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  1. 1. Fundamentals of Business & Financial Journalism Week 4: Covering foreign exchange & bond markets Jeffrey TimmermansMonday, 8 October, 12
  2. 2. Group Projects Banking Property Retail Transport Cherie Karthie Emma Jasmine Harkua Mimi Sandor Yudi Jill Sam Tandis Zack ZhouMonday, 8 October, 12
  3. 3. 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/JPYMonday, 8 October, 12
  4. 4. Uses of foreign currency ✤ Trade ✤ Overseas investment ✤ speculate on future changes in the relative value of foreign currenciesMonday, 8 October, 12
  5. 5. 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 tradeMonday, 8 October, 12
  6. 6. Current major forex rates USD JPY EUR GBP CHF USD 1 78.65 0.7673 0.6200 0.9298 JPY 0.0127 1 0.0097 0.0079 ? EUR 1.3033 113.97 1 0.8075 1.2119 GBP 1.6132 126.88 1.238 1 ? CHF 1.076 ? 0.8251 ? 1 Source: Reuters, 7 Oct. 2012Monday, 8 October, 12
  7. 7. Forex market data Reuters 3000 summary view of global forex spot ratesMonday, 8 October, 12
  8. 8. Causes of Forex moves ✤ Interest rates 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. MossMonday, 8 October, 12
  9. 9. 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 currencyMonday, 8 October, 12
  10. 10. The Banking System Prime rate Commercial Home/car Bank Loans Interbank Commercial Bank rate Interbank Commercial market Bank Deposits Commercial Deposit rate Bank Business Discount loans Discount rate window +$ –$ Commercial lending rate Base rate Central determined by Bank money supplyMonday, 8 October, 12
  11. 11. Benchmark interest rates ✤ Base rate (Fed Funds rate) ✤ Interbank rate (Libor) ✤ Government bonds (Treasurys) ✤ U.S. Treasurys considered risk-free ✤ Money market rate (Commercial paper) ✤ Prime lending rateMonday, 8 October, 12
  12. 12. 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) currencyMonday, 8 October, 12
  13. 13. 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 goodsMonday, 8 October, 12
  14. 14. 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. MossMonday, 8 October, 12
  15. 15. SEPTEMBER 21, 2010 Dollar Falls on Euro By ANDREW J. JOHNSON Change 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 Tuesdays meeting of the Federal Reserve. Cause While the Feds policy-setting committee isnt expected to announce additional programs involving asset purchases to boost liquidity, the mere possibility of such Expectations 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 dollars other rivals to advance. A Japanese Context 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 its unclear what thats going to be," said Nick Bennenbroek, head of currency strategy at Wells Fargo in Comment 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 Future 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.Monday, 8 October, 12
  16. 16. 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’sMonday, 8 October, 12
  17. 17. Bond markets ✤ Bonds are quoted in prices and yields ✤ Prices and yields move in opposite directions: if the price goes up, the yield goes down ✤ The coupon represents the regular interest payment received by bond purchasers ✤ The coupon is fixed, but the yield will vary based on price ✤ Most bonds are issued at a price of 100 ✤ Therefore, at issue yield and coupon are equalMonday, 8 October, 12
  18. 18. 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 issuerMonday, 8 October, 12
  19. 19. Ratings agencies ✤ Three major agencies: Standard & Poor’s, Moody’s & Fitch ✤ Rate countries (sovereigns), companies, and individual debt products ✤ Can change “outlook” on ratings as well as ratings themselves ✤ Outlook can be revised to positive or negativeMonday, 8 October, 12
  20. 20. Debt (bond) ratings An obligation rated AAA has the highest rating assigned by Standard & Poors. The obligors capacity to meet AAA 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 obligors AA 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. A However, the obligors capacity to meet its financial commitment on the obligation is still strong. Exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances BBB 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 BB 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 B 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, CCC financial, and economic conditions for the obligor to meet its financial commitment on the obligation. CC 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 C have payment arrearages, or obligations of an issuer that is the subject of a bankruptcy petition. D An obligation rated D is in payment default. Source: Standard & Poor’sMonday, 8 October, 12
  21. 21. Typical maturities of Treasurys ✤ One month ✤ Five years ✤ Three months ✤ Seven years ✤ Six months ✤ Ten years ✤ One year ✤ Twenty years ✤ Two years ✤ Thirty years ✤ Three yearsMonday, 8 October, 12
  22. 22. 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 ✤ The higher inflation is likely to be, the more yield investors will demand ✤ 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 maturityMonday, 8 October, 12
  23. 23. Yield curves Yield Yield Normal Inverted Maturity Maturity Yield Yield Humped Flat Maturity MaturityMonday, 8 October, 12
  24. 24. Yield curve for U.S. Treasurys Yield Maturity Source: Bloomberg, 7 Oct. 2012Monday, 8 October, 12
  25. 25. Bond market comment Treasuries Fall for Third Day on Speculation Europe to Counter Debt Crisis By Emma Charlton and Wes Goodman - Sep 27, 2011 Treasuries dropped for a third day as speculation that Europe’s leaders are closer to agreeing on new measures to counter the region’s crisis cut demand for the safest assets. Thirty-year bonds led the market lower, extending their run of declines to the longest in a month, as the government prepared to sell $99 billion of notes this week. Treasury Secretary Timothy F. Geithner predicted yesterday European officials will increase efforts to tackle the debt crisis that is threatening economic growth globally. A flight to safety sparked by Europe’s turmoil pushed 10-year rates to a record low last week. “Treasuries are suffering because of the improved risk sentiment in the market and there is also some supply coming,” said Niels From, chief analyst at Nordea Bank AB in Copenhagen. “Speculation that there could be some policy action in Europe has improved risk sentiment. It remains very fragile and any comments going in the opposite direction may change it very quickly again, especially if we don’t see any action.” The 30-year yield rose five basis points to 3.05 percent at 10:03 a.m. in London, according to Bloomberg Bond Trader prices. The 3.75 percent security due August 2041 slid 1 1/8, or $11.25 per $1,000 face amount, to 113 23/32. The last time bonds fell for three days was the period ended Aug. 24. Ten-year rates climbed four basis points to 1.94 percent, after touching 1.95 percent, the most since Sept. 21. They have gained on each of the past three days after falling to a record 1.6714 percent on Sept. 23.Monday, 8 October, 12