Posts from — November 2006

Over the last few months, we’ve seen the FX market reach decade lows in terms of volatility.  We also saw a continuing slew of poor economic data being released from the US combined with a Fed that stopped raising interest  rates in August for the first time in over two years.  This was the perfect recipe for an inevitable sell off of US Dollars and that is exactly what traders saw starting last Thursday during Thanksgiving.  The EUR/USD was rangebound between 1.2500 and 1.2900 since the end of April and the market was just waiting for that breakout.

On what was supposed to be a fairly quiet weekend, with both the US and Japanese markets closed on Thursday, the market saw traders take advantage of thin liquidity to sell off massive positions of dollars.  On Sunday, when most financial institutions began opening up their trading desks again, we saw both the EUR/USD and GBP/USD gap upwards over 100 pips!  Over the course of a few days, the Euro and Pound have rallied over 300 pips to reach yearly highs of 1.3161 and 1.9473 respectively. The market also saw what could be the unwinding of the carry trade in the USD/JPY as the pair dropped to a low of 115.37.

So what is causing all this dumping of dollars? Traders are betting that the Fed will cut interest rates sooner than later combined with the fact that the ECB and BOE are both considering rate hikes.  Whether you are dollar bull or bear, we can all agree that this is a great time to start trading FX.  If you haven’t done so already, find a broker and open that account.

Have you heard the expression “Money changes people”? The saying implies that people’s behaviors and attitude towards society change as they come into possession of large amounts of money. Now according to an article from SeattlePI.com, just SEEING money can alter people’s behaviors. Several experiments were conducted to see the affect of people who were exposed to seeing money versus those who were not. The results were that people who were exposed to money became more self-sufficient and less social.

“The underlying idea is that at some point early on in human evolution everyone probably needed someone else to help them achieve their goals,” whether building a home or catching food. Eventually systems of exchange came along, and then money, which could be exchanged for things, allowing people to pursue their own aims without the aid of others. So, over time, people with money didn’t need other people so much.”

In one experiment conducted, 61 students at the University of British Columbia were asked to fill out questionaires. Some of the students sat in front of a poster showing money, sat in front of a poster that showed flowers, and the others sat in front of a poster that showed a seascape. The students were then asked to choose between different recreational activities that were categorized into group or individual events. The results showed that students who were looking at the money were more likely to choose individual activities.

Another test had students unscramble a set of letters into words. The words fell into two groups, one that involved money and one that did not. The students were then asked to solve a puzzle and told to ask for help if needed. Those who unscrambled the words that involved money, waited almost twice as long to ask for help versus those whose words were random.

“Subjects exposed to the idea of money subsequently show more self-reliant but also a more self-centered approach to problem-solving than subjects exposed to neutral concepts,” said Carole B. Burgoyne and Stephen E. G. Lee of the University of Exeter in England.

More and more companies are creating their own currencies for online exchange of goods and services. With Microsoft’s release of their iPod clone, they created a system where customers buy ‘points’ to purchase media. Some have a negative views on it, like applematters.com:

Adding a completely unnecessary layer of confusion is, in and of itself, a bad thing. But it wouldn’t be Microsoft if they didn’t go that extra mile to rape their customers. You see, when you buy these “points” you can’t buy them as you need them, you have to purchase them in Microsoft defined denominations. In other words, Microsoft just invented a currency and they require you to invest in this currency before they can sell you any music. And just if you were wondering, here are the denominations:

$5 = 400 points
$15 = 1200 points
$25 = 2000 points
$50 = 4000 points

But wait, it gets BETTER! There isn’t a 1 to 1 correspondence between the value of a “point” and the value of a penny. Let me break out some math for you:

If
$5 = 400 points
then
$1 = 80 points
therefore
100 cents = 80 points
meaning
1 cent = .8 points
or
1 point = 1.25 cents

But one company stands out above the rest for a new digital currency. Linden’s Lab’s Second Life has not only a currency with a exchange rate, but one can actually trade it like they would trade the EUR/USD! The USD/SLL is the US Dollar against the Linden Dollar. There’s market data on the company’s website and even a site that offers charts and currency exchange. You can see charts of price and even volume, like this one:

Chart made using slexchange.com.

Smythe & Co., one of the world’s leading auction houses specializing in Coins, Paper Money, Antique Stocks and Bonds, is scheduled to hold an auction containing high quality, rare proof notes and sheets on December 12 and 13. Approximately 750 lots will be catalogued and sold in this important sale.

Money mavens will be able to find Colonial, Obsolete, and US Currency as well as stocks and bonds and a special section of security printing history items. The colonial section will feature a rare Benjamin Franklin marbled back 1789 3 Pence Pennsylvania note. The stock and bond section features a newly discovered Arizona and New Mexico Express Company stock dated 1875 and signed by Henry Wells. In the US section one of only three known 1929 $100 Minneapolis stars will also be offered.

For more information regarding this auction and to find out about upcoming currency auctions, visit the Smythe & Co. site.

“We will take action in advance, moderately, to avoid drastic reactions. We will adopt a forward-looking approach” states Bank of Japan Governor Fukui.

Boris Schlossberg of Forex Capital Markets says:

Those comments helped propel the yen higher as traders speculated that the central bank may be ready to raise rates before the year end. Although recent economic data from Japan has been relatively lackluster reflecting the overall global slowdown in demand, the country’s unnaturally low interest rate of only 25bp has attracted enormous amounts of carry trade flows against the currency, pushing the EUR/JPY rate above the critically important 150 level. Japanese officials cognizant of the deep discomfort on the part of their European counterparts at the lofty levels of euro against the yen have tried to jawbone the exchange rate lower. Last week Hiroshi Watanabe, Japan’s top FX official stated that there was no reason for yen to weaken further. However Mr. Watanabe’s remarks had little lasting impact on the market as traders dismissed them as mere talk. Tonight’s statement by Governor Fukui appears to be an effort by Japanese officials to finally back their words with action. Should BoJ raise rates before the year end, the yen may rally higher as carry trade liquidation takes hold in earnest.

On the technical side, the USD/JPY (dollar against the yen) is:

• Below yesterday’s low at 117.65
• Price falls into monthly pivot range (117.38 to 118.25)
• Price still below 20 day moving average (118.43)

ECB President Jean Claude Trichet continued to use the term “vigilence” during his statement after the ECB rate decision. “Strong vigilance remains of the essence,” Mr Trichet said. “It is essential that inflation expectations remain firmly anchored at levels consistent with price stability. We will do all that is necessary for price stability.” These similar hawkish comments have been made throughout the central bank’s last five rate hikes. Although the ECB left rates unchanged at 3.25%, it is almost certain that they will raise by at least another 25 basis points in December.

The market was relatively somber following the comments as expectations were already priced in. The EUR/USD slipped about 20 pips to 1.2763 but quickly recovered and continues to make daily highs as it approaches the 1.2800 figure.

This sounds like a scam right? Well, it’s happening. The Wall Street Journal published an interesting article today about the discount placed on certain bills based of age, condition, and even the signature on the bill.

In many countries, from Russia to Singapore, the dollar’s value depends not just on global economic forces that move international currency markets, but also on the age, condition and denomination of the bills themselves. Some money changers and banks worry that big U.S. notes are counterfeit. Some can’t be bothered to deal with small bills. Some don’t want to take the risk that they won’t be able to pass old or damaged bills onto the next person. And some just don’t like the looks of them.

Even hotels discriminate against certain bills:

The Stella Matutina Lodge in Goma, Democratic Republic of Congo, accepts 2001 series C-notes — the ones with Treasury Secretary Paul H. O’Neill’s signature — but says they’re only worth $90. The hotel accepts the 2003 Snow bills at face value.

Notes have always been discounted for various reasons. Before the United States had one currency, prices of notes from banks of different cities were published in local papers. The discounting there however was generally due to the transportation of the currency. A note from the Bank of New Orleans would not be worth as much in Chicago as it would in New Orleans. Interesting to see this factor combined with counterfeiting still plays a role in money.