Chapter 2: The balance of payments and the foreign exchange market 1- Exchange rates and international transactions Currency Overview Asia 10:46 a.m. EDT 03/22/11 Last (bid) Prior Day Australian Dollar (in dollars) 1.0113 1.0054 Hong Kong Dollar 7.7936 7.7978 Indian Rupee 44.900 45.005 Indonesian Rupiah 8721 8726 Japanese Yen 81.02 81.05 Malaysian Ringgit 3.0280 3.0331 Singapore Dollar 1.2634 1.2674 South Korean Won 1120.60 1120.95 Taiwanese Dollar 29.560 29.525 Thai Baht 30.210 30.257 Late Monday in New York. Europe & Others 11:05 a.m. EDT 03/22/11 Last (bid) Prior Day Euro (in dollars) 1.4191 1.4221 Czech Republic Koruna 17.2100 17.1820 Denmark Krone 5.5244 5.2438 Norwegian Krone 5.5818 5.5432 Polish Zloty 2.8776 2.8785 Russian Ruble 28.2185 28.2650 Swedish Krona 6.3089 6.2696 Swiss Franc 0.9036 0.9051 U.K. Pound (in dollars) 1.6376 1.6313 Egyptian Pound 5.9420 5.9361 Israeli Shekel 3.5280 3.5336 South African Rand 6.9068 6.9541 Late Monday in New York. Americas 11:12 a.m. EDT 03/22/11 Last (bid) Prior Day Argentine Peso 4.0400 4.0404 Brazilian Real 1.6644 1.6658 Canadian Dollar 0.9789 0.9796 Mexican Peso 11.9905 11.9847 Late Monday in New York. -1-
Key Currency Cross Rates: 10:34 a.m. EDT 03/22/11 Dollar Euro Pound SFranc Peso Yen CdnDlr Canada 0.97900 1.3891 1.6032 1.0834 0.08176 0.01209 --- Japan 81.000 114.93 132.65 89.641 6.7648 --- 82.737 Mexico 11.974 16.989 19.608 13.251 --- 0.14782 12.231 Switzerland 0.90360 1.2821 1.4797 --- 0.07547 0.01116 0.92298 U.K. 0.61065 0.86645 --- 0.67580 0.05100 0.00754 0.62375 Euro 0.70477 --- 1.1541 0.77996 0.05886 0.00870 0.71989 U.S. --- 1.4189 1.6376 1.1067 0.08352 0.01235 1.0215 (Source: Thomson Reuters) http://online.wsj.com/mdc/public/page/mdc_currencies.html?refresh=on The real euro/dollar exchange rate, denoted q, is the euro price of the American basket relative to that of the euro area: q = (E x P $ )/P (2-1) The nominal effective exchange rate: n NEER i = ω j.e ji j=1,j i (2-2a) where, NEER i = (nominal) effective exchange rate of currency i, E ji = nominal exchange rate of currency i with respect to currency j, ω j = weight given to currency j in the construction of the index; by definition the sum of weights equals one. The real effective exchange rate: n REER i = ω j.q ji j=1,j i (2-2b) where, NEER i = (nominal) effective exchange rate of currency i, q ji = real exchange rate of currency i with respect to currency j, ω j = weight given to currency j in the construction of the index; by definition the sum of weights equals one. -2-
Graph 1: Government debt, deficits and sovereign credit premia (Source: BIS, Quarterly review, March 2011) Graph 2: Implied forward interest rates (Source: BIS, Quarterly review, March 2011) -3-
Graph 3: International debt securities issuance (in billions of US dollars) (Source: BIS, Quarterly review, March 2011) Graph 4: Expectations for inflation, monetary policy and NEER (emerging countries) (Source: BIS, Quarterly review, March 2011) -4-
Currency Futures, Tuesday, March 30, 2010 March 22 10:29:32 GMT All quotes are in Greenwich Mean Time Euro CME Session Previous day Month Open High Low Last Time Sett Chg Volume Sett. OpenInt Cash - - - 1.41903 Mar 22, 10 :29 - - - June 11 1.42200 1.42200 1.42200 1.42200 Mar 22, 10 :11 - - 233494 1.42200 190609 Sept 11 - - - 1.42200 Mar 21, 16 :20 517 1.42070 894 Dec 11 - - - 1.41370 Mar 21, 16 :20 - - 1.41370 71 Mar 12 - - - 1.40940 Mar 21, 16 :20 - - - 1.40940 282 June 12 - - - 1.40510 Mar 21, 16 :20 - - - 1.40510 8 Sept 12 - - - 1.40080 Mar 21, 16 :20 - - - 1.40080 - http://futures.tradingcharts.com/marketquotes/index.php3?sectorname=currency 3. The balance of payments as the net demand for foreign currency Table 2-1: Comparing euro rates of return on dollar and euro deposits Dollar Expected rate of euro interest rate depreciation against dollar Euro interest rate Rate of return difference between euro and dollar deposits Case R R $ (E e /$ - E /$ )/E /$ R - R $ - (E e /$ - E /$ )/E /$ 1 0.04 0.02 0.00 0.02 2 0.04 0.02 0.02 0.00 3 0.04 0.02 0.04-0.02 4 0.04 0.05 0.02 0.01 The uncovered interest parity condition between dollar and euro deposits shows that the equality between the two assets expected rates of return measured in euros: R = R $ + (E e - E)/E (2.5) Table 2-2: Today s euro/dollar exchange rate and the expected euro return of dollar deposit when E e = per dollar Euro exchange rate, direct Interest rate on dollar Expected rate of depreciation of euro Expected euro return on dollar deposits terms deposits against dollar Case E R $ (0.77 - E)/E R $ + (0.77 - E)/E 1 0.81 0.02-0.049-0.029 2 0.79 0.02-0.025-0.005 3 0.77 0.02 0.000 0.020 4 0.75 0.02 0.027 0.047 5 0.73 0.02 0.055 0.075-5-
Figure 2-2: Relation between current exchange rate and expected euro return in dollar deposits 0,82 0,8 Today's euro/dollar exchange rate 0,78 0,76 0,74 0,72 0,7 0,68-0,029-0,005 0,02 0,047 0,075 Expected euro return in dollar deposits The covered interest parity condition can be written R = R $ + (F E)/E (2-7) with F the one-year forward price of dollars in terms of euros. -6-
4. Exchange rates regimes De Facto Classification of Exchange Rate Regimes and Monetary Policy Frameworks Data as of April 31, 2008 The classification system is based on the members' actual, de facto arrangements as identified by IMF staff, which may differ from their officially announced arrangements. The scheme ranks exchange rate arrangements on the basis of their degree of flexibility and the existence of formal or informal commitments to exchange rate paths. It distinguishes among different forms of exchange rate arrangements, in addition to arrangements with no separate legal tender, to help assess the implications of the choice of exchange rate arrangement for the degree of independence of monetary policy. The system presents members' exchange rate regimes against alternative monetary policy frameworks in order to highlight the role of the exchange rate in braod economic policy and to illustrate that different exchange rate arrangements can be consistent with similar monetary frameworks. The following explains the categoreis. Exchange rate anchor The monetary authority stands ready to buy or sell foreign exchange at given quoted rates to maintain the exchange rate at its predetermined level or within a range (the exchange rate serves as the nominal anchor or intermediate target of monetary policy). These regimes cover exchange rate regimes with no separate legal tender, currency board arrangements, fixed pegs with or without bands, and crawling pegs with or without bands. Monetary aggregate target The monetary authority uses its instruments to achieve a target growth rate for a monetary aggregate, such as reserve money, M1, or M2, and the targeted aggregate becomes the nominal anchor or intermediate target of monetary policy. Inflation targeting framework This involves the public announcement of medium-term numerical targets for inflation, with an institutional commitment by the monetary authority to achieve these targets. Additional key features include increased communication with the public and the markets about the plans and objectives of monetary policymakers and increased accountability of the central bank for its inflation objectives. Monetary policy decisions are guided by the deviation of forecasts of future inflation from the announced inflation target, with the inflation forecast acting (implicitly or explicitly) as the intermediate target of monetary policy. Other The country has no explicitly stated nominal anchor, but rather monitors various indicators in conducting monetary policy. This is also used when no relevant information on the country is available. http://www.imf.org/external/np/mfd/er/2008/eng/0408.htm -7-
4,5 4 3,5 3 2,5 2 1,5 1 0,5 0 The exchange rate of the Deutschemark againt the US dollar and the French Franc 1953-1998 90 80 70 60 50 40 30 20 10 0-8- USD 1 = DEM... 1953 1955 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 FRF 100 = DEM... Source: Bundesbank (Exchange rates on the Frankfurt exchange)
The annual rate of appreciation of the Deutschemark against the US dollar and the French Franc 1954 1998 30 20 USD 1 = DEM FRF 100 = DEM 10 0-10 -20-30 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 Source: Bundesbank (Exchange rates on the Frankfurt exchange) -9-
-10- Source: European Central Bank
(Source : WEO, October 2010) -11-
(Source: OECD, March 2011) -12-