Monthly Archives: December 2011

Mirror, mirror on the wall, what’s the fairest currency of them all? The Brothers Grimm in “Snow White” posed that question about the queen’s beauty, but in the financial world, Germany’s Deutsche mark had been one of the strongest and handsomest monetary units in the land.

As the euro zone crisis continues, German Chancellor Angela Merkel and French President Nicolas Sarkozy have issued an ultimatum to the 27 European Union governments, saying they need greater control of their national budgets by Dec. 9. If countries don’t participate, the 17-member euro zone will progress with plans for amendments to fiscal treaties aimed at creating a tighter and more integrated union. While Germany spearheads reforms, Standard & Poor’s warned that credit ratings for European nations, including Europe’s economic powerhouse of Germany, could drastically fall if agreements to the financial crisis aren’t reached.

A history dating back to 1871, the Deutsche mark’s official user is Germany, with unofficial users Bosnia, Montenegro and Kosovo. This is our fifth post in our series about “currency culture,” where we examine the history of different world currencies and how they play a role in popular culture (see our previous posts about Britain’s pound sterling, Italy’s lira, Switzerland’s franc and Greece’s drachma). With an introduction as melodic as Ludwig van Beethoven’s Symphony No. 9, here are some interesting facts about the mark:

  • Commonly called the “Deutschmark” in English; called the “Mark” or “D-Mark” in German
  • Introduced June 20, 1948, by Ludwig Erhard, late chancellor of Germany, and replaced the Reichsmark
  • Symboled as “DM”
  • Banknotes of DM 5, DM 10, DM 20, DM 50, DM 100, DM 200; coins of 1 pf, 2 pf, 5 pf, 10 pf, 50 pf, DM 1, DM 2, DM 5, DM 10
  • Deutsche Bundesbank, the central bank of Germany, is referred to as “Buba” (from Budesbank)
  • Banknotes observe notable Germans such as fablers Jacob Grimm and Wilhelm Grimm, writer and novelist Bettina von Arnim, scientist Paul Ehrlich, naturalist Maria Sibylla Merian and mathematician Johann Carl Friedrich Gauss
  • Construction costs of Neuschwanstein Castle—the inspiration for Disneyland’s Sleeping Beauty Castle—during the lifetime of King Ludwig II totaled 6.2 billion deutsche marks
  • Signal Iduna Park, considered to be the “Opera House of German Football,” has an estimated price tag of 35 million deutsche marks
  • Deutsche Bank is a leading global investment bank in Germany, Europe, North America and Asia and title sponsors the professional golf tournament Deutsche Bank Championship held Labor Day weekend in Norton, Mass.
  • Taxi fare from Berlin Schoenefeld International Airport to the city of Berlin costs about 60 to 70 deutsche marks
  • Costs zero deutsche marks to enter Oktoberfest, the most famous event in Germany and the world’s largest fair (the beer, however, is not free)

Like a Mercedes-Benz, we hope these facts “mark” some new luxurious currency knowledge as your drive to master the financial markets continue.

 

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

I had a chat with a reporter from Smart Money the other day. She wanted to know what kind of impact the big move in EUR/USD on Wednesday following the announcement of improved dollar swap line terms would have had on forex market participants. It was a pretty easy question to answer. After all, a 200+ pip move in either direction is always going to catch half the market in a bad spot. The speed of the appreciation in EUR/USD (and other markets) in and of itself is evidence that a lot of standing orders (stops) were tripped to accelerate things along.

Of course that brings up the subject of risk management.

No matter whether you're an investor or a trader, the current market situation is a challenging one. The market is hyper-responsive to news, especially news that has to do with the Euro Zone.

Witness Monday's market reaction to word that S&P was going to put the EZ countries on negative credit watch. Was that really a significant market development? No. Just as the swap line news from last week wasn't something that altered the fundamental economic and political landscape in Europe. Nor was it something that represented a meaningful change in dollar or euro supply/demand considerations. All it did was ensure that a worst case scenario of a major bank failure due to lack of dollar funding wouldn't happen. That's why there was no follow-through.

 

 

Too often, the headlines we're seeing these days serve as reasons for short-term traders to pile in and out of positions, creating lots of volatility. This needs to be accounted for by participants at every level of involvement.

While it's true that the forex market isn't any more risky than any other market, and is less so than most, it can still hurt you badly if you aren't careful about your exposure. The EUR/USD move on the swap line news was close to 2%. A trader using 50:1 leverage would have been completely wiped out by that if he didn't have protection against that kind of move. Even a position half that size would have seen an account lose 50% of its value in less than an hour.

Whether it's through hedging in some fashion or trading smaller positions (potentially with wider stops), forex market participants these days need to guard against the market's volatility. With volumes likely to drop as we head deeper into the holiday season, the potential for rapid directional moves will only tend to increase in the weeks to come.

 

Major activities in the euro zone economic crisis, including proposed amendments from European leaders and austerity packages from Italy, topped our transaction of the biggest currency markets headlines.

France and Germany spearheaded negotiations about new fiscal plans for the 17-member euro zone, issuing proposed amendments to Europe’s governing treaties to provide better economic governance to nations. Meeting at Élysée Palace in France, French President Nicolas Sarkozy and German Chancellor Angela Merkel prepared proposals they would deliver to the full European Union Dec. 8. Some proposed amendments include automatic penalties for countries that exceed European deficit limits as well as the creation of a monetary fund for Europe. Sarkozy said he hoped the treaty changes would be ready for ratification as early as March 2012.

On Dec. 4, Italian Prime Minister Mario Monti unveiled for his country a 30-billion euro austerity package, which includes raising taxes and the pension age, in hopes of harnessing the euro zone crisis. He said the package was painful, but important, as he also renounced his own salary as prime minister and economy minister. Late last week, Sarkozy spoke to French voters about the economic slowdown and rising unemployment. His speech came on the heels of remarks from European Commissioner for Economic and Monetary Affairs Olli Rehn about the euro zone entering a “crucial” 10-day period. During this time, nations must focus on building “convincing” financial protections and tightening economic governance, as Sarkozy and Merkel have outlined.

While Italy, France and Germany devised reforms, Greeks returned to simpler ways of life. Because of Greece’s debt, many inhabitants have defaulted to bartering. In the small fishing village of Volos, which is about 200 miles north of Athens, many residents have been buying and selling goods from each other and vowing to neighbors during harsh economic times. In the United Kingdom, the British pound sterling emerged as a safe haven for investing because demands for British government bonds rose. Investors also turned to the pound sterling because it was up 2.1 percent against the euro since early September.

Across the Atlantic, the United States saw some signs of hope for jobs. According to the U.S. Labor Department, unemployment dropped to 8.6 percent. In November, 120,000 jobs were added, up from 100,000 from October. The good news was that the American economy grew, even though conditions abroad waned. But what weren’t waning were the wallets of some Connecticut hedge fund managers who won a $254-million Powerball drawing. The three winners pocketed the state’s biggest lottery ever and have donated some of the money to people in need.

 

 

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Market pressures continue to escalate in the euro-zone and, an economic downturn across the region is all but certain at this juncture.  Strong global interdependence amongst economies, through financial interconnections and trade linkages, threatens to propagate the adverse shock across the world relatively quickly and, could derail the upturn in global economic activity that began more than two years ago.

Indeed, the Chinese Vice-Premier, Wang Qishan, was recently reported as saying that a, “long-term global recession is certain to happen,” and, that the downturn “caused by the international financial crisis will be chronic.”  Wang’s comments on the global economic outlook are the most bearish ever made by a leading Chinese decision-maker but, they have been dismissed by most observers as hyperbole.

However, the dismantling of the global decoupling thesis at the height of the financial crisis three years ago, suggests that the downbeat forecast should not be taken so lightly.  Indeed, the world economy is more integrated today than at any time in modern history and, the emergence of global supply chains has magnified the impact of slowing final demand on trade.

The changing nature of the global competitive landscape in recent decades has seen international trade become much more than a simple exchange of merchandise between countries.  Supply chains have become increasingly fragmented across several countries to take advantage of regional specialisations and low production costs in emerging countries.

Intermediate goods or components for further assembly are manufactured in a number of locations and, shipped to a central hub for final assembly and, eventual re-export to end-consumers in the rest of the world.   These extended supply chains virtually ensure that a drop in demand in one region is transmitted relatively quickly to another.  Importantly, the so-called ‘bullwhip’ effect means that the negative shock is amplified through the supply chain into large swings in demand the further one moves away from the final consumer.

The ‘bullwhip’ effect was first identified more than half a century ago by Ruth Mack, an economist with the National Bureau of Economic Research, in her landmark study of the shoe, leather and cattle hide sequence.  At the time of Mack’s study, the demand for shoes was moderately cyclical, where consumers often postponed purchase during challenging economic times and, had their old shoes repaired instead.

The resulting slowdown in demand growth led to an excess supply of shoes and leather among shoemakers, which triggered production cutbacks and a decline in orders for leather, which is made from cattle hides.  The actual fall in the demand for leather translated to a sharp decline in the demand for and the price of cattle hides.

The Economic Cycle Research Institute notes that the ‘bullwhip’ effect occurs when “relatively mild fluctuations in end demand are dramatically amplified up the supply chain, just as a flick of the wrist sends the tip of a bullwhip flying in a great arc.”  The crack of a real bullwhip is in fact, “the sound of its tip breaking the sound barrier while travelling at over 1,500 km/hour.”

Prior to the financial crisis, it was widely believed that modern just-in-time inventory techniques had tamed the inventory cycle and thus, contributed to the observed moderation in economic volatility.  The subsequent turmoil however, revealed that extended supply chains across borders had in fact, revived the ‘bullwhip’ effect, such that a decline in consumer demand in the developed led to an unprecedented collapse in word trade and, a sharp drop in industrial production in export-based economies across the emerging world.

The impact was particularly pronounced in developing Asia, where the region’s production-driven model had seen its export share of pan-regional GDP jump by more than 10 percentage points in less than a decade to a record high of 47 per cent in 2007.  The export-led growth and dependence on end-user demand in the developed world exposed the region to the worst of the potential demand destruction arising from the ‘bullwhip’ effect.

Advocates of global decoupling – the idea that emerging Asia could withstand a recession in the developed world – highlighted the fact that intra-regional trade accounted for almost one-half of the region’s total exports in 2007 but, failed to take account of the large trade in intermediate goods to a central hub for further assembly and, subsequent export to the developed world.  The facts showed that more than 70 per cent of end-user demand was generated outside of Asia, with the U.S. and Europe accounting for almost two-thirds of the external demand.

Evidence from the financial crisis reveals that it is wishful thinking to believe that the emerging world can withstand a severe recession in the euro-zone.  Europe is the world’s top export destination and is the end-market for almost one-quarter of total Asian exports.  The ‘bullwhip’ effect ensures that a decline in European demand will be amplified through the supply chain and, inevitably precipitate weakness in industrial production trends across the export-based developing world and, declining prices for the producers of raw materials elsewhere.

Investors should note that the global decoupling thesis is bunkum.

Previously posted on www.charliefell.com


Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Big Ben, Tower Bridge and The London Eye are icons of Great Britain, but there’s also an interesting culture about its currency, the British pound sterling—and it doesn’t require traveling on a double-decker bus to learn.

As the European economic crisis continues, the United Kingdom is emerging as a safe haven for investing. Demands for British government bonds are rising and attention is now being turned to the pound because it’s up 2.1 percent against the euro since early September. But Britain, like so many other euro zone nations, is facing its own economic challenges and is implementing austerity measures that are causing anger. These actions are prompting the country’s first general strike in many years.

A history dating back to 1158 during King Henry II’s rule, the British pound users include the U.K, its Crown Dependencies (the Isle of Man and the Channel Islands), the British Overseas Territories of South Georgia and the South Sandwich Islands. This is our fourth post in our series about “currency culture,” where we examine the history of different world currencies and how they play a role in popular culture (see our previous posts about Italy’s lira, Switzerland’s franc and Greece’s drachma). With an introduction as regal as Buckingham Palace, here are some interesting facts about the pound sterling:

  • Formally called British pound sterling; abbreviations “ster.” and “stg.” are sometimes used
  • Sterling component is the result of the sterling silver metal that composed the old coins
  • World’s oldest currency still in use
  • History dates to 1158 when England’s King Henry II introduced new metal coins to replace silver pennies that had been previously circulated for centuries
  • Sterling is the fourth most-traded currency in the foreign exchange market (after the U.S. dollar, euro and Japanese yen); the third most-held reserve currency in global services
  • Banknotes include denominations of £5, £10, £20, £50; coins of 1p, 2p, 5p, 10p, 20p, 50p, £1, £2
  • The royal wedding of Prince William and Kate Middleton was rumored to have cost as much as 80 million pounds, compared to the wedding of Prince Charles and Diana Spencer, which was priced at about 4 million to 30 million pounds
  • “The Twilight Saga: Breaking Dawn Part 1” shattered U.K. box-office records, sucking in 13.9 million pounds
  • British actor and Harry Potter star Daniel Radcliffe has earned 51.8 million pounds during his career, making him Britain’s richest and youngest entertainer
  • The 2012 London Olympic Games is reported to have a contingency budget of 2.7 billion pounds, and finances for security at the event are expected to rise by about 275 million pounds (about double the original estimate)

Like a course at Oxford University, we hope these facts are now pound-ed into your currency intelligence for your next tea-and-crumpet conversation. Until next time, cheerio!

 

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.