[BMC] Currencies

Lesson 1: Currency Market Mechanics

 

ECTR(Trade Flow)

: a relevant starting point since global trade has soared over many decades, thus driving currency transactions. 

 

Growth of currency market

-Bretton Woods agreement sealed by the WW2 allies in the US, when they all agreed to lock their currencies to the US dollar. The US dollar in turn was convertible into gold at a price of $35 per ounce, with gold available on demand from Fort Knox. → gold standard

- 베트남 전쟁으로 미경제가 stagnated되자 lock currencies는 닉슨대통령의 1971년 발표로 끝나게 되었다. 이 결정으로 modern flat currency regime이 시작되었다.  

 

currency market은 business week동안 24시간 운영된다. 

 

who trades currencies

1. financial investors
2. corporations
3. travelers

 

Pegged currencies

currency conversion calculations은 한 나라가 major currency로의 exchange rate를 고정하면 쉽다

 

PEG(pegged currencies)

 

FX reserves : a huge stack of cash with which to manipulate the supply of and demand for a currency and therefore manipulate its value. 

 

미달러는 FX reserves를 만드는데 가장 흔하게 쓰인다. 

 

BI: Bloomberg Intelligence

 

정부는 pegs를 방어하기 위해서 interest rate를 올린다. 

 

Floating currencies

FXTF(FX ticker finder)

FXC(Currency Rates Matrix)

 

Summary

-over $5T currencies are traded every day

-1971 marked the dawn of the modern currency market

-several countries peg their currencies to other currencies

-locked exchange rates are not actually set in stone but are government aspirations

-floating currencies move against one another in a matrix

-The U.S. dollar is the world’s reserve currency and is the most heavily traded currency

 

 

 

Lesson 2 : Currency Valuation

 

Observing currency strength

-Reaganomics: 레이건 대통령의 미달러 강세 정책

 

-law of one price: in the long run, identical goods and services should cost the same no matter where they are sold around the world

 

-Big Mac index

 

Three main currency drivers

1) surprise changes in interest rates

2) surprise changes in inflation

3) surprise changes in trade

 

1)surprise changes in interest rates

FXC(Currency Rates Matrix)

 

Q.What generally happens when a central bank unexpectedly decreases interest rates?

A.The currency weakens

 

2)surprise changes in inflation

inflation은 currency를 약화시킨다.

 

3) surprise changes in trade

ex) 러시아는 오일, 가스 수출이 많아서 오일 가격에 currency가 영향받는다

 

Switzerland case study

2011년에 사람들은 스위스 프랑을 그리스 빚 위기에서의 안전책이라 생각했다. 스위스 프랑은 full euro로 살수 있었고 항상 유로에 비해 높았다.

 

2 problems of the overvalued the Swiss franc

-Swiss exporters were challenged as their products then appeared more expensive to consumers across the eurozone

-Swiss importers, such as consumers, found foreign products cheaper to buy due to the strength of the Swiss franc. → deflation유도

 

따라서 스위스 정부가 스위스 프랑이 0.83유로보다 높지않게 정함.

Summary

-The value of a currency is relative and not absolute

-Trade-weighted baskets express currency overall strength and weakness

-In the long run, the “law of one price” drives currency values

-In the short run, these are three of the main drivers of currency valuation: 1) Surprise changes in interest rates 2) Surprise changes in inflation 3) Surprise changes in trade

Lesson 3: Central Banks and Currencies

 

IFMO : inflation monitor function

 

The inflation vicious cycle

Typical target rate of a developed economy is to have inflation of about 2 %

Inflation targeting is not as easy as it sounds because inflation is psychological.

이 사이클을 깨기 위해 Central banker들이 극단적인 방법을 써야할 때가 있다. 

Inflation response cases study

FDTR : Federal Funds Target Rate, the main U.S. interest rate

 

1970년 Bretton Woods 합의의 붕괴와 2번의 오일쇼크로 인플레이션이 발생했을 때, FED의 chair인 Paul Volcker는 당시 10%정도였던 interest rate를 1980년대 초까지 20%까지 올리며 인플레이션을 근절했다. 

 

High interest rates competed with the inflation and sucked money out of the system. It did this by making saving money relatively more attractive than spending money on goods and services

The deflation vicious cycle

The classic example of deflation : The Great Depression in the U.S. in the 1930s.

 

Deflation response case study

일본은 1980년-1990년 엄청한 경제 호황기를 겪고 그 후 약 20년 간 만성적인 deflation에 시달렸다. 

Abenomics : deflation을 해결하기 위한 극심한 inflation

 

After the Japanese stock market peaked in 1990, Japan entered a vicious deflationary cycle over the subsequent two decades. Abenomics was an attempt to break that cycle by weakening the yen to spur inflation and boost exports

Summary

-Central bankers control the levels of the currency markets

-The standard inflation target is 2% for industrialized nations

-Inflation can lead to a vicious cycle of pay increases leading to price increases

-Deflation can lead to a vicious cycle of purchase deferrals and layoffs

Lesson 4 : Currency Risk

The inconvenience of currency volatility

Currency movement can wreak havoc on investment returns and corporate planning 

 

Ex) 일본 주식 투자에 관심이 있는 미국 기반 투자자

TOPIX equity index = TPX index

 

1 million dollars → yen으로 환전

환전한 yen으로 TOPIX 구매 → 46% 수익, 127M yen

127 million yen → 1.21M dollars 환전

최종 수익율 계산 → 21%

 

엔화약세로 엔화로는 주식에서 46% 수익을 봤음에도 미화로 변환했을 때, 21% 밖에 나오지 않았다. 

 

Japan is traditionally a heavy exporter. (turbines, automobiles) 엔화약세로 외국인들에게 일본제품이 더 매력적이게 되고 큰 제조기업들이 많은 매출을 올리며 주식시장도 성장했다. 

 

Tools to assess currency risk

1. Historic volatility of currency pair values
2. Analyst forecasts of currency pairs

Historic volatility of currency pair values

FXFM : The FX forecast Model

 

Analyst forecasts of currency pairs

FXFC : Foreign Exchange Forecast

 

Currency 예측을 할 때 여러 factor를 고려해 예측한다.

Hedging currency risk 

투자자들은 currency forward market을 이용한 locking their currency exposure for long period의 옵션이 있다. 

 

FRD : FX Forward Calculator

 

Gold : the ancient currency

금은 전통적으로 안전한 자산으로 평가받았다. 

paper money와 달리, 어떠한 정부도 금을 조작할 수 없다.

따라서 금은 inflation hedge으로 여겨진다. 

Gold is a non-yielding asset, meaning that it pays no dividends or interest and is expensive to store. 

It is durable, rare, and unlike paper money which can be printed on a whim by a government- it is not able to be manipulated by any government. 

 

XAU Currency : gold price chart

 

gold bugs : durability, scarcity, physical attractiveness of gold

 

Summary

-Currency movements can wreak havoc on corporations and investors

-Historic volatility and currency rate forecasts shed light on currency risk

-Forward agreements lock in currency rates in the future, facilitating hedging and speculation

-The fact that gold is scarce and cannot simply be printed has meant that it has retained value

 

 

 

 

 

Final Score 81.5%