2. Currency (forex) markets
✤ Five main global currencies
✤ US dollar, Euro, Yen, Sterling, Swiss franc
✤ Daily global volume of around US$4 trillion
✤ Trading is 24 hrs., moves from Tokyo to London to New York
✤ Forex price quotes are in pairs of currencies
✤ EUR/USD, USD/HKD, USD/JPY, HKD/JPY
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3. Uses of foreign currency
✤ Trade
✤ Overseas investment
✤ ...to speculate on future changes in the relative value of foreign
currencies
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6. The (relative) price of a currency
✤ Currencies have a “price” like other assets, but it’s only measured
relative to another currency
✤ Supply of a freely tradable currency is determined by governments/
central banks via monetary policy
✤ Demand for a currency is determined by expectations for investment
opportunities in that country
✤ Inflation & interest rates impact this demand, as well as trade
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7. Causes of Forex moves
✤ Interest rates or money supply for short-term movements
✤ Rate increases associated with appreciation
✤ Inflation for medium-term movements
✤ High inflation associated with depreciation
✤ Current account (trade) imbalances for longer-term
✤ Surpluses associated with appreciation
Source: “A Concise Guide to Macroeconomics” by David A. Moss
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8. Interest rates
✤ Interest rates, and money supply, are the main monetary policy tools
of governments/central banks
✤ The main goals of monetary policy are low, steady inflation and
low unemployment
✤ If a country’s interest rate is higher than the rate in other countries,
that country’s currency tends to appreciate as investors switch into the
higher-yielding currency
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9. Inflation
✤ Measures how the purchasing power of a currency changes over time
✤ An overheated economy, or mismanaged monetary policy, can lead to
inflation
✤ High inflation erodes purchasing power, and leads to a “cheaper” (i.e.
weaker) currency
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10. Trade
✤ Demand for a country’s goods & services from overseas will tend to
lead to a trade surplus and an appreciation in that country’s currency
as overseas consumers need that currency to buy those goods
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11. NEW YORK—The dollar fell against most of its rivals Monday as worries about a new
round of economic stimulus prompted investors to adopt a defensive stance ahead of
Tuesday's meeting of the Federal Reserve.
While the Fed's policy-setting committee isn't expected to announce additional
programs involving asset purchases to boost liquidity, the mere possibility of such
measures weighed on the dollar.
The statement that the Federal Open Market Committee will issue at the conclusion of
its regular meeting has taken precedence over lingering euro-zone sovereign-debt
issues, allowing the euro and most of the dollar's other rivals to advance. A Japanese
holiday kept yen trading light, with investors still keeping one eye out for more
Japanese intervention.
"There is a sense the Federal Reserve might be up to something, but it's unclear what
that's going to be," said Nick Bennenbroek, head of currency strategy at Wells Fargo in
New York.
As is customary ahead of an FOMC announcement, investors were exercising caution
and most currencies remained within narrow ranges. If anything, investors bet the Fed
will be more proactive and surprise the market Tuesday, Mr. Bennenbroek said. He
cited the decision in August to reinvest principal payments on mortgage-related debt
into longer-term Treasurys as the latest example of the Fed catching the market off-
guard.
Without any hint of new quantitative easing, the dollar is likely to gain, said Daragh
Maher, deputy head of global foreign-exchange strategy at Crédit Agricole CIB in
London.
Late Monday, the euro was at $1.3064 from $1.3039 from late Friday. The dollar was at
85.70 yen from yen 85.82, while the euro was at yen 111.96 from 112.89 yen. The U.K.
pound was at $1.5547 from $1.5626. The dollar was at 1.0046 Swiss francs from 1.0098
francs.
Change
Cause
Expectations
Context
Comment
Dollar Falls on Euro
By ANDREW J. JOHNSON
Future
SEPTEMBER 21, 2010
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12. What’s a bond?
✤ Debt issued by governments, corporations and “supranationals” like
the Asian Development Bank
✤ Maturity (duration) of debt varies from short-term (30 days) to long-
term (30 years or longer)
✤ A bond’s coupon determines the interest rate paid to buyers of the
bond
✤ Bonds can be, and often are, traded before they mature
✤ Bonds are typically given a credit rating by S&P or Moody’s
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13. Bond markets
✤ Bonds traded on an exchange are quoted in prices and yields (the
total return, or yield-to-maturity)
✤ Prices and yields move in opposite directions: if the price goes up,
the yield goes down
✤ Most bonds are issued at “par,” or face value (typically 100)
✤ Therefore at issue, yield and coupon are equal
✤ Government bond yields serve as a benchmark for comparison
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14. Causes of bond moves
✤ Interest rates
✤ As coupons of bonds are fixed, their price tends to decline as
interest rates rise (meaning new bonds will likely have a higher
coupon)
✤ Inflation
✤ Inflation raises real interest rates, and reduces the value of the
principle returned
✤ Financial health of issuer
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15. Debt (bond) ratings
AAA
AA
A
BBB
BB
B
CCC
CC
C
D
An obligation rated 'AAA' has the highest rating assigned by Standard & Poor's. The obligor's capacity to meet
its financial commitment on the obligation is extremely strong.
An obligation rated 'AA' differs from the highest-rated obligations only to a small degree. The obligor's
capacity to meet its financial commitment on the obligation is very strong.
Somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions.
However, the obligor's capacity to meet its financial commitment on the obligation is still strong.
Exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity of the obligor to meet its financial commitment.
An obligation rated 'BB' is less vulnerable to nonpayment than other speculative issues. However, it faces
major ongoing uncertainties or exposure to adverse business, financial, or economic conditions.
An obligation rated 'B' is more vulnerable to nonpayment than obligations rated 'BB', but the obligor currently
has the capacity to meet its financial commitment on the obligation.
An obligation rated 'CCC' is currently vulnerable to nonpayment, and is dependent upon favorable business,
financial, and economic conditions for the obligor to meet its financial commitment on the obligation.
An obligation rated 'CC' is currently highly vulnerable to nonpayment.
A 'C' rating is assigned to obligations that are currently highly vulnerable to nonpayment, obligations that
have payment arrearages, or obligations of an issuer that is the subject of a bankruptcy petition.
An obligation rated 'D' is in payment default.
Source: Standard & Poor’s
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16. Typical maturities ofTreasurys
✤ One month
✤ Three months
✤ Six months
✤ One year
✤ Two years
✤ Three years
✤ Five years
✤ Seven years
✤ Ten years
✤ Twenty years
✤ Thirty years
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17. Curves & Spreads
✤ The yield curve of a bond issuer reflects expectations of future
changes in rates
✤ For government bonds, the yield curve reflects expectations of
inflation
✤ A spike in the curve can reflect the time horizon of any market
concern
✤ Spreads measure the risk premium of a particular bond over a risk-
free bond of the same maturity
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19. Yield curve for U.S.Treasurys
Yield
Maturity
Source: Bloomberg, 8 Apr. 2012
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20. Bond spreads
✤ Compares the relative yields of
two bonds of the same maturity
but different issuer
✤ Measured in basis points
(hundredths of a percentage pt)
✤ Can illustrate relative riskiness
✤ Changes in spreads can
illustrate changes in investor
sentiment -150
-75
0
75
150
225
300
Japan Germany France Italy Greece
Global government bonds
(spread over Treasurys)
Source: FT, 18 Apr. 2013
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21. TED Spread
✤ Difference between three-
month Libor and three-month
Treasuries
✤ Wider spread indicates
nervousness about the banking
system
✤ Spread typically between 15-50
basis points
Source: Bloomberg
100
200
300
400
500
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