Every month seems to witness the induction of a new country into the pantheon of those with burgeoning forex reserves. The new member for the month of February is...Iran? Most of the attention Iran receives is political rather than economic, but with oil prices recently topping $100 a barrel for the second time, you can bet that Iran will start appearing on the radar screens of more and more analysts. Iran's reserves currently total $76 Billion, which is unimpressive in itself, but represents a 30% year-over-year increase. Of more significance, perhaps, is that Iran is leading the charge against the Dollar by actively diversifying its reserves into Euros. It remains to be seen whether any "non-rogue" countries will follow suit. The Economic Times reports:
Iran, the world's fourth largest oil exporter and the second ranking in OPEC, has benefited from record crude prices which have helped it to weather domestic economic problems.
Sunday, February 24, 2008
Forex Forecast
Forex Forecast- try saying that three times fast! The Market Oracle, an online financial publication, has done even better, preparing a one-year forecast for all of the major currencies along with a detailed analysis of the major factors driving each currency in the month of February. The Dollar and Yen are projected to be the strongest performers in this time frame, benefiting from a trend towards risk aversion. It should be noted that this prediction is consistent with news reported by the Forex Blog earlier this week. On the other hand, currencies that have been propped up by the Yen carry trade, namely those of Australia, New Zealand, Canada and South Africa, will face selling pressure. The British Pound is projected to underperform slightly, due to an easing of British monetary policy, which will narrow the interest rate advantage claimed over the US.
Finally, the Euro is something of a wildcard. On the one hand, the EU economy is stagnating, and the ECB has hinted that rate cuts are a possibility. On the other hand, the Euro theoretically stands to inherit a significant amount of risk-averse capital, especially from foreign investors looking for a stable alternative to the Dollar. Accordingly, the Market Oracle forecasts a short-term decline in the value of the Euro but a long-term appreciation.
Finally, the Euro is something of a wildcard. On the one hand, the EU economy is stagnating, and the ECB has hinted that rate cuts are a possibility. On the other hand, the Euro theoretically stands to inherit a significant amount of risk-averse capital, especially from foreign investors looking for a stable alternative to the Dollar. Accordingly, the Market Oracle forecasts a short-term decline in the value of the Euro but a long-term appreciation.
Dollar Benefits from Risk Aversion
As talk and evidence of a US economic recession builds, the Dollar has witnessed a slight upswing. How to explain these seemingly contradictory trends? The rationale is surprisingly simple. While a US recession would predictably hit the US harder than other countries, it would still hamper growth abroad, especially in emerging markets that have come to depend on exports to the US to drive growth. Accordingly, investing in such emerging markets becomes relatively more risky than investing in the US, which is still considered to have the world's most stable investing climate from a long-term perspective. Thus, as risk aversion rises, so does the Dollar. Thomson Financial reports:
The combination of poor data weighed on stock markets in the US and Asia, while major bourses in Europe have all opened lower today. This meant the dollar gained support as investors shy away from riskier emerging market assets.
The combination of poor data weighed on stock markets in the US and Asia, while major bourses in Europe have all opened lower today. This meant the dollar gained support as investors shy away from riskier emerging market assets.
India Projects Forex Reserve Growth
Those who make a living tracking and betting on the foreign exchange reserves of Central Banks officially have a new player to keep tabs on: India. Nearly 17 years ago, India's reserves dipped below $1 Billion, and government ministers began sounding the alarm bells. In comparison, fiscal 2007 witnessed a rise of $47 Billion in India's reserves, bringing the total to $280 Billion. The government is projecting an even greater increase in 2008, estimated at $100 Billion. Now, the challenge is what to do with all of the reserves; investors will be tracking developments in this regard because of the implications for the currencies of which the reserves are denominated in. The Dollar and Euro are currently jockeying for position; while the Dollar is way ahead, the Euro is quickly closing in.
China's Forex Reserves Roar Past $1.5 Trillion
On January 24 last year, the Forex Blog reported with great fanfare that China's forex reserves had breached the epic milestone of $1 Trillion. [In hindsight, it turns out that the psychologically important barrier was broken several months earlier, but that is beside the point]. Less than one year later, China's forex reserves reached another important threshold, soaring past $1.5 Trillion. It appears that new reserves are being accumulated at an exponential rate, having increased $460 Billion last year and over $30 Billion in the month of December alone. By no coincidence, China's 2007 trade surplus of $262 Billion shattered the previous record and is expanding at a comparably supersonic pace.
Most analysts reckon that the country is locked in a vicious cycle: when its trade surplus grows, its forex reserves grow proportionately. Moreover, the lopsided trade imbalance th\at China maintains with most of the world ensures that the demand for Chinese Yuan exceeds the supply. In the short run, a more expensive currency equates to higher prices paid for its exports which only increases the trade surplus and forex reserves further, and exerts still more pressure on the currency to appreciate. Meanwhile, as the Yuan rises, the value of China's forex reserves, which are denominated predominantly in USD, falls. What a conundrum indeed! Xinhua News reports:
The value of Chinese RMB against the US dollars has appreciated by over six percent in 2007. The central parity rate of the RMB was 7.2672 to the US dollar on Friday.
Most analysts reckon that the country is locked in a vicious cycle: when its trade surplus grows, its forex reserves grow proportionately. Moreover, the lopsided trade imbalance th\at China maintains with most of the world ensures that the demand for Chinese Yuan exceeds the supply. In the short run, a more expensive currency equates to higher prices paid for its exports which only increases the trade surplus and forex reserves further, and exerts still more pressure on the currency to appreciate. Meanwhile, as the Yuan rises, the value of China's forex reserves, which are denominated predominantly in USD, falls. What a conundrum indeed! Xinhua News reports:
The value of Chinese RMB against the US dollars has appreciated by over six percent in 2007. The central parity rate of the RMB was 7.2672 to the US dollar on Friday.
Forex Themes for 2008
Last week, the Forex Blog recounted what happened across forex markets in 2007, in all of its drama. Now, we would like to offer a nice counterpoint, in the form of the major themes expected to dominate forex headlines in 2008, courtesy of Dow Jones. The list includes eight distinct themes, though there is some overlap. Three of the themes pertain directly to the USD, which is the currency most worth watching in the upcoming year. The fundamentals bode well for the Dollar; the economy has not suffered from the credit crunch nearly as much as economists feared; the cheaper currency has boosted exports; foreigners have proven surprisingly willing to finance the twin deficits.
Then, there is inflation, which has reared its ugly head in the US as well as abroad. Foreign Central Banks, especially in Asia, may have to tighten monetary policy in order to maintain price stability. Those countries with already-high interest rates, such as Australia and New Zealand, are expected to keep rates high. The next theme, accordingly, is the carry trade, which should continue its run due to the aforementioned high interest rates. Next is China, which will be watched on two fronts: its economy and its currency, both of which are expected to continue rising.
The final two themes pertain especially to the Middle East: currency pegs and Sovereign Wealth Funds. As the Dollar declined in 2007, several nations in the Mid East mulled the possibility of de-linking their respective currencies from the Dollar, but thus far, the status quo has obtained. Sovereign Wealth Funds also made a big splash in 2007 with several high-profile investments in the US, implicitly underscoring their their commitment to the Dollar. They represent a growing force in global capital markets, and will be watched vigilantly in 2008.
Then, there is inflation, which has reared its ugly head in the US as well as abroad. Foreign Central Banks, especially in Asia, may have to tighten monetary policy in order to maintain price stability. Those countries with already-high interest rates, such as Australia and New Zealand, are expected to keep rates high. The next theme, accordingly, is the carry trade, which should continue its run due to the aforementioned high interest rates. Next is China, which will be watched on two fronts: its economy and its currency, both of which are expected to continue rising.
The final two themes pertain especially to the Middle East: currency pegs and Sovereign Wealth Funds. As the Dollar declined in 2007, several nations in the Mid East mulled the possibility of de-linking their respective currencies from the Dollar, but thus far, the status quo has obtained. Sovereign Wealth Funds also made a big splash in 2007 with several high-profile investments in the US, implicitly underscoring their their commitment to the Dollar. They represent a growing force in global capital markets, and will be watched vigilantly in 2008.
India's Forex Reserves Near $300 Billion
India is quickly becoming a major force on the foreign exchange reserve scene. While India doesn't fix its currency to the USD like China does, it still removes most foreign currency from circulation in order to mitigate against inflation. As a result, its reserves have ballooned to nearly $300 Billion, having increased by $100 Billion this year alone. India will now be faced with the same decisions that many other forex reserve hogs have been forced to reckon with, namely how to allocate its reserves. While India hasn't weighed in prominently on the issue as China has, analysts will be watching closely. The Economic Times reports:
Rate cut by the Fed in the US along with the positive perception prevailing about the emerging economies such as India has led to sharp rise in inflows, it said.
Rate cut by the Fed in the US along with the positive perception prevailing about the emerging economies such as India has led to sharp rise in inflows, it said.
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