{quote} Clemmo could u plz share something that could help me understand gold fundamentals thank you
- Joined Jul 2016 | Status: Member | 1,600 Posts
- Joined Jul 2016 | Status: Member | 1,600 Posts
Chapter 20 - Quantitative Easing and Its Impact on Forex
No effect.
No effect.
- QE’s goal is to flood the market with liquidity (and enrich central banker chairs) and to keep yields low
- US started with multiple programs in Nov 2008
- UK responded in march 2009 - many programs with impossible to remember acronyms
- The money is not going to you and me, comrades! (unless you bought Bitcoin. Damn I wish I had bought more Bitcoin)
- Japan QE started in 2001
- October 2011 they increased the program to 5T yen - small compared to other countries (about $66B USD)
- Abenomics begins April 2013 and they buy 60-70T yen annually. Expanded to 80T
- Joined Jul 2016 | Status: Member | 1,600 Posts
Chapter 22 - Fundamental Strategy: Using Bond Spreads as a Leading Indicator for FX
“In FX trading, an interest rate differential is the difference between the interest rate of a base currency (appearing first in the pair) less the interest rate of the quoted currency (appearing second in the pair). Each day at 5pm EST, the close of the day for currency markets, funds are either paid out or received to adjust for interest rate differences. This is known as rollover.”
“The best way to use interest rate differentials for trading is by keeping track of one-month LIBOR rates and/or 10-year bond yields in Microsoft Excel.”
Publicly available on Bloomberg.com (maybe with a terminal)
Interest rate differentials are calculated by subtracting the yield of the second currency in the pair from the yield of the first.
For instance, the interest rate differentials in GBPUSD should be the 10-year gilt rate minus the U.S. 10-year rate. For euro data, use data from the German 10-year bund.
EURUSD vs 10y German Bund and US treasury yield spreads
There is ‘strong correlation’.
Currencies will sometimes have a delayed reaction.
Kl cites the period in 2013 when yields are falling and the Euro continued to rise until nearly 2014.
KL goes on a sideline about whether the yield spreads are leading, lagging or coincident indicators but doesn’t commit, naturally (they don’t forecast jack squat is my guess)
“The rule of thumb is that when there is a big move in the yield spread, it will coincide with a big move in the currency pair; and if that hasn’t happen(sic), then it signals an imminent move in the pair. No correlation is perfect.” It sure ain't.
Holy smokes I’m only ⅔ of the way done this behemoth!! Gah
“In FX trading, an interest rate differential is the difference between the interest rate of a base currency (appearing first in the pair) less the interest rate of the quoted currency (appearing second in the pair). Each day at 5pm EST, the close of the day for currency markets, funds are either paid out or received to adjust for interest rate differences. This is known as rollover.”
“The best way to use interest rate differentials for trading is by keeping track of one-month LIBOR rates and/or 10-year bond yields in Microsoft Excel.”
Publicly available on Bloomberg.com (maybe with a terminal)
Interest rate differentials are calculated by subtracting the yield of the second currency in the pair from the yield of the first.
For instance, the interest rate differentials in GBPUSD should be the 10-year gilt rate minus the U.S. 10-year rate. For euro data, use data from the German 10-year bund.
EURUSD vs 10y German Bund and US treasury yield spreads
There is ‘strong correlation’.
Currencies will sometimes have a delayed reaction.
Kl cites the period in 2013 when yields are falling and the Euro continued to rise until nearly 2014.
KL goes on a sideline about whether the yield spreads are leading, lagging or coincident indicators but doesn’t commit, naturally (they don’t forecast jack squat is my guess)
“The rule of thumb is that when there is a big move in the yield spread, it will coincide with a big move in the currency pair; and if that hasn’t happen(sic), then it signals an imminent move in the pair. No correlation is perfect.” It sure ain't.
Holy smokes I’m only ⅔ of the way done this behemoth!! Gah
- Joined Jul 2016 | Status: Member | 1,600 Posts
23 - Risk reversals
I highlighted where I think this provides some useful leading info but in pink I show where it diverges (provides misleading leading info) and the rest of the time it just seems to track with price. However as KL tells us this is meant to be a contrarian indicator so actually the pink section is working as intended, the green ones are less useful.
KL, however, points out that the major spikes are of the most interest. The major trough around 09/15 signalled a bounce and when it spiked after that, price continued to sell off. Then a year later there is a major spike that does herald a decline. However RRs then dropped down and price didn't recover much. So is this really telling us much?
- FX has no reliable volume data/ sentiment data
- Risk reversals offer an alternative
- Provided by FXCM news plugin? Is it this https://www.fxcmapps.com/apps/fxcm-news/ unfortunately an FXCM account and their proprietary trading software is required to use this
- Also provided by Bloomberg terminals
- As described in chapter 7 an imbalance in put-call parity can reveal sentiment
I highlighted where I think this provides some useful leading info but in pink I show where it diverges (provides misleading leading info) and the rest of the time it just seems to track with price. However as KL tells us this is meant to be a contrarian indicator so actually the pink section is working as intended, the green ones are less useful.
KL, however, points out that the major spikes are of the most interest. The major trough around 09/15 signalled a bounce and when it spiked after that, price continued to sell off. Then a year later there is a major spike that does herald a decline. However RRs then dropped down and price didn't recover much. So is this really telling us much?
- Joined Jul 2016 | Status: Member | 1,600 Posts
24 - using option volatilities to time market moves
Notice that one month and 3 month volatilities are tracking closely. When short-term volatility spiked above long-term vol price ‘stalled’ (just a bit!). When short-term vol dropped significantly below long, the GBPUSD downtrend resumed. BUT look at the period right before the second arrow. Short-term vol was dropping and price was still rising against the trend.
KL points out another vol spike down below long-term vol that foretells a breakout from the range. However, look at all the other spikes that tell us nothing much. It would be easier and safer just to straddle both sides of a range if you expect a breakout.
“breakout traders should look for short-term volatilities to be significantly lower than long-term volatilities before making a breakout trade.” Look at the spot between 3/9 and 4/9. Short term vol fell below long term but price did nothing. Look at 10/9. That would have been a brilliant long breakout trade. Short term vol is ABOVE long-term there.
- Volatility is a measure of a currency’s expected fluctuations over time based on past fluctuations
- We can see it on a chart as an expanding/contracting range.
- If the daily trading range of EURUSD contracted from 100 to 60 pips we would expect volatility to contract as well
- Two simple rules
- 1. If short-term option volatilities are lower than long-term volatilities expect a breakout in either direction
- 2. If short-term volatilities are higher than long-term expect a reversion to range trading
Notice that one month and 3 month volatilities are tracking closely. When short-term volatility spiked above long-term vol price ‘stalled’ (just a bit!). When short-term vol dropped significantly below long, the GBPUSD downtrend resumed. BUT look at the period right before the second arrow. Short-term vol was dropping and price was still rising against the trend.
KL points out another vol spike down below long-term vol that foretells a breakout from the range. However, look at all the other spikes that tell us nothing much. It would be easier and safer just to straddle both sides of a range if you expect a breakout.
“breakout traders should look for short-term volatilities to be significantly lower than long-term volatilities before making a breakout trade.” Look at the spot between 3/9 and 4/9. Short term vol fell below long term but price did nothing. Look at 10/9. That would have been a brilliant long breakout trade. Short term vol is ABOVE long-term there.
- Joined Jul 2016 | Status: Member | 1,600 Posts
The last chapters of this book are basically appendices that dump a lot of data about each currency. Some of this data may be outdated. Some of it may be based on generalizations that are no longer true or were never based on facts. However most of it is fairly interesting, especially to anyone who wants to try adding fundamental edges to their trading.
26 - Currency Profiles and Outlook
USD
It does appear to do be like that sometimes. Of course this makes sense as gold’s value is essentially only relative to whatever you’re buying it with, and that’s usually USD.
The big question is when the manure hits the A/C will investors cling to gold or to crypto?? My guess is the true believers will get wiped out against the need for real money to pay rents. However my guesses are not worth jack squat as I’ve learned from hard experience.
26 - Currency Profiles and Outlook
USD
- World’s leading economic power
- Highest GDP
- Based on purchasing power parity it is 4x Japan, 5x Germany, 7x UK (China is catching up and may have overtaken though)
- Service-oriented economy
- 80%GDP comes from real estate, transport, finance, health care, business services
- Foreign direct investments are 40% of total global net inflows
- The USA absorbs 71% of net foreign savings
- If foreign investors weren’t happy with returns in US asset markets that money would have a huge effect on the dollar
- Big export /import volumes
- Very large current account deficit (KL says $113B in Q4 2014) it was $171B in Q3 2021. This fluctuates a lot per month though.
- Most countries have the US as their largest trade partner
- Weaker dollar encourages US exports; but since the US doesn’t export as much as it imports the strong dollar is less of a problem
Leading Export Markets
1. Canada
2. Mexico
3. China
4. European Union
5. Japan
Despite this, Joe Biden said “America has 'no closer ally' than Australia”. Australia!
Leading Import Sources
1. China
2. Canada
3. Mexico
4. European Union
5. Japan
Source: US Trade.gov 2014
The Federal Reserve
- Federal Reserve board (Fed) is the monetary policy authority of the US.
- Sets and implements monetary policy
- 12 member Federal Open Market Committee (FOMC)
- Voting members are the 7 governors of the Fed board plus 5 presidents of the 12 district reserve banks
- Holds eight meetings per year
- After 4 of those meetings the central bank chair holds a press conference when major monetary policy changes are made
- High degree of independence (you can even trade stonks while being in charge of QE!)
- Most members are accorded long terms so they don’t fall under the influence of any political authority
- Issues a bi-annual Monetary policy report in February and July
- followed by Humphrey Hawkins testimony - responds to questions from Congress (very hard to find any of this on the internet, strangely!)
- Fed’s mandate is ‘price stability and sustainable economic growth’
- Ostensibly wants to limit inflation and unemployment, achieve balanced growth
To wit it uses these tools:
- Open market operations - purchasing gov securities, treasury bills, notes and bonds
- Decreases interest rates
- Selling securities boosts interest rates
- Fed Funds Target
- The Fed Funds target rate is the key policy target of the Fed
- The interest rate for borrowing that the Fed offers its member banks
- Rate increases to curb inflation, decreases to increase inflation
- The actual body that determines dollar policy is the US treasury
- So its view is important - it gives the Fed authority to intervene
- Over the past few decades the Fed and treasury have had a ‘strong dollar’ bias
- And then along came Donald Trump!
Important characteristics of the US dollar
- >80% of all currency transactions use the USD
- So USD fundamentals are particularly important (maybe the only one worth spending time on?)
- One of the world’s premier ‘safe haven’ currencies
- 76% of global currency reserves are held in dollars
- Challenges coming from the Euro (not really) and the Renminbi (maybe)
- The USD moves in the opposite direction of gold prices
It’s hard to get a good chart of this since the dollar moves in a much narrower range than the price of gold but I went ahead and made one myself. Gold in white bars, and DXY in black bars.
It does appear to do be like that sometimes. Of course this makes sense as gold’s value is essentially only relative to whatever you’re buying it with, and that’s usually USD.
The big question is when the manure hits the A/C will investors cling to gold or to crypto?? My guess is the true believers will get wiped out against the need for real money to pay rents. However my guesses are not worth jack squat as I’ve learned from hard experience.
- ‘Many’ emerging markets peg their local currencies to the dollar but now they are increasingly using a basket of currencies with the dollar as one component
- Interest rate differential between US treasuries and foreign bonds - investors seek yields
- Keep an eye on the dollar index
- USIDX/DXY is traded on ICE - intercontinental exchange, calculated using a trade-weighted geometric average of six currencies
- The index doesn’t accurately reflect the real trade basis and central bankers may use that instead
- Equities and treasuries have an effect on the dollar.
- Joined Jul 2016 | Status: Member | 1,600 Posts
Important Economic data
I’m going to skim over this because Donnelly already covered it in detail.
Oh my goodness. That’s a spike. From https://www.bls.gov/cpi/latest-numbers.htm
Trade deficit growing...hmm
I’m going to skim over this because Donnelly already covered it in detail.
- Employment : Nonfarm payrolls (NFP)
- Most important and widely watched
- The Fed is required to keep unemployment under control
- Released first friday of every month
- Revisions also have a big impact
- You can see the latest summary (at the time of writing) at https://www.fxstreet.com/news/breaking-us-nonfarm-payrolls-rise-by-194-000-in-september-dollar-weakens-202110081230
- Expectations were missed, but revisions were positive. After that data came out the USD lost 0.15% which is nothing
- Consumer Price Index
- Key gauge of inflation
- The market tends to focus on CPI-U
Oh my goodness. That’s a spike. From https://www.bls.gov/cpi/latest-numbers.htm
- Nonmanufacturing and Manufacturing ISM
- Value over 50 represents expansion
- I note that the ISM now calls nonmanufacturing the Services ISM
- At the time of writing both were above 50 and have been for 14-16 months indicating the economy is expanding
- Consumer Confidence
- Released by the conference board and the U of Michigan
- Interestingly, these are both way down at the time of writing. So maybe the economy is doing fine but people just don’t think it is, or they are cueing-in to a problem that isn’t yet in the data?
- Retail sales index
- Retail sales less autos is the most important number
- A 1.8 % rise over 0.1% expected! The US economy is doing fine!
- Producer Price Index
- https://www.bls.gov/pPI/
- Modest rise in August. Next numbers released Oct. 14
- Gross Domestic Product
- The advance release by the Bureau of Economic Analysis is the most important (BEA)
- https://www.bea.gov/data/gdp/gross-domestic-product
- Rising! With all this good news how can the Fed possibly not raise rates and start tapering? That means, buy buy buy the USD!
- International Trade
- Balance of trade - imports vs exports
- https://www.bea.gov/news/2021/us-international-trade-goods-and-services-august-2021
Trade deficit growing...hmm
- Employment Cost Index (ECI)
- Includes nonwage costs which is a ‘big advantage’ says KL
- https://www.bls.gov/news.release/eci.toc.htm
- Muted reaction to this as it is stable but it’s one of the Fed’s favorite indicators says KL
- Industrial Production
- Focus on seasonally adjusted monthly change in aggregate figure
- https://www.federalreserve.gov/releases/g17/Current/default.htm
- Looks like it’s rising
- Treasury International Capital Flow Data (TIC Data)
- Measures capital flow into the USA
- Becoming increasingly important as the US deficit becomes an issue
- https://home.treasury.gov/data/treasury-international-capital-tic-system
- Would it kill them to produce a chart? Looks like they are going up though at least for Japan which is the top holder. China is holding steady.
Well, after spending all morning with this I think it’s safe to say that I can submit my strategic plan of operations to my boss and get approval for going long USD. However since I am my own boss I will simply tell myself that it might be faster next time to look at a chart and do this:
Yup, that appears to be going up all right!
edit: since I wrote this the EURUSD has plunged, verifying my initial theory. I think it's a cinch we'll see 1.10 soon. If anyone wants me to make such stellar forecasts for them using fundamental data, please let me know. 
{quote} ps. it looks like you're doing quite well in your demo accounts at least. Are you sure you need any help?
- Joined Jul 2016 | Status: Member | 1,600 Posts
27 - Euro
I can’t find any correlation, can you? From:
http://www.worldgovernmentbonds.com/...ates-10-years/
The years when the Euro really went DOWN: 2008, 2011, 2014, 2018, 2021
The years when it really went UP: 2007, 2009, 2013, 2017, 2020
Now let’s look at the spread values for each of those years:
2008: +60
2011:+36
2014:-54
2018:-46
2021:-27 (so far) a mix of negative and positive for the most bearish years
2007:+70
2009:-130
2013:-69
2017:+26
2020:+61
Again, mixed. Even if you allow for a year lag between the value and the result it still doesn’t work. I don’t trust this pet theory at all.
Important indicators
PMI
Short EURUSD is starting to look good, but I could have told you that by looking at the W1 chart.
Inflation is up. Is this stagflation?
So with GDP and employment rising, maybe short EURUSD isn’t such a great trade? You see, it’s impossible to know. Trading is gambling. Go with the odds.
- European Monetary union is the second largest economic power, with GDP valued at $18T USD.
- Second most attractive investment market for international investors
- ECB strives to maintain annual growth in HCPI (Harmonized Consumer Price Index) below 2% and M3 (Money Supply) annualgrowth around 4.5%.
- ECB has four categories of open market operations
- Main refinancing operations - regular weekly reverse-transactions which mature in 2 weeks
- Longer-term refinancing - monthly frequency, and maturity of 3 months
- Fine-tuning operations - ad hoc
- Structural operations - issuance of debt certificates, reverse and outright transactions
- Civilization is definitely a ponzi scheme
- ECB minimum bid rate is the key policy target for the ECB
- No exchange rate target
- Watch comments by the governing council closely
- Publishes monthly bulletins and staff forecasts and minutes from past meetings
- Spread between 10y treasuries and 10y Bunds can show Euro sentiment
I can’t find any correlation, can you? From:
http://www.worldgovernmentbonds.com/...ates-10-years/
The years when the Euro really went DOWN: 2008, 2011, 2014, 2018, 2021
The years when it really went UP: 2007, 2009, 2013, 2017, 2020
Now let’s look at the spread values for each of those years:
2008: +60
2011:+36
2014:-54
2018:-46
2021:-27 (so far) a mix of negative and positive for the most bearish years
2007:+70
2009:-130
2013:-69
2017:+26
2020:+61
Again, mixed. Even if you allow for a year lag between the value and the result it still doesn’t work. I don’t trust this pet theory at all.
Important indicators
PMI
- Markit Economics
- https://www.markiteconomics.com/Public/Release/PressReleases
Short EURUSD is starting to look good, but I could have told you that by looking at the W1 chart.
- IFO institute survey
- German survey
- Typical range is 80-120 but the most value comes from comparison with prior values
- https://www.ifo.de/en/survey-results
- Third consecutive fall. Ouch! Sitting at 98.6
- HICP
- Harmonized Index of Consumer Prices
- Published by Eurostat
- https://ec.europa.eu/eurostat/web/hicp
Inflation is up. Is this stagflation?
- German Industrial Production
- German unemployment
- Released by the labour office
- Rumours about this release are notoriously imprecise
- https://www.destatis.de/EN/Themes/Labour/Labour-Market/Employment/_node.html
- Numbers are up 0.1% but still below pre-crisis levels;
- Preliminary GDP
- Eurostat
- https://ec.europa.eu/eurostat/cache/recovery-dashboard/ (it’s tricky trying to find the exact publication for GDP but this chart is as good as anything)
So with GDP and employment rising, maybe short EURUSD isn’t such a great trade? You see, it’s impossible to know. Trading is gambling. Go with the odds.
- M3 money supply
- EU closely monitors it as they view it as a key inflation measure
- Individual country budget deficits
- Ain’t nobody got time for that
- Joined Jul 2016 | Status: Member | 1,600 Posts
28 - GBP
Correlation confirmed. However there’s an interesting divergence happening at the moment. Brent Donnelly would dig into this I’m sure.
It seems things are recovering in the UK but supply constraints are the main bottleneck.
- KL spends a lot of time talking about what it would take for the UK to join the EMU but in view of Brexit it’s all academic. The main reason that Britain will never join Europe is bigotry, pure and simple. And powerful.
Monetary and Fiscal Policy Makers— Bank of England
- BoE
- Made up of the Monetary Policy committee (MPC)
- 9 members - governor, two deputies, two exec-directors, four outside experts
- Granted operational independence in 1997
- Monetary policies centered on achieving an inflation target set by the Chancellor of the Treasury
- That target is RPIX - retail price index inflation of 2.5%
- Monthly meetings
- Publishes statements after each meeting, along with a quarterly inflation report with a 2 year forecast for growth and inflation
- Quarterly Bulletin - analyzes international economic environment
- Main policy tools
- Bank Repo rate (interest rate)
- Affects rates set by commercial banks
- Open Market Operations
- Bank Repo rate (interest rate)
- Important characteristics of GBP
- GBPUSD is very liquid due to the highly developed capital markets of the UK
- British pound, sterling, cable
- Highly speculated
- Interest rate differentials between Gilts and foreign bonds (do they work better than the Treasuries vs. Bunds?)
- Euro sterling futures can give indications for interest rates
- GBP is positively correlated with energy prices
Correlation confirmed. However there’s an interesting divergence happening at the moment. Brent Donnelly would dig into this I’m sure.
- EURGBP is less liquid but is more representative of actual GBP strength as it is less influence by USD and more by EUR, its main trading partner. (although earlier she listed USA as the top trading partner for the UK)
Important Economic Indicators
- PMI - Markit Economics
- https://www.markiteconomics.com/Public/Release/PressReleases
It seems things are recovering in the UK but supply constraints are the main bottleneck.
- Retail sales
- https://www.ons.gov.uk/businessindustryandtrade/retailindustry/bulletins/retailsales/august2021
- “Retail sales volumes fell by 0.9% in August 2021, following a 2.8% fall in July; however, volumes were up by 0.3% in the three months to August compared with the previous three months, and in August 2021 were 4.6% higher than their pre-coronavirus (COVID-19) pandemic February 2020 levels.”
- CPI / RPI
- RPI-X is the most closely watched
- https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/cdkq
- Currently 4.9%, high but no record
- GDP
- https://www.ons.gov.uk/economy/grossdomesticproductgdp
- A slight blip appears
- Industrial Production
- https://www.ons.gov.uk/economy/economicoutputandproductivity/output/bulletins/indexofproduction/july2021
- Latest release is for July! So lagging by nearly 3 months.
- UK Housing Starts
- https://tradingeconomics.com/united-kingdom/housing-starts
- “Housing Starts in the United Kingdom decreased to 42900 units in the second quarter of 2021 from 46010 units in the first quarter of 2021”
- Joined Jul 2016 | Status: Member | 1,600 Posts
29 - CHF
The correlation is fairly rough. It seems lately the rock-solid range of the USDCHF cannot be moved by such fancies as gold price.
- Known as a safe haven for offshore assets
- The banking/finance sector employs over 50% of the population! And accounts for 70% of GDP
Monetary and Fiscal Policy Makers— Swiss National Bank
- Swiss National Bank (SNB)
- A 3 person committee - chairman, vice chairman and one other member
- SNB sets to official interest rate target but sets a target range for 3 month Swiss Libor rate
- Central bank goals
- 1999 shifted from monetary targets (M3) to an inflation target less than 2%
- Should inflation exceed 2% in the medium term, the National Bank will tend to tighten its monetary stance. (has it made a peep yet?)
- In uncertain times capital flows in so the SNB favours a weak franc
- Tools of the SNB
- Target Interest Rate range
- “a trimmed mean of the rates charged by 12 leading banks and is published daily by the British Bankers’ Association” (do they still use this after the Libor scandal?)
- Extends over 1 percent
- SNB aims to keep it in the middle of the range
- Undertakes quarterly economic and monetary assessments
- Press releases
- Open Market Operations
- Repos
- “A repo transaction involves a cash taker (borrower) selling securities to a cash provider (lender), while agreeing to repurchase the securities of the same type and quantity at a later date. This structure is similar to a secured loan, whereby the cash taker must pay the cash provider interest.”
- Short durations of days to weeks
- 1.20 EURCHF peg implementation and abandonment
- A mandatory part of any book about FX. I think we know the story by now?
- Target Interest Rate range
Important characteristics of the Swiss Franc
- Safe haven status
- Secrecy of banking
- Neutral government
- Correlated with gold because of traditional requirement to back the franc with 40% of gold reserves
The correlation is fairly rough. It seems lately the rock-solid range of the USDCHF cannot be moved by such fancies as gold price.
- A popular currency for funding carry trades as it has low interest and its price range is stable
- Interest rate differentials between Euro swiss futures and foreign interest rate future are closely followed
- interest rate differential between three-month euro Swiss futures and eurodollar futures
- Changes in banking regulations
- European regulators are pressuring Swiss authorities to make their system more transparent (and to give back the Nazi gold!)
- M&A activity in banking
- EURCHF is more commonly traded than USDCHF (really?) as it’s more liquid and more volatile.
- Day traders may favour USDCHF
- USDCHF is actually synthetic product of EURCHF and EURUSD
- Theoretically USDCHF should == EURCHF/EURUSD
- Small differences are quickly exploited
- At time of writing that seems to check out. Using bid prices:
- EURCHF is 1.0730 and EU is 1.15744
- 1.0730/1.15744 = 0.92705 while the close price of USDCHF was 0.92703
Important Economic Indicators for Switzerland
- KoF Leading indicators
- Released by the Swiss Institute for Business Cycle Research
- https://kof.ethz.ch/en/forecasts-and-indicators/indicators/kof-economic-barometer.html
- CPI
- GDP
- Balance of Payments
- Industrial Production index
- Retail Sales
- Joined Jul 2016 | Status: Member | 1,600 Posts
30 - JPY
The green vertical lines are the last week in March for each year. Maybe there’s a pattern of declines after most of the green lines?? Maaaybe?? But that contradicts what KL has told us since that means the yen is appreciating against the US dollar!
- Japan’s economy is the third largest in the world, ahead of the European Union (!) (still??)
- A quick check casts some doubt on this claim https://www.worldometers.info/population/china-eu-usa-japan-comparison/
- Still, clearly Japan is punching well above their weight
- Electronics, cars drive the economy
- Japanese growth is highly sensitive to the currency value
- After the 2011 tsunami Japan became an oil importer but in 2015 things turned around and it became a surplus nation, creating a demand for yen
Abenomics - print money!
- Before abenomics the Japanese economy was crippled with bad debts, falling stock prices, collapsing real estate values - more than 20 years
- Basically massive perpetual stimulus
- The yen declined and unemployment did too
Monetary policy Makers
- Bank of Japan (BoJ)
- Ministry of Finance permitted it independence in 1998
- However the MoF still remains in charge of foreign exchange policy (so not really independent at all?)
- BoJ Policy board = governor, two deputy governors, and six other members
- Policy meetings held twice a month, with briefings and press releases
- BoJ publishes a monthly report and Monthly economic report
- Favours a weaker yen
Open Market Operations
- Zero interest rate policy
- Control of the uncollateralized overnight call rate
- Buys bills, repos, government bonds with short maturities
Important characteristics of the JPY
- Proxy for Asian strength/weakness
- BoJ intervention - they do it a lot when:
- The yen moves by 7 percent or more in less than six weeks
- Current USDJPY rate - less often when above the 115 level
- Massive speculative positions
- JPY movements are sensitive to time
- Very active towards the end of the fiscal year (Mar 31) as exporters repatriate their dollar assets to ‘window dress’ their balance sheets
- Following a year-end the yen tends to depreciate
This demands a quick check-over.
The green vertical lines are the last week in March for each year. Maybe there’s a pattern of declines after most of the green lines?? Maaaybe?? But that contradicts what KL has told us since that means the yen is appreciating against the US dollar!
- Stocks and bonds are positively correlated with USDJPY
- Weak yen means strong economy
- Carry trade effects
- JPY has the lowest interest rate
- GBPJPY, AUDJPY, NZDJPY, USDJPY are popular carry trade currencies
Important Economic Indicators
- Tankan Survey
- Quarterly
- https://www.boj.or.jp/en/statistics/tk/index.htm/
- Balance of Payments
- https://www.boj.or.jp/en/statistics/br/bop_06/index.htm/
- Employment
- https://tradingeconomics.com/japan/unemployment-rate
- Industrial Production
- https://tradingeconomics.com/japan/industrial-production
- GDP
- https://tradingeconomics.com/japan/gdp