Volatility in Global Forex Markets

In the converging global economy, volatility has spread its tentacles beyond the equity markets to the Forex markets. Sophisticated forex market investors stumbled upon the fact of global volatility that got re-linked to various global factors like cross-country fund flows, exim trades, inflation rates, interest rates, industrial production growth rates and other socio-geographic factors that bear down forex co-movements.

Initially, the forex rate volatility was better contained within the G-3 economies-US, Japan and Germany, but later extended to G-10 countries whose currencies are traded most in the international exchanges. Exchange rate volatility not only affects the profit-seeking behaviors of currency traders, it also bows down on the productivity and profit margins of manufacturing enterprises that depend on export revenues. The macro-economic effects thus have far outreached in order to call in for monetary policy objectives from the regulators to extend support to those affected, in terms of export sops and duty cuts.











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It has been implicated that a sound domestic macroeconomic and monetary policy could diminish exchange rate volatility. However, market factors and capital flow dynamics drive exchange rate movements that may not be compromised in certain situations. Some of the recent forex misalignments are due to increased capital flow dynamics into the emerging markets and out of the developed markets, and fund flow thus triggers some factors of dynamic forex movements. $/¥ and $/€ have caught the glimpse of investors who foresee major gains in future spot prices and by also formulating the famous ‘carry trade’, where one borrow cheap (Japan) and invest in higher dollar ($) yielding assets.

The above chart depicts the forex movements of six countries tracking for a period of six months, from August 2007 till December end. Many questions remain unanswered and have become topics of great interest as to whether continued depreciation, as that happened in the case during the Asian Financial crisis 1997 leads to evolution of financial crisis, effect of exchange rate volatility on the economy, or does economic shocks always leads to a recession?

Sandy Chatterjee, Analyst
Right Horizons Research Desk

The Next Big Thing In the Market: e-Paper and e-books

How about going to a beach enjoying the sun and the breeze with a virtual paper that downloads news data, novels or even articles via wireless network, yet small 'n flexible enough to fit into one's pocket?
It is there already in the markets thanks due to some miraculous breakthroughs in digital vision technology! PVI technologies and others like Sony are out in the market with the first of its kind- 'e-paper' or electronic paper based on active matrix display technology utilizing electrophoretic crystals or organic polymers (OLED) that is paper thin and could be read just as a newspaper. The concept is based on flexible e-paper display that produces bi-stable images with paper-like 180' degree glare free readability.


Bi-stable, meaning a device that draws power only if the image is refreshed, as opposed to the backlighting facility employed in LCD panels. Handheld e-reading devices have metamorphosed and evolved rapidly in the last decade from the first PDA's to the current e-papers. Organic light emmitting diode crystals are used to create full feature motion videos, high graphics-enable images with good resolution even under sunlight. These cousins of PDAs are both light, durable, unbreakable enabling digitization of conventional books.

E-paper can be used to read pages just like any other book, but without turning pages, with with future battery capabilities, each could survive about 7000 pages of readebility per charge. The technology behind e-paper is quite interesting and dates back to 1960's when Xerox took the first initiative to develope innovative display devices.

Technology Behind E-Paper:

Usually, electronic paper has two parts-electronic ink as a 'first plane' and ICs used to create patterns of texts and images as a 'backplane'. The older theory worked on the concept of ‘electro capillarity’ that works by moving colored liquids against a white background. Later, the term was changed to 'Electro wetting' as a widely applied theme. Organic TFT technology is implicated in this new version. E-paper structurally consists of thin sheets of plastic beads encapsulated in pockets of oil that are able to rotate freely within the plastic sheet when electricity is passed between them. In-turn, each hemispheres of a bead (ball) have a different color and charge assigned to them. When electric fields are applied by the backplane, beads rotate creating a two-colored pattern. Aggregations of thousands of similar beads are used to create simple texts or images based on electrical fields applied.



The limitations of these bi-chromal frontplane were that it lacked colors. As a result, electrophorectic front plane were developed to display multi-color texts and images. Millions of microcapsules of 100 microns (diameter of human hair) each filled with clear fluid (+ve white, and -ve black)were placed on the front plane and electric fields applied. When -ve field is applied, +ve white particles moved up to the top of the microcapsules appearing as white dots, while black particles settling down to remain hidden from view. Again, when +ve field is applied, black particles migrate upward to the top while white particles move to the bottom thus generating black text or picture. This same technology was somewhat modified to include colored crystals as Cholesteric Liquid Crystals (ChLCD), some spiral shaped liquid crystal molecules that can change orientations from horizontal to vertical positions and vice versa to produce multicolored effects when electricity is applied.

E-paper has a wide potential aplications within various domains for example, someday, we would be delivered e-newspapers instead of the one we have now, or e-displays and hoards up on the sky, or just wearable display screens on the front-back of our trousers or so! The Financial opportunity is huge considering the easiness and wide acceptability within the consumers domain.Commpanies like PVI, Taiwan, Sony, IBM, Phillips, Toshiba and Fuzitshu has already jumped into the business of Electronic paper R&D and marketability.

Sources: http://www.tfot.info/articles/1000/the-future-of-electronic-paper.html
http://64.202.120.86/upload/image/articles/2007/the-future-of-electronic-paper/cholesteric-liquid-crystal-.jpg
http://www.pvi.com.tw/index_en.php
Sandy Chatterjee, Analyst
Right Horizons Research Desk

Pig shortage in China powers inflation -Telegraph .co.uk

By Mark Kleinman, in Hong Kong

A shortage of pigs and rising feed costs helped China's inflation index to its highest rate in more than a decade last month, raising the prospect of further interest rate hikes in the final quarter of the year.

Fore more, Read...

As previously last year we presented the acute food and pig shortages in China propelling the inflation level to a decade high, it seems that Beijing is fast exporting its inflation level outside China.

Read Our Analysis.....

Right Horizons Desk.

Dynamicity of the Capital Markets: Miracle Economies, Business Cycles and Others

Investment Boom and Bust Cycles: The same old story!

On the backdrop of a robust economic growth driven by China and India’s powerful driving engine, Asia seems to have been the perfect ground boasting competitive yet broader economic reforms and thus have entered the phase of miracle economy. There have been an increased participation of foreign capitals as ‘private equity’ as well as from hedge funds who have brought in huge inflows into these markets. According to a recent IMF estimation, global growth have been forecasted around 4.8%-- from a 5.2% forecats earlier, and now down to 4.1% due to the ensuing slowdown in the US economy and the problems in the US housing markets.

The euro zone, with its 13 member nations are predicted to expand by 2.1% while the US could expand by only 1.9% instead of 2.8%. Where else, the Asian region is expected to grow by 6-6.5% on average taken for major Asian economies , i.e., China, India, Hong Kong, Taiwan, Korea, Thailand, Malaysia and Singapore.

The financial market turmoil has left the markets highly volatile and somewhat unstable. With the ‘Greenbacks’-(US $), further depreciating against the major currencies, particularly the euro, a rising euro and the Yuan pressure has caused a substantial widening of the US current account deficit to-6% of its GDP, above a 4% comfort zone.

Much of the causes of US current account deficit have been blamed on China due to its undervalued Yuan, which the country enjoy as an export incentive over other countries. China has recently increased its forex reserve to well above US $ 1 trillion, which resulted in trade
shortfall for the US.

Is the Dollar still dominating?

The US dollar’s dominant role as an international reserve currency seems to have been heading for a flack, as euro has recently emerged as a currency of choice among the forex markets due to its strong holding against the $. The Yuan (renminbi), has also gained critical importance due to its sustained pressure on the $ markets, the chief cause for calling China to revaluate its currency.

The euro appreciation, on the other hand has increased concern for the euro zone exporters, as exports have become costly relative to China, which means cheaper imports for the Chinese goods to the European markets and vice-versa. It is to be seen whether cheaper imports could contain the inflationary pressures in Europe, as well as a low interest rate scenario be possible in the near future. But the Yuan seems to have cast its spell on the euro zone besides the US, as such; one is likely to see if there could be any substantial trade deficits to follow from these regions too. Recent account points to this trade deficit as being 25% amounting to US $88 billion for the euro zone.

G-7 Summit and the Weforum 2008 On Global Economics and the Financial Markets

The G-7 Summit and the Weforum 2007 concentrated mainly on some of the problems and policy changes in the international capital markets. Among those were:

Soaring value of the euro
How to contain financial market turmoil
China’s revaluation of its Yuan (Renminbe)
China’s mounting trade surpluses
Yen appreciation and containing Japan’s deflationary phase
Risks in the international financial markets
Bank and financial institutions exposures to the current sub prime mortgage market collapse
How to contain further US $ depreciation
International Foreign exchange market stabilityCrude oil price shock and its global impact

How Much Strong is the US Dollar?

One would wonder about the US strong dollar policy adopted by the federal treasury behind the dollar’s debacle in the global forex markets, as a falling dollar may not sound favorable to the monetary policy makers. These factors, combined with undervalued Yuan have already disrupted the global exchange rate management as some countries are finding it difficult to remain pegged to US dollar. We have noticed some major currencies appreciate against the ($) dollar, such as Yen (¥), Indian Rupee, Euro (€) and the Thai Baht, by at least 7-10%, except the Chinese Yuan (renminbi) which moved only 0.75% in the past six months. One of the causes behind the falling dollar is diminishing importance of the ‘Greenback’ due to shifting of investors target toward the high growth emerging markets, Asia-Pacific, where the global investors see potentially higher return on investments (RoI) compared to the US markets/assets.

Some Concern For India and South East Asia: Inflation, Market and Currency Volatility!

On the Indian perspective, though the country has been doing perfectly well in containing inflation well under 4% as well as managing capital inflows, recent rise in peak crude oil price touching $100/brl brought-in inflationary pressures within the RBI horizon. RBI’s weekly statistical supplement (WSS) reported that India’s forex reserve jumped from $256.7 billion till 20th October to $287 bn in January 2008 . India has also gained a fair share of the global forex turnover with around $34 billion on average turnover on daily basis —that’s 0.9 % of the total share. Singapore and Hong Kong are the leaders in Asia (ex-Japan), with each about $231 and $175 billion, that’s 5.8% for Singapore and 4.4% for Hong Kong respectively. This naturally shows how the strength of the Indian capital and the growing 'Forex' market is gaining continuous momentum from overseas investors and FII.

The data released by Bloomberg points out to the fact that India, along with China are absorbing foreign funds more quickly than the rest of the Asian countries. The Bloomberg report also notes that the investor activity of private equities and hedge funds have increased considerably till last year in the Asia-Pacific region due to prevailing strong Asian currencies, low volatility and less risk aversion. But the exported credit market crisis from the USA changed the scenario somewhat equally replaced by high uncertainty and volatility. Truly, the dynamicity of the Asian capital and the equity markets has increased beyond expectation with new emerging economies like Vietnam, Thailand, Malaysia and Indonesia contributing to the economic successes within this turbulent times.

Sources: Bloomberg.com, Thompson, Moneymorning, FEER, FT and Economic Times

Sandy Chatterjee, Analyst

Right Horizons' Research Desk.

Oil Price Moderation: When will that happen?

The Asian markets continued the downtrend on the event of the crude oil crossing the $100 per barrel mark for the first time in 2008. Markets weighted heavily on the current uncertainties and volatilities involving crude oil prices. Even on the backdrop of an US recession when analysts predicted the easing of off crude oil prices due to a potential low demand from the US, oil seems ride high on the financial streets with no sign of moderation.

Is Global Recession to Ease Oil Demand?

Demand pressures on oil prices are here to stay and there is a little chance of oil price moderation which is still trading above $95/brl. And, with higher oil prices on the horizon, upside risk to inflation forecast in US and emerging markets would weigh down on Fed policies and interest rates which the markets expect to ease the ongoing credit squeeze. Funding constraints of ongoing projects due to a recession could well affect crude oil prices and production demand easing in the world’s largest economy, the US. China, being the third biggest importer and the largest exporter could feel the pinch if export demand comes down the line. But is it also expected that a strong emerging markets growth in investment and consumption is likely to keep up the demand for oil and petroleum-products in 2008.

Petroleum (Oil) Sector Outlook:

Oil Exploration, Production and Output: Demand vs. Supply Story “It is estimated that the world liquid fuel consumption will increase from 83mn barrels per day in 2004 to 97mn barrels/pd 118mn barrels/pd in 2030”. (IEO Report). World crude oil prices are estimated to fluctuate between $38 on the lowest and $157 on the highest, according to IEO estimates. By 2030, OPEC is expected to produce 57mn barrels per day as against non-OPEC countries that would be producing around 61mn barrels/pd. In 2004, OPEC produced some 41% of global oil, below its high of 53% in 1973.

A price shift for crude oil is on the line but one is to notice whether it will be a demand induced or supply driven. As of January 1, 2007, proved world oil reserves, as reported by IEO, were estimated at 1,317 billion barrels. With this ever expanding demand and supply constraints in the global petrochemical industry, China, India and other Asian countries shed a strong outlook for the coming 2-3 years despite a threat of impending US recession. The global petroleum
industry is valued around $ 3.4 trilllion, with an annual growth rate of 4%. BRICS nations are poised to play a dominant role in global expansion of the refining industry due to increase in demand from the related client industries.

Capacity expansion of petrochemical plants and new investments for exploration and production projects are to keep the spirit of the petro- energy sector in both China and other countries. Global giants like Chevron, ConocoPhilips, CNPC, Shell, BP, Exxon and others have taken initiatives for further expansion of oil and gas pipeline network, thus providing a strong outlook for the petroleum producing countries.

Sources: IEO, Bloomberg, FT
Right Horizons' Research Desk