I have already done some research, I don’t know so much about economics and I consider I’ve learned a lot in this couple of months.
As I’ve seen the news, definitions and some articles I understand this:
Higher Interest Rates -> Currency [I]probably[/I] increase its value
Lower Interest Rates -> The opposite
But I just don’t get why countries are keeping interest rates at near to zero because of the crisis, US for example, why do not raise Interest rates a little so the dollar could get a little better and regain some value? Why keeping it at 0,25% helps the economy?
Another Example is Australia and New Zealand, obviously the have performed really great this past recent year, but why they didn’t change their interest rates near to zero like everybody else?
I would like some good advice or documentation as I’m not getting the point here…
Your understanding is correct. You can leave probably out because interest rates increase the value of a currency.
[B]But.[/B]
We are living in an age of Quantitative Easing=QE.
QE is the monetarization of debt through interst rates near zero on a global scale.
Banks borrow from the FED with an interest rate near zero and use that money to create bubbles and debauching the USD at the same time through inflation of the montary base.
FOREX does not like QE because it decreases currency value. The term used to describe this phenomena is “Race to the bottom”.
The USD has become the preferred currency for carry trades and therefore interest rates differentials have become meaningless.
But I just don’t get why countries are keeping interest rates at near to zero because of the crisis, US for example, why do not raise Interest rates a little so the dollar could get a little better and regain some value?
Without QE the global banking system would have crashed in October 2008. 17th to be precise.
Cheap money is keeping the global banking system from collapsing because of non performing credit default swaps in all shapes and sizes which nobody understands. The value of that junk is estimated to be a 3 figure trillion USD sum.
Also there is an issue with a 40% undervalued YUAN.
Why keeping it at 0,25% helps the economy?
It does not help the economy. All what it does it creates inflated prices for commodities, equities and so forth.
Another Example is Australia and New Zealand, obviously the have performed really great this past recent year, but why they didn’t change their interest rates near to zero like everybody else?
Australia is worse off than the US because of the present Australian government fiscal policy. That crowd in Canberra has managed to run the Australian government budget into the ground since election. They are spending like there is no tomorrow. Interest rates rose to attract foreign money to finance budget deficits.
Also there has been a shift in Gold’s behaviour that made the AUD less predictible.
Banks borrow from the FED with an interest rate near zero and use that money to create bubbles and debauching the USD at the same time through inflation of the montary base.
Why do banks create this bubbles and contribute to inflation?
Why do banks create this bubbles and contribute to inflation?
Because the money made available through QE needs to be invested to earn a return [B]greater[/B] than the cost of borrowing for the banks.
If your LIBOR rate of borrowing is 0.28% for three month you want a return a lot higher than that.
So the money gets pumped into markets like Bonds, Currencies, Equities, Commodities and so forth by the banks with the result of inflated prices.
Supply and demand fundamentals are not valid any longer. All what drives prices are the amount of money being pumped into various markets and chasing returns. Speculation at it’s finest.
AUD drops 1000 pips? EUR drops 800 pips? All the result of this speculative money being pulled out and pushed into various markets.
Actually, no you cannot. High rates do not automatically mean higher currency values for one simple reason - inflation. Higher interest rates often come as a result of higher inflation because investors want to earn enough offset the loss of purchasing power. High inflation obviously erodes the value of a currency.
So the money gets pumped into markets like Bonds, Currencies, Equities, Commodities and so forth by the banks with the result of inflated prices.
Why the prices get inflated because of this markets? As the basic definition of inflation I have is “To much money chasing too few goods” but this money is not chasing anything, is it?
Used, do you have some information extra I can read about this? maybe a book of reference or something, it’s like not easy for me.
Add rice as well because it is the staple food of the majority of people living in asia.
Add Oil because oil is needed to manufacture almost everything from packaging to medicine.
On top of it put timber and copper.
They are all commodities. All this money is inflating the price of above commodities because of speculation to gain maximum profits.
Producers who are dependent on this commodities to manufacture goods and foodstuff have to pay the inflated price for their basic “ingredients” the speculators with all their money dictate to them.
Used, do you have some information extra I can read about this? maybe a book of reference or something, it’s like not easy for me.
What are you after in particular?
Because economics and monetary issues are overlapping in our discussion.
Also, QE is a new tool used by global central banks. There hasn’t been much written about it.
Perhaps, you could be more specific and I might be able to give you some resources. Thanks.
Add rice as well because it is the staple food of the majority of people living in asia.
Add Oil because oil is needed to manufacture almost everything from packaging to medicine.
On top of it put timber and copper.
They are all commodities. All this money is inflating the price of above commodities because of speculation to gain maximum profits.
Producers who are dependent on this commodities to manufacture goods and foodstuff have to pay the inflated price for their basic “ingredients” the speculators with all their money dictate to them.
I would never have figured that out for myself, now I understand it completely.
Because economics and monetary issues are overlapping in our discussion.
Also, QE is a new tool used by global central banks. There hasn’t been much written about it.
Perhaps, you could be more specific and I might be able to give you some resources. Thanks.
This was my biggest doubt, I’m more interested about fundamental long term trader cos I think it has more weight in the market, not forgetting technical data, right now I really don’t have any specific subject, the financial crisis still a complex event for me as when it came I didn’t know anything about global macroeconomics and financial movement, is like too much information to handle for me.
For a trader it is very helpful to know how all this money flows around FOREX and other markets. And what direction it takes. Also, what the influences are when all this money changes it’s direction.
Because when that happens you see big FOREX moves in the various EUR, YEN, CAD and AUD pairs because they are closely linked with commodities and equities.
Money flow changes it’s direction because of perception and psychology. FOREX is solely driven by the factor psychology.
News prints are used as a tool in FOREX to influence and change the direction of money flow because of the psychological impact it has on traders.
This has all come down to a mind game. Partly because of cheap money and partly because of increased uncertainty resulting from information-flow and the impact of the global financial crisis.
Best example was the EUR drop in dec 2009. That was solely based on psychological factors, news prints and a resulting directional change of money flow.
Follow the money. Especially the YEN, AUD and EUR because of it’s dependency on Gold and Oil.
A EUR above 1.52 will result in a high gold price and high AUD.
A high Oil price will result in a weaker YEN to the USD and vice versa.
TA has it’s merits but it is useless when it comes to money flow.
I mean price inflation. Increases in the monetary base (notice the difference in terms used) can, but does not always, lead to price inflation.
But what is happening has not been done before. QE is a policy instrument not used by central banks in history.
Yes it has. Look to Japan.
How do you drain the excess liquidity when the time has come?
Lots of ways. In fact, the Fed wouldn’t have to do anything at all to unwind its mortgage purchases. The fact that it receives interest and principle payments on all that paper automatically will drain money from the system. Of course they could also sell those securities, and the Treasuries. They could raise what they pay on excess reserves. They could increase the reserve requirement. Those are the ones which immediately come to mind.
Would that offset the loss of purchasing power when you have deflationary pressures in the real economy?
Deflationary pressure in the economy is an offset to the loss of purchasing power by definition. I’m not sure what you’re asking here.
This is patently untrue. Yes, psychology and perception are big factors, and to my mind are why trends seem to persist longer than you’d expect in the forex market. First and foremost, though, forex is about the actual flow of goods and capital around the globe. The bulks of daily trading volume in the market is swaps, which is generally more about doing currency exchanges and hedging.
Additionally, the fact that there are real “seasonal” patterns in the forex market indicate that there are underlying real money flows at work driving rates.
Isn’t this an issue like “what’s more important the chicken or the egg”? Both flows of goods / capital etc and market sentiment determine the market price. In a traded market one can’t be more important than the other…
Can I jump to the stock market for my short example? Stocks trade on earnings and market sentiment, can’t have one without the other. Stocks have different PE ratio because of market sentiment. Without market sentiment they would all trade at the same PE, and there wouldn’t be an active market.
And without earnings there would be no evidence of a stocks worth and measure of performance. (for now let’s just forget the dot com bubble :o) And worth, performance - future expectations (and maybe some news & hype) is necessary to create market sentiment.
In other words, the hard numbers / values / flows etc and market sentiment are all [B][U]equally important [/U][/B]to the market price at any given time.
ps I like eating fried chicken more than fried eggs
First and foremost, though, forex is about the actual flow of goods and capital around the globe. The bulks of daily trading volume in the market is swaps, [B]which is generally more about doing currency exchanges and hedging.[/B]
Toyota did suffer a major loss in 2008.
The biggest factor in that loss was FOREX transactions gone wrong because of unpredictability.
Daimler is moving it’s small car operations out of the EURO zone into the US because of FOREX unpredictability. They are not prepared to play the risk factor EURUSD any longer.
Additionally, the fact that there are real “seasonal” patterns in the forex market indicate that there are underlying real money flows at work driving rates.
How much is real money at work and how much is speculative money at work?
Equally at any given point is probably not correct, since one or the other could be dominant, but you’ve made my point. I was arguing that psychology is not the only or most important thing.
Without knowing any of the details or specifics involved, I can’t really say whether it was hedging or not hedging, or basically speculating with is at issue here. More than one company has gotten in trouble because they either didn’t hedge right or were actually speculating when they really had no business doing so.
How much is real money at work and how much is speculative money at work?
You’d have to ask the BIS that. There was an estimate in an FT article which suggested that about 2/3ds of daily forex volume is in derivatives, the largest portion of which is swaps.
