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.

Introduction of exchange traded currency derivatives in India

Over the years the foreign exchange market in India has shown significant growth in terms of volumes, product range, liquidity, and participation level. The average daily turnover in the foreign exchange market in March 2007 was a whopping 33 billion USD. Due to lack of exchange traded currency instruments, these transactions were done in over-the-counter (OTC) market like currency forwards, swaps, and options. There was always a need for a more developed currency markets in India to match the international standards.

Benefits of Exchange traded over OTC
The exchange trading makes the transaction more transparent. The price discovery is more efficient in case of exchange trading because of presence of large number of market players. It also offers trading opportunity for relatively smaller players because of small contract size compared to OTC market. Moreover, in exchange traded products the counter-party risk is eliminated by the clearing corporation. Using electronic trading superior risk management systems can be used for exchange trading thereby minimizing the overall risk in the portfolio.

In August 2008, RBI and SEBI allowed selected exchanges to offer currency trading and issued guidelines for the same. RBI & SEBI allowed USD-INR to be traded on exchange. The size of the contract will be USD 1000. The contract can have a maximum maturity of 1 year and it should be quoted and settled in Indian Rupees. Settlement price will be the RBI’s reference rate. Some more specific details in the guidelines about the currency derivatives were:

Underlying

• US Dollar – Indian Rupee (US$-INR)

Trading Hours

• The trading on currency futures would be available from 9 a.m. to 5 p.m.

Size of the contract

• US$ 1000

Quotation

• The currency futures contract would be quoted in rupee terms.

Tenor of the contract

• The currency futures contract shall have a maximum maturity of 12 months.

Available contracts

• All monthly maturities from 1 to 12 months would be made available.

Settlement mechanism

• The currency futures contract shall be settled in cash in Indian Rupee.

Settlement price

• The settlement price would be the Reserve Bank Reference Rate on the date of expiry.

Final settlement day

• The currency futures contract would expire on the last working day (excluding Saturdays) of the month.

The excerpt, from the guidelines, about the trading member is shown below:

"
The Trading Member will be subject to a balance sheet net worth requirement of Rs. 1 crore while the Clearing Member would be subject to a balance sheet net worth requirement of Rs 10 crore. Banks authorized by the Reserve Bank of India under Section 10 of the Foreign Exchange Management Act, 1999 as 'AD Category - I bank' are permitted to become Trading and/or Trading-cum-Clearing Members of the Currency Futures market, on their own account and on behalf of their clients, subject to fulfilling the following minimum prudential requirements:

a. Minimum net worth of Rs. 500 crore.
b. Minimum CRAR of 10 %.
c. Net NPA should not exceed 3 %.
d. Bank should have made a net profit in last 3 years.

The Trading Members and sales persons in the Currency Futures market must pass a Certification Programme which is considered adequate by SEBI. BSE Training Institute offers a training course and it also separately runs a Certification Programme. All approved users and sales personnel of the Trading Member are required by SEBI to have passed the Certification Programme.

"

Pursuant to the guidelines BSE and NSE have started currency derivative trading. The Currency Futures trading at BSE takes place through a fully automated screen-based trading platform called BSE-CDX (BSE's Currency Derivatives Exchange). The CDX is designed to allow trading on a real-time basis. In addition to generating trades by matching opposite orders, the CDX also generates various reports for the Member participants.
















Source: BSE, NSE, RBI, SEBI websites