Expat Currency Corner
No two individuals are the same and therefore each and every currency transaction should be looked at on an individual basis; at least that is the opinion we have here, in the Expat Currency Corner of SGM Foreign Exchange. This means that instead of adopting a prescriptive approach to your individual currency exchange requirements, you remain in charge, with us providing you with our support whenever it is needed. Building relationships with our clients allows us to understand your needs and your own preferences, making every foreign exchange transaction as smooth and competitive as possible.
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17th November 2017 – Expat Currency Corner Asia-Pacific News:
Despite the Australian economy adding fewer jobs than expected, unemployment data fell to its lowest level since February 2013. According to the Australian Bureau of Statistics, the seasonally-adjusted unemployment rate fell by 0.1 percentage points in October, from 5.5% to 5.4%. Unemployment was expected to stay at 5.5%, having been stuck between 5.5% and 6% for the past two years, falling from a peak of 6.4% in October 2014. A net 3,700 jobs were added in October, well below the 17,500 Reuter’s forecast. This translates to roughly an increase of 24,300 full time jobs being added and 20,700 part-time jobs being eliminated. The rise in full time jobs has been reflected in the rise of hours worked, up by 0.3%. The Australian currency was 0.1% stronger, with the Aussie Dollar trading at $0.7595 against the US Dollar in the morning session, following a brief dip to as low as $0.7968 immediately after the release.
The Japanese economy grew at an annualised rate of 1.4% in the third quarter of this year. The country is experiencing its seventh consecutive quarter of growth, as well as recording its longest run of uninterrupted expansion since 2001. Despite growth being slower than in the second quarter, it is still far above Japan’s long-term trend of 0.5%. The growth suggests that Japanese Prime Minister, Shinzo Abe’s, dovish policies seem to be successfully working towards creating inflation. “Household incomes continue to grow at a solid pace and external demand is holding up,” said senior economist, Marcel Thieliant. “However, the economy is running into capacity constraints which suggest that growth will start to slow next year.” While both business and public investment offered very little to the expansion, the quarter was rescued by trade and inventory building. Net exports contributed 2% to growth, with overseas sales boosted by a weak Yen. US Dollar-Yen variance was 2.78% over the month, with the Yen losing value against the Dollar. Aided by a weakening Dollar, the Yen recovered rapidly from the start of November, and the Yen now trades at similar levels to the 19th October.
14th November 2017 – Expat Currency Corner Euro News:
The Euro rose today, following a boost from stronger than expected German GDP data. Growth was up to 0.8% when measured from the previous quarter, more than the expected 0.6%. This performance was a result of export led growth, as well as strong trade and investment. The data was the most recent sign of strength from the bloc’s powerhouse, and the latest evidence of the acceleration of the Eurozone’s biggest economy, reinforcing the case for the European Central Bank, ECB, to begin tightening monetary policy. Growth is up 2.3% compared to a year ago, and is growing at its fastest pace since 2011. Foreign trade is a major factor driving growth, with exports increasing faster than imports. The Federal Statistics Office said, “While state and household consumption remained roughly on the previous quarter’s level, gross capital investment contributed to overall growth … investment in equipment, especially, rose on the quarter.” The Euro has hit a three-week high, the highest rate since 26th October, when the ECB decided to extend its Quantitative Easing programme to September 2018.
This news came less than a week after the Berlin government’s Council of Economic Advisors warned that the economy was in danger of overheating. The council, composed of five top economists, have called for the country’s next government to pursue economic reforms to ensure that the boom does not end in ruin. The council warned that above trend growth and low interest rates threatened the to create a property bubble, while increasing risk within the country’s financial systems. “We’re in this low interest environment that has been going on for a long time, and so there is good reason for these high prices [for property],” council member Isabel Schnabel said in Berlin. “But when the interest rates rise again, these prices could go very quickly in the opposite direction.” In its annual report, the council projected a 2.2% growth in Germany’s economy. The council considers Germany’s long-term potential growth rate – the rate at which Germany can grow without creating negative effects to inflation and markets – to be 1.4%.
13th November 2017 – Expat Currency Corner Brexit News:
The pound is facing some downward pressure today, losing more than 0.6% against the Euro and down almost one cent against the US Dollar, due to PM Theresa May’s supposed weakness emerging over the weekend. As many as 40 MPs have agreed to sign a letter of no confidence in May, while prominent cabinet members, Boris Johnson, Foreign Secretary, and Michael Gove, Environment Secretary, have sent a leaked letter to her reportedly telling her how to run Brexit. May’s position looks increasingly fragile.
It emerged over the weekend that as many as 40 MPs have agreed to sign a letter of no confidence in Prime Minister May. This is close to the 48 needed to trigger a vote of no confidence which, if lost, could lead to a Tory leadership contest. The crisis started following May’s chaotic conference speech, when 35 MPs agreed to sign a letter of no confidence, leading to a failed coup. Since then, the problems have only increased for May: the Westminster sexual harassment scandal; resignations of cabinet members, Sir Michael Fallon and Priti Patel; and Boris Johnson’s blunder leading to a British dual-citizen being threatened with a longer prison sentence in Iran. Coupled with the continuous schism within the Government over Brexit negotiations, markets appear to fear that May is losing control.
Meanwhile, Foreign Secretary, Boris Johnson, and Environment Secretary, Michael Gove, have sent a leaked letter to May, reportedly instructing her on how to run a hard Brexit and expressing their discontent with the current Government response. They wrote that they “are profoundly worried that in some parts of Government the current preparations are not proceeding with anything like sufficient energy.” The letter also said that transition arrangement must end by 30 June 2021, and made a thinly veiled attack on Chancellor, Phillip Hammond. A government source told the Mail on Sunday newspaper that Johnson and Gove had attempted a “soft coup” and described May as their “Downing Street hostage”. While neither has commented on the report, the letter suggests both men have set aside their differences after last year’s Tory leadership contest.
10th November 2017 – Expat Currency Corner US Dollar News:
US Jobless data was released yesterday, with more people claiming unemployment benefit in the United States than last week. Initial jobless claims were up 10,000, hitting 239,000, from last week. Unemployment assistance claims were only expected to rise by 2,000 to 231,000, therefore, the release exceeded market expectations. Claimant levels fell to their lowest since the 1970s the week prior, and remain well below the 300,000 mark that signals a healthy labour market and economy.
It should be noted that the Labor Department is now processing backlogged claims following the disruption caused by the hurricanes in Puerto Rico. This means that the data could be inflated and inaccurate. While operations in the Virgin Islands remain severely disrupted, there could be further inflated and inaccurate data released. Although there was immediate US Dollar strength following the data release, this was corrected within the hour.
American President, Donald Trump, is now coming to the end of his 11-day Asia trip. Trump spoke in the Vietnamese city of Da Nang today, at the annual Asia Pacific Economic Cooperation meeting. Whilst praising many nations for achieving remarkable economic success over the last few decades, he used the opportunity to revive his campaign stance that the US had been treated unfairly in terms of trade. He said, “I will make bilateral trade agreements with any Indo-Pacific nation that wants to be our partner and will abide by the principles of fair and reciprocal trade.”
The speech followed Trump’s 2-day visit to China, where he is supposed to have raised China’s “unfair trade practices” with Chinese President, Xi Jinping, in a blunt discussion. Trump’s rhetoric has changed dramatically since his campaign, when he accused China of “raping” the US, and placing the blame on his predecessor for allowing it. “I do not blame China for taking advantage of the US on trade,” he said, “if their representatives are able to get away with it, they are just doing their jobs.”
US President Trump has landed in China for his first official visit, in what senior Chinese officials are calling a “state visit plus”. The world’s two largest economies are known to have billion dollar trade deals as well as North Korea on the programme. Trump has signalled that this trip will be different to previous presidential trips, with no reference to meetings with human rights representatives usually attended by the POTUS.
It was confirmed that $9 billion worth of new deals were signed yesterday between Chinese and US companies, with more expected today. JD.com, a Chinese ecommerce group, signed a deal to buy $1.2 billion of pork and beef over the next three years, sizing up to be one of the biggest deals signed during the visit. Minnesota-based wastewater treatment company Viroment also agreed to $800 million worth of deals to build plants with partners in China. The trade delegation accompanying Trump is made up mainly by manufacturing and industrial companies, including Boeing. Critics, however, are sceptical that the contracts will not come close to what is needed to fill the US’s $347 billion trade deficit.
Trump is also using the trip as an opportunity to link economic and strategic goals. He has implied softening his trade demands in return for help in managing North Korea’s nuclear programme. This carries on from the visit in South Korea, where he warned North Korea not to underestimate the USA. Speaking at the South Korean Parliament, he warned North Korea not to interpret American restraint as weakness, calling it a “fatal miscalculation” citing his current government as different from previous ones. The 35-minute speech has been described as unlike Trump, with a more positive and less provocative tone than feared. This has helped stabilise the US Dollar, which lost 0.3% in anticipation of Trump’s arrival in South Korea. There was very little movement the following day reflecting confidence in Trump following his speech.
Worries concerning the lack of transparency from the British government concerning Brexit negotiations emerging following an alleged meeting between Wilbur Ross, the US commerce secretary, and a number of large banks. Banks, including JPMorgan Chase, Goldman Sachs and HSBC, met with Ross on Friday highlighting concerns about the apparent lack of progress in Brexit negotiations. The banks are said to be worried by Britain’s lack of clarity surrounding Brexit talks and whether a transition deal will be reached.
Without clarity on Brexit, banks have claimed they would be forced to move jobs out of London and back to the US or to European capitals. In a recent tweet, Goldman Sachs’ Chief Executive warned that he expected to be “spending a lot more time” in Frankfurt post Brexit. Executives of the banks have also warned Ross that a “point of no return” is now approaching, when they must start moving jobs, capital and infrastructure in a worse-case-scenario plan, ahead of the March 2019 deadline.
The next three months will determine whether the mass exodus of jobs is necessary. The Bank of England confirmed last week that it was working on the assumption that ten thousand jobs would be lost if the UK left the EU without a deal. Nonetheless, Deputy Governor, Sam Woods, said that the seventy-five thousand job loss figure cited in a previous report by Oliver Wyman, was now “plausible” as a long-term figure.
Despite continued criticism of the current government, the possibility of a Labour government under Jeremy Corbyn is believed to be even more of a disaster. Corbyn has pushed for a “transition tax” – a tax on financial services – which Sadiq Khan, London Mayor and a member of Mr Corbyn’s own party, has called “madness”. The proposal was separate from the financial transaction tax discussed in 2013 by EU member states. George Osbourne, Chancellor at the time, promised to sue the Commission in the European Court of Justice if the tax affected the City of London.
Bank of England Governor, Mark Carney, announced yesterday that the Bank was raising interest rates for the first time in almost a decade. The 25 basis point rise from 0.25 to 0.5 percent was expected following Carney’s recent comments. Hinting at the rise in September, Carney suggested the bank was ready to “ease its foot off the accelerator,” with rises starting as early as November. The rise is aimed at pulling down rising inflation rates, keeping the rising costs to households down. Surprisingly, the pound fell following the announcement, down to the more cautious route the Bank seems to be taking on interest rate rises in the future.
The decision has analysts divided. Proponents of the hike are calling to the fall in unemployment, which is currently at its lowest levels since the 1970s. They are also quoting the need to curb inflation as reasons for the rise. Citing the 2012, 5 percent, rate as the example of what can happen when interest rates are left unmoved. Those questioning the timing of the rise, including us here at SGM-FX, have argued that wage growth is not yet strong enough to handle an interest rate hike. Real wage growth is currently stagnating despite nominal wage growth rising significantly. This leads onto other critics claiming the decision will put more pressure on those with debt. The TUC has criticised the decision by saying that “Today’s hike is a hammer blow for those in problem debt, those repayments will now rise. The Bank of England has made the wrong call.”
Click here to read our further analysis on the decision
The Federal Reserve Bank, the Fed, is set to hold interests rates at 1-1.25 percent in anticipation of an interest rate hike in December. Analysis conducted using Federal Reserve Bank of New York data confirmed a 98.5 percent probability that interest rate policy would remain the same, while simultaneously confirming a 96.7 percent chance of a rate hike in December. The decision looks to be priced into the market and so, unless there is a surprise hike by the Fed, should have very little effect on the price of the US Dollar. The decision looks to be down to solid economic growth and labour market performance. Presently, only inflation and wage growth stand in the way of Fed policy normalisation. Elsewhere, the unemployment rate has further declined, while household spending has also increased.
US President, Donald Trump, is set to confirm the new Fed chair tomorrow. Jerome ‘Jay’ Powell, extant member of the Fed board, and John Taylor, a Stanford University economist and brains behind the Taylor Rule, are both in the running. Current Fed Chair, Janet Yellen, is also in the top picks, however, she is seen as an unlikely pick. Rumours surfaced that Yellen does not want to accept another term as Fed chair, while Trump has also hinted towards a different direction.
The President has hinted towards appointing Powell as Chair for some time. Powell represents more of a continuation of Yellen’s system, rather than a break away from it. On the other hand, John Taylor, considered a ‘hawk’ by the market, is expected to have a more aggressive approach and will likely raise interest rates more significantly. Christian Keller, an Analyst for Barclays, said that the selection ‘probably won’t make that big of a difference.’
In a press release on Thursday, the European Central Bank, ECB, made the decision to reduce its quantitative easing program by cutting the number of bonds they buy every month and extending the schedule to September 2018. ECB President, Mario Draghi, added that they were willing to prolong the process even further if necessary. From January, purchases will fall to €30bn a month, half of what they are presently at. The ECB introduced the quantitative easing program – buying assets to stimulate growth – following the global financial crisis and the Eurozone sovereign debt crisis. They also introduced record low interest rates at 0 percent. The move was considered ‘dovish’ by the market – a bias towards stimulus given the situation – with the Euro dropping by just under 1.6 percent against the Pound Sterling in less than a week.
The crisis in Catalonia has rocked the boat in Europe this week with the Catalan President, Carles Puigdemont, fleeing to Belgium. Puigdemont’s lawyer confirmed last night that the president, along with five of his cabinet members, were in Belgium, but that no decision had been reached on whether he would seek political asylum there. Spain’s President, Mariano Rajoy, has called for regional elections in Catalonia since imposing direct rule over the region last Monday. Analysts have said that the political crisis, the worst seen by Spain in four decades, will not end soon. ‘Spain is headed for a period of disruption, and like the UK and Brexit, having its policy agenda dominated by one political issue’ said Raj Badiani, an economist at Markit in London. Catalonia represents 1.5 percent of Eurozone GDP. Straddling the gap between negligible and significant, Catalonia has been enough to generate a headwind, but not cause explicit devaluation, within the Euro.
The triumph of the Liberal Democratic Party (LDP) and Japanese Prime Minister, Shinzo Abe, over the weekend has driven the Japanese stock market skyward and the exchange rate downward. Whilst the certainty of a freshly mandated national government usually affords a domestic currency with value, the specific brand of PM Abe’s premiership explains the Yen’s downturn.
The problem, as Princeton and Nobel Prize-winning economist and Japan specialist, Paul Krugman, points out is the deflationary pressure and low growth that the Japanese economy has endured for decades. Periods of severe deflation, an extremely concerning and eschewed macroeconomic reality, have gripped the Japanese political economy sporadically throughout the period. The solution that Krugman points to is an increase in the money supply and general stimulus; big time.
The Bank of Japan has this capacity. Either through the rapid acquisition of vast amounts of governmental or private debt, the Bank can increase the money supply, thereby increasing the lending facility of private banks, financing government expenditure, and generally increasing the availability of credit and the circulation of money.
This brand of macroeconomic and political guidance is exactly that endorsed by the successful candidate, Shinzo Abe and the Liberal Democratic Party. Whilst this may ultimately be what Japan needs in the long-run to finally escape its deflationary and recessionary pendulum, it is nevertheless erodes the value of the economy in the medium term.
As many of my articles have explained, loose monetary policy leads to a depreciation of the exchange rate by increasing the supply of money and decreasing the reward for investment. The former lowers the effective price of the domestic currency whilst the latter decreases its attractiveness from outside and within; thereby leading investors and savers to look elsewhere for their currency exposure. Therefore, it is ultimately unsurprising that the confirmation of and lead up to Abe’s success was characterised by consistent gains on the Nikkei, the Japanese stock market, and consistent losses for the Yen.
Shown in the graph below, the devaluation has been sustained yet relatively modest. The long-term prosperity of the Japanese economy, particularly when considered alongside the increase in exporting competitiveness derived from a weaker Yen, may well outweigh the shorter run cost to consumers from more expensive imports.
20th October 2017 – Expat Currency Corner’s Safe Haven Currencies:
The US Dollar is not a safe haven. That may come as a surprise because one could make a strong argument for its stability as the most liquid and heavily traded currency in the world. This characteristic, in fact, is confusingly why it is not a safe haven. The liquidity and stability of the US Dollar in good times is one of the reasons why it is the world’s major conduit for business. Companies and corporations over the world flock to the consistent purchasing power of the Dollar, supported by an immense population underneath it.
This corporate and financial exposure of the US Dollar is why it is not a safe haven. When times are bad, i.e. when global geopolitical risk is mounting and looking unsustainable, it is these institutions that investors and stakeholders wish to minimise their exposure to. Therefore, there is a de facto exodus from the dollar, flooding market supply which, when met by low demand, allows the price of the Dollar to fall.
Despite lacking the status of a safe haven, the US Dollar is unequivocally stable and, unsurprisingly, a popular currency amongst the expatriate community. With the Dollar consolidating considerable value over the past few weeks, many analysts see little reason for this trend to reverse into 2018.
The election is dominating the political economy of Japan at the moment. Before this weekend’s event, most immediate fluctuations in the value of the Japanese Yen are likely, although not certain, to be derived from the leadership contest. However, with crises of industry affecting wider Japanese markets, the supremacy of the election to the Yen cannot be guaranteed.
Critically, also, the Yen is a fully fledged safe haven currency. Therefore, whilst the domestic environment will be reflected in the value of the Yen, the global geopolitical atmosphere has the propensity to make the Japanese currency highly volatile. As a central safe haven asset, alongside the Swiss Franc and Gold, its price is proven to vary inversely with other non-safe haven currencies.
Therefore, whilst the value of the Yen may, at times, be uncertain, it can usually be considered overpriced in globally bad times and under- or fairly priced during good times. The rising tension within the Koran Peninsula creates an interesting new dynamic within Japan and the Yen. Whilst the value of the Yen should rise during times of geopolitical uncertainty and insecurity, its geographical proximity to the epicentre of the troubles makes its relevance as a safe haven against North Korea questionable.
For almost 100 years, the Swiss Franc has acted as a safe haven currency. A politically and socially stable country, Switzerland is also a quintessentially neutral player on the international stage. Known for its strong and entrenched financial system, confidential banking and low inflation rates, it is considered by many to be one of the most stable currencies in the world. Although these are some of the most likely reasons why the Swiss Franc is a safe haven currency, the nature of a safe haven currency means one cannot know for certain.
What we do know is that investors flock to the Swiss Franc when geopolitical or natural challenges arise. Bucking the trend, when all other currencies seem to be shedding value, the Swiss Franc appreciates. The Swiss Franc is essentially a disaster fund, so whilst you may not protect yourself against inflation and loss in good times, you can be confident that the Franc will stay strong.
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