Vinny’s Blog

Currency review.

I got this request recently & had received it earlier also from some of my readers. I actually ( until now) had been avoiding currencies because It’s getting increasingly difficult to cover currencies, market is very turbulent these days. Wild swings in currency values all over the world is a common thing.

Take India for example. Rupees was 42 to a dollar not so long ago today it’s trading at 51+ to a dollar that’s 20% swing on the down side and it did not take much for the rupee to go down against dollar this change happened within months. Slide from 47-48 to 51 was even quicker ( within weeks). Not sure if  business and every family had the time to adjust to this swing which ( like it or not ) has affected 1 Billion people’s daily life just in India.

This problem is much bigger for a businessman. They already have too many things to look after such as - running a manufacturing plant, raw material, delivery orders , controlling employees, unions, salaries, flow of money ……….and the list goes on it is a challenge. Now on top of that if a businessman has to focus ( which they do ) on stupid currency values each day just to find out how much money they need to pay and how much money they are going to receive. Sorry ! they are as unlucky as they can get. ( I think ) businessman all over the world, whether they are oil producing nation, or they are exporters of any kind having this constant headache of dollar value.

One day the it’s (USD)  up the other day it’s down. Forget businessman if you earn your living in USD and have to send money back home to support your family and folks, you get the same headache. You just don’t know when to send money because you don’t know what the value is going to be next week, next month or few months from now. Looks like everybody is forced to deal with this situation. Mark my words you’re forced to DEAL WITH IT.

And everybody means everybody no exception - Even in US you don’t know what you will be expected to pay at the pump next month for gas/petrol/diesel and how much your grocery bill is going to be as a result of that.

Questions are why exactly this happens ? who is responsible for it ? why you have to put up with this ?

Dollar…Dollar…..Dollar………value of Dollar……….is the answer !!

Unless you’re living in China. Chinese government has largely maintained a very narrow channel in which they allow their currency to trade against dollar. It’s good for business at least Chinese know on any given day what their money is worth and they also know that no matter what. Their money is not going to go out of that narrow trading band in terms of it’s value against dollar. It’s a big relief. Billions of people, 1000s of businessman they don’t have to worry about these wild swings. They can plan a budget, draw a strategy and WILL KNOW they don’t have to worry about currency exchange rate as much.

Otherwise valuation of USD, is one un-necessary skill that everybody is forced to acquire.

I don’t know about you, but I am not a currency investor or a trader or have much knowledge about currencies. I am a normal family man trying to make my living. I don’t have the skills for currency trading and don’t want to master them either, I don’t have the freaking time. I just want to live my life, this is one headache I can do without. I don’t want to worry about what the value ( worth ) of my retirement account is going be when I will retire 20 years from now and to counter that which decision I should make today.  I can’t see a week in future from today, how can I make a decision that lies 20 years ahead  from TODAY ? I can’t. If I do, it’s best to say that, it’s a guess and if it turns out right it’s only because I got very lucky.

Let me give you another example that will make it clear. If everybody knew what they know now..or if everybody could see this coming in future. Everybody would have put a large amount if not all of their savings in GOLD.  Gold was $250/Oz approx. 8 years ago today it’s over 900$/oz. currency values have gone down comparatively. Did everybody invest in gold ? did you ? my point exactly. We can’t see the future ( that far..) clearly. We are ordinary people. For us rule of thumb is the right time to invest in anything was yesterday and the right time to get out of a falling investment was a day before yesterday.

Anyway, do you get the picture ? this USD value has become everybody’s problem. With crude oil at 140+ dollar a barrel, oil producing countries were looking richer than ever before Dubai was a favorite hot spot suddenly their oil was worth so many dollars they could afford one out of every 3rd construction crane in the world. It looked as if Dubai had an endless money supply and though they live in a desert. Cement ( quantity) will be the largest imported commodity but not food or water. So where are they now……check this out…

Dubai Faces Curb on Money-Hub Ambitions After Bailout (Update1)
By Henry Meyer
Feb. 24 (Bloomberg) — A $10 billion bailout from neighbor Abu Dhabi threatens to cost Dubai its autonomy and the free- wheeling economic system that helped establish it as the Middle East’s main business hub.

The financial help comes as the sheikhdom, one of seven within the United Arab Emirates along with Abu Dhabi, is struggling with damage to its international reputation after an Israeli tennis player was refused a visa for the Barclays Dubai Tennis Championships it hosts.

Dubai ? Bailout ? …yes !! from being rich to going bust to the extent that Dubai needs a bailout. How did that happen ? credit tightening and crude oil prices fell from a record 150+ USD a barrel to today’s under 50 USD per barrel. That’s whopping 100 Dollar difference on each barrel. All calculations go out the door…if anyone made assumptions on value of crude in the past.

Dubai is just one example also because it’s the biggest one. But, there are plenty to uncover from the media. If so interested just do a relevant search and you will find what you’re looking for. Plenty of examples. As I said earlier- currencies is a very difficult area to cover and understand specially these days. Specially USD. Also, when governments/Central banks from all around the world are  printing money in truck loads. US has bigger trucks. Almost all currencies are linked to USD, since it’s world’s reserve currency.

Question is what will happen to USD and what will happen to all other currencies in the world ? I wish I had a simple answer for that better if had a right answer for that. I would have made millions by now but, instead I am writing this article and trying to impress you like I know something about it  :).

Anyway…..article is not about me and my skills but about currencies…so let us continue to focus on it. I will cover all major currencies in this article to best of my abilities and I will cover Indian Rupee exclusively at the end.

Very soon in first week of April ( past April fool’s day - thank god ) G20 ( group of 20 industrial nations ) will have a meet. Also known as G20 summit. In this summit besides other things, representatives of these nations are going to talk about reform of current financial system. It is going to be the top if not THE only agenda.

Everybody ( and no exception, businessman/citizens remember my examples above) have had it with USD. The system does not work and it’s completely broken. Politicians and Treasury in US had been promising day after day, week after week and month after month they are working on fixing the system and the work continues. Evey week it’s the next week, every month it’s the next month when the system will get fixed.

If it’s not TARP that is going to fix it..it’s TALF that’s going to fix it. If both can’t fix it..it’s going to be a tax deduction that’s going to fix it. If that does not fix it…then world will do in depression and so Fed’s printing press will fix it..to see how much money is being printed you must look at this article I wrote on it before.

This does not sound like someone who knows how to fix the system. My problem believing in the fix is very simple, if those who claim to have a fix for the system are so smart how come they did not see this coming. Where were all these programs ? Why there were no such programs in place to fix the problem before it arrived ?  The result of feds actions that they want you to believe is going to fix the system is not going to fix the system.

When problem is too big you don’t control the problem, problem controls you. Ask someone who has a Cancer threat and learn from them how ‘manageable’ the problem is - they will tell you who is in control.

The truth is - they Feds are no longer in control of the problem. Today Feds HAVE TO help AIG else it will take down the entire financial system, Citi, Bank of America, Bear…the list goes on, FDIC..list goes on..and they want you to believe they are in control of the problem. Yeah  Right !! more on the list….GM, Chrysler, Ford….when you ‘re done counting them…take on the airlines. ya ! just keep adding.

When you’re finished and you think you have added them all…remember to add housing at the bottom of the list…which BTW should actually be at the top.

Then again it will be credit cards, commercial real estate….Medicare, social security, pension funds….ya ! just keep adding. But don’t worry it’s America, everything is under control, there is no problem, everything is going to be just fine. Feds are in control. Lower interest rate are there because they are in control..not because housing is so messed up and people are not able to pay…no not because of that…but it’s because they are in control. Money printing press is running full force, again because they are in control, not because situation so messed up that they have to run the press…no not because of that.

The thing is if someone has always been smart and said something idiotic once it gets ignored, but if they continue to talk like an idiot people eventually take notice of that. And that is where US is today….and that is something ( idiotic/printing money ) that everyone wants to move away from.

Chinese central bank governor calls for financial reforms
2009-03-29 12:29:49

MEDELLIN, Colombia, March 28 (Xinhua) — Chinese Central Bank Governor Zhou Xiaochuan on Saturday urged for international financial reforms in the face of the global economic downturn.

Zhou made the remarks in the Colombian city of Medellin where he is attending a five-day Inter-American Development Bank (IDB) meeting.

The Chinese official told reporters that he expected financial reforms and regulatory measures for international financial organizations, including the  International Monetary Fund and the World Bank, would be discussed at the upcoming G20 summit of leading industrialized and developing nations in London.

It’s widely known that China has biggest USD reserve, probably more USD than they need and recently they have realized that they may be becoming worthless. That’s a lot of money on the line, loosing that much money is like almost going back to what China once was (…poor !!).

First worldwide shock about currency problems came early this year. When….openly

Geithner Says China Manipulates Its Currency
Comments Suggest Harder Line on Trade Friday, January 23, 2009

As Timothy F. Geithner moved closer yesterday to confirmation as Treasury secretary, he signaled a more confrontational approach toward China, bluntly stating that the new administration thinks Beijing is “manipulating” its currency and it will act “aggressively” using “all the diplomatic avenues” to change China’s currency practices.

–Others decided to step away from this discussion. No one wants to go against Chinese one on one.

IMF cannot conclude if Chinese currency yuan is manipulated.
By Alan Purkiss
Jan. 26 (Bloomberg) — The International Monetary Fund is hampered by a controversy between members over whether to characterize China’s currency as “fundamentally misaligned,” the Financial Times reported, citing Eswar Prasad, a professor of trade policy at Cornell University who formerly headed the
IMF’s China division.

Soon after..

Geithner: US to judge China currency ‘carefully’
Updated: 2009-02-11 11:47
The United States will look at the broad global picture when it decides in coming months whether China is manipulating its currency, US Treasury Secretary Timothy Geithner said on Tuesday.
“We’re going to make that judgment carefully, looking not just at what’s happening in China in the management of their exchange rate regime, but what’s happening globally at that time,” Geithner said on Bloomberg Television.

US law requires the Treasury Department to issue a report every six months on the currency practices of major trading partners. The next one is due

Obama backing down on China
The Obama administration backed away from a confrontation with China after Treasury Secretary Tim Geithner said during confirmation hearings that “President Obama — backed by the conclusions of a broad range of economists — believes that China is manipulating its currency.”
China immediately hit back, denying that it manipulated its currency to get an unfair trade advantage. Within days, Vice President Joe Biden said on television: “There’s been no judgment based in the administration that there has been a manipulation.” That word, he explained, “triggers within trade agreements certain responses.”

And President Obama himself telephoned Hu Jintao to give his Chinese counterpart further reassurances.

–And then see the tone change.

Geithner Said to Push G-7 to Ease Criticism of China (Update1)
By Rebecca Christie and Michael Forsythe
March 12 (Bloomberg) — Treasury Secretary Timothy Geithner pushed Group of Seven officials to soften criticism of China last month, according to a person briefed on the matter, after his accusation that the nation was “manipulating” the yuan strained ties with the U.S.’s second-biggest trading partner.
G-7 finance ministers and central bankers on Feb. 14 welcomed “China’s fiscal measures and continued commitment to move to a more flexible exchange rate.” By  contrast, the group in April 2008 pressed for “accelerated appreciation” of the yuan.

–Now, it doesn’t look like it was a very good idea to Challenge China in first place does it ?

– Finally China does realize, that their USD reserves ( world’s biggest ) are not safe…

– So, first they asked US to protect and guarantee them.

China Needs U.S. Guarantees for Treasuries, Yu Says (Update2)
By Belinda Cao and Judy Chen
Feb. 11 (Bloomberg) — China should seek guarantees that its $682 billion holdings of U.S. government debt won’t be eroded by “reckless policies,” said Yu Yongding, a former adviser to the central bank.
U.S. government bonds returned 14 percent last year including price gains and reinvested interest, the most since rallying 18.5 percent in 1995, according to indexes compiled by Merrill Lynch & Co. Concern that the flood of bonds would overwhelm demand caused Treasuries to lose 3.08 percent in January, the
steepest drop in almost five years, Merrill data show. Fed Buying Bill Gross, co-chief investment officer of Pacific Investment Management Co., said on Feb. 5 the Federal Reserve will have to buy Treasuries to curb yields  as debt sales increase. Fed officials said Jan. 28 they were “prepared” to buy longer-term Treasuries.
Linking Disputes Yu said China has no plans to channel its reserves toward stimulating its own economy because its trade surplus is sufficient to fund any import needs. China’s trade surplus was $39 billion in January.

China “should diversify its reserves away from U.S. Treasuries if the value of China’s foreign-exchange reserves is in danger of being inflated away by the U.S. government’s pump- priming,” he said.

China may try to link trade and currency policy disputes to its future investment in Treasuries, said Lu Zhengwei, an economist in Shanghai at Industrial Bank Co., a Chinese lender partly owned by a unit of HSBC Holdings Plc.

U.S. Treasury Secretary Timothy Geithner accused China on Jan. 22 of “manipulating” the yuan to give an unfair advantage to its exporters. The currency has dropped 0.16 percent this year to 6.8342 per dollar, following a 21 percent gain since a peg against the dollar was abandoned in July 2005.

“China can also use this opportunity to get a promise from the U.S. not to make inappropriate requests on bilateral trade and the Chinese yuan,” Lu said. “We can’t afford more yuan appreciation as the economy is facing a serious slowdown.”

–Then they asked US and Europe.

China Urges U.S., Europe to Protect Value of Debt in Reserves
By Belinda Cao

Feb. 18 (Bloomberg) — China, whose $1.95 trillion in currency reserves are the world’s largest, called on the U.S. and Europe to protect the value of its overseas investments and said it plans to spend more foreign exchange on imports and acquisitions.

“We hope countries whose currencies are the main holdings in our international reserves will take effective measures to cope with the financial crisis,” Fang Shangpu, deputy director at the State Administration for Foreign Exchange, told a press conference in Beijing today. “They should work to maintain economic
and financial stability, and protect the interests and confidence of investors.”

–Then they asked all other countries. G20 group consists of US, Europe, Asia , BRIC, Australia, Canada etc.

China May Press G-20 to Guard Its U.S. Assets, Researcher Says
By Li Yanping
March 24 (Bloomberg) — China’s leaders may press at the Group of 20 summit for specific steps to protect its more than $1 trillion of dollar assets as U.S. fiscal policies risk sparking a “currency war,” a senior Chinese researcher said.

The dollar weakened after the Federal Reserve said March 18 it would buy as much as $300 billion of Treasuries and the U.S. this week outlined plans to buy as much as $1 trillion of illiquid bank assets.
U.S. purchases of Treasuries are “irresponsible” because they may weaken the dollar, Li Xiangyang, of the government- backed Chinese Academy of Social Sciences, told a forum in Beijing today. “Chinese leaders are likely to articulate their concern to their U.S. counterparts strongly and ask for specific measures.”

“China is a hostage,” said Andy Xie, an independent Shanghai-based analyst who was formerly Morgan Stanley’s chief Asia economist. “China is America’s bank and America basically says there’s nothing you can do to me. If I go down you don’t get paid.”  Fed purchases of Treasuries are “irresponsible” because of the dollar’s role as a global reserve currency and the possibility that other nations will devalue their currencies should the dollar keep falling, Li said.

– Are they ( Chinese ) right in worrying about funding of US debt ? I guess so…US has not even been able to fix the primary problem, the pin that burst the bubble…subprime/housing. Check these articles out and see the dates on them they are as current as they could be.

Subprime-Mortgage Defaults to Surge: Report
By KELLY CURRAN , February 26, 2009 1:23 PM CST

Moody’s Investors Service announced Thursday that it’s raising its loss expectations for US subprime residential mortgage-backed securities issued between 2005 and 2007, as it believes, without intervention, nearly all already-delinquent loans will eventually default. The company has therefore placed 7,942
tranches of subprime RMBS with an original balance of $680 billion, on review for possible downgrade.

Moody’s attributes the higher loss expectations to “the continued deterioration in home prices, rising loss severities on liquidated loans, persistent elevated default rates, and progressively diminishing prepayment rates throughout the sector.”

More Than 8.3 Million U.S. Mortgages Are Underwater (Update2)
By Dan Levy
March 4 (Bloomberg) — More than 8.3 million U.S. mortgage holders owed more on their loans in the fourth quarter than their property was worth as the recession cut home values by $2.4 trillion last year, First American CoreLogic said.
An additional 2.2 million borrowers will be underwater if home prices decline another 5 percent, First American, a Santa Ana, California-based seller of mortgage and economic data, said in a report today. Households with negative equity or near it account for a quarter of all mortgage holders.

1 in 5 mortgages ‘underwater’ , March 4, 2009: 7:26 AM ET
Report shows uptick in Americans with mortgages whose property values are less than what the borrowers owe.
By Julianne Pepitone, CNNMoney.com contributing writer
NEW YORK (CNNMoney.com) — The dramatic decline in the housing market has hit Americans hard: 20% of people with mortgages owe more than their home is worth, according to a report released Wednesday.

More than 8.3 million U.S. mortgages were “underwater” as of December, said research firm First American CoreLogic. Three months earlier, 18% were underwater.

– Does this indicate to you that situation is under control, if it was, the trend would be reversing not increasing…..and If this does not indicate that Chinese are worried I am not sure what will. Often worries of this nature ( this big ) trigger a change. Request for change has already been triggered by Chinese.

Continued…..

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[views and opinions expressed here are mine and you need not agree with them. You should not make any financial decisions or any other decision based upon material you read on this website. For that you must contact an expert in the relevant area of your need.]

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