Chinese RMB depreciated continuously to the EURO, the Japanese Yen and other currencies since almost 6 months
Despite announcements of the Chinese government concerning an appreciation of the Chinese currency soon, the Yuan has continuously lost external value since May 2010 within the statistically largest international market, the Euro-zone, and the third largest market, Japan, as well as towards the Indian Rupee.
Having in fact lost more than 10% of its value towards the EURO and the Japanese Yen since June 2010, the Chinese exports were boosted by strong monetary support.
The Russian Ruble marks an interesting exception of these currency relations because, as a regulated currency by itself, the Russian monetary authorities depreciated the Ruble against the Yuan constantly in the same time.
Given the domestic regulations on foreign currency transfers in China forcing businesses to exchange external profits into domestic currency, the Communist Party of China controls the largest reserves in foreign currencies worldwide. Using this capital for acquisitions of Portuguese and Greek bonds for example, as recently announced, shows the potential political impact of China’s controlled economic system on traditional market environments. Being bailed out by Chinese currency reserves might have a further impact on worldwide currency relations as well as on the European position in the race of export competitiveness. It might be a temptation for weaker European economies to use the option of Chinese monetary support but it will be for sure a risky one.
Election results in the US will probably increase volatility of currency and stock markets until end of 2010
Information sources associated with the Federal Reserve indicate that Quantitative Easing II (QE2) will start in the near future but that it will be introduced progressively and not too quickly. It is likely that the interest rates on the issued Treasury Bonds will start to increase slowly. At that point the value of the Treasury Bonds might begin to fall and loan interest rates will begin to rise. The dollar is therefore expected to fall further in value and the start of inflation becomes more likely.
It is worth mentioning that although the general opinion of economists is that inflation is bound to occur as a result of quantitative easing programs, there may be a period of extreme volatility after the election results are announced.
It is hard to foresee but if there is a Congress in conflict then the acceptance of risk may be very low. The stock market may stay with a flat volatility as fears of inflation and lack of strong domestic growth signals could outweigh each other. If this occurs then it is likely that the cash withdrawn from the market is likely to boost the dollar value for a period of time before the dollar devaluation due to money printing may take hold.
Annual exchange rate charts of the Hong Kong Dollar indicate fundamental closeness to the USD if compared to the EUR/USD rate. There is an almost fully simultaneous profile along the USD rate visible towards the EURO in opposite to the HKD/USD relation itself having a highly volatile relation – but only within a very small range.
Demonstrating a deliberately limited autonomy to the leading currencies the HKD exchange rate of the Chinese Yuan on the opposite shows a continuous depreciation course.
As one of the most sensitive currencies worldwide in regard to its political as well as its direct trading implications the HKD might give a glimpse on hybrid currency volatility management that is partly free and partly influenced by interventions (by the Hong Kong Monetary Authority). Its smart profile might underline Hong Kong’s further increasing relevance as a financial centre of implied political sensitivity.
With most of its currencies tied to the Dollar and several in a structured depreciation process on the way to convertibility, African economies could become the first ones damaged by the current depreciation race of major international currencies.
Not only that the purchasing power of countries facing a permanent lack of foreign currency is decreasing by the weak Dollar, also the competition between domestic products and Chinese imports on the African consumer markets again tends towards the Chinese benefits as the Chinese Yuan remains strictly tied to the declining US currency.
On top of that almost all commodities exported from Africa are traded in the US currency leading to further decline of import revenues as long as commodity prices do not rise accordingly or stay highly volatile. Africa with more than 40 different currencies and its huge regional gaps in regard to natural wealth and domestic growth rates is far from having any overall united monetary voice. Not even the idea for an African currency pact was heard, at least since long time.
But Africa needs a new effort towards more unity and independence from the world market powers to safeguard its interests and its current growth perspectives. Its richness of gold, silver and other precious metals, its strategic position in regard to the resource bases of tomorrow could provide a chance to use the current volatility effects quickly for a new stance beyond Western or Chinese interests by an own monetary position.
Martin Wheatley, chief executive officer of the Securities and Futures Commission in Hong Kong, published a profound comment about the risks and benefits of ultra-fast electronic trading in the Financial Times at September 20th, 2010.
Quoting an US based HFT firm that promotes its average holding periods for US equities with 11 seconds he emphasized how significantly algorithm based trading has changed the traditional idea of growth orientated industrial investment already.
With microseconds as the current status of fastest reactions on the market, the programmed strategies capture price inefficiencies and generate tiny profits maximized by huge trade volumes. Already up to 60-70 % of trading at US exchanges is based on HFT.
Wheatley states that rules were necessary to avoid risks of one dimensional strategies shared by all software based trading tools undermining the base of a successful market system that necessarily reflects various viewpoints and decisions of participants.
Referring to the ‘flash-crash’ at May 6th this year when stock prices had fallen down to a penny before they bounced back within minutes he discusses various methods to control such risks related to HFT.
But surprisingly all these ideas suggest governmental or administrative intervention for example by introducing a tax that makes thin gains unprofitable or by penalties for big volumes traded in to short time.
By my understanding, Wheatley has put the finger at the right point: the exclusion of viewpoints, individual estimation and emotional volatility by automatic transactions, the shift of trading processes into superhuman time frames, a thousand times shorter than a blink of an eye. All this creates a risk that might be incalculable at a critical point.
But what is missing in the article is a fundamental, phenomenological analysis of the related change of market culture. What might be the long-term effects for capital seeking industries, for long term investment strategies – and for the future of human decision making within automatized environments? Or are these tools not just only forerunners for other spheres of the economy, maybe even for unprecedented ways of social management in the future?
HFT is urging us to understand the volatility of the markets not anymore as the result of sentiments, hopes, fears or strategic thinking (that are all human) but as a neutral process generated by self-referring rendering. Thinking this to the end, investment banking could become an outdated profession.
But asking the government for help in this situation, like Wheatley suggests, by setting up regulations, taxes and penalties, could turn this process in a more negative way. Regulations can never change the course of technological development. In the worst case they just increase the power and profits of the regulators.
Therefore it might be a better way of handling HFT if competition between HFT traders were boosted and their access to the markets even simplified in order to increase the number of alternative models. Broader competition might even create Low Frequency Trading systems. But this could only happen if all HFT traders were to obliged by the exchanges to provide full transparency in regard to their trading tool characteristics.
By this, investment decisions and strategies couldn’t be dominated so easily by self-referring rendering processes. It meant also that investment banking changed its function more towards value orientation beyond short-term profits. Transparent competition of a variety of trading tools could reflect the interests of investors much better than the current reduction to primitive algorithms.