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Showing posts with label Exchange rates. Show all posts
Showing posts with label Exchange rates. Show all posts
Weak yen...
The Japanese firm expects net profit in the year to March of 1.7 trillion yen ($15.1bn; £12.1bn), compared with a previous forecast of 1.55 trillion yen.
That is despite losing its top-selling carmaker status to Volkswagen in 2016,
Meanwhile, Toyota said it had begun formal talks to work with Suzuki on projects including safety technology.
Analysts said the partnership - which could also involve collaboration on vehicles that were less damaging to the environment - would give Suzuki access to Toyota's technology. Benefits for Toyota are likely to include tapping in to Suzuki's strong market position in India.
Pound losing status?
Not only has the pound shed more than 15 per cent of its value
against the dollar since the Brexit vote last June, but now one City of
London analyst has suggested that sterling could be at risk of losing its “reserve currency” status too.
But what does this mean? Why would it matter? And is it even true?
They do this for the purposes of managing their own currencies in times of stress, by selling the reserves at certain times and buying them at others.
The vast majority of global trade is conducted in US dollars – so the dollar is the world’s pre-eminent reserve currency, at around 63 per cent of the total.
But the euro is another, on 20 per cent. Then, some distance later, comes the pound sterling at 4.5 per cent, roughly equal to the Japanese Yen.
According to IMF data the equivalent of $350bn of reserves is held around the world in sterling.
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But what does this mean? Why would it matter? And is it even true?
What is a reserve currency?
These are well-established and internationally used national currencies that central banks and governments around the world buy and hold as official “reserves” along with other assets such as gold.They do this for the purposes of managing their own currencies in times of stress, by selling the reserves at certain times and buying them at others.
The vast majority of global trade is conducted in US dollars – so the dollar is the world’s pre-eminent reserve currency, at around 63 per cent of the total.
But the euro is another, on 20 per cent. Then, some distance later, comes the pound sterling at 4.5 per cent, roughly equal to the Japanese Yen.
According to IMF data the equivalent of $350bn of reserves is held around the world in sterling.
Read more
A weaker pound would help
Britain can re-industrialise and
restore manufacturing jobs around the country - if the pound can be
pushed down to a substantially weaker level, according to John Mills,
the boss of retail group JML.
Mr Mills, a major donor to the Labour party and prominent Leave campaigner in the EU referendum, believes that the UK can become a competitive manufacturing centre if sterling falls to $1.05 for a sustained period of time.
The pound fell from $1.48 just before the EU referendum to $1.25 currently, but further falls could help the UK reach a tipping point at which the country can compete even with the likes of China, he said
Mr Mills, a major donor to the Labour party and prominent Leave campaigner in the EU referendum, believes that the UK can become a competitive manufacturing centre if sterling falls to $1.05 for a sustained period of time.
The pound fell from $1.48 just before the EU referendum to $1.25 currently, but further falls could help the UK reach a tipping point at which the country can compete even with the likes of China, he said
“If the exchange rate came down to $1.05 it would become more
economical to site manufacturing in the UK rather than shipping goods in
from China,” he said.
“We’d need to get the exchange rate to that level to make it worth producing the vast range of goods you see in the shops.”
He noted that other rich countries including Germany and Japan have far larger manufacturing sectors than the UK, and blames, in part, a rise in the exchange rate from the 1970s and through the 1980s for making life tougher for British exporters.
A weaker pound would push up the cost of imported goods, hitting households in the pocket. But he argued that an improvement in jobs and wages across much of the country would work to offset much of this harm over time if the economy was revitalised by greater industrial investment.
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“We’d need to get the exchange rate to that level to make it worth producing the vast range of goods you see in the shops.”
He noted that other rich countries including Germany and Japan have far larger manufacturing sectors than the UK, and blames, in part, a rise in the exchange rate from the 1970s and through the 1980s for making life tougher for British exporters.
A weaker pound would push up the cost of imported goods, hitting households in the pocket. But he argued that an improvement in jobs and wages across much of the country would work to offset much of this harm over time if the economy was revitalised by greater industrial investment.
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The good times cannot last
Profit warnings are on the up as
British companies show the first signs of pressure from the falling
pound, according to figures from EY.
Listed firms issued 73 profit warnings in the final three months of 2016, up from 68 in the previous three quarters.
Another 27 have issued warnings in January, including major businesses such as BT, Pearson, Mitie and Premier Foods
Listed firms issued 73 profit warnings in the final three months of 2016, up from 68 in the previous three quarters.
Another 27 have issued warnings in January, including major businesses such as BT, Pearson, Mitie and Premier Foods
Analysts at EY believe this could be a sign the period of steady corporate performance may be nearing an end.
“A strong end to 2016 represents the calm before the storm. The headline numbers show the UK economy weathering the initial impact of the Brexit vote remarkably well. But, we expect 2017 to be a very different year and for many companies a much tougher one,” said Alan Hudson, EY’s head of restructuring for UK and Ireland.
“There is a gap between winners and losers, one which in many cases predates the Brexit vote and stems from ongoing structural weaknesses that will leave companies exposed to the significant changes and new challenges that lie ahead.”
That includes a disparity between companies which suffer from the fall in the pound and those which benefit from a weaker sterling.
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“A strong end to 2016 represents the calm before the storm. The headline numbers show the UK economy weathering the initial impact of the Brexit vote remarkably well. But, we expect 2017 to be a very different year and for many companies a much tougher one,” said Alan Hudson, EY’s head of restructuring for UK and Ireland.
“There is a gap between winners and losers, one which in many cases predates the Brexit vote and stems from ongoing structural weaknesses that will leave companies exposed to the significant changes and new challenges that lie ahead.”
That includes a disparity between companies which suffer from the fall in the pound and those which benefit from a weaker sterling.
Read more
Weak pound...
The pressure on the pound from Britain’s vote to leave the EU is
stoking inflation, denting household finances and putting a brake on
spending, according to a Guardian analysis.
Official figures this week are expected to confirm the economy enjoyed a strong finish to 2016 as companies and consumers continued to shrug off the shock of the Brexit vote. But signs of a spending slowdown, corporate jitters around the triggering of article 50 and rising prices point to a more challenging growth outlook in 2017.
Seven months on from the referendum, the Guardian’s monthly tracker of economic news shows the weaker pound is being felt in the real economy more keenly than ever, as it raises the cost of imports such as energy and food and that gets passed on to consumers as higher prices in the shops.
Read more...
Official figures this week are expected to confirm the economy enjoyed a strong finish to 2016 as companies and consumers continued to shrug off the shock of the Brexit vote. But signs of a spending slowdown, corporate jitters around the triggering of article 50 and rising prices point to a more challenging growth outlook in 2017.
Seven months on from the referendum, the Guardian’s monthly tracker of economic news shows the weaker pound is being felt in the real economy more keenly than ever, as it raises the cost of imports such as energy and food and that gets passed on to consumers as higher prices in the shops.
Read more...
A weaker pound....
Britain can
re-industrialise and restore manufacturing jobs around the country - if
the pound can be pushed down to a substantially weaker level, according
to John Mills, the boss of retail group JML.
Mr Mills, a major donor to the Labour party and prominent Leave campaigner in the EU referendum, believes that the UK can become a competitive manufacturing centre if sterling falls to $1.05 for a sustained period of time.
The pound fell from $1.48 just before the EU referendum to $1.25 currently, but further falls could help the UK reach a tipping point at which the country can compete even with the likes of China, he said.
Read more...
Mr Mills, a major donor to the Labour party and prominent Leave campaigner in the EU referendum, believes that the UK can become a competitive manufacturing centre if sterling falls to $1.05 for a sustained period of time.
The pound fell from $1.48 just before the EU referendum to $1.25 currently, but further falls could help the UK reach a tipping point at which the country can compete even with the likes of China, he said.
Read more...
Government Intervention in the Foreign Exchange Market
Under certain circumstances, the government might want to intervene
in the foreign exchange markets to influence the level of the exchange
rate.
However this policy has an obvious side effect because lower AD will cause lower growth and higher unemployment
In response the government raised interest rates to 15% and bought Pound Sterling on the foreign currency reserves. However this was insufficient to stop the £ falling. Eventually the govt had to give into market pressures and exit the ERM.
The govt intervention failed because the market felt the governments intervention was not sustainable. Interest rates of 15% were disastrous for an economy already in recession.
This shows the limit of governments intervention.
Source: Economics Help
Methods to Influence the Exchange Rate
- Reserves and Borrowing. If the value of an exchange rate is falling and the government wants to maintain its original value it can use its foreign exchange reserves – e.g. selling its dollars reserves and purchase pounds. This purchase of Pound sterling should increase its value.
- Borrow The government can also borrow foreign currency from abroad to be able to buy sterling.
- Changing interest rates (In UK this is now done by the MPC) higher interest rates will cause hot money flows and increase demand for sterling. Higher interest rates make it relatively more attractive to save in the UK.
- Reduce Inflation
- Through either tight fiscal or Monetary policy Aggregate Demand and hence inflation can be reduced.
- By decreasing AD consumers will spend less and purchase less imports and so will supply less pounds. This will increase the value of the ER
- Lower inflation rate will also help because British goods will become more competitive. Thus the demand for Sterling will rise.
However this policy has an obvious side effect because lower AD will cause lower growth and higher unemployment
- Supply side measure to increase the competitiveness of the economy. This will take along time to have an effect.
UK forced out of Exchange Rate Mechanism
Note: Governments often fail in their attempt to influence the exchange rate. In 1992 the £ was in the ERM but struggled to keep its value against the DM. The Pound Sterling kept falling to its lower limit in the exchange rate mechanism.In response the government raised interest rates to 15% and bought Pound Sterling on the foreign currency reserves. However this was insufficient to stop the £ falling. Eventually the govt had to give into market pressures and exit the ERM.
The govt intervention failed because the market felt the governments intervention was not sustainable. Interest rates of 15% were disastrous for an economy already in recession.
This shows the limit of governments intervention.
Source: Economics Help
Toy Prices
The price of some toys could rise by up to 15% as a result of the plunging pound, manufacturers have warned.
Lego and the producer of Peppa Pig merchandise are among the companies to have announced price rises recently.
Natasha Crookes, spokeswoman for the British Toy and Hobby Association (BTHA), said most UK toy makers, who typically design products in Britain but have them manufactured and imported from east Asia, had managed to contain price rises until now.
“Toys are produced with an 18-month lead-in time, so while some conversations about pricing have already taken place, clearly some tough commercial decisions are having to be made now,” Crookes said. He was speaking at the Toy Fair, a three-day BTHA event at the Olympia in London featuring 270 exhibitors showcasing toys and games likely to be popular next Christmas.
“We are predicting price rises of between 5% and 15%, depending on the category and materials used. The UK toy industry is a very resilient and creative one, which last year launched 63,500 new products.
“To sustain growth we look forward to more clarity on the process of Brexit, particularly the relationship with Europe on free trade agreements, customs union access and favourable tariffs with World Trade Organization members.”
Manufacturers suggest recommended retail prices (RRP) and retailers decide whether to pass on any increases to the customer or absorb them.
Despite the squeeze on household incomes and economic uncertainty after the Brexit vote in June, the BTHA – which represents 80% of the industry – said the “resilient” sector had enjoyed strong growth in 2016 to make it the fourth largest market in the world after the US, China and Japan.
The UK toy market experienced a 6.3% rise in sales last year, pushing up its value to more than £3.5bn for the first time, according to figures released at the fair.
It emerged in December that Lego planned to increase its UK prices by 5% from this month as it became the latest manufacturer to respond to the fall in sterling.
The Danish firm confirmed it would raise the prices of its playsets, bricks and mini-figures as a result of currency fluctuations. It said it would consider further increases if the pound did not recover.
That means the RRP of a Star Wars Lego Death Star set has gone up by £20 to £419, while the price of a Doctor Who Lego set has risen by £2.49 to £52.48.
Ty UK, the UK division of the US manufacturer of popular furry collectable animals – with licensed deals including Peppa Pig – said it had increased its prices by 11% at the end of 2016.
“We took a hit because of exchange rate fluctuations so we felt we had no choice, although we are guaranteeing a fixed price for the rest of this year,” said the company’s games designer, Morley Lester.
Sam Ireland, operations manager of BigJigs toys, which makes wooden pre-school educational toys and trades in 98 countries, said the Folkestone-based company was putting up its prices by 10%.
The market research firm NPD said overall growth in the market was largely driven by the popularity of collectibles, which experienced a year-on-year increase of 44% and account for almost a quarter of toys sold.
At the Toy Fair, Meccano’s owner Spin Master unveiled a red and black robotic spider that can be programmed via an app to walk and guard its owner’s bedroom door. It even squirts water at unsuspecting intruders. The £99.99 kit, aimed at children aged 10 and older, has 300 pieces and can be assembled in about 90 minutes. The completed spider spans about half a metre. The toy will go on sale in the UK in August.
Read more...
Lego and the producer of Peppa Pig merchandise are among the companies to have announced price rises recently.
Natasha Crookes, spokeswoman for the British Toy and Hobby Association (BTHA), said most UK toy makers, who typically design products in Britain but have them manufactured and imported from east Asia, had managed to contain price rises until now.
“Toys are produced with an 18-month lead-in time, so while some conversations about pricing have already taken place, clearly some tough commercial decisions are having to be made now,” Crookes said. He was speaking at the Toy Fair, a three-day BTHA event at the Olympia in London featuring 270 exhibitors showcasing toys and games likely to be popular next Christmas.
“We are predicting price rises of between 5% and 15%, depending on the category and materials used. The UK toy industry is a very resilient and creative one, which last year launched 63,500 new products.
“To sustain growth we look forward to more clarity on the process of Brexit, particularly the relationship with Europe on free trade agreements, customs union access and favourable tariffs with World Trade Organization members.”
Manufacturers suggest recommended retail prices (RRP) and retailers decide whether to pass on any increases to the customer or absorb them.
Despite the squeeze on household incomes and economic uncertainty after the Brexit vote in June, the BTHA – which represents 80% of the industry – said the “resilient” sector had enjoyed strong growth in 2016 to make it the fourth largest market in the world after the US, China and Japan.
The UK toy market experienced a 6.3% rise in sales last year, pushing up its value to more than £3.5bn for the first time, according to figures released at the fair.
It emerged in December that Lego planned to increase its UK prices by 5% from this month as it became the latest manufacturer to respond to the fall in sterling.
The Danish firm confirmed it would raise the prices of its playsets, bricks and mini-figures as a result of currency fluctuations. It said it would consider further increases if the pound did not recover.
That means the RRP of a Star Wars Lego Death Star set has gone up by £20 to £419, while the price of a Doctor Who Lego set has risen by £2.49 to £52.48.
Ty UK, the UK division of the US manufacturer of popular furry collectable animals – with licensed deals including Peppa Pig – said it had increased its prices by 11% at the end of 2016.
“We took a hit because of exchange rate fluctuations so we felt we had no choice, although we are guaranteeing a fixed price for the rest of this year,” said the company’s games designer, Morley Lester.
Sam Ireland, operations manager of BigJigs toys, which makes wooden pre-school educational toys and trades in 98 countries, said the Folkestone-based company was putting up its prices by 10%.
The market research firm NPD said overall growth in the market was largely driven by the popularity of collectibles, which experienced a year-on-year increase of 44% and account for almost a quarter of toys sold.
At the Toy Fair, Meccano’s owner Spin Master unveiled a red and black robotic spider that can be programmed via an app to walk and guard its owner’s bedroom door. It even squirts water at unsuspecting intruders. The £99.99 kit, aimed at children aged 10 and older, has 300 pieces and can be assembled in about 90 minutes. The completed spider spans about half a metre. The toy will go on sale in the UK in August.
Read more...
Effective exchange rates
READ THIS FIRST: UNDERSTANDING EXCHANGE RATES
The real effective exchange rate (REER) is the weighted average of a country's currency relative to an index or basket of other major currencies, adjusted for the effects of inflation. The weights are determined by comparing the relative trade balance of a country's currency against each country within the index.
The effective exchange rate is good for looking at the overall performance of a currency. For example, the Pound may appreciate against the Dollar – but this may be due to just temporary weakness in the Dollar. However, if the overall effective exchange rate increases, it suggests the Pound is becoming stronger.
RER = E.R *(price level in country A/Price level in country B)
Increase in real exchange rate
Inflation and the exchange rate
If the UK experienced inflation of 10% and US had inflation of 0%. We would expect the nominal value of the Pound to fall 10%. In this case, the real exchange rate would stay the same. The Pound has fallen 10%, but British goods are 10% cheaper. The amount of goods you can buy stays the same.
A good example is the Pound Sterling in the ERM crisis. In 1990, the UK entered the ERM – a semi-fixed exchange rate mechanism. This tried to keep the value of the Pound at a fixed rate against the German D-Mark. However, in the late 1980s, the UK experience high inflation and then a recession. The market value of the Pound started to fall, to reflect the real changes in the exchange rate.
However, the government (rather artificially) were trying to keep the value of the Pound high and constant in the ERM. Therefore, they intervened on the foreign exchange markets buying Pounds and increasing interest rates to keep the value of the Pound high. Therefore, the nominal exchange rate became overvalued against the real exchange rate. But, eventually, the attempt to keep the nominal value of the Pound high failed. Markets correctly predicted that the Pound was overvalued. Intense selling of the Pound eventually forced the UK government to leave the ERM and allow the Pound to devalue – coming closer to its real exchange rate.
This was an example of the nominal exchange rate being overvalued compared to its real value.
Read more here.
The real effective exchange rate (REER) is the weighted average of a country's currency relative to an index or basket of other major currencies, adjusted for the effects of inflation. The weights are determined by comparing the relative trade balance of a country's currency against each country within the index.
Effective exchange rate
The effective exchange rate measures a currency against a basked of other currencies. This is usually trade-weighted. When looking at the effective Sterling exchange rate we will compare the value of Sterling against our main trading partners – The Euro, the Dollar, the Yen e.t.c and give a weighting depending on how much we trade with that country, e.g. Eurozone 60%. A weighting will be given to different trading countries depending on how significant they are.The effective exchange rate is good for looking at the overall performance of a currency. For example, the Pound may appreciate against the Dollar – but this may be due to just temporary weakness in the Dollar. However, if the overall effective exchange rate increases, it suggests the Pound is becoming stronger.
Real exchange rate
The real exchange rate measures the value of currencies, taking into account changes in the price level. The real exchange rate shows what you can actually buy. It is the value consumers will actually pay for a good.RER = E.R *(price level in country A/Price level in country B)
Increase in real exchange rate
- If a countries real exchange rate is rising it means its goods are becoming more expensive relative to its competitors.
- An increase in the real exchange rate means people in a country can get more foreign goods for an equivalent amount of domestic goods.
- Therefore an increase in the real exchange rate will tend to increase net imports. Foreigners will buy our less expensive exports. It now becomes more attractive to buy imports. This can cause a widening of the current account deficit and lower domestic AD. It will also help reduce inflation.
- Similarly a fall in the real exchange rate should increase net exports as domestic goods are more competitive.
Inflation and the exchange rate
If the UK experienced inflation of 10% and US had inflation of 0%. We would expect the nominal value of the Pound to fall 10%. In this case, the real exchange rate would stay the same. The Pound has fallen 10%, but British goods are 10% cheaper. The amount of goods you can buy stays the same.
Example of Real exchange rate
- Suppose there is just one good that is traded. If the good costs £100 in UK and $100 in the US. The real exchange rate is 1:1
- If the nominal exchange rate was £1 = $1. Then the real exchange rate is the same as the nominal exchange rate. There is perfect purchasing power parity (PPP). It makes no difference whether you buy the good in the US or UK.
- Now suppose that the cost of British goods increases. That good now costs £120 in the UK, and $100 in the US. This means that the good in terms of Pound is 1.2 more expensive than the Dollar. The real exchange rate is £1.2 = $1
- If the nominal exchange rate is still £1 = $1, what will consumers do? They could buy the good for $100 in the US and sell in the UK for £120. They will make a profit because selling for £120, they can convert into $120.
- Therefore, we would expect the nominal exchange rate to adjust to reflect the real changes. If goods in the UK are more expensive, we would expect the Pound Sterling to fall in relation to the dollar.
- In theory, the nominal exchange rate should reflect the real exchange rate. If the nominal exchange rate rises to £1.2 = $1 then there is no profit to be made from buying goods in the US and selling in the UK.
- In the real world, there are numerous goods, so that we used average price indexes to indicate relative movement in the price of goods.
Changes in real exchange rate
If a country experiences rapid productivity growth, then it can enable lower costs and lower price level, this will help to reduce the real exchange rate.Misaligned real exchange rates
Suppose that prices in country A increase, this decreases the real exchange rate. However, if the nominal exchange rate is kept constant, then we can see a misalignment between the exchange rate and it’s ‘real value’A good example is the Pound Sterling in the ERM crisis. In 1990, the UK entered the ERM – a semi-fixed exchange rate mechanism. This tried to keep the value of the Pound at a fixed rate against the German D-Mark. However, in the late 1980s, the UK experience high inflation and then a recession. The market value of the Pound started to fall, to reflect the real changes in the exchange rate.
However, the government (rather artificially) were trying to keep the value of the Pound high and constant in the ERM. Therefore, they intervened on the foreign exchange markets buying Pounds and increasing interest rates to keep the value of the Pound high. Therefore, the nominal exchange rate became overvalued against the real exchange rate. But, eventually, the attempt to keep the nominal value of the Pound high failed. Markets correctly predicted that the Pound was overvalued. Intense selling of the Pound eventually forced the UK government to leave the ERM and allow the Pound to devalue – coming closer to its real exchange rate.
This was an example of the nominal exchange rate being overvalued compared to its real value.
Read more here.
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