FOREX market (1 Viewer)

[rkk]

Do not get these statements!

*country with overvalued?? exchange rates tend to experience a decline in exports

*the value of currency can influence inflation & intereset rates

When a large number of investors sell holdings of FOREX it can destabalise an entire country--> does this have any relation to portfolio investment?? i.e Asian Crisis

I relly suck at understanding how & where a Forex market works.

relly confused ><
ANY help would be relly appreciated! thankyou

 

[mitsui]

Do not get these statements!

*country with overvalued?? exchange rates tend to experience a decline in exports

*the value of currency can influence inflation & intereset rates

When a large number of investors sell holdings of FOREX it can destabalise an entire country--> does this have any relation to portfolio investment?? i.e Asian Crisis

I relly suck at understanding how & where a Forex market works.

relly confused ><
ANY help would be relly appreciated! thankyou

*country with overvalued?? exchange rates tend to experience a decline in exports example would be the exchange rates of US dollars and China yuans, where US dollar has a very high value thus its exports r more expensive so it is less internationally competitive, China on the other hand has a very low value currency so its exports are cheap. and that is why the US gov. recently been tryin to make China float its currency

*the value of currency can influence inflation & intereset rates the value of the currency determines the amount of good you can buy. if a currency has a very high value, then its products' prices will rise (since every1 is payin it wif many $$$) and the inflationary rates goes up (and from yr11 work, thus interest rate goes up ETC.ETC)

When a large number of investors sell holdings of FOREX it can destabalise an entire country
It is like the capital fight of the Asian Crisis in 1997, where the speculators draw their holdings of the Thailand currency and subsquently its neighboring currencies in a sudden and short time period. I believe, the short term FOREX financial instruments r portfolio investments (someone correct me on that)

FOREX are networks of buyers and sellers exchangin one currency for another where there is an exchange rate. Most countries' currency value is determined by the interacting force of the demand and supply on the FOREX market.

 

[Demandred]

I think the last point could be simplified into demand and supply. Rapid selling of FOREX = high supply and low demand = price drop .

Theoritically, a rapid drop in FOREX = more competitive exports and higher export revenue, BUT, it increases debt repayments by so much that investment drops to zero and the economy collapses.

What happened in the AFC was a rapid increase in interest rates which in theory should attract foreign investment which means more demand for that currency, which means an appreciation, which means less debt repayments.

In reality, the surge of interest rates killed of any sort of domestic demand, hence destroying the capability to repay debt as well as diminishing investor confidence, so no matter how high the returns on investment were, investors weren't investing.

 

[mitsui]

"destroying the capability to repay debt"?
does that mean:

when the interest rate was raised purposely in Thailand, the domestic borrowers r unable to repay their debt ...that explains the 50% rate of non performing loan in Thailand ...(even thot it was initially used to attract FDI)... and so began the capital flight and domestic firms unable to pay the imports due to appreciation in the currency...all adds up to a collapse?

 

[Demandred]

Just to rephrase.

The increase in interest rates was issued in response to the rapid sell offs to regain confidence, unfortunately it only exacerbated the problem by destroying domestic demand, which in turn reduced the capability to pay off the debts and further reduced investors' confidence - your ability to repay debts is greatly diminished when your GDP is decreasing from lack of demand !

 

[mitsui]

oh yea. true *scribble it allll down*
lol thx

 

[gnrlies]

Do not get these statements!

*country with overvalued?? exchange rates tend to experience a decline in exports

*the value of currency can influence inflation & intereset rates

When a large number of investors sell holdings of FOREX it can destabalise an entire country--> does this have any relation to portfolio investment?? i.e Asian Crisis

I relly suck at understanding how & where a Forex market works.

relly confused ><
ANY help would be relly appreciated! thankyou

1 - Overvalued is probably not the best term to have been used. Worsening of the "Terms of Trade" is the best term to use. When the "Terms of Trade" worsens, exchange rates normally rise, or the costs of producing rise, so this is where the "overvaluation of currency" concept comes in - although its a bad concept because its like asking how long a piece of string is. How do you know any currency is overvalued? - obviously its only relative which is what the terms of trade measures.

2 - The value of a currency influences inflation because quite simply when a currency changes, imports become either more expensive or cheaper (depending on the currency move). When looking at headline inflation, import prices are included in the CPI.

The value of a currency is very important when it comes to interest rates. Theres a thing called interest rate parity. It basically deals with anticipated changes in currency valuation, and interest rates. For example if you were looking to borrow funds, and you had the choice of borrowing domestically at 5.5% where currency fluctuations arent relevant, OR borrowing in another country at say 7%, but where you expected their currency to devalue and for you to be able to pay back easier, then they may cost the same, or 7% may even be a cheaper option.

The only flaw to the statement is that the causal relationship is in reverse. Interest rates affect currency. In australia we have a floating exchange rate and we implement inflation targeting (in other words we control interest rates), and not the other way around. So generally as we increase our interest rates, our currency will increase in value (as more people wish to invest in australia and more australians will seeks finance from overseas).

 

[¬_¬]

Wow you guys seem to really know your stuff. *thumbs up*

Nonetheless, I feel like answering based on my own simple definitions/answers.

*country with overvalued?? exchange rates tend to experience a decline in exports

When one country's currency is overvalued, then it means it costs more for other countries to buy their exports- and as a result, the exports will decline.

*the value of currency can influence inflation & intereset rates

There are wayyy too many possible connections to talk about here in a simple post.

For example;
Strong currency -> More imports -> Imported inflation -> Interest rates rise to fight inflation -> More foreigners/speculators buy local currency to invest -> Currency strengthens

But then businesses will have less exports, possibly leading to interest rates falling to stimulate them and weaken the currency, etc..

People USUALLY speak of interest rates affecting value of currency where higher interest rates will attract foreigners to invest in domestic banks, and vice versa when interest rates are low- this is a much more direct relationship.

When a large number of investors sell holdings of FOREX it can destabalise an entire country--> does this have any relation to portfolio investment?? i.e Asian Crisis

For a currency which is largely traded by speculators such as the Australian dollar, it can push the currency around significantly. Other countries such as Brazil have had much more unstable currencies which if someone sold a considerable amount, the value of the currency will fall substantially, worsening the terms of trade/purchasing power of the country's people.

Portfolio investment could be affected by the sale of holdings of FOREX in the sense that there are people who are purely speculative and are hoping to make profits from movements in the currency (rather than actually using the money for a productive purpose), and as a result, if someone sold a lot of a currency, and everyone else followed suit, the people who are left still holding the currency are worse off.

 

[mitsui]

. Worsening of the "Terms of Trade" is the best term to use.

hmm how does the "term of trade" affect exchange rate??
shouldnt it b the other way around??

 

[gnrlies]

hmm how does the "term of trade" affect exchange rate??
shouldnt it b the other way around??

Im not sure if it was clear by what I said, but the terms of trade is affected by two things, either changes in the cost of producing goods in a country, or by currency fluctuations. So yes you are right, the terms of trade does not affect the exchange rate, it is the exchange rate affecting the terms of trade.

The terms of trade can be calculated as a formula which is basically:

P(australia) x E(australia) / P(foreign country) x E(foreign country)

Where P = General level of prices (for example cpi)
Where E = Exchange rate (E.g. valued in terms of $US)

So yeah as you can see those are the two things to consider. I just didn't like the term "overvalued" because it is a vague statement. At least with terms of trade you can actually measure it.

 

[mitsui]

lol yea. true. xD