The Fed's interest rate cut of 0.25%, disappointed many investors, as concerns of recession, the housing slump and the credit crunch grow. Many investors believe that this cut in rates was not enough and 0.5% would have been more appropriate if the Fed was serious about avoiding recession.
The Fed's warning that the turbulence in global credit markets has led to more uncertainty in the economic outlook. This has led to bond traders pricing in a further 0.25% cut when the bank meets again on January 30th.
There is growing concern that the tight credit markets will increase the risks for an economy that is expected to grow a measly 1.8% in 2008.
Wednesday, December 12, 2007
Australian Unemployment: November 2007
Australian unemployment results for November came out today. The market was expecting a figure of around 4.3%, but the actual amount was 4.5%. This had an immediate negative impact on the AUD, as it has fallen to 0.8828 against the USD by 12:14pm Australian EST.
The number of employed increased by 52,600 in November - more than the 20,000 that had been forecast. The seasonally adjusted workforce participation rate increased to 65.3 percent in November - up from 65.0 percent in October.
The number of people employed in November was 10.58 million, marking an rise of 30,000 from October's 10.53 million. The total number of full-time workers in November rose by 8,200 to 7.6 million. The total number of part-time workers was up 44,400 to 2.99 million.
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The number of employed increased by 52,600 in November - more than the 20,000 that had been forecast. The seasonally adjusted workforce participation rate increased to 65.3 percent in November - up from 65.0 percent in October.
The number of people employed in November was 10.58 million, marking an rise of 30,000 from October's 10.53 million. The total number of full-time workers in November rose by 8,200 to 7.6 million. The total number of part-time workers was up 44,400 to 2.99 million.
For the latest in economic results and Forex news, register with ForexCT
Monday, December 10, 2007
Weekly Country Focus: South Africa
South Africa has a two-tiered economy; one rivaling other developed countries and the other with only the most basic infrastructure. It therefore is a productive and industrialised economy that exhibits many characteristics associated with developing countries, including a division of labour between formal and informal sectors--and uneven distribution of wealth and income. The formal sector, based on manufacturing, services, mining, and agriculture, is well developed.
South Africa's transportation infrastructure is among the best in Africa, supporting both domestic and regional needs. The OR Tambo International Airport serves as a hub for flights to other Southern African and International countries. South Africa also has several major ports that make it a central point for most trade in the southern African region.
Currency
1 Rand = 100 cents
GDP ranking
24th (2005)
GDP
$576.4 billion (2006)
GDP growth
4.5% (2006 est.)
GDP per capita
$13,000 (2006 est.)
Forex reserves
$20.16 billion (February 2006)
Inflation
5% (2006)
Unemployment
25.5% (2006 est.)
Main industries
Mining (Platinum, Gold, Chromium, Diamonds), Automobile assembly, Metalworking, Machinery, Textile, Iron, Steel, Chemicals, Fertilizer and Foodstuffs
Inflation Targeting and GDP growth
In the February 2000 Budget Speech, the Minister of Finance, announced a policy of inflation targeting, helping to bring consumer inflation, which had been running in the double digits for over 20 years, under control. Inflation declined from 6.9% in 1998 to less than 6.0% in 2000. The target was set to keep the consumer price index (CPIX) — a key indicator of inflation — between 3% and 6% average per annum. Although initially successful, the rand's rapid depreciation in late 2001 led to greater inflationary pressure and the South African Reserve Bank missed the target during the course of 2002, with inflation coming in at an average of 9.3% for the year.
Since September 2003, however, the CPIX inflation rate has remained consistently within the target range. The average annual rates of CPIX since 2001 were: 2001 - 6.6%, 2002 - 9.3%, 2003 - 6.8%, 2004 - 4.3%, 2005 - 4.3%.
Success in keeping inflation down allowed the Reserve Bank to reduce the prime lending rate — that determines the interest rate. During 2003 alone interest rates were cut by 550 basis points (5.5%), while between 2002 and 2006 interest rates were cut by a total 650 basis points (6.5%).
The cut in interest rates saw consumer spending rise, the construction sector boom and the sale of new vehicles reach record levels. This in turn generated much needed growth in gross domestic product (GDP). Ironically enough, GDP growth started to gather steam just as the end of the GEAR period neared. Since 1999, quarterly GDP growth has been consistently positive and annual GDP growth consistently above 2%. The present business cycle upswing is the longest on record. Between 1996 and 2004, GDP growth averaged 3.1%, rising to 4.5% (based on 2005 market prices) in 2004. Growth for 2005 is expected to comfortably exceed 4%, some predicting growth rates greater than 5%. This contrasts sharply with the erratic growth rates of 4.3% in 1996, 2.6% in 1997, 0.5% in 1998 and 2.4% in 1999 under GEAR (baseline 2005).
Although economic growth has improved, the growth has been largely jobless, and quicker growth is still needed. The South African Government estimates that the economy must achieve growth at an average of 4.5% until 2010 and 6% thereafter to reach its goal of halving South Africa's high levels of unemployment, estimated at 26.5% (March 2005 - Stats SA), by 2014.
In an effort to boost economic growth further and spur job creation, the government has launched special investment corridors to promote development in specific regions and also is working to encourage small, medium, and micro enterprise development. In fact the policy has been condemned and opposed by the ANC (African National Congress) alliance partners, namely the Congress of South African Trade Unions (COSATU) and the South African Communist Party (SACP).
Some Useful links:
Johannesburg Stock Exchange, South Africa
The South African Futures Exchange(SAFEX), South Africa
Learn more about economic and financial issues at ForexCT!
South Africa's transportation infrastructure is among the best in Africa, supporting both domestic and regional needs. The OR Tambo International Airport serves as a hub for flights to other Southern African and International countries. South Africa also has several major ports that make it a central point for most trade in the southern African region.
Currency
1 Rand = 100 cents
GDP ranking
24th (2005)
GDP
$576.4 billion (2006)
GDP growth
4.5% (2006 est.)
GDP per capita
$13,000 (2006 est.)
Forex reserves
$20.16 billion (February 2006)
Inflation
5% (2006)
Unemployment
25.5% (2006 est.)
Main industries
Mining (Platinum, Gold, Chromium, Diamonds), Automobile assembly, Metalworking, Machinery, Textile, Iron, Steel, Chemicals, Fertilizer and Foodstuffs
Inflation Targeting and GDP growth
In the February 2000 Budget Speech, the Minister of Finance, announced a policy of inflation targeting, helping to bring consumer inflation, which had been running in the double digits for over 20 years, under control. Inflation declined from 6.9% in 1998 to less than 6.0% in 2000. The target was set to keep the consumer price index (CPIX) — a key indicator of inflation — between 3% and 6% average per annum. Although initially successful, the rand's rapid depreciation in late 2001 led to greater inflationary pressure and the South African Reserve Bank missed the target during the course of 2002, with inflation coming in at an average of 9.3% for the year.
Since September 2003, however, the CPIX inflation rate has remained consistently within the target range. The average annual rates of CPIX since 2001 were: 2001 - 6.6%, 2002 - 9.3%, 2003 - 6.8%, 2004 - 4.3%, 2005 - 4.3%.
Success in keeping inflation down allowed the Reserve Bank to reduce the prime lending rate — that determines the interest rate. During 2003 alone interest rates were cut by 550 basis points (5.5%), while between 2002 and 2006 interest rates were cut by a total 650 basis points (6.5%).
The cut in interest rates saw consumer spending rise, the construction sector boom and the sale of new vehicles reach record levels. This in turn generated much needed growth in gross domestic product (GDP). Ironically enough, GDP growth started to gather steam just as the end of the GEAR period neared. Since 1999, quarterly GDP growth has been consistently positive and annual GDP growth consistently above 2%. The present business cycle upswing is the longest on record. Between 1996 and 2004, GDP growth averaged 3.1%, rising to 4.5% (based on 2005 market prices) in 2004. Growth for 2005 is expected to comfortably exceed 4%, some predicting growth rates greater than 5%. This contrasts sharply with the erratic growth rates of 4.3% in 1996, 2.6% in 1997, 0.5% in 1998 and 2.4% in 1999 under GEAR (baseline 2005).
Although economic growth has improved, the growth has been largely jobless, and quicker growth is still needed. The South African Government estimates that the economy must achieve growth at an average of 4.5% until 2010 and 6% thereafter to reach its goal of halving South Africa's high levels of unemployment, estimated at 26.5% (March 2005 - Stats SA), by 2014.
In an effort to boost economic growth further and spur job creation, the government has launched special investment corridors to promote development in specific regions and also is working to encourage small, medium, and micro enterprise development. In fact the policy has been condemned and opposed by the ANC (African National Congress) alliance partners, namely the Congress of South African Trade Unions (COSATU) and the South African Communist Party (SACP).
Some Useful links:
Johannesburg Stock Exchange, South Africa
The South African Futures Exchange(SAFEX), South Africa
Learn more about economic and financial issues at ForexCT!
Major News: Week December 10th, 2007
The Federal Open Market Committee is widely tipped to decrease US interest rates by 25 basis points on Tuesday. There was specualtion earlier in the week that they cut would rates by 50 basis points, however the market has since dismissed this, since US Payrolls results were better than expected on Friday.
The value of the AUD has increased to highs of 0.8886 by late Tuesday afternoon on the back of the carry trades.
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The value of the AUD has increased to highs of 0.8886 by late Tuesday afternoon on the back of the carry trades.
For more of the latest, up to the second Free Dow-Jones finance news, please register with ForexCT
Sunday, December 9, 2007
Some New Links
Share Data and Calls for Indian Stock Market - This site is for sharing Historical data and sharing intrday, delivery and futures calls with everyone. You are free to give calls and use others in the forum.
Free Internet Marketing - Provides free internet marketing space such as Free business directory, free link exchange, free advertising forum, free classified ads
Free Internet Marketing - Provides free internet marketing space such as Free business directory, free link exchange, free advertising forum, free classified ads
Thursday, December 6, 2007
How to Exploit Nonrandomness in Currency Returns
Currency returns are positively correlated; that is they trend. Here we describe a trading rule to exploit the nonrandomness of currency returns. For the approach to be useful, the historical presence of trends must, of course, be more than a period-specific phenomenon. One reason to believe that currencies will in fact continue to trend is the conclusion that the trending arises from central bank inteventions. The reasoning for such a conclusion is as follows. Central banks prefer stable exchange rates. Thus, whenever an economic or political shock occurs, they intervene to prevent exchange rates from moving abruptly. Generally, they do not prevent the currency from eventually reaching its market determined price, but by "leaning against the wind," they stretch out the change in a currency's value over time. They cushion its movement to the new price.
If an investor believes that central banks will continue to promote stable exchange rates and accepts the argument that central bank interventions promote currency trending, then that investor will believe a profit can be made by purchasing a currency after it rises and selling it after it falls. The rationale is that, because of the central bank's intervention, the currency's value will continue to move in the direction it has been going until underlying market forces gradually overcome the central bank's dampening efforts.
If currency returns trend, adding value to a buy-and-hold exposure may be possible by following a dynamic strategy that generates a convex payoff function. This is illustrated in the diagram below.
The horizonral axis is the exchange rate of a currency and the vertical axis represents the returns - the conditional return of a buy-and-hold exposure to the currency and the return of a dynamic strategy that produces a convex payoff function. The buy-and-hold strategy produces a straight-line payoff function with a slot of 0.5 (because it is assumed to begin with a 50% exposure to the currency); thus if the currency were to move from a value of 1.0 to 1.2, the buy-and-hold strategy would generate a return of 10%.
As can be seen, the convex strategy outperforms the buy-and-hold strategy when the exchange rate moves significantly away from its value at inception (1.0), and the direction of that move does not matter. Thus, the dynamic strategy is appealing in an environment in which currencies trend, because trending increases the likelihood that the currency's exchange rate will move to one extreme or the other rather than fluctuate within a narrow interval.
An investor can generate a convex payoff fucntion by following a linear investment rule that increases exposure to a currency as it appreciates and decreases exposure to a currency as it depreciates. For example, suppose an investor starts out with 50% exposure to a currency and the currency appreciates 1.2%. The change in the value of the currency by itself increases the buy-and-hold exposure to 50.6%. The investor can increase this exposure exposure by multiplying the currency's return by a multiple greater than 1 and then adding this value to the initial exposure. If the multiple equals 5, the new exposure to the currency would equal 56%; that is , 50% + (1.2% x 5). If the currency declines by 1.2%, the new exposure under this rule would equal 43%. As long as the currency trends, the rule produces a convex pay-off function and adds value to a buy-and-hold strategy.
The value added as the currency trends in one direction is lost, however, during turning points when the trend changes direction unless the investor imposes a ceiling and a floor to constrain the exposure to the currency. Suppose, for example, that the investor's neutral exposure is 50%. The investor may impose a 75% ceiling and 25% floor. As the currency appreicates, the investor increases exposure to the currency unltil the ceiling is reached. As the currency continues continues to trend up, the exposure remains at 75%, thus adding value relative to the buy-and-hold exposure. At some point, the currency changes direction, however, so with this rule, the investor begins to reduce exposure to the currency. During this transition, some of the profits that accrued to the strategy as the currency appreciated are lost, but because the maximum exposure was constrained to 75%, the strategy returns to a neutral exposure relatively quickly, before all of the profits are lost. It then begins to add additional value as the exposure is reduced bellow the neutral exposure. In the same fashion, as the currency's move once again changes direction, the 25% floor serves to protect some of the added value. In general if the ceiling or floor is reached before the trend changes direction, this strategy will add value beyond a buy-and-hold strategy.
If an investor believes that central banks will continue to promote stable exchange rates and accepts the argument that central bank interventions promote currency trending, then that investor will believe a profit can be made by purchasing a currency after it rises and selling it after it falls. The rationale is that, because of the central bank's intervention, the currency's value will continue to move in the direction it has been going until underlying market forces gradually overcome the central bank's dampening efforts.
If currency returns trend, adding value to a buy-and-hold exposure may be possible by following a dynamic strategy that generates a convex payoff function. This is illustrated in the diagram below.
The horizonral axis is the exchange rate of a currency and the vertical axis represents the returns - the conditional return of a buy-and-hold exposure to the currency and the return of a dynamic strategy that produces a convex payoff function. The buy-and-hold strategy produces a straight-line payoff function with a slot of 0.5 (because it is assumed to begin with a 50% exposure to the currency); thus if the currency were to move from a value of 1.0 to 1.2, the buy-and-hold strategy would generate a return of 10%.
As can be seen, the convex strategy outperforms the buy-and-hold strategy when the exchange rate moves significantly away from its value at inception (1.0), and the direction of that move does not matter. Thus, the dynamic strategy is appealing in an environment in which currencies trend, because trending increases the likelihood that the currency's exchange rate will move to one extreme or the other rather than fluctuate within a narrow interval.
An investor can generate a convex payoff fucntion by following a linear investment rule that increases exposure to a currency as it appreciates and decreases exposure to a currency as it depreciates. For example, suppose an investor starts out with 50% exposure to a currency and the currency appreciates 1.2%. The change in the value of the currency by itself increases the buy-and-hold exposure to 50.6%. The investor can increase this exposure exposure by multiplying the currency's return by a multiple greater than 1 and then adding this value to the initial exposure. If the multiple equals 5, the new exposure to the currency would equal 56%; that is , 50% + (1.2% x 5). If the currency declines by 1.2%, the new exposure under this rule would equal 43%. As long as the currency trends, the rule produces a convex pay-off function and adds value to a buy-and-hold strategy.
The value added as the currency trends in one direction is lost, however, during turning points when the trend changes direction unless the investor imposes a ceiling and a floor to constrain the exposure to the currency. Suppose, for example, that the investor's neutral exposure is 50%. The investor may impose a 75% ceiling and 25% floor. As the currency appreicates, the investor increases exposure to the currency unltil the ceiling is reached. As the currency continues continues to trend up, the exposure remains at 75%, thus adding value relative to the buy-and-hold exposure. At some point, the currency changes direction, however, so with this rule, the investor begins to reduce exposure to the currency. During this transition, some of the profits that accrued to the strategy as the currency appreciated are lost, but because the maximum exposure was constrained to 75%, the strategy returns to a neutral exposure relatively quickly, before all of the profits are lost. It then begins to add additional value as the exposure is reduced bellow the neutral exposure. In the same fashion, as the currency's move once again changes direction, the 25% floor serves to protect some of the added value. In general if the ceiling or floor is reached before the trend changes direction, this strategy will add value beyond a buy-and-hold strategy.
Bollinger Bands
Bollinger Bands are a technical analysis tool invented by John Bollinger in the 1980s. Having evolved from the concept of trading bands, Bollinger Bands can be used to measure the highness or lowness of the price relative to previous trades.
Bollinger Bands consist of:
Bollinger Bands consist of:
- a middle band being a N-period simple moving average
- an upper band at K times a N-period standard deviation above the middle band
- a lower band at K times a N-period standard deviation below the middle band
Typical values for N and K are 20 and 2, respectively.
95% of price action will take place within the Bollinger bands and thus the Bands act as strong areas of support and resistance when the forex market is without trend. It is possible at times like this to successfully trade the price rising or falling from one Bollinger line to the other. When a trend begins and the volatility of the market increases thus the spacing of the Bollinger Bands will widen, as the trend slows down the Bollinger bands will narrow.
The use of Bollinger Bands varies wildly among traders. Some traders buy when price touches the lower Bollinger Band and exit when price touches the moving average in the center of the bands. Other traders buy when price breaks above the upper Bollinger Band or sell when price falls below the lower Bollinger Band. Moreover, the use of Bollinger Bands is not confined to stock traders; options traders, most notably implied volatility traders, often sell options when Bollinger Bands are historically far apart or buy options when the Bollinger Bands are historically close together, in both instances, expecting volatility to revert back towards the average historical volatility level for the stock.
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