Category — Currency

The Yen was hammered last night in the forex market.  In the Bank of Japan meeting there was a decision to keep the overnight lending rate at 0.5%, the lowest among all the major currencies.  All the major currencies increased against the Japanese yen as it became obvious that rate differentials were not going to compress.  But as Boris Schlossberg of DailyFX.com points out, the losses probably had as much to do with the bank’s reluctance to commit to a rate hike in August as they had to do with today’s decision.  The policy makers in Japan admitted that they were more worried about the still-lagging domestic consumer demand than they were about the admittedly undervalued currency.

Carry traders continue to rejoice with the non-move in interest rates.  With no danger of a US rate cut, USD/JPY reached a fresh 5-year high.  There is cause for some worry for carry traders in the currency market.  The undervalued yen has led to an advantage for Japanese companies overseas.  There has already been complaining in Europe about this advantage.  If policy makers in the US jump on this bandwagon as well, it could lead the BoJ to institute a preemptive rate hike.

Going back to the dollar, there are a few signs of continuing dollar strength.  On June 14, we saw PPI numbers that positively surprised the forex market.  Almost all recent data that has come out the US has been higher than expected and supported dollar bids.  And in the last week, high bond yields have continued to suggest an interest rate hike by the Fed.

But today’s data shows creeping signs of dollar weakness.  Home mortgage rates last month reached record highs, as did foreclosures.  With that kind of negative push on the US economy, it might be unwise to raise rates at the time.  In addition, today’s CPI report came in surprisingly tame, with a lower-than-expected rise in prices.  Production at factories, mines and utilities declined last month, and consumer expectations have been underwhelming.  A repeat of this kind of performance in coming days might give the Fed some cover for a rate cut.  And it is that fear that allowed EUR/USD to gain so strongly yesterday.

The rise of prices in base metals has caused possessiveness and even theft of various common items made of these now more valuable metals. This theft and vandalism, what some call the “Red Gold” Rush, has been hurting basic functions of society. In Italy copper has been ripped off of bridges, train equipment, and tombs. In some cases, like at South Africa construction sites, the crime is organized.

The value of the metal has gotten to the point where it is worth more than the coins it is used to make. This excerpt in from the Wall Street Journal:

U.S. Mint officials said they were putting into place rules prohibiting the melting down of one-cent and five-cent coins. The rules also limit the number of coins that can be shipped out of the country. Officials said they had received a number of inquiries from the public in recent months concerning the value of the metal in the coins and whether it was legal to melt them.

Because of the prevailing prices of copper, zinc and nickel, the cost of producing pennies and nickels exceeds the face value of the coins.

A nickel is 25% nickel and 75% copper. The metal in one nickel costs 6.99 cents. When the Mint’s cost of producing the coins is added, the total cost for each nickel is 8.34 cents.

Modern pennies have 2.5% copper content with zinc making up the rest of the coin. The copper and zinc in a penny are worth 1.12 cents.

On a monthly chart the GBP/USD hits a rarely touched thirty year trend line.

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.