Oct. 3rd: G10 Currencies
What are G10 currencies?
G10 currencies are 10 currencies used by major developed countries, and are most heavily traded. They include:
1. USD (US dollar) 2. EUR (Euro) 3. GBP (UK pound,Sterling) 4. JPY (Japanese yen)5. AUD (Australian dollar, Aussie)
6. NZD (New Zealand dollar, Kiwi) 7. CAD (Canadian dollar) 8. CHF (Swiss franc) 9. SEK (Swedish krona) 10. NOK (Norwegian krone)
DKK (Danish krone) is not included.
The major currencies used in developing countries (emerging market) are called EM currencies.
1、USD (米ドル) 2、EUR (ユーロ) 3、GBP (英ポンド) 4、JPY (日本円) 5、AUD (豪ドル)
6、NZD (NZドル) 7、CAD (カナダ=ドル) 8、CHF (スイス=フラン) 9、SEK (スェーデン=クローナ) 10、NOK (ノルウェー=クローネ)
Oct. 4th: JPY as a safe haven
Why JPY is considered as a “safe haven”?
Whenever there’s a negative market impact, we can see USDJPY falls, which indicates a sell off for USD in exchange for JPY (The graph below shows the pattern when Donald Trump declared he had diagnosed with Covid-19)
The first reason is that Japanese investors have “suffered from” the negative interest rates for long. As a result, they usually swap their JPY into foreign currencies and enjoy relatively higher return from foreign markets. (And Japanese investors are actually super rich.) Whenever there’s a negative market impact, those investors will sell off their foreign assets and exchange back to JPY, pushing USDJPY lower. The same pattern can be seen in USD/JPY cross currency swap basis.
Second reason may come from Japanese central bank. Japan has a positive net foreign asset position. When there’s a negative market impact, the JCB is supposed to sell some foreign assets to be defensive.
Third reason is market consensus, since the first two reasons are well-known by all the market participants. Foreign entities may also sell USD in exchange for JPY, either for risk aversion or for speculating.
Oct. 5th: Iron Ore
Some interesting topics on the iron ore market
1. The iron ore market is an oligopoly market controlled by four major companies: Rio Tinto (UK/AUS), BHP(UK/AUS), Vale(BRA) and FMG(AUS). The four companies occupy 77% of the market.
2. The benchmark of iron ore spot price is Platts iron ore index (IODEX). The assessment is based on a standard specification of iron ore fines with 62% iron. The index comes from the highest bid and lowest offer every morning. (GMT+8)
3. The productivity of the four major companies can affect iron ore price a lot. The price of the iron ore futures traded in DCE, China soared during Q1 and Q2 2019 due to a collapse in a Vale-owned dam.
blue: Iron ore future price (DCE, left axis) orange: IODEX (left axis)
bars (right axis) yellow: Rio Tinto production grey: Vale production blue: BHP production green: FMG production
4. Because 3/4 of the major iron mining companies are in Australia, AUD rate is also an important factor for iron ore price.
Legend Blue: Iron ore future price (DCE, left axis) Orange: IODEX (left axis) Grey: AUDUSD (right axis)
5. For a long time in history, the iron ore price came from negotiation between producer and purchaser. During a negotiation in 2009, the Chinese government accused Rio Tinto to have the data crucial to the negotiation, which are too detailed to be obtained legally, Rio Tinto's Chinese representative, Stern Hu was arrested and sentenced to 10 years' jail on this (probably framed up) accusation.
Oct. 6th: Commodity Currencies
What are commodity currencies?
A commodity currency is a currency whose price co-moves with the general commodity price, due to its circulating country’s dependency on exports of certain commodities.
AUD(Australian Dollar) / BRL(Brazilian Real) -> Iron ore
NOK(Norwegian Krone) / RUB(Russian Ruble) -> Oil
CLP(Chilean Peso) -> Copper
NOK collapsed during the COVID-19 crisis in March, when the WTI future traded at a negative price.
Oct. 9th: LIBOR
What is LIBOR?
LIBOR stands for London Inter-Bank Offer Rate. It has been the benchmark rate for USD, CHF and JPY for long, but is scheduled to be abandoned by the end of 2021. It will be replaced by SOFR for USD, and TORF for JPY, both are risk free rates. LIBOR is an interbank rate, and thus NOT risk free.
Oct. 10th: CBDC (Central Bank Digital Currencies)
Why PBoC is pushing hard to issue digital currency? We can get some insight from the working papers published by PBoC itself.
1. What can block chains do, and what can’t they do? (区块链能做什么，不能做什么？) pbc.gov.cn/yanjiuju/12442 It’s a very technical paper describing the details of block chain ( and to be honest, I’m not an expert on this).
In this paper, the author built up a DSGE model to show that the zero bound for deposit rate can impede the transmission of the negative interest rate policy. Then the author showed that central banks can pass-through this zero bound by adopting drastically negative rate. However, the most interesting (or maybe insidious / vicious, depends on where you are standing) part in this paper could be the last paragraph in part 4.
「...central banks can set negative rates to digital currencies when needed and thus replacing cash by digital currency can be a solution to the problem that people will withdraw their money from banks imposing negative rates...」
It is clearly shown that the reason for PBoC to issue digital currency is that they are going to impose negative rate in the future, and they want to keep the effect of the policy by letting people not able to withdraw there money from banks and keep cash.
That’s an action equivalent to levying seigniorage, or simply robbing people of their savings. It can by no means be called a “technical innovation”, and it’s no wonder that a country always neglects its people’s basic rights would be a pioneer for this kind of “robbery”.
Oct. 11th: LIBOR swaps
The benchmarks are most usually used for interest rate swaps. An interest rate swap(IRS) is an agreement in which one party agrees to pay fixed rate over a certain notional amount in exchange for the other party paying floating rate (derived from benchmarks).
Oct. 12th: Gold
Besides JPY (which we have introduced before), gold is also considered a safe-haven asset. We see gold price soared during the coronavirus crisis.
As a commodity, gold price is affected by supply and demand. However, the only industrial demand for gold is jewelry manufacturing, an extremely small amount compared to its investment demand. Central banks are piling up gold as reserves these years, but we see a selling-out trend due to the FX reserves lost in EM countries. Uzbekistan sold most gold in the past few months.
From the historical data, we can see a strong correlation between gold price and dollar index, and between gold price and USD interest rates.
Silver is another precious metal, but silver has more industrial demands than gold. And thus gold and silver price correlated with each other but silver price moves more drastically. Gold-silver ratio is an important indicator for the relative price between gold and silver. The ratio is believed to be mean reversing, and a ratio above 100 means an opportunity to long silver.
Another important indicator is gold-copper ratio. Gold is considered a safe-haven asset, while copper on the other hand, is a basic industrial metal and thus performs positively with world economy. A higher gold-copper ratio indicates a worse performing economy.