Friday, 23 March 2012

Exchange Traits

A mixed bag of marbles
Since the Financial Crisis struck we have seen a mixed bag of exchange rate levels for advanced economies. With the Euro weakened by its self-induced paralysis, the sterling is relatively stronger since half of British Trade is with the EU. The above graph calculates the exchange rate as a share of an economy's trade with its respective partners; put simply, it is a measure of overall competitiveness for an economy's trading industries in foreign markets and a higher value indicates a higher price for an economy's goods and services.

With the dollar, initially we saw appreciation in the months after Lehman's Collapse as there were strong capital flows into the US from liquidation of US held foreign assets. Since then with several rounds of liquidity support by the Fed and fiscal deficits, the dollar has gradually weakened. By contrast, the Swiss Franc has been stabilised at a ceiling since the summer of last year by the Swiss Central Bank, to prevent a repeat of the drastic appreciation in mid-2011 when hot money fleeing from the then unfolding European Debt Fiasco came into the country.

The Aussie Dollar has become stronger due to two factors in play; firstly, the economy is seen as a safe haven by foreign investors and yields on Australian property, assets, and bonds are quite healthy and robust; secondly, there is an extraordinary demand for Australian commodities from Asian Economies. With world prices for several commodities sky high, Australian terms of trade has drastically improved too.

The Yen is a paradox given the weak health of the Japanese Economy since the Earthquake of March 2011, and its first merchandise trade deficit since 1963 reported last year. The strength of the Yen is most probably due to the unfolding of the Carry Trade. Such arbitrage trade is done with enormous volumes of capital borrowed from low-interest economies, like Japan, and invested in high-yielding currencies, such as the Aussie Dollar. Foreign exchange trading, much of which is conducted here from London, has been wounded by the unravelling of the Financial Crisis.