Global Investing

from Jeremy Gaunt:

When things stagnate

Goldman Sachs researchers have been hitting the history books again, trying to divine what happens to currencies when economies stagnate. Answer:  Not as much as you might think

Looking at exchange rates for years before and during "stagnation", Goldman found that year-to-year FX volatility in such periods is lower than in normal periods. But a lot of it depends on the type of stagnation.

First, an average stagnation -- a period of sub-par economic growth lasting for at least six years:

On average, the run-up to stagnations (and the early years into an episode) tends to be characterised by moderate FX appreciation. Later on, FX remains flat for a while and gradually assumes a depreciation trend during the last years of stagnation. The average initial appreciation hovers below 5%, while the ultimate depreciation tends to be smaller than 10%.

Next, a "Great Stagnation" -- a period lasting for 10 years or more:

The initial appreciation can reach more than 20% (computed from the years prior to the stagnation) and the posterior depreciation can surpass 10 % .

from MacroScope:

Giant FX market now $4 trillion gorilla

Global foreign exchange has always been one of the biggest markets in the world but its exponential growth keeps accelerating. The triennial survey by the Bank for International Settlements shows global foreign exchange market turnover leapt 20 percent to $4 trillion, compared with $3.3 trillion three years ago.

FXBIS

The increase in turnover was driven by growth in spot transactions, which represent 37 percent of FX market turnover.  Turnover was driven by trading activity by "other financial institutions" -- a category that includes hedge funds, pension funds and central banks, extending a trend seen in the past several years where buyside firms are increasingly trading currencies themselves, via prime brokerage, rather than turning to interbank dealers.

Also notably, emerging market currencies are gradually increasing their share in the marketplace. Turnover of the Russian rouble has increased its share in total turnover to 0.9 percent of 200 percent (FX is double counted as transaction involves two currencies), up from 0.7 percent three years ago, while the Brazilian real rose to 0.7 percent from 0.4 percent. The Indian rupee's share rose to 0.9 percent from 0.7 percent. The dollar keeps its dominance, although off its 2001 peak, with its share standing at 84.9 percent.

from Sebastian Tong:

Stop pushing and we’ll do it

The growing acrimony in the international debate over China's currency policy has led some to warn that Beijing could dig in its heels if pushed to hard to let its yuan rise. crybaby

But Barclays Capital says Beijing could let its currency strengthen as early as next month, notwithstanding its public resolve against Washington's threat to label it as a currency manipulator.

"They do have a 'If you stop pushing, we'll do it' attitude, which is kind of childish, really. But it will happen because they are the only country in the world, besides India, where there is a whiff of inflation," says Barclays' asset allocation head Tim Bond.

Financial survival tips for the age of debt

From whom would you rather take investment advice:  one of the thousands of bankers or wealth managers who did not see the financial crisis coming or one of the few economists who predicted it?

In his 2003 bestseller “The Dollar Crisis”, Richard Duncan forecast how the unbridled creation of liquidity was set to spark a financial crisis. Three years after the crisis unfolded, Duncan’s new book, “The Corruption of Capitalism”, paints an even bleaker future.

Duncan expects that, in the years ahead, governments will prop up economies with ever-bigger doses of fiscal and monetary stimulus, but that eventually the extreme imbalances in the world economy will be corrected by market forces.

It’s the dollar

Two graphs (from Scott Barber) to remind that what you get from assets depends on the currency:

Yuan vs. Dollar

The United States and China hold economic and strategic talks in Washington starting on July 27. The United States, International Monetary Fund and other groups have urged China to allow its currency to appreciate in order to help unwind global imbalances. Here is a chart showing the Chinese yuan vs the U.S. dollar.

UPDATE: More on U.S.-China economic ties here.

from Commodity Corner:

Correlation Between Oil and Equities Markets

oil-vs-stock-market

Oil prices have been trading in an unusually strong positive correlation with equities markets over the past few months on hopes that signs of an economic recovery could mean a boost for energy demand.

But with oil and product inventories swelling and little sign of demand improving in the United States and other big developed economies, analysts warn that the linkage may be hard to maintain, especially if U.S. motorists cut back on vacations this summer.

from MacroScope:

SDR bonds from the IMF?

Analysts are starting to wonder if the International Monetary Fund will issue bonds denominated in its currency, Special Drawing Rights (SDRs), to boost the international lender’s capital. 

G20 leaders meeting today are said to be ready to agree a tripling of the IMF’s resources, to $750 billion. One source at the summit said the IMF might also tap international capital markets. 

BNP Paribas analysts like the idea of SDR bonds that could be bought by central banks reallocating portfolios away from the dollar. “Increased IMF firepower and the IMF likely to issue SDR-denominated bonds later this year will allow equities to move significantly higher,” they say in a client note.

from Raw Japan:

Whither the yen — a withering yen?

The yen's fall against the dollar the past few weeks has been remarkably fast, and calculated from where it is now around 97.70 yen, the dollar has jumped nearly 9 percent this month, on track for its biggest such gain since August 1995.

The yen surged last year as the worsening financial crisis forced investors to unwind risky carry trades - meaning they had to buy lots of yen - under the belief that Japan's economy and banks were holding up through the storm.

Only last month, the yen hit an over-13-year high of 87.10 per dollar. So why has the Japanese currency fallen so fast?

Please put a penny…

Britons are not only having to contend with a pound falling to near parity with the euro and hitting multi-year lows against the dollar, they are also now being weighed down with change.

The country has long been one for coinage. The smallest note is for five pounds, which earlier this year was worth about $10 and is now around a mere $6.50. No equivalent of the paper dollar and hence lost of change.

Now, however, pockets are filling up with more pennies than usual, courtesy of one of Prime Minister Gordon Brown‘s economic stimulus plans. Brown cut 2.5 percent off value-added tax. So now a £3.50 film rental costs £3.41 and a $2.15 coffee is £2.09. Lots of increasingly worthless coppers floating around — unless of course deflation joins the party.