Bloomberg Market Concepts
Central Banks an Currencies summary:
-central bankers control the levers of the currency markets -the standard inflation target is 2% for industrialized nations -inflation can lead to a vicious cycle of pay increases leading to price increases -deflation can lead to a vicious cycle of purchase deferrals and layoffs
Currency market mechanics summary:
-the US dollar equivilent of 5T of currencies are traded every day -1971 marked the dawn of the modern currency market -several contries peg their currencies to other currencies -locked exchange rates are not actually set in stone but are government aspirations -floating currencies move against one another in a matrix -the US dollar is the world's reserve currency and is the most heavily traded currency
Currency Valuation Summary:
-the value of a currency is relatice and not absolute -trade-weighted baskets express currency overall strength and weakness -in the long run, the "law of one price" drives currency values -in the short run, there are three main drivers of currency valuation: 1. surprise changes in interest rates 2. surprise changes in inflation 3. surprise changes in trade
What are 3 examples of failed pegs?
1. British sterling against the Deutsch mark in 1992 2. Mexican peso against the US dollar in 1994 3. Argentine peso against the US dollar in 2002
What is the most common target inflation rate for an advanced economy?
2%
GDP statistics are typically released by the government a month or more after the period in question, by which point dozens of other indicators have been released.
Because GDP statistics are released well after other economic indicators
Nonfarm payrolls, CPI and PMI are published monthly. GDP is only published on a quarterly basis.
GDP
By what mechanism so interest rates affect currency value?
Global investors are attracted by higher bond yields in high interest rate countries
What is an example of a failed peg?
Hong Kong dollar aginst the US dollar in 1997
Which headlines could move a currency pair?
US Stocks Rally of Fed's Surprise Reduction of Interest Rate
What driver weakened the Swiss frank?
a surprise change in inflation expectations
In 1994, the Mexican peso declined against the US dollar by 37% during the so-called Tequila Crisis. What exacerbating factor did Mexico's Tequila Crisis have in common with the Argentine crisis of 2002?
both countries had large dollar-denominated debts
What does the Big Mac index show?
how currencies may be undervalues or overvalued
Were the two oil crises in the 1970s linked to deflation or inflation?
inflation
Which economic indicator is most directly linked to unemployment?
nonfarm payrolls
What are 3 main short-term drivers of currency valuation?
surprise changes in interest rates, inflation, and trade
What generally happens when a central bank unexpectedly increases interest rates?
the currency strengthens
Which of the following is the biggest pitfall of economic indicators? 1. they do not take into account seasonality 2, they are not sufficiently timely to make investment decisions 3. they only serve as proxys for economic activity 4. they do not consistently presage turning points
they do not consistently presage turning points
"New news" moves markets. Accordingly, the economic indicators that heralds "new news" are of the most value to traders and investors.
timeliness of release
What was the primary goal of Abenomics?
to halt the vicious cycle of deflation
What is the main reason that investment banks create estimates of economic indicators?
to know when specific economic data points are a positive or negative surprise