FOREX
GUIDE
UNITED
STATES
The
United States is the world's leading economic power, with
GDP valued at over $10 trillion USD in 2001. This is the highest
GDP in the world and based upon purchasing power parity (PPP),
it is three times the size of Japan's output, five times the
size of Germany's and seven times the size of the United Kingdom's
GDP. With the U.S. having the most liquid equity and fixed
income markets in the world, foreign investors have consistently
increased their purchases of U.S. assets. Foreign direct investments
represent approximately 40 percent of total global net inflows
for U.S. On a net basis, the U.S. absorbs 71 percent of total
foreign savings.
The
import and export volume of the U.S. also exceeds that of
any other country. On a netted basis, the U.S. is running
a very large trade deficit of nearly $500bln. This is because
the U.S. is the largest trading partner for most countries,
representing 20 percent of total world trade. This large absolute
number indicates that the U.S. is heavily reliant on capital
flows and the dollar is very sensitive to changes in those
flows. In fact, in order to prevent a further decline in the
USD as a result of trade, the U.S. would need to attract close
to $1.9bn in capital inflows per day.
The
U.S. is primarily a service-oriented country with nearly 80
percent of their GDP coming from real estate, transportation,
finance, healthcare, and business services. With the advent
of new technology such as the internet, productivity in the
U.S. has consistently increased. This is particularly interesting
in light of the recent economic downturn, because many economists
argue that despite the current downturn, increased productivity
indicates that we are in a "new economy." The importance
of this comment is that if the U.S. is indeed in a "new
economy," previous reactions to recessionary conditions
may not repeat themselves in this downturn.
Characteristics
of the U.S. Dollar
More
than 90 percent of all currency deals involve the USD.
Gold and USD tend to have inverse relationships.
Market participants closely follow the U.S. Dollar Index as
a gage to overall USD strength or weakness.
Economic
Indicators for United States
Employment
Consumer Price Index (CPI)
Producers Price Index (PPI)
Gross Domestic Product (GDP)
International Trade
Employment Cost Index (CPI)
Institute of Supply Managers (Formerly NAPM)
Industrial Production
Consumer Confidence
Retail Sales
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UNITED KINGDOM
The
United Kingdom is the world's fourth largest economy with
GDP valued at over $1.4 trillion USD in 2001. The economy
is very healthy, with low unemployment, expanding output and
resilient consumption. The strength of consumer consumption
has in large part been due to a strong housing market, which
is currently 16 percent above the peak in 1988. The U.K. has
a service-oriented economy, with manufacturing representing
an increasingly smaller portion of GDP, equivalent to only
one-fifth of its national output. It's capital market systems
are one of the most developed in the world and, as a result
finance and banking, has become the strongest contributors
to GDP. Although the majority of the U.K.'s GDP is from services,
it is important to know that they are also one of the largest
producers and exporters of natural gas in the EU. The energy
production industry accounts for 10 percent of GDP, one of
the highest shares of any industrialized nation. This is particularly
important, as increases in energy prices, such as oil, will
significantly benefit the large number of U.K. oil exporters.
Overall,
the U.K. is a net importer of goods with a consistent trade
deficit. Its largest trading partner is the European Union
(E.U.), with trade between the two constituencies accounting
for more than 50 percent of all of the country's import and
export activities. The U.S., on an individual basis, still
remains largest trading partner.
The
central issue that the U.K. is grappling with is whether or
not to join the Euro. The decision on Euro entry has significant
ramifications for the U.K. economy. Currently, this is the
key political and economic agenda on the government's plate.
The U.K. is a very political country where government officials
are highly concerned with voter approval. If voters do not
support Euro entry, the likelihood of ECU entry would decline.
The following are some of the arguments for and against adopting
the Euro.
One
of the primary reasons for not joining the Euro is that the
U.K. government has sound macroeconomic policies that have
worked very well for the country. Their successful monetary
and fiscal policies have led them to outperform most major
economies in the current economic downturn, including the
EU.
Characteristics
of the British Pound
GBP is very liquid.
GBP has one of the highest interest rates among the developed
countries.
Interest rate differentials between Gilts and foreign bonds
are closely followed
Euro-sterling futures can give indications for interest rate
movements.
Comments on Euro by U.K. politicians affect the Euro.
GBP has positive correlation with energy prices.
Economic
Indicators for United Kingdom
Employment Situation
Retail Price Index (RPIX)
Gross Domestic Product (GDP)
Industrial Production
Purchasing Managers Index (PMI)
U.K. Housing Starts
Consumer Price Inflation (CPI)
Producer Price Index (PPI)
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EUROPEAN UNION
The
European Union (EU) was developed as an institutional framework
for the construction of a united Europe. The EU consists of
15 member countries; Austria, Belgium, Denmark, Finland, France,
Germany, Greece, Ireland, Italy, Luxembourg, The Netherlands,
Portugal, Spain, Sweden, and the United Kingdom. All of these
countries share the Euro as a common currency, except for
Denmark, Sweden and the United Kingdom. They are known as
the European Monetary Union (EMU). Aside from a common currency,
these countries also share a single monetary policy dictated
by the European Central Bank or (ECB).
The
EMU is the world's second largest economic power, with GDP
valued at over $6 trillion USD in 2002. With a highly developed
fixed income, equity and futures market, the EMU has the second
most attractive investment market for domestic and international
investors. The EMU is primarily a service-oriented economy.
Services in 2001 accounted for approximately 70 percent of
GDP while manufacturing, mining and utilities only account
for 22 percent of GDP.
The
EMU is a trade and capital-flow driven economy. Unlike most
major economies, the EMU does not have a large trade deficit
or surplus. In fact, the EMU went from a small trade deficit
in 2001 to a small trade surplus in 2002. EU exports comprise
approximately 19 percent of world trade while EU imports account
for only 17 percent of total world imports. Because of the
size of the EMU's trade with the rest of the world it has
significant power in the international trade arena. International
clout is one of the primary goals when the EU was formed allowing
the individual countries to group as one entity as well as
negotiating a more equal playing field with the U.S., its
largest trading partner.
The
EU's growing role in international trade has important implications
for the role of the Euro as a reserve currency. At the end
of the 1990s approximately 65 percent of all world reserves
were held in U.S. dollars, but with the introduction of the
Euro, foreign reserve assets are shifting in favor of the
Euro. This trend is expected to continue while the EU becomes
one of the major trading partners for most countries around
the world.
Characteristics
of the Euro
EUR/USD is the most liquid currency.
Euro risks as a new currency.
Spread between 10Yr U.S. Treasuries and 10YR Bunds can indicate
Euro sentiment.
Interest rate differentials are used to predict Euro area
money flows.
Economic
Indicators for the European Union
Gross Domestic Product (GDP)
Individual Country Budget Deficits
IFO Business Climate Survey
Harmonized Index of Consumer Prices (HCIP)
M3 (measure of monetary supply tracked by the New York Federal
Reserve Bank and reported every Thursday)
German Unemployment
German Industrial Production
Consumer Price Inflation (CPI)
Producer Price Index (PPI)
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AUSTRALIA
Australia's
gross domestic product (GDP) for 2002 was close to $400 billion
USD The economy is relatively small, but on a per capita basis
is comparable to many industrialized Western European countries.
Australia has a service-oriented economy with close to 79
percent of its GDP coming from industries such as finance,
property and business services. However, the country has a
trade deficit, with manufacturing dominating its exporting
activities. Rural and mineral exports account for over 60
percent of all manufacturing exports. As a result, the economy
is highly sensitive to changes in commodity prices.
Japan
and the ASEAN (Association of Southeast Asian Nations) are
the leading importers of Australian goods. In the past, however,
Australia has experienced much of the spillover effects of
general Asian weakness. This resilience stems from Australia's
sound foundation of strong domestic consumer consumption.
Characteristics
of the Australian dollar
Commodity-linked currency.
Australia has one of highest interest rates among the developed
countries.
Interest rate differentials between the cash rates of Australia
and the short-term Interest rate yields of other industrialized
countries are closely followed.
Severe weather conditions such as droughts negatively affect
Australia's economy.
Economic
Indicators for Australia
Gross Domestic Product (GDP)
Consumer Price Inflation (CPI)
Balance of Goods and Services
Private Consumption
Consumer Price Inflation (CPI)
Producer Price Index (PPI)
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NEW ZEALAND
New
Zealand is a very small economy with GDP valued at approximately
$50 billion USD in 2001. The country's population is actually
equivalent to less than half of the population of New York
City. It was once one of the most regulated countries within
the OECD (Organization for Economic Co-operation and Development),
but over the past two decades has been moving towards an open,
modern and stable economy.
New
Zealand also has highly developed manufacturing and services
sectors, with the agricultural industry driving the bulk of
the country's exports. The economy is strongly trade-oriented,
with exports of goods and services representing approximately
one third of GDP. Due to the small size of the economy and
its significant trade activities, New Zealand is highly sensitive
to global performance, especially as it relates to its key
Asian trading partners, Australia and Japan. Together, Australia
and Japan represent 30 percent of New Zealand's trading activity.
During the Asian Crisis, New Zealand's GDP contracted by 1.3
percent as a result of reduced demand for exports, and two
consecutive droughts from reduced agricultural and related
production.
Characteristics
of the New Zealand dollar
Strong correlation with AUD.
Commodity-linked currency.
Carry trades.
With the highest interest rate of the industrialized countries,
the NZD has been one of the most popular currencies to buy
for carry trades.
Population Migration.
Economic
Indicators for New Zealand
Gross Domestic Product (GDP)
Consumer Price Index (CPI)
Producer Price Index (PPI)
Balance of Goods and Services
Private Consumption
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JAPAN
Japan
is the third largest economy in the world with GDP valued
at over $4 trillion USD in 2002 (behind the U.S. and the entire
Eurozone). The country is also one of the world's largest
exporters and is responsible for over $400 billion in exports
per year. Manufacturing and exports account for nearly 20
percent of GDP. This has resulted in a consistent trade surplus,
which creates an inherent demand for the JPY (despite severe
structural deficiencies). Aside from being an exporter, Japan
is also a large importer of raw materials for the production
of its goods. The primary trade partners for Japan in terms
of imports and exports are the U.S. and China. China is becoming
an increasingly important trade partner. In fact, China's
inexpensive goods have allowed it to gain a larger share of
Japan's import market.
Japanese
Banking Crisis
In the 1980s, Japan's capital market was one of the most attractive
markets for international investors seeking Asian investment
opportunities. The country had the most developed capital
markets in the region while its banking system was considered
to be the one of strongest in the world. At the same time,
the country also experienced above-trend economic growth and
near-zero inflation. This resulted in rapid growth expectations,
boosted asset prices and rapid credit expansion that led to
the development of an "asset bubble." Between 1990
and 97 the asset bubble collapsed inducing a USD $10 trillion
fall in asset prices, as well as a fall in real estate prices
that accounted for nearly 65 percent of the total decline.
This fall in asset prices sparked the banking crisis in Japan,
which began in the early 1990s and developed into a full-blown
systemic crisis in 1997, followed by the failure of a number
of high-profile financial institutions.
With
Japan experiencing deflationary conditions each succeeding
month of deflation raised the real burden of the banks' outstanding
debt. To date, the Japanese Ministry of Finance and Bank of
Japan are still grappling with this problem.
Characteristics
of the Japanese Yen
Proxy for Asian Strength / Weakness.
The Bank of Japan and Ministry of Finance are very active
participants in the FX markets.
JPY movements are sensitive to time: Fiscal year end, Japanese
trading hours etc.
Banking stocks are widely watched.
Carry trade effects.
Economic
Indicators for Japan
Gross Domestic Product
Tankan Survey
Balance of Payments
Employment
Industrial Production
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SWITZERLAND
Switzerland
is the 19th largest economy in the world, with GDP valued
at more than $240 billion USD in 2001. The economy is relatively
small, but it is one of the wealthiest in the world on a GDP
per capita basis. The confidentiality offered by the Swiss
banking system coupled with the country's lengthy history
of political neutrality has created a "safe haven"
reputation for the country and its currency. As a result,
Switzerland is the world's largest destination for offshore
capital. The country holds over U.S. $2 trillion in offshore
assets and is estimated to attract more than 35 percent of
the world's private, wealth-management business. This has
created a large and highly advanced banking and insurance
industry that employs at least 50 percent of the population
and comprises more than 70 percent of the total GDP. Since
Switzerland's financial industry thrives on its safe haven
status and renowned confidentiality, capital flows tend to
drive the economy during times of global risk aversion while
trade flows drive the economy during a risk-seeking environment.
Therefore, trade flows are important with nearly two thirds
of all trade conducted with Europe.
Characteristics
of the Swiss Franc
Safe Haven Status.
Swiss Franc is correlated with gold.
Carry trades effects.
Interest rate differentials between Euro and Swiss futures
and foreign interest rate futures are closely followed.
Potential changes in banking regulations negatively weigh
on CHF.
Mergers and acquisitions are common in Switzerland's banking
and insurance sectors.
Economic
Indicators for Switzerland
Consumer Price Inflation (CPI)
Producer Price Index (PPI)
Gross Domestic Product (GDP)
Balance of Payments
M3 (measure of monetary supply tracked by the New York Federal
Reserve Bank and reported every Thursday)
Unemployment
Production Index (Industrial Production)
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CANADA
Canada
is the 7th largest country in the world with GDP valued at
$700 billion USD in 2001. The country has been growing consistently
since 1991. Canada is currently the world's 5th largest producer
of gold and the 14th largest producer of oil. However, two-thirds
of the country's GDP comes from the service sector, which
employs 3 out 4 Canadians.
Manufacturing
and resources are very important for the Canadian economy,
as it represents over 25 percent of the country's exports.
Characteristics
of the Canadian dollar
Commodity linked currency.
The U.S. imports 85 percent of Canada's exports. The Canadian
economy is highly sensitive to changes in the U.S. economy.
Mergers and acquisitions between firms in the U.S. and Canada
are very common.
Interest rate differentials between the cash rates of Canada
and the short-term interest rate yields of other industrialized
countries are closely followed.
When Canada has a higher interest rate than the U.S, the sell-USD,
buy-CAD carry trade becomes more popular.
Economic
Indicators for Canada
Unemployment
Consumer Price Inflation (CPI)
Producer Price Index (PPI)
Gross Domestic Product (GDP)
Balance of Trade
Producer Price Index (PPI)
Consumer Consumption
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United States
United Kingdom
European Union
Austraila
New Zealand
Japan
Switzerland
Canada