InvestMacro FX

How the Yen-Yuan Agreement Benefits the United States

by Jason Jenkins, Investment U Research
Thursday, January 12, 2012

What you may have missed during the last week of 2011 was the announcement of a currency pact between Tokyo and Beijing. Here’s your briefing of what went down…

During a visit to China by Japanese Prime Minister Yoshihiko Noda, China and Japan announced a series of deals that promote the use of the yuan in trade and investment between the world’s second- and third-largest economies.

On December 26, 2011, it was officially announced that Japan and China will promote direct trading of the yen and yuan without at first using dollars and will encourage the development of a market for companies involved in the exchanges.

What this means is that the two countries agreed to promote direct yuan-yen trade, rather than converting their currencies first to dollars, and also for Japan to hold yuan in its foreign-exchange reserves, which are now largely denominated in dollars.

This will limit some of the power of the dollar in Asia.

Not Just Japan

China also announced an $11-billion currency swap agreement with Thailand earlier in December as part of a plan outlined in October to promote the use of the yuan in the Association of Southeast Asian Nations (ASEAN) and establish free trade zones.

ASEAN is a geo-political and economic organization of ten countries located in Southeast Asia which aims include the acceleration of economic growth, social progress, cultural development among its members, the protection of regional peace and stability.

Their top six economies are: Indonesia, Thailand, Malaysia, Singapore, Philippines and Vietnam.

Central banks from Thailand to Africa have expressed interest in buying yuan assets as slowing global growth have knocked down interest rates in the more developed economies.

What it Means…

• From the Japanese point of view:

A Japanese government official said that in the future, Asian currencies “may become more important than they currently are.” However, Japan did not make this move to buy Chinese government debt based on a perception that the yuan is likely to become more popular and dominant than the yen. “The yen’s role will rather become more important to other countries if we deepen our relationships with them,” the official said. This is strategic positioning.

• From the Chinese point of view:

The Chinese have always been wary of the almighty dollar’s role in international trade, and has suggested other ways to run the international monetary system – this includes giving a bigger role to the International Monetary Fund (IMF) and a wider role for the yuan.

• The U.S. stance:

Harvard University economist Jeffrey Frankel said that “this hastens a multicurrency world, but this is just one of 100 steps along the way.” We know the yuan is far away from becoming an international safe haven currency like the dollar.

Yet, the U.S. government loves this agreement because it forces the yuan to be stronger on the international stage. For the yuan to play a larger role, China would need to restructure its monetary policy. Morris Goldstein, an economist at the Peterson Institute of International Economics in Washington D.C., said those policies would include sharply reducing its exchange-rate intervention, liberalizing interest rates, reducing restrictions on capital flows and putting its banking system “on a more market-oriented basis,” so the yuan can trade freely.

Good Investing,

Jason Jenkins

Article by Investment U

This is what’s in the news for Thursday January 12, 2012. The Wall Street Journal reports U.S. energy firms are pumping so much natural gas out of the ground that prices are dropping–down 5.7% yesterday–and the cheap gas isn’t likely to end anytime soon. The Wall Street Journal also reports Google (NASDAQ:GOOG), which took its Web-search engine out of mainland China two years ago after a censorship fight with Chinese authorities, renewed its drive to expand there. The Wall Street Journal also reports Sears Holdings (NASDAQ:SHLD) suffered a new setback when CIT Group (NYSE:CIT) said it would no longer finance loans to suppliers waiting for payment from the company. Reuters reports GM (NYSE:GM) could move more vehicle production to its European factories in a cost-cutting deal with its German union that could avoid a standoff and keep its Opel unit out of bankruptcy, Reuters reports. Finally, Bloomberg reports generic drug maker Teva Pharmaceutical Industries (NASDAQ:TEVA) is seeking acquisitions in Asia to help its sales in the region and expand its product lines, company executives say.

U.S. Manufacturing Vitality Offers Opportunities

by Carl Delfeld, Investment U Senior Analyst
Thursday, January 12, 2011: Issue #1685

I hail from Milwaukee – the heart of America’s industrial backbone.

My father and his two brothers all graduated from Marquette University with degrees in engineering. My Dad was an industrial and manufacturing engineer working for giants like Allis-Chalmers and smaller companies like Pressed Steel Tank.

Sadly, my only contribution to American industry was pitching industrial stocks to institutional investors in Tokyo, Hong Kong and Sydney during the mid-1980s. Given the growing perception that American manufacturing was on a path to oblivion – it was like pounding your head against a wall.

The perception of a manufacturing base in decline is largely tied to manufacturing jobs that have dropped sharply from 19.6 million in 1979 to 11.8 million today.

The truth is far more positive and encouraging.

• U.S. manufacturing workers are standout performers with productivity rates five times that of Chinese workers.
• American manufacturing output is roughly equal to that produced by China and equal to the entire economy of India! The value of American manufactured exports over the latest 12-month period is $1.074 trillion (not adjusted for inflation) according to The New York Times.
• America is the largest exporter of advanced manufactured products in the world. The United States is particularly strong in machinery, chemicals and transportation equipment, which together make up nearly half of the exports.

And lately, manufacturing has been a bright spot in a rather sluggish U.S. economy.

The U.S. Labor Department reported that manufacturing companies have added jobs in two consecutive years. Until last year, there had not been a single year when manufacturing employment rose since 1997.

Another favorable trend is that companies are beginning to move some offshore manufacturing back home. This is driven by higher labor costs in countries like China, plus the desire to protect intellectual property and bring production closer to end markets.

No wonder that a recent PricewaterhouseCoopers quarterly survey of manufacturing executives found almost 63% were optimistic about growth prospects in the next 12 months.

A More Vibrant Manufacturing Base

One manufacturing play that highlights the trend of a more vibrant manufacturing base is Honeywell (NYSE: HON).

Honeywell is a well-diversified multinational in the aerospace, climate control, special materials and auto parts business. The company is best known for its heating, cooling, ventilation, and home security products and services.

Roughly 50% of its products are linked to energy efficiency – a nice place to be right now.

CEO Dave Cody has outlined some ambitious performance targets to be achieved by 2014. The company plans to increase annual revenue growth to 9%, reduce cycle times by 30%, reduce product costs by 50%, increase revenue from emerging markets from 23% to 30%, and more than double its product sales from $4.1 billion to $9 billion by 2014.

Plus, investing in America’s manufacturing micro boom is great for your portfolio and for the country.

Good Investing,

Carl Delfeld

Article by Investment U

Jan. 12 (Bloomberg) — Adrian Kinderis, a member of the Internet Corporation for Assigned Names and Numbers’ advisory council and chief executive officer of ARI Registry Services, talks about domain names. Icann, manager of the Web’s address system under a U.S. Commerce Department contract, will start accepting applications for new top-level domains today. The Marina del Rey, California-based group may approve hundreds of new Web address extensions to the right of the “dot,” including company and brand names, cities and almost any word in any language. Kinderis speaks from New York with Susan Li on Bloomberg Television’s “First Up.” (Source: Bloomberg)

Jan. 12 (Bloomberg) — The European Central Bank held interest rates steady after two straight cuts as signs of respite from the sovereign debt crisis gave it scope to pause. ECB policy makers meeting in Frankfurt kept the benchmark interest rate at a record low of 1 percent. Sara Eisen reports on Bloomberg Television’s “In the Loop.” (Source: Bloomberg)

London Gold Market Report
from Adrian Ash
BullionVault
Thurs 12 Jan., 08:55 EST

The PRICE of BOTH gold and silver hit a 1-month high in London on Thursday morning, gaining 0.9% and 2.1% respectively as world stock markets also rose, as did the single Euro currency and industrial commodities.

US, German and UK government bond prices all ticked lower, nudging yields higher, after Spain and Italy successfully auctioned €22 billion in new debt between them, and at much lower interest rates than investors demanded in December.

Dollar prices to buy gold touched $1658 per ounce. Silver extended its New Year gains to 10.0% at $30.70.

“Because gold is easy to sell, it has seen the same flight to cash that risk assets such as equities have suffered,” says Mark Dampier head of research at UK equity and fund brokerage Hargreaves Lansdown, writing in Money Marketing magazine.

However, “The attractions of gold remain undiminished…I believe the fall back in price could present a buying opportunity,” says Dampier, advising investors to consider “more risky and potentially more rewarding” exposure to gold through mining stocks.

“Clearly the uptrend [in gold] will prevail,” agrees UBS Wealth Management’s head of commodity research Dominic Schnider.

“[But] technically we are still in a consolidation period after the record high in September, and this phase will likely end in end-February or early March.”

Ending New York trade on Wednesday some 0.3% higher – and “finally closing back above its 200-day moving average at 1636” – the rising price to buy gold means “We are more neutral now from our bearish outlook,” says Scotia Mocatta’s latest technical analysis.

Wholesale demand to buy gold in Hong Kong was “slow” overnight according to one local dealer.

“This is surprising,” says Thursday’s commodities note from Standard Bank, “given that we usually see a seasonal pick-up in physical gold demand from China ahead of the New Year celebrations” – falling earlier than usual in 2012 on January 23rd.

China meantime reported a drop in consumer-price inflation to 4.1% annually for December.

Currently offered just 3.5% annual interest on bank deposits, Chinese households were today deprived of yields of up to 9% offered by trust funds investing in short-term debt issued by banks and corporations known as commercial paper.

“We have received the phone call today, and the product has been banned,” Reuters quotes an un-named executive with a state-owned trust.

“If the notes aren’t sold to banks, it’s equivalent to moving a loan off banks’ balance sheets,” says She Minhua at Zhong De Securities.

One Chinese data provider says 17 such commercial-paper trusts were launched in 1 week in December. The China Banking Regulatory Commission reckons their total value is perhaps CNY300 billion ($48bn).

Beijing yesterday announced its 2012 targets for money-supply and bank lending growth, raising the permitted volume of new credit by 7% from 2011’s full-year total of CNY7.47 trillion ($1.18trn).

“Inflation is coming down, but there are still a lot of tailwinds and structural forces behind price rises,” says Kevin Lai at Daiwa Capital Markets in Hong Kong, speaking to Reuters and pointing to last year’s 22% rise in the China’s minimum wage.

But “China is more worried about an economic slowdown now and will continue the policy easing cycle,” says Nomura’s chief China economist Zhang Zhiwei.

Here in Europe on Thursday, both the UK and Eurozone central banks today voted to keep their interest rates on hold, and both also left their latest “extraordinary measures” on hold.

That enables the Bank of England to buy and hold a total of £275 billion ($420bn) in UK government bonds. The European Central Bank will next month repeat its unlimited offer of 3-year loans, of which commercial banks took €489 billion ($623bn) in December.

“The only reason [today’s Italian and Spanish debt sale] has been taken so well is abundant ECB liquidity,” reckons strategist Michael Leister at DZ Bank in Frankfurt.

“The market seems very complacent.”

Eurozone governments “need to do their utmost” to correct fiscal deficits, said ECB president Mario Draghi at the monthly press conference following today’s interest-rate decision, adding that the 50% write-down of privately-held Greek government debt is “unique and exceptional”.

The Euro rose on Thursday, but the Pound fell to its lowest level against the Dollar since early October, helping the price to buy gold in Sterling rise to 1-month highs just shy of £1080 per ounce.

Adrian Ash
BullionVault

Gold price chart, no delay   |   Buy gold online at live prices

Adrian Ash is head of research at BullionVault, the secure, low-cost gold and silver market for private investors online, where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2012

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Jan. 12 (Bloomberg) — Didier Duret, chief investment officer at ABN Amro Private Banking, talks about Europe’s debt crisis, its implications for global equity markets and the outlook for the euro. Duret speaks with Rishaad Salamat on Bloomberg Television’s “On the Move Asia.” (Source: Bloomberg)

Jan. 11 (Bloomberg) — Carrie McCabe, founder and chief executive officer at Lasair Capital LLC, talks about the outlook for hedge funds. She speaks with Pimm Fox on Bloomberg Television’s “Taking Stock.”

Video courtesy of ForexCT – A leading Australian forex broker, liscensed by the Australian Securities & Investments Commission, offers the MetaTrader4 and PROfit Platform to retail traders. Other services include Segregated Accounts, Trading workshops, Tutorials, and Commodities trading.

Source: ForexYard

Ahead of a key European interest rate announcement scheduled for later today, the EUR once again has turned bearish following comments from a from a leading credit agency which highlighted just how vulnerable the currency is. With Spanish and Italian debt auctions scheduled to close out the week, traders can count on heavy volatility throughout the day today.

Economic News

USD – Return to Safe-Havens Turns USD Bullish

The US dollar recouped many of its losses from earlier in the week yesterday, as traders once again abandoned riskier assets in favor of safe-haven currencies like the greenback. The move brought the EUR/USD just shy of its 16-month low, while the GBP/USD fell to right around the 1.5300 level. The dollar’s bullish movement began after comments by a leading credit agency regarding the euro-zone debt crisis sent traders to more secure currencies. The comments highlighted just how fragile the euro-zone situation is.

Turning to today, while most of the day is likely to be dominated by euro-zone news, traders will want to pay attention to several US economic indicators which may influence the markets. Both the Core Retail Sales and Retail Sales figures are forecasted to come in above last month’s figures. Additionally, the weekly US Unemployment Claims figure is predicted to show continued positive movement in the American employment sector. If so, investors may be more inclined to shift their funds to riskier assets. That being said, if any negative European news is released today, it would likely lead to heavy EUR losses in mid-day trading.

EUR – Euro Dips Ahead of Minimum Bid Rate

Negative comments by a top credit agency turned the euro bearish in yesterday’s trading, following several days of upward movement. The comments served as a warning to any trader who thought that the currency could maintain its bullish momentum. The EUR/USD once again dropped toward a 16-month low as investors reverted their funds back to safe-haven currencies.

Today, a batch of European news is forecasted to influence the market-place. The European Central Bank’s interest rate decision and subsequent press conference is expected to generate heavy market volatility. Additionally, euro-zone debt auctions scheduled for today and tomorrow will illustrate just how bad the current euro-zone crisis actually is.

Traders should note that unless the debt auctions go smoothly, the euro is unlikely to stage any kind of meaningful recovery before the end of the week. With market sentiment overwhelmingly against the euro at the moment, it would take substantially good news to turn the currency bullish.

JPY – Yen Drops to 5-Day Low against USD

The USD/JPY broke the 77.00 barrier yesterday to reach a 5-day high before edging back down in late day trading. Analysts attributed the spike to a return to safe-have assets following another negative day for the euro. The yen faired significantly better against its other main currency rivals, like the euro and British pound, as it was able to take advantage of its reputation as a stable currency during market volatility.

Today, the JPY is forecasted to remain bullish against the EUR and GBP, as a batch of euro-zone news is likely to create major price movements in the market. Without positive European news, the yen may continue its bullish run to close out the week. At the same time, the USD seems to be benefitting most from the current bout of negative euro-zone data. If the current trend remains, the USD/JPY is likely to rise even further.

Crude Oil – Oil Prices Fall Amid Euro-Zone Debt Fears

The price of crude oil fell on Wednesday, as fears of an economic slowdown in Europe prompted investors to shift their funds away from the commodity. With the USD once again rising, crude oil has become less attractive of an investment. A strong US dollar makes oil more expensive for international buyers and drives investors away.

Crude was still able to stay well above the $100 a barrel level, as continued tensions between Iran and the West kept supply side fears on investors’ minds. Today, with plenty of euro-zone news forecasted to impact the markets, traders can expect another hectic day for oil. Any increase in the value of the US dollar is likely to send the price of oil down further.

Technical News

EUR/USD

A bullish cross on the daily chart’s Stochastic Slow is a sign that upward movement may occur in the near future. This theory is supported by the Relative Strength Index on the same chart, which has drifted into the oversold zone. Traders may want to go long in their positions today.

GBP/USD

The Williams Percent Range on the weekly chart has dipped well into the oversold region, indicating that bullish movement may be on the horizon. Additionally, the Relative Strength Index is hovering close to the 20 level. Going long may be the preferred strategy today.

USD/JPY

Technical indicators are still providing mixed signals for this currency pair. While the Relative Strength Index on the 8-hour chart is in oversold territory, most other indicators are in the neutral zone. Taking a wait-and-see approach may be the preferred strategy today.

USD/CHF

The daily chart’s Williams Percent Range has drifted above the -20 level, indicating that bearish movement may occur in the near future. Traders may want to go short in their positions before any downward correction.

The Wild Card

Platinum

The 8-hour chart’s technical indicators show that this commodity has been overbought for some time. A bearish cross has formed on the Stochastic Slow, while the Relative Strength Index shows that a downward correction could take place. Forex traders may want to take this opportunity to open short positions ahead of a bearish correction.

Forex Market Analysis provided by ForexYard.

© 2006 by FxYard Ltd

Disclaimer: Trading Foreign Exchange carries a high level of risk and may not be suitable for all investors. There is a possibility that you could sustain a loss of all of your investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with Foreign Exchange trading.