An Asian Currency Bloc?

Now this is extremely interesting news indeed. An Asian currency bloc?

I quote:

Asian central banks appear to be adopting similar monetary policies in a way that suggests they could be preparing for an eventual currency union for the region, according to Deutsche Bank.
Twelve Asia-Pacific currencies – including the yen, the Korean won, the Indian rupee and the Australian dollar – have increasingly traded as a bloc since 2005, the bank’s research has found.
There is an increase in the correlation between the value of Asian currencies as central banks try to keep their export-led economies competitive internationally and also reduce foreign exchange volatility within the region.
This trend is a result of the wider use of trade-weighted currency baskets in India, China, Singapore and Malaysia, the bank says, adding that the patterns show similarities to movements in some European Union currencies in the years before the euro was created in 1999.
“Asia is beginning to look a lot like Europe in the 1980s and the start of the 1990s,” said Martin Hohensee, Asian head of fixed income and credit research, who led the analysis.
“Policymakers and politicians are talking seriously about the possibility of Asian currency union, even if there isn’t a single currency,” he told the Financial Times in an interview.

All this to be taken with a grain of piquant salt!!!

India keen to usher in currency futures

Very good step, its better for corporates to manage the exposure to exchange rates via hedging rather than hope that the government will take a very blunt macroeconomic weapon to trying to manage the exchange rates.

India’s financial market regulators and stock exchanges are speeding up the introduction of currency futures amid government concern that a sharp appreciation in the rupee against the dollar is hurting politically sensitive export sectors.

Ravi Narain, managing director and chief executive of the National Stock Exchange, India’s largest bourse, said talks were under way with regulators about bringing in currency futures, possibly by early next year. The timing seems a no-brainer,” he said. “Everyone is keen to see this introduced sooner rather than later.”

A strengthening of more than 10 per cent in the rupee against the dollar this year has prompted layoffs in India’s textile, jewellery and other labour-intensive export industries.

In its battle to sterilise a flood of foreign dollars into the country’s booming equity and real estate markets, the Reserve Bank of India has accumulated a record $95.4bn in reserves over the past 12 months, bringing the total to $262.5bn.

There are concerns the RBI can slow but not stop the rise of the rupee, leading regulators to conclude that exporters need more tools with which to hedge foreign exchange risk, such as a large and liquid currency futures market.

Mr Narain said regulators were also working on developing interest rate futures, seen as crucial to the development of the country’s debt markets.

Bankers welcomed the moves. Sanjay Nayar, Citigroup chief executive officer for India and head of Nepal, Sri Lanka and Bangladesh, said: “If Mumbai is to become a financial centre, the development of the bond, currency and derivative markets is critical. People need to be able to hedge their risk, and regulators seem to be gaining traction in that direction.”

The stock market regulator, the Securities and Exchange Board of India, has promised to fast-track new products following measures last month aimed at curbing the use of offshore derivative instruments, or P-notes, that allowed investors to trade Indian stocks without registering locally.

Mr Narain said he was cautious about the prospect of consolidation among global exchanges, including those in Asia, partly because of a “stratospheric” rise in valuations on some bourses.

He said he had not seen a departure of liquidity from India following the crackdown on the use of P-notes, which were favoured by hedge funds.

The NSE accounts for 85 per cent of India’s combined equities and derivatives trading. In the year ending March, it made revenues of about $450m and profits of about $200m.

All this to be taken with a grain of piquant salt!!!

Value of the US Dollar - the Supermodel viewpoint

I had a quiet chuckle when I read this quote from the Euromoney

"I have absolutely no idea how low the dollar can go. But I can’t help thinking that when supermodels start predicting it will fall further, we must be near the base"

this relates to this story.

Supermodel Gisele Bundchen has proved she's got a head for figures - the
financial kind. The Brazilian beauty has insisted that she is paid in Euros
rather than US dollars.
With the dollar hitting an all time low against the Euro and British pound, the 27 year old catwalk queen has demanded the currency change.

All this to be taken with a grain of piquant salt!!!

The Indian Rupee is squeaking a bit

The Lex reports that because of the fall in the USD, the Indian Rupee is heaving itself upwards and slowly the market equalisation bill is rising for India. Lex suggests 3 options:

Assuming further big-scale currency appreciation is off the agenda, India’s
policymakers have three options. They can continue hiking bank’s reserve
requirements, which has the added advantage of curbing credit growth. Second,
interest rates could be cut to lower the cost of sterilisation – but that would
risk stoking an already hot economy. Last, policymakers could follow their
neighbours and revert to old-fashioned capital controls. India has already
dallied with this, imposing curbs on external commercial borrowing and
participatory notes, but could extend these to real estate or local banks’
foreign currency operations. In Asia, the least palatable option can never be
ruled out.

Well, perhaps Lex didnt notice but India just did the first one, second one and it has a fair bit of third one already. And one didnt see the fourth option, and that is to push for Indian firms to invest outside, so to take the damn rupees out of the country rather than the familiar giant sucking sound so beloved of the Indian banks and corporates (and individuals, but they are pipsqueaks compared to the big chaps).

It promises tobe quite interesting to see how the Reserve Bank of India handles this situation! :)


All this to be taken with a grain of piquant salt!!!

An event study of institutions and currency crises

This is what I would call as a d'oh study. The authors study many institutional variables ranging from corruption, conflict, bureacratic ability etc. before and after a currency crisis. And well, the d'oh conclusion is that they do find that there are severe institutional issues around currency crisis. But it is clear that if a country has weak institutions and institutional frameworks, then the chances of having a currency crisis is much higher.

Pattama L. Shimpalee and Janice Boucher Breuer, An event study of institutions and currency crises, Review of Financial Economics, Volume 16, Issue 3, Exchange Rates and International Financial Assets: A Special Issue in Honor of Stanley W. Black, 2007, Pages 274-290.
Abstract: We use event study methodology to examine the behavior of seven institutional variables eighteen months prior to and after a currency crisis. Our data on institutions include bureaucratic quality, corruption, ethnic tensions, external conflict, internal conflict, government stability, and law and order over the period 1984-2002. Our country coverage includes forty industrial, emerging market, and developing economies for various regions of the world. The graphical event study shows that there are many instances where institutions are weaker in periods before and after a currency crisis than during tranquil periods. The evidence is most compelling for government stability, law and order, bureaucratic quality, and corruption. We also test for differences in the mean values of institutional variables in turbulent periods around a crisis event and tranquil, non-crisis periods. Results from our tests generally complement evidence from the event study.