USD/JPYUSD/JPYUSA-Japanese USA-Japanese ExperiencesExperiences

Can Countries Can Countries Manipulate the Forex Manipulate the Forex

Market Market

International International Finances Finances

Dr. J.D. Han Dr. J.D. Han

Instructor’s comment: A lot of institutional search is well combined with course materials.

““Japan Sold $25 Billion in Yen in First Japan Sold $25 Billion in Yen in First

Currency Intervention in Six Years”Currency Intervention in Six Years”

--Bloomberg News Sep 30, 2010   Bloomberg News Sep 30, 2010  

““QE2 may imperil dollar,QE2 may imperil dollar,

 $600 billion bond-buying program, $600 billion bond-buying program,

The Fed's $600 billion quantitative easing The Fed's $600 billion quantitative easing

program "introduces significant uncertainty program "introduces significant uncertainty

regarding the future strength of the dollar ” regarding the future strength of the dollar ”

– Reuters 11/17/2010  – Reuters 11/17/2010 

Loose Monetary Policy Debases US Loose Monetary Policy Debases US

Currency Currency

What Moves the Forex What Moves the Forex Market?Market?

1. Governments Monetary and Fiscal Policy 2. Global Institutions' decisions (policy)- IMF

3. Inflation – Purchasing Power Parity

4. Economic strength-weakness

5. Political Environment -Stable or Unstable

6. Economic Shock

7. Technical Analysis- Psycology of the market

Governments Monetary and Governments Monetary and

Fiscal Policy Fiscal Policy • Governments try to exert control over their

currencies. Whoever controls currency holds power and government almost always seek power.

• Currency is a symbol of national pride and power.

• Government’s financial arm (in the US it’s the treasury) and the Central Bank (Federal Reserve) and in Tokyo (Bank of Japan). These institutions can do a number of things both short and long term that affect their nation’s currency.

Governments Monetary Policy Governments Monetary Policy

Central Bank Monetary policy can be loose Central Bank Monetary policy can be loose

or tightor tight

Tight

•Purpose: To slow down the economic growth in a country

•Strategy 1: Higher interest rates tighter money supply

•Unintended consequence: Currency appreciation

•Strategy 2: Forex intervention – Central bank buys currency- to slow exports

Governments Monetary Policy Governments Monetary Policy

Central Bank Monetary policy can be loose Central Bank Monetary policy can be loose

or tightor tight

Loose

•Purpose: To increase the economic growth in a country •Strategy 1: Lower interest rates rapid money supply growth

•Unintended consequence: Currency depreciation

•Strategy 2: Forex intervention – Central bank sells currency- to increase exports

Governments Fiscal Policy Governments Fiscal Policy

THE CLASH BETWEEN THE CLASH BETWEEN

Governments and Forex Governments and Forex

MarketsMarkets

• Governments try to exert control over their currencies. Whoever controls currency holds power and government almost always seek power.

• Governments can spend money voraciously. When deficits bloom and credit is ruined (Fiscal policy), they often resort to tricks (Monetary policy) rather than making the painful and necessary decision to rein in their spending, raise taxes, or both.

THE CLASH BETWEEN THE CLASH BETWEEN

Governments and Forex Governments and Forex

MarketsMarkets• This is where the market comes in . Because money

today holds no value – it is simply an article of faith, someone must ensure that it is worth as much as a nation says it is. Forex investors exercise the will of faith in the market. It can be ruthless and sometimes scary, but it is also vitally necessary. Money is far too important to be controlled by government!

• The market is always seeking true value, a spot where it can reach equilibrium.

• At the end of each day, an average of $3.2 trillion has been traded, dwarfing, the New York Stock Exchange, the NASDAQ, the FTSE, the DAX and the Tokyo Nikkei combined. US annual GDP value $14.12 Trillion.

Government tricks Government tricks Monetary Policy Monetary Policy

Japan •Japan, the world’s second-largest economy, uses yen for its currency. The Japanese government often intervenes to keep the yen at a favorable value and to ensure that Japanese exports remain competitive in world markets.

•“Japan export fall casts doubt on trade recovery. Doubts about the outlook for exports could be a discouraging sign for the government as it fans concern that a rapid recovery in shipments could slow down and weigh on Japanese growth. “

- Reuters Tue Mar 23, 2010

Government tricks Government tricks Monetary Policy Monetary Policy

Japan

• Strategy: Bank of Japan currency intervention (Sell Yen to increase USD/JPY value).

•Hypotheses: Intervention will depreciate Yen value to increase export to enhances economic

growth.

•Result: 1. Lower currency value in the short term. 2. Higher currency again in the long term (1 month later).

• Conclusion: Japan can not manipulate the Forex Market in the long run.

Markets True Value Always Markets True Value Always Prevails in the Long Run!Prevails in the Long Run!

Government Tricks Government Tricks for Failed Fiscal Policy for Failed Fiscal Policy

United States

•American government budget deficits and trade deficits put tremendous downward pressure on the dollar.

Domestic Deficit •“The budget deficit will be $1.5 trillion next year, both higher than previous Obama administration forecasts because of a recession that was deeper and longer than expected.”

- White House budget chief Peter Orszag August 25, 2009  

International Deficit • “The U.S. trade deficit was $379.1 billion in the first nine months of this year, compared to $270.2 billion in the same period in 2009, putting it on a path to exceed $500 billion in 2010.”

-Reuters, Nov 10, 2010

Government Tricks Government Tricks for Failed Fiscal Policy for Failed Fiscal Policy

United States

• Problem: US twin deficit out of control , US economy stagnating, monetary policy not working and US currency is debasing.

•“Asian banks are ‘subsidizing rather than punishing American profligacy, allowing deficits to grow for too long of a period of time. When the inevitable correction comes it will be all the more painful.”

- The Economist magazine, Oct 2nd 2004

•US solution (trick): Loose monetary policy-QE2

Markets True Value Always Markets True Value Always Prevails in the Long Run!Prevails in the Long Run!

Government tricks Government tricks Monetary Policy Monetary Policy

United States

•Strategy: US Federal Revere Quantitate Easing 2 (QE2) The Federal Revere extends loose

monetary policy by buying back US government bonds to expand the money supply to keep interest rates low and stimulate economic demand.

•Hypotheses: Loose money supply will stimulate growth in the economy resulting in a strong US dollar.

•Result: 1. Little economic growth and excess dollar currency around the world. 2. US currency continues to debase.

•Conclusion: US can not manipulate the Forex Market even with a coordinated effort between the US and japan.

•Countries cannot manipulate the Forex market!

Co-ordinated Effort?Co-ordinated Effort?US dollar Still declines!US dollar Still declines!

Conclusion Conclusion • Monetary and Fiscal policy are important factors in moving

countries currency values.

• Governments can influence currency directions in the short term but not manipulate currency value in the long run.

• Manipulative and unsuccessful fiscal and monetary policy can have unintended consequences that have a long lasting impact on currency values.

• The global imbalances in currency, goods and services, and capital markets due to ineffective government policy's will continued to be reflected in currency values fluctuating since the market is always seeking true value, a spot where it can reach equilibrium.

• Monetary policy tricks don’t work!

References References • "Forex Daily Volume Volume Surpasses All." Forex News Channel. Forex News Trading Channel

on Forex Robots, Trading Softwares, System and Courses, September 21, 2009 . Web. 26 Nov 2010. http://www.forexnewschannel.com/tag/forex-daily-volume-volume-surpasses-all

• Homan, Timothy R. "Bloomberg Businessweek." U.S. Economy: Trade Gap Shrank as Exports Increase. BLOOMBERG L.P., November 10, 2010. Web. 26 Nov 2010. http://www.businessweek.com/news/2010-11-10/u-s-economy-trade-gap-shrank-as-exports-increase.html

• Catts , Tim . "Bloomberg." Bank of America Lowers Corporate Bond-Sale Forecast as Cash Balances Climb. BLOOMBERG L.P , July 7, 2010. Web. 26 Nov 2010. http://www.bloomberg.com/news/2010-07-07/bank-of-america-lowers-corporate-bond-sale-forecast-as-cash-balances-climb.html

• "Reuters." Republicans to Bernanke: QE2 may imperil dollar. Thomson Reuters, 11/17/2010. Web. 26 Nov 2010. http://www.msnbc.msn.com/id/40237304/ns/business-stocks_and_economy

• http://www.fxcm.co.uk/forex-system-selector.jsp -Charts from Forex Trading system. • http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)

• Kajimoto, Tetsushi . "UPDATE 1-Japan export fall casts doubt on trade recovery." Reuters. Thomson Reuters, Tue Mar 23, 201. Web. 26 Nov 2010. http://www.reuters.com/article/idUSTOE61E03A20100324

• Runningen Faler, Roger Brian. "Obama Raises 2010 Deficit Estimate to $1.5 Trillion." Bloomberg. BLOOMBERG L.P., August 25, 2009. Web. 26 Nov 2010. http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aNaqecavD9ek

• Palmer, Doug. "Trade gap narrows more than expected in Sept." Reuters. Thomson Reuters, Nov 10, 2010. Web. 26 Nov 2010. http://www.reuters.com/article/idUSTRE6A92V420101110

• “Forex Revolution” by Peter Rosenstreich, Prentice Hall, July 206, New Jersey.