Pakistan faces bankruptcy with $3bn forex reserves: report

London, Oct 7 (IANS) Pakistan’s foreign exchange reserves are on the brink at a mere $3 billion - enough to buy only a month’s supply of oil and food, a newspaper reported Tuesday.The Daily Telegraph said that on paper the country’s central bank holds $8.14 billion of foreign currency, but if forward liabilities are included, the real reserves may be only $3 billion.

It said Pakistan had $16 billion of foreign exchange nine months ago, but high oil prices “have combined with endemic corruption and mismanagement to inflict huge damage on the economy”.

The report comes after President Asif Ali Zardari told the Wall Street Journal newspaper his country needs a $100 billion bail out package.

“If I can’t pay my own oil bill, how am I going to increase my police? The oil companies are asking me to pay $135 [per barrel] of oil and at the same time they want me to keep the world peaceful and Pakistan peaceful,” Zardari said in an interview published Saturday.

The Daily Telegraph said Pakistan’s efforts to defer payment for 100,000 barrels of oil supplied every day by Saudi Arabia have not yet yielded results, and that the government has failed to raise loans on favourable terms from “friendly countries”.

It said Zardari is expected to ask the international community for a rescue package at a meeting in Abu Dhabi next month.

Paul Monroe Says

Thanks, BJ. I enjoyed reading through that discussion - I doubt there are many Congressional candidate’s websites were so much interesting commentary can be found.
There certainly is a potential danger in inflating a currency, but I think that banks would realize that if they provide a bank note which has an unstable value or which devalues over time, people would be more reluctant to use it.
I don’t think that the supply of a bank’s notes would fluctuate much in practice, as banks would likely settle on a ratio and would probably not alter it much from there.
Also, doesn’t the discovery of gold confiscate the purchasing power of gold? The same goes with any other commodity. I think the morality argument applies more with the current system since it is a policy decision to debase the value of the currency. Even still, it is certainly debatable that it would also be immoral in a “free banking” system.

Dave Knaack Says

Regarding fractional reserve lending. After spending lots of time reading about how banking systems work (including lots of really dry stuff like international settlement systems) I’ve come to the conclusion that fractional reserve practices fill critically important and likely delicate roles in highly interconnected and critical global systems and that leading the charge to change those rules would be tilting at windmills. This is not the sort of problem where we should write a new system, reinstall and reboot.
We should instead address one of the major flaws of the system, the accumulation of debt in excess of the money supply (think of it as an in-memory patch).
Perhaps this issue could be solved with by tasking the Treasury with issuing into circulation of non-debt dollars in a quantity equal to the interest paid for each reporting period (quarterly I’d suppose).
I’m not convinced that the ‘boom and bust’ cycle is solely the result of Fed control of the monetary system (seems to me that complex social factors probably also play in important role; consider the development of CDOs and MBSs), or that it is /necessarily/ a bad thing. Booms encourage and enable new ideas (lots of money available results in funding of wild and harebrained ideas that just might work but that wouldn’t be able to pay off in an environment of higher interest rates one would expect in a completely stable economy), and busts weed out marginal or weak practices (the harebrained ideas). The cycle (provided it describes mild recessions rather than Great Depressions) may help to prevent stagnation.
What is bad is that in conjunction with the current practice of creating only principle rather than principle+interest the system can be managed to (or perhaps must) cause an accumulation of debt obligation toward the entities permitted to practice fractional reserve lending.
Perhaps we can greatly improve the system simply by causing to exist each quarter all the money required to pay off the interest on loans. This would begin the injection of credit money into the system with minimal impact on business.

Forex Achieves New Prominence

The credit crisis has resulted in a collapse in prices for nearly every type of investable asset class (i.e. stocks, bonds, commodities, real estate)- with the notable exception of one: currencies. Of course, this is an inherent quality of forex: a rise in one currency must necessarily be offset by a fall in another currency. While you are probably rolling your eye at the obviousness of this observation, it is still worthwhile to make because it implies that there is always a bull market in forex. Accordingly, capital from both institutions and retail investors continues to pour in, causing daily turnover to surge by 41% (according to one survey), which would imply a total of $4.5 Trillion per day!
Investment banks, especially, are trying to increase their forex business in order to compensate for a decline in other divisions. Said one representative: ”We have probably made more of an aggressive leapfrog in growing our revenue base, which has virtually doubled in 2008 versus 2007. With the situation that has been developing over the past six months, where banks are clearly re-embarking on a new role leading back to basics, foreign exchange has to be one of the products that tops that list.” Based on New York data, which generally reflects global forex activity, transactions between the Dollar, Euro, and Yen (i.e. not including outside currencies) now account for more than half of the total.
Contrary to popular belief, however, most foreign exchange transactions involve derivatives, rather than spot trades. In the case of swaps, it is the nominal value of the swap that is reported, which well exceeds the total amount of currency that is exchanged, and thus results in an inflated estimate of total daily turnover. One would expect that the increase in both liquidity and the role of derivatives in forex markets would result in a corresponding decrease in volatility. Of course, this is quickly belied by the turbulence of the last six months, in which many currency pairs set daily, weekly, and/or monthly records for swings and volatility. I recently read an article about so-called “predictive markets,” which use a grassroots approach to make forecasts by “by giving people virtual trading accounts that allow them to buy and sell “shares” that correspond to a particular outcome. Shares in an outcome that is considered more likely to occur then trade at a higher price than those that represent a less likely outcome.” Given that the “experts” are almost invariably wrong, I think this idea has tremendous potential to make forex markets even more transparent.

Spike in Eastern Europe is Short-Lived

Last week, the currencies of Eastern Europe (Hungary, Poland, Czech Republic, etc.) received a nice bump from the announcement of a $25 Billion loan from several multilateral banks, as well as from a slight pickup in risk aversion. The sense of optimism proved to be short-lived, however, as the EU recently rejected a request to provide large scale ($200 Billion+) assistance to the the region. The swift and decisive refusal to intervene injected a fresh wave of uncertainty into a region that is already among the hardest-hit from the credit crisis. The move also carried important political implications, conveying that the EU still sees a clear distinction between eastern and western Europe. Bloomberg News reports:Growth in Poland, the biggest eastern European economy, will slow to 2 percent, the slackest pace since 2002, the European Commission forecasts. Latvia, a former Soviet republic, will contract 6.9 percent.

Fundamentals Catch up with Yen

In hindsight, it is now clear that the Japanese Yen’s dramatic rise in 2008 was mostly due to financial, rather than economic factors. In other words, a decline in risk aversion led to the unwinding of the Yen carry trade and a subsequent inflow of capital into Japan. Unfortunately, the recession and inflated currency have since taken their toll on the Japanese economy, resulting in an annualized 13% contraction in GDP for the latest quarter. The balance of trade has also shifted, to such an extent that Japan actually recorded a trade deficit in the most recent month. Having concluded, for the moment at least, that forex intervention is no longer necessary, the Central Bank has announced plans to deploy some of its $1 Trillion+ forex reserve hoard to help ailing companies. Barron’s reports:A reversal of the yen, from strength to weakness, will have “major global implications…” Perhaps beleaguered Japanese authorities already have begun reacting to the “carnage” the yen’s rise has wrought.

Dollar Retains Safe Haven Status

The ForexBlog recently reported that investors were cautiously wading back into emerging market currencies. In hindsight, it looks like this report was delivered prematurely, as this week marked a return to the notion of the Dollar as save haven currency, having displaced even the Japanese Yen. While President Obama did his best to assure taxpayers and investors that the economic stimulus would bring the economy out of its slump, the markets were unconvinced. Economic data, especially as it pertains to the housing market, has become increasingly grim, and even Chairman Bernanke of the Federal Reserve conceded that a recovery is unlikely before 2010. Given that the government will have to issue a tremendous quantity of Treasury Bonds in order to fund its ambitious spending plans, however, it’s possible that foreign investors will soon lose their appetite for low-yielding American securities. Reuters reports:
Any optimism that the global economy could be recovering, however, should prompt investors to sell the dollar and buy riskier assets and currencies.”When panic and risk aversion abate, money will start flowing into other regions such as Europe,” said a portfolio manager.

Forex is a Zero-Sum Game

I recently stumbled across an article that argued that forex trading is not a zero-sum game. The author is (unwittingly) correct in his conclusion, although not in his reasoning that it is possible for a trade to produce two winners. The conclusion verged on truth only because after accounting for broker commissions (i.e. the bid/ask spread), forex trading is actually a negative-sum game. It is important to recognize that the nature of forex is such that all currencies cannot simultaneously appreciate, and hence, every trade involves a winning party and a losing party. Even if all parties manage to break even over the long run, the existence of spreads and commissions ensures a long-term average return that is negative. This does not mean that it is impossible to to profit in forex, but rather that the profits of the winners are underwritten by the losers. While one cannot expect to always occupy the winning side, there are steps that can be taken to minimize being on the losing side. Admittedly this is vague; the idea here is simply that it’s vitally important to be well-informed when investing in forex so as to enter and exit trades only at levels that are “fundamentally” sound.

Asia Forms Forex Pool

After nearly six months of currency depreciation, the nations of Asia have finally been spurred to action. Japan, China, and South Korea have joined together with the 10 ASEAN economies to form a $120 Billion pool of foreign exchange reserves, which contributors can tap into to protect their currencies. The goal is to prevent capital flight and currency weakness from engendering the same kind of financial crisis that only 10 years ago ravaged Asia. Fortunately, this time around, the 13 countries possess a combined $3.6 Trillion in reserves, which can be deployed in forex and securities markets in order to restore investor confidence. Ironically, the bulk of these reserves belong to China and Japan (who are also funding a large portion of the forex pool), both of whose currencies remain strong in spite of the crisis. Bloomberg News reports:
The fund is aimed at ensuring central banks have enough to shield their currencies from speculative attacks such as those that depleted the reserves of Indonesia, Thailand and South Korea during the 1997-1998 financial crisis.

Investors Return to Emerging Markets

In the last few weeks, investors have waded cautiously back into emerging markets. Spurred in part by the Obama economic stimulus plan and pending US investment in Citigroup, investors have evidently been persuaded to take on more risk. The Japanese Yen, accordingly, has already begun to beat a retreat from the highs it reached earlier this year. If this trend continues, the US Dollar could become the next “victim.” On the other side of the equation are currencies such as the South African Rand, which have benefited from a renewed interest in yield, as well as increased monetary stability driven by lower inflation. Ultimately, this movement of capital can just as easily reverse itself, which it no doubt will at the next economic hiccup. Bloomberg News reports:
“There is a little more risk appetite,” said..an analyst. “The rand is being driven by offshore sentiment.”

Eastern Europe Plagued by Currency Instability

The credit crisis continues to exact a devastating toll on the economies of Eastern Europe, and capital flight has caused the region’s currencies to plummet precipitously. This has prompted internal debate in countries such as Poland, Czech Republic, and Latvia - to name a few- as to whether the effects of the crisis would have been so blunt had they adopted the Euro. While certainly Euro membership would have spared them from currency instability, it would not have necessarily facilitated financial and economic stability, as Italy, Spain, and Greece have learned the hard way. Regardless of whether Eastern European countries are politically willing to commit to the Euro (itself doubtful), this debate is largely moot, since the credit crisis has all but eliminated their ability to meet the preconditions of membership in the short run. The New York Times reports:
The Baltic states would like to join as quickly as possible, but their economies are contracting so much that it would be impossible to meet the criteria, which, among other things, stipulates that budget deficits should be below 3 percent of gross domestic product

Yuan Revaluation is in China’s Interest

While China remains committed, in rhetoric at least, to a flexible Chinese Yuan that rises and falls in accordance with market forces, its actions suggest otherwise. Beginning in the second half of 2008, China stopped allowing the Yuan to appreciate, for fear that a more expensive currency would exacerbate the domestic effects of the credit crisis by making exports less competitive. What China fails to realize however, is that a more valuable Yuan is not only conducive to global economic stability, but also to its own economic well-being. In fact, the artificially cheap Yuan may have actually worsened the economic downturn in China, because de-incentivized the creation of a domestic economic base. Now that overseas demand has dried up, it is left feeling the consequences of this neglect. The San Francisco Chronicle reports:
With China far too dependent on export-driven growth, it is now extremely vulnerable to the current steep decline in global export demand. Unless that structural imbalance is fixed, China’s long-term growth prospects are as bleak as those of the United States.

Japanese Yen Braces for Intervention

After months of speculation, it appears that forex markets have finally concluded that the Central Bank of Japan is now prepared to bring down the Yen. On the one hand, the Finance Minister of Japan very publicly denied that the overvalued Yen and the consequent need for forex intervention was discussed during either his personal conversation with US Treasury Secretary Geithner or at the most recent G7 conference. At the same time, he pledged the willingness of Japan to fight “excessive swings” in forex and capital markets. Meanwhile, the expensive Japanese Yen has already trickled down to the economy, driving a 12.7% decline in GDP (in annualized terms) for the most recent quarter. The Yen, accordingly, has begun its retreat, already erasing nearly 10% of the gains it racked up against the Dollar over the last year. Reuters reports:
Japan, like the United States, is in recession and can ill afford a rising currency, which puts an extra choke-hold on exporters that are cutting jobs and shuttering factories in the face of a global slump in demand.

ECB Hints at Rate Cut

At its next meeting, to be held in March, the European Central Bank is all but certain to bow to pressure and cut its benchmark interest rate to a record low. This should not come as a surprise, for the ECB’s February decision to hold rates constant was met with a large outcry, in both public and private circles. Soon-to-be-released inflation data is expected to confirm that prices are rising at a slower pace, perhaps even below the ECB’s 2% benchmark. Members of the Bank are also paying attention to the Euro, the continued weakness of which is ironically a product of the ECB’s comparatively tight monetary policy, as investors guard themselves against the risk of deflation. The Guardian reports:
As the economy falters, speculation is also increasing that the ECB may expand its monetary toolbox, possibly through asset purchases, to boost growth while keeping rates relatively high compared to other central banks.

The reversal of Interest Rate Parity

Convention forex wisdom, as well as the "immutable" laws of economics, have long held that higher interest rates correspond with currency appreciation. This has been especially true in recent years, as risk-hungry investors used low-yielding currencies to fund carry trades, the proceeds of which were invested in higher-yielding alternatives. In the context of the credit crisis, however, this logic has been turned on its head, as the countries with the lowest interest rates have seen their currencies outperform. Emerging market economies that have turned bearish on inflation have likewise been rewarded with strong currencies, despite a potential imbalance in the risk/reward profile. This phenomenon suggests that investors are primarily concerned with deflation, and are parking their money in the countries they believe can best preserve their capital, even if the real rate of return is negative. One analyst argues this could spur further interest in gold, reports SeekingAlpha:
If it [the Euro] also joins the zero interest band-wagon then one may wonder what’s left for the currency markets to play with? Is this is a precursor to a crisis brewing here? Does gold get a further leg up – it’s a zero yield currency anyway!

Forex Reserves Backfire

Prevailing wisdom has long held that the accumulation of foreign exchange reserves has helped stabilize emerging market economies by cushioning them against economic shocks. The economies of Asia, in particular, were praised by economists for responding to the 1997 Southeast Asian economic crisis by building up their reserves to guard against runs on their currencies in the future. In hindsight, however, the accumulation of reserves may have actually contributed to the current economic crisis, by facilitating the formation of massive global economic imbalances. High savings rates in Asia, for example, enabled western countries to run continuous current account deficits. Now, the chickens are coming home to roost, and developing economies are once again finding themselves vulnerable to recession, since their forex reserve policies came at the expense of developing domestic economic bases. The Times of India reports:
Re-balancing means that Asian countries must stop piling up ever-rising forex reserves (and trade surpluses). Such reserves represent excessive saving, excessive exports and insufficient imports.

Chinese Up or Down?

Speculation surrounding the Chinese Yuan has been mounting for months, beginning with a sudden halt to the currency's appreciation and continuing with the insinuation of the Obama administration that China is a currency manipulator. In the context of falling exports and a sagging economy, meanwhile, the Chinese Ministry of Finance has issued a research report encouraging the Central Bank to allow the currency to appreciate. Despite the Central Bank's insistence that it wants a "stable" currency, futures prices indicate a mean expectation that in fact, the Yuan will be nudged downward over the next twelve months. On the other side of the equation are financial analysts, who collectively forecast a slightly stronger Yuan, with one bullish analyst projecting a 3.5% appreciation in 2009, on the basis of selectively culled economic data. Bloomberg News reports:
“The consensus around China has been weak growth and falling reserves. The recent data challenges both views. Lending looks good, money supply looks good, and the PMI balanced to slightly bad from very bad levels.”

US and Japan Should Form “Forex Partnership”

While continuing to deny the possibility of direct forex intervention, Japan is nonetheless desperate to halt the rise in the Yen. The primary concern of the US government, meanwhile, is not that the Dollar is becoming too valuable, but rather that it will face great difficulty in funding its economic stimulus plan. Perhaps there exists a golden opportunity to simultaneously alleviate both of these quandaries; Japan should be solicited to buy US government bonds. A large-scale purchase of US Treasury securities by the Central Bank of Japan would be tantamount to intervention, and would probably lead to a decline in the Yen, at least against the Dollar. Of course the US would benefit not only by the direct purchase of its bonds, but also by the positive signal that this would send to other institutional investors. Besides, given that China is in no position to increase its holdings of US Treasury securities, Japan represents the best candidate for partnership. The Washington Post reports:
Achieving such a currency adjustment may seem farfetched, but the yen-dollar exchange rate historically has been heavily influenced by the market's perception of the U.S. and Japanese governments' comfort level for the currency relationship.

Strong Dollar Hurts US Businesses

While the year-long surge in the Dollar has been a welcome development for American consumers and the US government (in terms of cheaper imports and easy credit, respectively), American businesses are not smiling. The strong Dollar has resulted in decreased competitiveness in the eyes of foreign consumers, and consequently, lower exports. For this reason, the US trade deficit has not shrunk significantly, despite a slight down-tick in imports. One must also look at the overseas earnings of American multinational corporations, which are frequently repatriated to the US and booked in Dollar-terms. In fact, as much as 50% of S&P 500 member company profits now come from overseas. Simply, lower exchange rates mean lower profits. In short, investing in the stocks of companies as a proxy for the markets in which they do business is not (as) profitable when the Dollar is strong. The Financial Times reports:
As a result of this greater impact of currency swings, companies are starting to put greater emphasis on trying to hedge their foreign exchange exposure, according to a recent survey from JPMorgan.

Yen, Dollar may Lose Safe Haven Status

In accordance with yesterday's post, it appears that this February is set to continue the trend of low volatility observed in previous years. With the US government on the verge of passing a record economic stimulus package, investors are becoming increasingly confident about the prospects of the global economy to avoid recession. On the surface, it would seem that the stimulus should benefit the economy, and by extension the Dollar. However, this ignores the fact that the Dollar is currently being driven by fear- the idea that the US remains a safe haven for investing- rather than by economic fundamentals. The same holds true for the Japanese Yen. Accordingly, regardless of how the stimulus ultimately impacts the economy, it will certainly increase risk tolerance in capital markets, potentially leading investors to shift capital out of the US and Japan into higher-yielding sectors. Bloomberg News reports:
"A lot of money that sat on the sideline is now being put back to work," said [one analyst]. "People are starting to move to make risky bets."

Seasonality in Forex

Efficient markets theory would suggest that the inherent randomness of commodity prices should be preserved from month to month, such that on average, prices are equally likely to go up as they are to fall. In practice, we know that earnings and tax calenders are such that stocks consistently perform better in some months, than they do in others. Such patterns can also be observed in forex markets.The Dollar, for example, typically rises in January, probably as a result of the US stock market to rise likewise. In February, meanwhile, one analyst has observed a consistent decline in volatility between the Yen and the Dollar. The implication is that with lower volatility will follow a sell-off in the Yen, due to renewed interest in the carry trade. Of course, this may not hold in the current market environment, as both currencies are now being used to fund carry trades and are being punished accordingly when risk tolerance increases.

Forex Achieves New Prominence

The credit crisis has resulted in a collapse in prices for nearly every type of investable asset class (i.e. stocks, bonds, commodities, real estate)- with the notable exception of one: currencies. Of course, this is an inherent quality of forex: a rise in one currency must necessarily be offset by a fall in another currency. While you are probably rolling your eye at the obviousness of this observation, it is still worthwhile to make because it implies that there is always a bull market in forex. Accordingly, capital from both institutions and retail investors continues to pour in to the forex markets, causing daily turnover to surge by 41% (according to one survey), which would imply a total of $4.5 Trillion per day!
Investment banks, especially, are trying to increase their forex business in order to compensate for a decline in other divisions. Said one representative: ”We have probably made more of an aggressive leapfrog in growing our revenue base, which has virtually doubled in 2008 versus 2007. With the situation that has been developing over the past six months, where banks are clearly re-embarking on a new role leading back to basics, foreign exchange has to be one of the products that tops that list.” Based on New York data, which generally reflects global forex activity, transactions between the Dollar, Euro, and Yen (i.e. not involving outside currencies) now account for more than half of the total.
Contrary to popular belief, however, most foreign exchange transactions involve derivatives, rather than spot trades. In the case of swaps, it is the nominal value of the swap that is reported, which well exceeds the total amount of currency that is exchanged, and thus results in an inflated estimate of total daily turnover. Regardless, all measures point to increasing volume. One would expect that the increase in both liquidity and the role of derivatives in forex markets would result in a corresponding decrease in volatility. Of course, this is quickly belied by the turbulence of the last six months, in which many currency pairs set daily, weekly, and/or monthly records for fluctuations and volatility. I recently read an article about so-called “predictive markets,” which use a grassroots approach to make forecasts by “by giving people virtual trading accounts that allow them to buy and sell “shares” that correspond to a particular outcome. Shares in an outcome that is considered more likely to occur then trade at a higher price than those that represent a less likely outcome.” Given that the forex ‘experts’ are almost invariably wrong, I think this idea has tremendous potential to make forex markets even more transparent. Of course, that also means that it will become more difficult to turn a profit, which is why “it’s vitally important to be well-informed when investing in forex so as to enter and exit trades only at levels that are ‘fundamentally’ sound.”

Will Mexican Peso Crisis of 1994 repeat itself?

Having risen to a six-year high against the Dollar in late 2008, the Mexican Peso seemed to have firmly distanced itself from the devastating financial and economic crisis suffered in the early 1990’s. However, all of the factors that were blamed for the earlier crisis have since re-emerged, leading some analysts to question whether a repeat is possible. According to a report published by the Atlanta Fed shortly after the 1994 crisis:The main fly in the ointment was Mexico’s current account deficit, which ballooned from $6 billion in 1989 to $15 billion in 1991 and to more than $20 billion in 1992 and 1993. To some extent, the current account deficit was a favorable development, reflecting the capital inflow stimulated by Mexican policy reforms. However, the large size of the deficit led some observers to worry that the peso was becoming overvalued, a circumstance that could discourage exports, stimulate imports, and lead eventually to a crisis.Sound familiar? A future (hypothetical) report that follows the looming currency crisis will likely point to a similar inflow of speculative capital and a surging current account deficit, which has reached the highest level since 2000. Given that “the size of the deficit may more than double this year as industrial production, foreign direct investment and money transfers from abroad continue to fall,” the likelihood of peso devaluation is rising, regardless of how low the currency has already fallen. On the one hand, Mexico’s response to the weakened Peso is promising. With the blessing of the US (which played a prominent role in the 1994 crisis), the Central Bank of Mexico has injected Billions of Dollars directly into the forex market, so as to keep up the facade that everything is under control. At the same time, it hasn’t lowered interest rates nearly to the extent of some of its peers, in order to guard against inflation and appeal to investors with comparatively attractive yields. Unfortunately, there are a couple reasons why both prongs of this strategy will backfire. On the monetary policy side of the equation, investors would actually prefer steeper interest rate cuts. The carry trade is functionally dead, and investors are now primarily concerned with the risk of deflation, which only becomes more likely as a result of higher interest rates. In other words, the consensus is that the Central Bank should stop griping about inflation, and focus instead on stimulating aggregate demand, since the Mexican economy is especially vulnerable due its dependence on (oil) exports to the US. The Central Bank is also likely to fail in its efforts to directly prop up the Peso, because of the tide of speculators betting against it. To quote the same Atlanta Fed report:A sudden shift of funds out of a currency is called a speculative attack in the economics literature…Rather than waiting for the central bank’s reserves to run out through a gradual process of current account deficits, speculators who realize that a devaluation is inevitable will attack the currency through massive capital outflows as soon as they command enough resources to force a devaluation.Most analysts have since turned bearish on Mexico, which means the fall of the Peso has become self-fulfilling. Check out the Mexican Peso ETF (FXM), which represents a simple and effective way to bet against (or for, for all of the contrarians out there) the Peso.

Currencies of Eastern Europe

Last week, the currencies of Eastern Europe (Hungary, Poland, Czech Republic, etc.) received a nice bump from the announcement of a $25 Billion loan from several multilateral banks, as well as from a slight pickup in risk aversion. The sense of optimism proved to be short-lived, however, as the EU recently rejected a request to provide large scale ($200 Billion+) assistance to the the region. The swift and decisive refusal to intervene injected a fresh wave of uncertainty into a region that is already among the hardest-hit from the credit crisis. The move also carried important political implications, conveying that the EU still sees a clear distinction between eastern and western Europe. Bloomberg News reports:
Growth in Poland, the biggest eastern European economy, will slow to 2 percent, the slackest pace since 2002, the European Commission forecasts. Latvia, a former Soviet republic, will contract 6.9 percent.

Last week, the currencies of Eastern Europe (Hungary, Poland, Czech Republic, etc.) received a nice bump from the announcement of a $25 Billion loan from several multilateral banks, as well as from a slight pickup in risk aversion. The sense of optimism proved to be short-lived, however, as the EU recently rejected a request to provide large scale ($200 Billion+) assistance to the the region. The swift and decisive refusal to intervene injected a fresh wave of uncertainty into a region that is already among the hardest-hit from the credit crisis. The move also carried important political implications, conveying that the EU still sees a clear distinction between eastern and western Europe. Bloomberg News reports:
Growth in Poland, the biggest eastern European economy, will slow to 2 percent, the slackest pace since 2002, the European Commission forecasts. Latvia, a former Soviet republic, will contract 6.9 percent.

Economic factors

In hindsight, it is now clear that the Japanese Yen’s dramatic rise in 2008 was mostly due to financial, rather than economic factors. In other words, a decline in risk aversion led to the unwinding of the Yen carry trade and a subsequent inflow of capital into Japan. Unfortunately, the recession and inflated currency have since taken their toll on the Japanese economy, resulting in an annualized 13% contraction in GDP for the latest quarter. The balance of trade has also shifted, to such an extent that Japan actually recorded a trade deficit in the most recent month. Having concluded, for the moment at least, that forex intervention is no longer necessary, the Central Bank has announced plans to deploy some of its $1 Trillion+ forex reserve hoard to help ailing companies. Barron’s reports:
A reversal of the yen, from strength to weakness, will have “major global implications…” Perhaps beleaguered Japanese authorities already have begun reacting to the “carnage” the yen’s rise has wrought.

Ulcer index

Ulcer index or UI is a popular indicator which shows the riskiness of an investment. The indicator was developed by Peter G. Martin and Byron B. McCann and was published in 1989 in the book “The Investors Guide to Fidelity Funds”. Ulcer index is mainly used by traders to measure short-term risk associated with an instrument; stock, index, funds or commodities.
Ulcer index differs from standard deviation and from other risk indicators in considering only the downside volatility. The idea is that, from a trader point of view only the downside risk is to be considered; as upside volatility usually favors the stock holder. Ulcer value for an investment is calculated by the formula
Where R is the percentage drop of closing prices calculated asR = 100 x (Price –highest price)/ highest price.
High values of ulcer index shows high risk associated with an instrument and if the instrument drops in price, it can take a long time to recover. Thus these kinds of instruments are not suitable for traders looking for short-term profits or who are trading on risk-capital. Most traders use 14-day ulcer index for technical analysis. Traders can also set a safe ulcer level (eg: at 5) for screening stocks, and can use the index for comparing two or more related stocks (same industry or section) and to trade the most suited ones. Remember ulcer level does not consider any upward movements and it drops with it

Ease of Movement Indicator

Ease of Movement or EMV is a momentum indicator which shows the relationship between price change and trading volume. Many traders trading stocks, futures and currencies use this indicator to generate buy and sell signals. Ease of Movement indicator was developed by Richard W Arms Jr. and is closely related to Equivolume charts. The formula for calculating EMV is
Ease of Movement = Mid Point Move / Box RatioWhereMid-point move = Today’s mid point (high + low/2) – Yesterday’s midpointBox Ratio = Volume / (high - low)The daily values of Ease of Movement are then smoothed by using a moving average (often 10 or 14 day).Ease of the movement indicator shows both negative and positive values.
High negative values show downtrends with low trading volume. i.e. low volume is required to make a movement.
High positive values show uptrends with low trading volume. Again low volume is required to make a movement.
Low values (around zero) show corresponding trends with high trading volume indicating accumulation or distribution. Here high volume is required to make a movement.
Zero value is generated when there is very high trading volume for very small price changes.Most systems generate buying signals when ease of the movement crosses above zero from below and generate sell signals when it crosses below zero from above. With most other technicals, it is advised to use other indicators and tools to confirm price changes and buy/sell signals.

Weekly Stock Market Letter, 23 February 2009

The Week Ahead: Although the White House continues to favor a privately held banking system, nationalization seems to be gaining the upper hand as many believe this to be inevitable. President Obama will address Congress on Tuesday while Ben Bernanke begins his two day testimony on Capital Hill. The Case Shiller House Price Index is also released. Existing home sales data is out on Wednesday. Durable goods and new home sales data are due by Thursday. Lastly, a preliminary look at the nations GDP for the fourth quarter on Friday will be closely watched.Stocks to Watch: Kindred Healthcare (KND) surprised many by beating EPS estimates and lifting their 2009 target as the stock reached a 4 month high. Cabela's (CAB), the outdoor sporting goods company, also broke strongly to the upside after beating estimates for their Q4. Actuant (ATU) shares fell because preliminary Q2 sales will be off by 23%. Tim Horton's (THI), the Canadian retaurant chain, boosted its quarterly dividend by 10 cents after releasing its Q4 results. Morningstar (MORN) came in light on their Q4 EPS and the stock fell about 14%.Special Note: The Dow Industrials are leading the market lower as it reached its lowest level since October 2002 and joined the Dow Transports in breaking last November's low. It's possible that some form of nationalization of the major banks could be the catalyzing event that would produce a more lasting low in the major indexes since the peak in October 2007 but at what level? All the major indexes are currently below their 20 year MA and long term charts indicate the 30 year moving averages at 5800, 675, and 1200 on the DJIA, S&P 500, and Nasdaq respectively.Commentary provided by Barry Ward, Registered Principal, NobleTrading.com, Inc.

Pakistani government had offered Islamic bonds at 225

Dr Ashfaq Khan said the Pakistani government had offered Islamic bonds at 225 basis points above the London Inter-Bank Operations Rate (LIBOR) which is less than the rate of return offered on the Euro bonds in February last year. He said the investment banks, funds, central banks and Saudi companies have bought the Sukuk bonds.

WB team: The government’s economic team also disclosed that nine executive directors of the World Bank (WB) - posted in the United Kingdom, Japan, India, Netherlands, Switzerland and Algeria - will visit country soon to discuss future lending programmes, infrastructure projects funding and other economic issues with the government.

Dr Shah said the visit of senior WB officials was a good omen for Pakistan and would help improve the country’s image and muster their support for the future.

He said the upcoming visit of WB President James Wolfensohn, scheduled for next month, is not linked to the Baglihar issue. “We will discuss various issues with the WB president, but his visit is not specifically for Baglihar project,” he told reporters. He also said the WB, the Asian Development Bank and the Islamic Development Bank would remain the primary sources of lending for Pakistan and the offering of bonds in international and domestic markets every year would test the country’s credibility.

He said that the government was also considering offering Sukuk bonds in the local markets. He said foreign investors had appreciated Pakistan’s economic growth over the last few years.

ISLAMABAD, PAKISTAN

Addressing a joint press conference, Mr Shah said the reserves had improved with the transfer of Islamic bonds worth $600 million and the disbursement of loans by donors. Omer Ayub Khan, minister of state for finance, Ashfaq H Khan, economic advisor to the Finance Ministry and Nawid Ehsan, finance secretary, also accompanied Dr Shah at the briefing.

Dr Shah said Pakistan became the first country to offer Islamic bonds in the international market at the start of this calendar year. “The size of the Sukuk bonds was the largest compared to those offered by other countries and the response was impressive,” said he said.

He said the government had leased the Lahore-Islamabad Motorway through the sale of the Sukuk bonds (asset-based) and the Pakistan Sukuk Company, set up by the government, would use income from the motorway to service lease/rental payments to bond buyers for a five-year period. After the five-year period, he said, the bonds transaction would be reversed to the government.

Pakistan’s foreign exchange

 Pakistan’s foreign exchange reserves have reached $12.75 billion following the transfer of proceeds from Sukuk bonds, Dr Salman Shah, the prime minister’s finance advisor, said on Saturday.

Pakistani forex reserves fall to $10.16 bln

KARACHI, Feb 26 (Reuters) - Pakistan's foreign exchange reserves fell by $210 million to $10.16 billion in the week that ended on Feb. 21, the central bank said on Thursday.

The State Bank of Pakistan's reserves

The State Bank of Pakistan's reserves were $6.73 billion from $6.91 billion a week earlier, while reserves held by commercial banks were $3.43 billion from $3.46 billion, the bank said.

Pakistan fully repaid a maturing $500 million euro bond, plus $17 million interest, on Feb. 18. The payment is reflected in this week's data.

Pakistan's foreign reserves hit a record high of $16.5 billion in October 2007 but fell to $6.6 billion in November, largely because of a soaring import bill.

Pakistan signed a $7.6 billion loan agreement with the International Monetary Fund in November to stave off a balance of payments crisis. It received its first tranche of $3.1 billion that month.

The next tranche is expected by the end of March

Forex Scalping?

ake care if you are considering trying your hand at Forex trading for the first time. There are better ways to begin that will save you a lot of possible trouble.Do your research. Do you even know what Forex trading is or how it works? Learn these things and everything else you can about trading on the Forex market. As you learn about the market, you will learn that there are two ways to trade. You can wing it and just go with your gut or you can research and analyze the market. Become familiar with the market and the trends and then go get a demo account and give it a try.

Scalpers are people that make hundreds of trades each day based on the tiniest fluctuation in the exchange rate. Scalping is risky and not for the faint of heart. Once you decide that you would like to give it a try, come up with a long term strategy rather than just floating along with no plan. Keep in mind that the Forex market is not a get rich quick kind of thing.

If you build slowly and cautiously you will prevent yourself from taking major losses.

Facts About Forex

The Forex market was not available to everyone since it’s inception. In fact it has only been available to the public since 1998. The Internet brought the opportunity for everyone to get on there and trade on their own.

The Forex market is the largest trading market in the world and it is basically buying and selling the different currencies of the world. A typical Forex deal is made when one currency is bought and another is sold at the same time. Before Forex became available to the general public, trading was almost exclusively done by banks and other financial institutions.

Global trade has made countries more dependent on each other and the currencies interact much more than in the past. Economic fluctuations in different countries have an affect on all of the currencies. By following and analyzing the trends, someone could generate a tidy little profit by online trading on the Forex market but just as easily as it can go up, it can also go down.

Forex Trading

Learning to read Forex quotes is one of the first steps to beginning to trade on the Forex market. The quotes are always listed in pairs with the first one listed being known as the base currency that is always the value of one unit of that currency.

The currency that is listed second is known as the counter. So, the first number shows the value of one currency compared to the second currency’s value. In laymen’s terms this means if you want to trade for one unit of the first currency, you will have to pay what ever dollar amount is listed after the second currency.

Sometimes there is something called a two sided quote. This is when there is two dollar amounts listed rather than just one. The first amount is the bid price which is the price that you can sell the base currency at. The second number is called the ask price and it is the price to buy the base currency. The difference between these two amounts is known as the spread and is where the money comes from to pay a broker if you are using one so that you don’t have to charge commission fees.

Forex For Beginners

Forex market trading consists of a huge volume of trades everyday but in the past this trading was only available to banks, huge corporations and currency dealers.

There was large minimum business size requirements and very strict financial requirements to be allowed to trace on the Forex market at that time. In 1998, it was made available to the general public to be allowed to trade and take advantage of the market’s extreme liquidity and strong currency exchange rates trends.

The major currencies that are traded on the Forex Market are the US dollar, the Euro, the Japanese yen, the British pound, the Swiss Franc, the Canadian dollar and Australian dollar.

The US Dollar is the most traded currency on the Forex Market. It is easier to begin trading using a currency that you are familiar with, if you happen to live in one of the countries that has currency on the market, because you can watch the newspapers and be able to judge the strength of your currency.

The Canadian $

Last year the people in Canada had a huge reason to celebrate as their currency became equal with United States currency for the first time in over thirty years.Unfortunately, that equality won’t likely stick around very long. Instead, it looks as though the Canadian dollar has been predicted to fall against its US counterpart throughout 2009, going down over fifteen percent.

The economy is shrinking and oil prices are going down, and Canada is not immune to the changes that are taking place throughout the world, but most notably with its neighbor to the south.

The Bank of Canada has cut its forecast for growth, and it looks like the Canadian economy is going to continue to struggle into 2009, which is a forecast that no one wanted to hear but that a lot of people expected.

Forex Trading

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