A tutotial on US$...
by, 13th-August-2009 at 07:12 PM (1619 Views)
** one possible reason why EUR is holding well at this level is the market belief that the Chinese are shifting part of their investment from US$ to EUR as a form of diversification.REERs and current accounts see USD undervalued vs EUR and JPY
Historically, currency interventions by the G3 countries – US, Europe and Japan –
have followed one key pattern: they were aimed at correcting major misalignments
in real effective exchange rates (REERs). Put simply, intervention supported the
weakest (or fastest depreciating) G3 currency in real trade-weighted terms.
If the G3 mount a concerted intervention today, it would be to support the dollar.
On a REER basis, the USD is undervalued against both EUR and JPY. This is inconsistent
with the improvement in the US current account deficit, and the deterioration in
the current account of Eurozone and Japan.
• The current account deficit in the Eurozone has deteriorated to levels not seen
since 2000. That’s where similarities end. Back then, confidence in the EUR was
so poor that it required concerted G3 interventions to support the single currency.
Today, Eurozone is facing the reverse problem – the EUR is extremely strong on
REER basis. The EZ current account deficit continued to deteriorate into 2009. In the first
five months of this year, the shortfall totalled Eur64.7bn, more than two-thirds
the Eur93.8bn deficit reported for the whole of 2008. The full-year deficit for
2008 was worse than the Eur91.0bn gap seen in 2000.
• Japan reported, for the first time since 1980, a trade deficit for three straight
quarters from 3Q08 to 1Q09. Without the traditional support from trade surpluses,
the JPY should have depreciated sharply. Instead, the JPY appreciated because
of the global crisis forcing JPY-funded carry trades to unwind. Although the
trade deficit reversed back into a surplus in 2Q09, it remains to be seen if they
could return to the high levels seen before the global crisis.
• The US trade deficit, which accounts for more than 90% of its current account
deficit, has narrowed to levels not seen since 2001. This suggests scope for more
recovery in the USD.
The favorite currency for carry trade is the Australian dollar (AUD). Before this
crisis, the AUD’s bounce from its bottom has traditionally followed a modest
appreciation path. The rise we have seen this year is abnormally strong. Based
on its close of 0.8370 on August 7th, AUD/USD is some 17-25% above the 0.67-
0.71 range seen in past rebound cycles.