After the reduction (and a certain stabilization of) the level of geopolitical risks in FOREX trading returned to the usual framework. They are increasingly determined by the direction of financial flows from the regional capital markets.
Old priorities
Not every day has recently been able to watch their eyes, as currency markets are changing under the impact of changing trends in financial flows from international capital markets and begin to play by old rules. However, one of those days happened July 3, 2003 the morning of the euro to leading world currencies, has fallen by almost 0.4%, reflecting currency traders reaction to the statement by German Chancellor Gerhard Schroeder (Gerhard Schroeder). According to Schroeder, he had cause for concern «the changed relationship between the euro and the dollar, which, of course, creates more difficulties for exports than would». The share of exports in GDP of Germany is 35%. In 2002, export growth is rescued from a reduction of the German economy. However, the sharp appreciation of the euro this year worsened the situation in the export area of the euro and strengthened the threat of recession in the country.
In the I quarter of German GDP fell by 0.2% compared with the IV quarter of 2002, when growth was zero (k2kapital.com). Obviously, in such a situation, the market began to dominate euro bears. A little later, when currency traders were known event in world bond markets, the situation has worsened with the Euro and the rate fell down more than 1%. And in the next 10 days he had lost about 3%. The fall of the euro in the first place, have contributed to weak sales of the new release of the 10-year government bonds in Japan. Auction was the most disappointing since September 2002, when the demand for 10-year Japanese bonds was lower than the proposal. Currency traders took the failure of a new tranche of placement as a signal of weakening investor interest in bonds against the backdrop of the growing interest in the shares, which can yield much higher returns than government debt securities.
In times of economic weakness and political uncertainty, investors prefer to invest in secure financial instruments, which include government bonds. But during the economic revitalization of preference shares.
Fed miscalculated
Correlated with the level of demand for capital market policy and the monetary authorities - the prime factor for the evolution of bond prices. When lowering the rates of central banks increasing the cost of government securities, during the period of rate increases - decreases.
Recently, U.S. Treasury bonds market experienced great disappointment. At the meeting of June 25, the Fed lowered its rate to just 0.25%, while making relatively optimistic statement. Many investors in the market expect the U.S. government debt at lower rates of 0.5%, and moderate the Fed decision was a blow for them.
As a result, the value of Treasury bonds fell, the yield increased. While economists believe that Fed is still very neskoro begins to raise its interest rate and may even reduce it again in the near term, the recent decision of the Fed and optimistic notes in its statement led to many feeling that the June treasury bond market has experienced its best time in the current business cycle, and further development of events does not exclude the stagnation and gradual decline in the market of government debt securities. In such a scenario, and said a strong U.S. stock market recovery in the II quarter, reflecting the optimism of American investors in relation to the coming of accelerating the growth of national economy. The most recent confirmation of the sustainability of the recovery of American stock market rally was the summer of his major indices, especially the futures S & P.
If the public markets for debt securities actually diminish, they may be weakened and the euro, the rise of which in the current year was to a great extent linked to the interest of investors in government bonds. A higher rate of the ECB has provided euro bonds yield more than Treasury bonds with the United States. This is directly determined the appetite of foreign investors in the securities of euro area, which gave the euro a solid odds against the dollar. If investors switch from bonds to shares, the difference in yield debt securities will not be critical.
Flow of capital between the regions
We found that capital market runs the mechanism of competition in the market conversion operations on the foreign currency. This provides a cross-free money from one regional market to another, taking into account the spread in the yield of the major financial instruments. The classic way to assess the state of perekuplennosti or pereprodannosti market one way or another currency is considered (short scale) A decision of the central bank to raise or lower the discount rate, which is directly related profitability of the bonds. The most sophisticated traders always use bonds not only for playing on the difference in interest rates, but also to make a decision on purchase / sale of foreign currency. For example, if an interest in T-bonds falls, the U.S. market, they begin to sell, of course, for U.S. dollars. That is, the currency market from foreign investors (relative to the U.S.) receives excess supply of dollars. This immediately leads to a drop in its value.
Thus, it is obvious that in recent years, going on a great transformation of global foreign exchange market. The flow of capital won, becoming the defining and driving force behind the evolution of exchange rate pairs. Thus, in all the London trading floors, on the basis of 1999 recognized the importance of capital flows. Only this year have left Western Europe 160 billion euros. Because the monthly take from Europe to 13 billion euros, the market made a clear conclusion that the euro should be sold. It is also worth noting that the cash flow is mainly settled in the United States, in their heated investment markets. This, among other things, required the conversion of euro into U.S. dollars.
At that time, changes in the dollar on the euro is largely coincided with changes in the yield spread of 10-year T-notes and 10-year-old German Eurobonds. Since then, a few traders otvazhatsya play in the strengthening of the dollar at a time when this spread continues to fall.
Now banking strategy analytics specifically examining the capital flows to predict changes in rates of major currency pairs. For example, the consortium of banks Citigroup, along with the department policies on the foreign exchange market department of the Bank is working effectively on international investment flows. This greatly helps his well-known analyst Robert Sinchu (Robert Sinche) make their predictions for the excellent exchange rates. Economists, Merrill Lynch (see the projections, for example, currency strategist company Marcela Kazumovicha) constantly use their hedge-indices for the euro and the dollar (the data indices are calculated on the basis of investment capital flows, and used the company to invest in the foreign exchange market).
Currency traders closely monitor flow of capital, consider that, perhaps, comes the time to buy U.S. dollars. By mid-summer of 2003, bond market denominated in euros, has been under strong negative pressure. Yield of 2-year euro area government bond rose to 5-week highs, yield 10-year-old gosbumag climbed to 7-week peaks. Active sales evrobumag raised a wave of euro selling.
«Reset Bond hits the euro - said an expert on monetary policies in the department of Deutsche Bank in London Hafez Bilal (Bilal Hafeez). - We see the active elimination of positions on the euro-denominated bonds in connection with developments in the perception of markets on the prospects for world economic growth ». This is mainly determined by summer and bearish trend in EUR / USD. Reset bonds euro has contributed to a statement the ECB chairman Wim Duisenberg's (Wim Duisenberg), made in the European Parliament in early July. It paid off hopes for a new ECB lowering rates, saying that the euro area monetary authorities have done their part to ensure the conditions for economic growth. The last time the ECB lowered the refinancing rate on 5 June.
Furthermore, Duisenberg made it clear that the ECB will not lower your bid to weaken the euro (for European exports): the high rate of European currencies would help curb inflation in the euro area.
Resonances in the yield spread
Mentioned Robert Sinch lowered forecasts for the euro / dollar in the coming months. He noted that the correlation between the euro / dollar and the yield spread a 10-year German government bonds and 10-year U.S. Treasury bond, which is an indicator of the impact of the business cycle on the exchange rates in the last quarter has become negative. «There are many factors that might explain why acyclic flows again become dominant in the foreign exchange markets in recent months - said Sinch. - And the difficulties that foreign investors will have to deal in the second half of 2003, will be to correctly assess when cyclical factors are returned to the fore, and the best prospects for cyclical growth the U.S. economy will be able to support a more sustainable rally of the dollar ».
Citibank is still believed that the cyclical growth of the economy and the prevailing yield advantage in favor of the U.S. in the second half of 2003 and sent to 2004 U.S. GDP growth is projected to the bank, in the time frame to reach 4% in annual terms. Increasing rates of the Fed in the second half of 2003 against a background of soft monetary policy in Europe and Japan will provide further impetus for the growth of the dollar.
It is clear that traders are looking for information to help them predict how behaves rate EUR / USD, increasingly rely on yield spread 10-year German government bonds and 10-year U.S. Treasury bonds.
Figure 1 presents graphs of return of German 10-year Eurobonds and U.S. 10-year T-notes. Their markets are similar and strongly correlated with each other. Nevertheless, rates of change in yield at different times are different, which affects the change in spreads.
Therefore, we can construct a response time of the first [1-2] on the spread of these returns and put it on the schedule for the dynamics of rate EUR / USD (curve res1 - in Fig. 2.
Here for more informative on the curve res1 superimposed curve moving average period of 5 - mA (5)). The formula for calculating this curve is quite simple:res1 = Yield (DB) - Yield (TY), where
Yield (DB) - returns the German 10-year eurobond,
Yield (TY) - profitability of American 10-year T-notes.
Figure 2 shows that from December 2002 to February 2003 there has been an increasing curve res1, who was accompanied by a growth rate of the Euro. After the resonance curve was included in the extreme zone perekuplennosti and the February was there in the market of EUR / USD took a lateral consolidation.
At the end of February - in early March res1 curve crosses its moving average curve from top to bottom and is rapidly leaving the euro zone perekuplennosti market, signaling a change of priorities in the market researched bonds. We can say that during this period, our response is beginning to swing a rate EUR / USD down. However, another seven days, the rise of the euro from 1.0875 to 1.1090 level, associated with sharp increases in the level of geopolitical risk and oil futures rally. However, developments in capital market related to the redistribution of financial flows, do not remain unnoticed by the currency market. At the end of the first decade of March, when, as seen in Figure 2, trend indicators and oscillator RSI gave false signals to buy, the market crashed and the euro turned down, once again confirming the idea that against the direction of financial flows, trade is extremely dangerous. At the same figure shows the resonance curve of the second moment of res2 [1-2] c overlay curve moving average period of 5 - mA (5). The formula for calculating the curve res2 is quite simple:
res2 = RSI (Yield (DB)) - RSI (Yield (TY)), where
RSI (Yield (DB)) - Relative Strength Index return of German 10-year eurobond,
RSI (Yield (TY)) - Relative Strength Index return of American 10-year T-notes.
Since the resonance of the second moment has a more pronounced features of the oscillator, all of its evidence of secondary, and they must be treated with greater caution. As seen in Figure 2, from the beginning of February this indicator began to apply the signals to a possible correction rate EUR / USD, thus the price ahead of the dynamics of the euro by as much as three weeks [3].
Thus, we can conclude that even the techniques able to effectively monitor mezhrynochnye capital flows and their view to take informed decisions on the currency market. This article discusses only one of several important financial flows between various components of a single global financial market. Still unknown cash flows between the regional fund, and manage money markets, in particular the role of mutual fund money in the process of pricing in the currency markets. This is a topic the following publications. Nevertheless, in this regard would lead as an example of the last report the U.S. Treasury (TIC data), published in the second half of July. He showed that net foreign investment in the United States reached a peak of $ 109.5 billion in May 2003 against a revised April value of $ 55.7 billion North American head of research department of Bank of New York Michael Vulfolk remarked: «On the background of continuing concern to the market deficit balance of current accounts United States recent data will provide some stability of the dollar.
The most remarkable long-lasting demand from foreign investors on short-term treasury bills, noted last year, despite the high, compared with European bonds, and a negative difference in interest rates ».
The expert believes that there are no signs of weakening demand for U.S. government debt securities, despite their lower yield. «This can be attributed to the huge Bank of Japan currency intervention in the international market and the accumulation of foreign exchange reserves of China», - considers Vulfolk (forexpf.ru).
In charting package was used by the technical analysis of CQG, Inc., Kindly permitted the use of company management, for which the author expresses his great thanks.
Vasily Yakimkin, Vera Shokolenko
References:
1. Yakimkin VN Financial dealings. Book 1. - M.: ICF OmegaL, 2001.
2. Yakimkin VN resonance - a new class of technical indicators. Parts 1 and 2 / / Currency speculator, 2001, № 4, pp. 44-48; № 5, pp. 42-47.
3. Yakimkin VN Financial dealings. Book 2. - Moscow: Russian citizen Yakimkina VG, 2002.
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