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  1. 1. Jeffrey TimmermansGlobal Financial JournalismWeek 10: Covering foreign exchange & bond marketsThursday, 18 April, 13
  2. 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/JPYThursday, 18 April, 13
  3. 3. Uses of foreign currency✤ Trade✤ Overseas investment✤ speculate on future changes in the relative value of foreigncurrenciesThursday, 18 April, 13
  4. 4. Current major forex ratesUSD JPY EUR GBP CHFUSDJPYEURGBPCHF1 98.370 0.7669 0.6160 0.93170.0102 1 0.0078 0.0076 ?1.3040 127.844 1 0.8554 1.28071.5244 149.452 1.1690 1 ?1.0733 ? 0.7598 ? 1Source: Reuters, 18 Apr. 2013 11:00pm HKTThursday, 18 April, 13
  5. 5. Forex market dataReuters 3000 summary view of global forex spot ratesThursday, 18 April, 13
  6. 6. The (relative) price of a currency✤ Currencies have a “price” like other assets, but it’s only measuredrelative 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 investmentopportunities in that country✤ Inflation & interest rates impact this demand, as well as tradeThursday, 18 April, 13
  7. 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 appreciationSource: “A Concise Guide to Macroeconomics” by David A. MossThursday, 18 April, 13
  8. 8. Interest rates✤ Interest rates, and money supply, are the main monetary policy toolsof governments/central banks✤ The main goals of monetary policy are low, steady inflation andlow 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 thehigher-yielding currencyThursday, 18 April, 13
  9. 9. Inflation✤ Measures how the purchasing power of a currency changes over time✤ An overheated economy, or mismanaged monetary policy, can lead toinflation✤ High inflation erodes purchasing power, and leads to a “cheaper” (i.e.weaker) currencyThursday, 18 April, 13
  10. 10. Trade✤ Demand for a country’s goods & services from overseas will tend tolead to a trade surplus and an appreciation in that country’s currencyas overseas consumers need that currency to buy those goodsThursday, 18 April, 13
  11. 11. NEW YORK—The dollar fell against most of its rivals Monday as worries about a newround of economic stimulus prompted investors to adopt a defensive stance ahead ofTuesdays meeting of the Federal Reserve.While the Feds policy-setting committee isnt expected to announce additionalprograms involving asset purchases to boost liquidity, the mere possibility of suchmeasures weighed on the dollar.The statement that the Federal Open Market Committee will issue at the conclusion ofits regular meeting has taken precedence over lingering euro-zone sovereign-debtissues, allowing the euro and most of the dollars other rivals to advance. A Japaneseholiday kept yen trading light, with investors still keeping one eye out for moreJapanese intervention."There is a sense the Federal Reserve might be up to something, but its unclear whatthats going to be," said Nick Bennenbroek, head of currency strategy at Wells Fargo inNew York.As is customary ahead of an FOMC announcement, investors were exercising cautionand most currencies remained within narrow ranges. If anything, investors bet the Fedwill be more proactive and surprise the market Tuesday, Mr. Bennenbroek said. Hecited the decision in August to reinvest principal payments on mortgage-related debtinto 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 DaraghMaher, deputy head of global foreign-exchange strategy at Crédit Agricole CIB inLondon.Late Monday, the euro was at $1.3064 from $1.3039 from late Friday. The dollar was at85.70 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 1.0098francs.ChangeCauseExpectationsContextCommentDollar Falls on EuroBy ANDREW J. JOHNSONFutureSEPTEMBER 21, 2010Thursday, 18 April, 13
  12. 12. What’s a bond?✤ Debt issued by governments, corporations and “supranationals” likethe 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 thebond✤ Bonds can be, and often are, traded before they mature✤ Bonds are typically given a credit rating by S&P or Moody’sThursday, 18 April, 13
  13. 13. Bond markets✤ Bonds traded on an exchange are quoted in prices and yields (thetotal 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 comparisonThursday, 18 April, 13
  14. 14. Causes of bond moves✤ Interest rates✤ As coupons of bonds are fixed, their price tends to decline asinterest rates rise (meaning new bonds will likely have a highercoupon)✤ Inflation✤ Inflation raises real interest rates, and reduces the value of theprinciple returned✤ Financial health of issuerThursday, 18 April, 13
  15. 15. Debt (bond) ratingsAAAAAABBBBBBCCCCCCDAn obligation rated AAA has the highest rating assigned by Standard & Poors. The obligors capacity to meetits financial commitment on the obligation is extremely strong.An obligation rated AA differs from the highest-rated obligations only to a small degree. The obligorscapacity 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 obligors capacity to meet its financial commitment on the obligation is still strong.Exhibits adequate protection parameters. However, adverse economic conditions or changing circumstancesare 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 facesmajor 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 currentlyhas 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 thathave 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’sThursday, 18 April, 13
  16. 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 yearsThursday, 18 April, 13
  17. 17. Curves & Spreads✤ The yield curve of a bond issuer reflects expectations of futurechanges in rates✤ For government bonds, the yield curve reflects expectations ofinflation✤ A spike in the curve can reflect the time horizon of any marketconcern✤ Spreads measure the risk premium of a particular bond over a risk-free bond of the same maturityThursday, 18 April, 13
  18. 18. Yield curvesYieldMaturityYieldMaturityYieldMaturityYieldMaturityNormalHumpedInvertedFlatThursday, 18 April, 13
  19. 19. Yield curve for U.S.TreasurysYieldMaturitySource: Bloomberg, 8 Apr. 2012Thursday, 18 April, 13
  20. 20. Bond spreads✤ Compares the relative yields oftwo bonds of the same maturitybut different issuer✤ Measured in basis points(hundredths of a percentage pt)✤ Can illustrate relative riskiness✤ Changes in spreads canillustrate changes in investorsentiment -150-75075150225300Japan Germany France Italy GreeceGlobal government bonds(spread over Treasurys)Source: FT, 18 Apr. 2013Thursday, 18 April, 13
  21. 21. TED Spread✤ Difference between three-month Libor and three-monthTreasuries✤ Wider spread indicatesnervousness about the bankingsystem✤ Spread typically between 15-50basis pointsSource: Bloomberg100200300400500Thursday, 18 April, 13