific to Chile and Brazil, and "bahtulism" effects still linger.

All three waves of attacks were largely regional. Once a country had suffered a speculative attack - Thailand in 1997, Mexico in 1994, Finland in 1992 - its trading partners and competitors were disproportionately likely to be attacked themselves. Not all major trading partners devalued - indeed, not all were even attacked. Macroeconomic and financial influences were certainly not irrelevant. But neither was the trade channel irrelevant as a means of transmitting speculative pressures across international borders.

It should be noted that currency crises were regional long before the 1990s. The German decision in April 1971 to abandon its Bretton Woods exchange rate obligations precipitated a rash of flotations by other European countries. The same was true of the German decision to float out of the Smithsonian Agreement in February 1973.

Explanations of currency crises

Most economists tend to think about currency crises using one of two standard models of speculative attacks, both of which emphasize macroeconomic fundamentals as determinants. "First generation" models direct attention to inconsistencies between an exchange rate commitment and domestic economic fundamentals. For example, excessive monetary expansion to monetize fiscal deficits can deplete the central bank=s foreign exchange reserves and weaken its ability to defend a peg. "Second generation" models view currency crises as shifts between different monetary policy equilibria in response to self-fulfilling speculative attacks. In these models, market speculators initiate attacks based on their beliefs about the willingness of policymakers to resist pressure on the exchange rate. When markets perceive that conditions such as high unemployment or a weak banking system compromise the central bank's willingness to defend a currency peg by raising interest rates, speculative attacks are more likely to succeed.

Both models suggest that currency crises will be regional if economic conditions are regional, i.e., a crisis may spread among countries in the same region if they exhibit similar macroeconomic and financial features. But macroeconomic conditions do not tend to be regional. Thus, from the perspective of most speculative attack models, it is hard to understand why currency crises tend to be regional, at least without an extra ingredient explaining the regional relationship of relevent macroeconomic fundamentals.

The "extra ingredient" may well be trade patterns, which are regional: countries tend to export and import with countries in geographic proximity. It is easy to imagine why the trade channel is important. If prices tend to be sticky, a nominal devaluation delivers a real exchange rate pricing advantage, at least in the short run. That is, countries lose competitiveness when their trading partners devalue. They are therefore more likely to be attacked -- and to devalue -- themselves.

Of course, this channel may not be important in practice. Nominal devaluations need not result in real exchange rate changes for any long period of time. Devaluations are costly and can be resisted. Making the case for the trade channel is therefore primarily an empirical exercise.

Empirical methodology

To demonstrate that trade provides an important channel for contagion above and beyond macroeconomic and financial similarities, we focus on explaining the incidence of currency crises across countries for five different currency crisis episodes: the breakdown of the Bretton Woods system in 1971, the collapse of the Smithsonian Agreement in 1973, the EMS Crisis of 1992-93, the Mexican meltdown and the Tequila Effect of 1994-95, and the Asian Flu of 1997-98. We ask why some countries were hit during each of these episodes of currency instability, while others were not. Further details are provided in Glick and Rose (1998).

Our empirical strategy keys off the "first victim" in a given crisis episode. Given the incidence of the initial speculative attack (e.g., Thailand in 1997 and Mexico in 1994), we ask how the crisis spreads from this first victim. Were the subsequent targets closely linked by international trade to the first victim? Or did they share macroeconomic similarities?

We answer this by estimating a cross-country relationship for each crisis episode; we compare the incidence of crises with a measure of each other country's trade linkage with the first crisis victim as well as relevant macroeconomic variables. To estimate this relationship we must (1) define the incidence of currency crises, (2) measure the trade linkage between the first crisis victim and other countries, and (3) measure the relevant macroeconomic and financial control variables.

We define our currency crisis measure as a simple binary variable indicator of crisis victims (1 if a country is a victim, 0 if it is not) determined from journalistic and academic histories of the various episodes. More complex measures of currency crisis involvement that take into account the extent of exchange rate pressure experienced by a country during a crisis deliver similar results.

The magnitude of international trade links between the first victim and other countries is constructed from a weighted average measure of the extent to which the countries compete in foreign export markets. This trade measure is computed for each episode using annual data for the relevant crisis year taken from the IMF's Direction of Trade data set.

As an example, in 1997 all of Thailand's top 10 trade competitors and 16 of its top 20 trade competitors were located in Asia. (The top 10 ranked in descending order were Malaysia, Korea, Indonesia, China, Japan, Taiwan, the Philippines, India, Myanmar, and Singapore; Hong Kong was 17th.) Unsurprisingly, these countries were also disproportionately likely to have suffered speculative attacks. Perturbing the trade linkage measure in different ways makes little difference to the results.

A variety of different macroeconomic variables are used to control for the determinants of currency crises dictated by standard macroeconomic models of speculative attacks. We do this so that the trade linkage variable picks up the effects of currency crises that spill over simply because of trade. That is, we take into account key aggregate and financial imbalances that might lead to a currency crisis for macroeconomic reasons. The macroeconomic variables we employ include the annual growth rate of domestic credit, the government budget as a percentage of GDP, the current account as a percentage of GDP, the growth rate of real GDP, the ratio of M2 to international reserves, domestic CPI inflation, and the degree of currency under-valuation. (We also tested other variables, and the thrust of the results was the same.) The data set is annual and was extracted from the IMF's International Financial Statistics.

Empirical results: trade links matter

The cross-country relationships between currency crisis involvement, trade linkage, and other macroeconomic variables are estimated by bivariate and multivariate probit analysis. The results are striking.

For all five episodes, the strength of trade linkage to the "first victim" varies systematically between crisis and non-crisis countries. In particular, it is systematically higher for crisis countries at all reasonable levels of statistical significance, i.e., countries that become "infected" by the crisis have closer trade linkages to the "first victim" than countries that escape the disease.

In contrast, none of the macroeconomic variables typically varies systematically across crisis and non-crisis countries. While some variables sometimes have significantly different means, these results are not consistent across episodes. And they are never as striking as the trade results. These findings are consistent with the importance of the trade channel in contagion.

When macroeconomic and trade linkages are included simultaneously, the results are unchanged. The trade channel for contagion remains consistently important. While the economic size of the effect varies significantly across episodes, it is consistently different from zero at conventional levels of statistical significance. Its consistently positive sign indicates that a stronger trade linkage is associated with a higher incidence of a currency crisis.

On the other hand, the macroeconomic controls are small economically and rarely of statistical importance. This is true both of individual variables and of a host of macroeconomic factors taken simultaneously. These results hold up with respect to a number of perturbations to the basic empirical methodology.

The hypothesis of no significant trade channel for contagion seems wildly inconsistent with the data, while macroeconomic conditions do not explain the cross-country incidence of currency crises. That is, currency crises seem to spread contagiously because of international trade patterns.

Conclusion

We have found strong evidence that currency crises tend to spread along the regional lines suggested by international trade. Countries tend to suffer speculative attacks after their foreign competitors are attacked.
This is true of five waves of speculative attacks since 1971. Accounting for a variety of different macroeconomic effects does not change this result. Indeed, macroeconomic factors do not consistently help much in explaining the cross-country incidence of speculative attacks.

Our analysis implies that countries may be attacked because of the actions (or inaction) of their neighbors who tend to be trading partners merely because of geographic proximity. This externality has important implications for policy. If speculative attacks spread through trade links, then enhanced international monitoring on a regional basis is desirable. Moreover, If countries are more at risk to the spread of currency crisis than is apparent by looking just at domestic economic factors, a lower threshold for international or regional assistance is also warranted in order to limit the spread of speculative attacks.

Reuven Glick
Vice President and Director
Center for Pacific Basin
Monetary and Economic Studies, FRBSF

Andrew K. Rose
Visiting Scholar, FRBSF, and
Professor, Haas School of Business
University of California, Berkeley
"If a speculator is correct half of the time, he is hitting a good average. Even being right 3 or 4 times out of 10 should yield a person a fortune if he has the sense to cut his losses quickly on the ventures where he has been wrong" - Bernard Baruch

Disclaimer - The author may at times own some of the stocks mentioned in this forum. All discussions are NOT to be construed as buy/sell recommendations. Readers are advised to do their own research and analysis.
User avatar
millionairemind
Big Boss
 
Posts: 8183
Joined: Wed May 07, 2008 8:50 am
Location: The Matrix

Next

Return to Currencies

Who is online

Users browsing this forum: No registered users and 4 guests