Cont.. Currency war and its implications on Forex market

Cont.. Currency war and its implications on Forex market
Important: Please read the disclaimer at the end of the post.


Short to medium term movement across some currency pairs


USD/CAD

The most undervalued currency in the Forex market is Loonie (Canadian Dollar). We expect a persistence appreciation of Loonie against Greenback (US Dollar) in the short to medium term. However, around parity the currency pair may experience high volatility and is well suited for scalpers. The crude oil price is likely to move up and a similar trend could be observed in Loonie as well is expected the same.

EUR/USD

Europe economy has been hit by number of crisis which were prevalent earlier (western Europe Debt crisis, Irish bank crisis etc.). The appreciation in Euro is hurting European exporters significantly. However, the US economy has fallen into liquidation trap and further bailout or rejuvenate policy may not help US in achieving a turnaround. We expect EUR to appreciate against USD amid high volatility in coming days.

USD/JPY

Twice intervention by BOJ is a warning sign for traders to be cautious for showing confidence in Yen. Traders will avoid long term (months etc.) investment in this currency with positions restricted to intraday exposure. Short term reversal can be expected in this currency in the coming weeks. This currency pair is currently positioned around historical lows.

AUD/USD

The Australian dollar seems to be currently in an overheated state. The Australian economy provides highest interest rate in the developed economy and hedge funds are expected to chase this currency. There is high correlation between price of Gold and AUD. Further appreciation of AUD against USD will be slow and any positive news related with US economy will move the currency pair down sharply. The currency pair current position is around all time high.


Disclaimer - The views expressed in this article are opinion of the author and are for knowledge sharing purposes only. Anything material published in this blog should not be treated as recommendation to buy/sell. For further details read the site disclaimer.

Currency war and its implications on Forex market

There is uproar in the international currency market about the advent of 'currency war'. Currency war is a situation when many countries interfere in the foreign exchange market to devalue their currency. A cheaper currency helps makes the exports more competitive. Exports form a significant of economy of countries like China, Japan etc. A strong Yen (Japanese currency) for example will make Japanese exporters less competitive and can led to recession in Japanese economy. In an effort to prevent slowdown in their economy countries take deliberate measures to devalue their currency. Japanese Yen has been touching new historical highs in the year 2010 with Yen breaching 15-year high record in September. This is likely to impact the Japanese exporters which form a significant part of Japanese economy. Recently, Bank of Japan (BOJ) intervened twice in the currency markets which by many analysts has been seen as signs of open currency war in the coming years. The atmosphere has become quiet tense in past few months and volatility is expected to be high in the currency market, which is seen by many as a sign of dramatic change in the dominance of Greenback (US Dollar).

Some of the recent developments that have rocked the Forex market are:

• - Greenback lost foothold against all currency & currently any positive news related with US economy is not helping it to reverse the already battered currency.
• - US economy seems to be caught up in a Liquidation trap.
• - Unemployment rate (~10%) is currently one of the major issues of the developed economy.
• - US/Europe's focus is to halt economy slowdown was to boost domestic demand, achieved by maintaining low interest rate regime.
• - However, persistently depreciation of Greenback against major currencies might result in inflation in US
• - Near zero interest rates and falling economy condition of US has led to the flow of money to the emerging markets as the condition in most of the developed economies is fragile.
• - Hence, developing countries are facing currency appreciation against Dollar which is the dangerous sign for their foreign trade. Also, there is danger of short term inflation in the emerging economy and may jeopardize their economy.
• - China has stringent/controlled economy policy: fixed interest rate, undervalued Yuan against USD, unfair advantage in foreign market as China can export goods at much cheaper rate, Accumulation of USD and hold approx. 30% of the total foreign reserve of the world.
• - IMF meeting was unsuccessful as nothing concrete came out of the meeting.
• - Bank of Japan unilaterally intervenes in the international finance market (Forex) firstly by selling Yen and buying USD to keep it export competitive in the international market followed by decreasing interest rate to 0%. Yen broke record of all time high 82 USD/JPY in last 15 years and the Japanese currency is appreciating further.
• - Japan is facing the danger of economy collapse as its economy relies on export and any appreciation of Yen against USD will doubly hurt Japan.
• - Japan intervention in International financial market has led to other countries like Brazil, Israel to control the inflow of money. Since they don’t want to lose pace with China.
• - We have seen emerging equity market like India moving higher as their market witnessed the Foreign cash inflows. However, there is a risk that the Central Bank of these countries may take steps to halt cash inflow; there is a high volatility in the Asian market.
• - In Europe Irish bank crisis and bailout has hit hard the situation of Europe economy.
• - OPEC countries are worried about the falling purchasing power of Greenback. They are urging to revalue crude oil price around 100$ per barrel.

Disclaimer - The views expressed in this article are opinion of the author and are for knowledge sharing purposes only. Anything material published in this blog should not be treated as recommendation to buy/sell. For further details read the site disclaimer.

Banks failures continue in 2010, pose risk for economic recovery

The financial crisis had severe repercussion on the banking systems in America. The number of banks that have failed in the country in the last two years (2009 and 2010) is much higher than the number of bank failure in the rest of the 2000-2010 decade.

Overall about 270 banks have failed since October 2000 out of which 173 have failed in the last one year (July 2009 to May 2010). The number is 238 for the last two year period (July 2008 to May 2010). To give a perspective of how big the scale is the total number of FDIC (Federal Deposit Insurance Corporation) insured institution as on May 2010 were 7895. So the number of banks that have failed in the last two years is about 3% of the total number.

What is a bank failure?

Bank failure is basically closure of a bank’s operations mainly by the regulators because the bank is likely to face insolvency and the risk of the bank being unable to meet its financial obligation towards depositors and creditors are high. This arises due to erosion in the market value of the assets owned by the bank leading to lower capital (net worth) of the bank. If the market value of assets of a bank becomes lower than the market value of liabilities, the net worth becomes negative and the bank even if it liquidates all its assets will not be able to pay the depositors and creditors. The regulators generally look at the capital ratio as a sign for a probable bank failure. If there is a high probability of negative net worth of a bank, it is better to declare the bank failure because if the bank keeps on operating those depositors who have the information about the bank’s weak position will withdraw their money leaving even lesser capital for the less informed depositors. The major loss will then have to be taken by the remaining depositors.

Contagion effects associated with a bank failure

Failure of a single bank can lead to a string of such failures and shake the entire financial system as the banks are closely intertwined with many cross exposures. Failure of one bank can result in capital erosion for other banks thereby triggering a chain reaction which could over a short time spill over to a large number of banks. The impact of the current bank failures can be estimated by FDIC estimate that another 700 banks are at risk of failure.

Role of regulators to shield the financial system

Due to domino effect associated with a weak bank, the role of regulators becomes very important. In United States, FDIC takes over the weak bank to reduce its impact from the system. The bank's assets are seized and liquidated/sold to other banks and the depositors are paid the insurance up to deposit insurance limit which is currently $250,000.

An example of a big bank failing

Washington Mutual Bank (WaMu) is the largest bank failure so far. Founded in 1889, the American bank had annual revenues of about $16 billion before its failure in 2008. WaMu faced bank run after news of its weak capital position spread. In 10 day time about $16 billion dollars of deposits were withdrawn. The regulators took over the bank to prevent systemic risk to the whole system. Later, its assets were sold to JP Morgan Chase.

Top 10 banks in the world by market value as on March 2010

About a year back we posted an article on the largest banks in world by market capitalization as on Feb 26, 2009. At that time I was searching for the list of the biggest banks but couldn't find it on internet for free. So, I had to find the market cap of the big banks in the world (finding the names of banks wasn't that difficult). 

Recently, I came across the list of biggest companies in the world by their market value published by Financial Times (FT). The list was comprehensive and has details like country and sector so finding the top 10 banks was a very easy thing now. Here's the top ten banks as on March 2010:

Rank	Company	Country
1	Industrial and Commercial Bank of China	China
2	China Construction Bank	China
3	Bank of America	US
4	JP Morgan Chase	US
5	HSBC	UK
6	Wells Fargo & Co	US
7	Bank of China	China
8	Citigroup	US
9	Banco Santander	Spain
10	BNP Paribas	France

There have been few changes in the list to what we published in Feb 2009. As the global financial situation witnessed some improvement, the American banks have regained some of their lost market capitalization thereby helping them to improve their rankings. Compared to Feb 2009 when the top 10 list had four banks  from China, two from US and one each from Italy, Japan, Spain and UK, in Mar 2010 there were four banks from US, three from China and one each from UK, Spain and France. However, the Chinese banks still hold the top two slots. This might be because the American banks although bigger than Chinese are yet to fully recover from the financial crisis that had hit the investor's confidence, while Chinese banks being  in an emerging economy also commands high valuations. However, what came in surprising is that in the list of top 500 companies in the world there were only seven American Banks, while China has nine banks in top 500. This appears to be bit on the lower side for the country with most number of banks  (as per Federal Deposit Insurance Corporation US had 7895 FDIC insured institution as on May 2010) and a highly advanced banking system. Is it because of consolidation in the US banking sector or investor's lack of confidence in smaller banks given the recent series of bank failures.

Country	No. of Banks in Top 500 Global Companies
China	9
US	7
Canada	5
UK	5
Australia	4
Brazil	4
France	3
India	3
Japan	3
Singapore	3

Data Source: Global Top 500