China spanks U.S. over downgrade

"A currency war would be very bad for the entire economy. China has an increasingly important pull," said Ashraf Laidi, chief executive officer of Intermarket Strategy Ltd, a London-based research firm. "Its bargaining power has increased. If the U.S. points fingers, it will be even worse for the dollar."

Also, isn't the U.S. more of a services-led economy these days anyway? Aren't "we" trying to export more to "them?" Fast food chain Yum Brands (YUM, Fortune 500), for example, now generates more revenue from China than in the U.S.

Luxury good retailer Coach (COH) is rapidly expanding its presence in China as well. Starbucks (SBUX, Fortune 500) also has aggressive plans to open more stores in China.

Do we really want to open up the door for China to retaliate and slap tariffs or more onerous restrictions on American companies?

"To change the trade dynamics between the U.S. and China is a tricky, delicate manner. You can't use a sledgehammer," said Andrew Busch, global currency and public policy strategist with BMO Capital Markets in Chicago.

"The repercussions will be swift and negative. There are other ways to address the issue that could be more productive," he added.

Can China save Europe?

It would be one thing if China could truly be singled out as the only major nation on the planet that manages its currency.

But as I've pointed out, the U.S. does it too. And one man's currency "manipulation" is another's currency "intervention." Many countries play funny games to move the value of their paper up or down.

The central banks of both Japan and Switzerland have taken steps this year to rein in the surging yen and franc. Both currencies have been bid up in speculative "safe haven" trades this year due to the deteriorating outlook for the dollar and euro.

Each country, but especially Japan, felt it necessary to act to protect their own economic interests. A runaway yen could be disastrous for Japan since it would make goods sold by companies ranging from Toyota (TM) and Honda (HMC) to Sony (SNE) and Panasonic more expensive overseas.

Sure, there is a difference between stepping in to stop the free markets from running amok and letting the free markets do their job in the first place.

But make no mistake. Everybody "manipulates" their currency in some fashion. The U.S. needs to recognize that and move on. Working with China, as opposed to more heated rhetoric, can help solve some of the world's economic problems.

"The party that loses the most in a trade war is the one that has a big deficit. We have a big dependency on China," said Axel Merk, president of Merk Mutual Funds, a Palo Alto, Calif.-based money manager specializing in currency investments.

"If you are always complaining about your lawn, you should cement it over and not have grass. It's always easier to blame somebody else for your own problems," Merk added.

The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, and Abbott Laboratories, La Monica does not own positions in any individual stocks.

China isn't the only currency manipulator

NEW YORK (CNNMoney) -- A newsflash to the legislators in Washington who suddenly want to act tough against China for currency manipulation: Have you looked in the mirror lately?

How can anyone with a straight face declare that China needs to be punished for keeping the yuan artificially low when the United States is also aggressively trying to devalue the dollar with its monetary and fiscal policies?

The righteous indignation and holier-than-thou attitude is comical at best. The Federal Reserve, through two rounds of quantitative easing and now Operation Twist, has helped push the dollar lower.

Simply put, buying up U.S. Treasuries as if they were Missoni apparel at Target leads to lower interest rates and a weaker currency.

The do-nothing Congress hasn't made matters any better. The debt ceiling debacle this summer didn't help the dollar either.

The short-term economic outlook is dismal. Focusing solely on longer-term deficit reduction at the expense of the current health of the cash-strapped/underwater on their house/nervous about their job American consumer also makes the U.S. dollar less attractive.

You may not agree with President Obama's latest jobs plan. But this economy needs some form of targeted and immediate stimulus to get it back on solid footing. Austerity isn't the answer. Just ask Greece.

Now don't get me wrong. I'm not endorsing China's policies per se. As much as China has opened itself up to the West and capitalist ideas, the government does not let the yuan trade as freely as it should. That's a huge problem.

GE: Partnering with China is better than being left out

However, the U.S. does need to concede that China has taken baby steps to let the yuan appreciate. After all, it is up against both the dollar and the euro this year.

Should the yuan be even higher? Probably. But provoking China into a possible trade war is not the answer.

Are U.S. manufacturers hurt by the fact that an artificially low yuan makes Chinese exports cheaper? Of course.

Funk metal band Primus (at least I think they're funk metal?) wryly comments on this in a song called "Eternal Consumption Engine" on their new album. Lyric: "Every time I get a little bit bored. Head to the Wally-Mart store. Livin' high on the greasy hog. As long as they don't deport my job. Cause everything's made in China."

Still, we need to ask ourselves this. While trying to protect manufacturing jobs in the U.S., do we risk damaging the broader economy even more by antagonizing China?

Like it or not, China holds nearly $1.2 trillion in U.S. Treasury debt. The Chinese are already not thrilled that the same dollar-damaging policies I've written about have also withered away the yields on long-term bonds.

Greek default believed to be just a matter of time

 It was once unthinkable but is now widely expected: Greece is headed toward default. Not if -- but when.

"A default is likely," said Wolfango Piccoli, director of the London office of the Eurasia Group. "At this stage, the question is about the timing."
The timing is important because Europeanauthorities are scrambling to build a "firewall" that will protect banks and other euro area nations from the fallout of a Greek default.

The first step is to overhaul an existing bailout fund for Europe, which is expected to be officially approved by all 17 eurozone nations by the end of October.

The goal, analysts say, is to create conditions for Greece to default in an organized way, rather than an abrupt collapse that could cause chaos in global financial markets.

Euro area officials have said repeatedly that Greece will meet its obligations and avoid a default. Yet the inevitability of a Greek default has become conventional wisdom in financial circles.

"The debt level of Greece is not sustainable," said Farid Abolfathi, senior director of the Risk Center at IHS Global. "No matter how much austerity, they will not be able to pay their creditors. At some point in time, they are going to default."

The argument is that Greece owes more money than it can realistically repay, considering that its economy has been in recession for years and is not expected to turn around any time soon.

For the past 15 months, Greece has been kept afloat by billions of euros in bailout money from the International Monetary Fund and its European "partners."

But the nation has had limited success when it comes to enacting the painful reforms necessary to bring down its budget deficits, and has yet to begin the process of restructuring its bloated public sector.

The Greek government disclosed over the weekend that it will not meet its budget goals this year and next, citing a worse-than-expected economic environment.

The shortfall, while not a surprise, has complicated the politically fraught negotiations over the latest *8 billion installment of emergency funding for Greece from last year's *110 billion bailout.

For one thing, the nations providing the bailout money are having a hard time convincing taxpayers that supporting Greece is absolutely necessary. There is limited political appetite in places like Germany, Austria and Finland for an open-ended commitment to a nation that did not manage its finances very well.

At the same time, there is evidence to suggest that the reforms Greece must make to qualify for its bailout money will only push its economy deeper into recession.

The nation is also facing an increasing political backlash in the form of protests and strikes in Athens. A one-day general strike got underway Wednesday morning. The halting progress has also raised questions about a plan to provide a second *109 billion bailout for Greece.

"This discussion about a second Greek bailout could easily morph into a debate about an orderly Greek default," said Holger Schmieding, chief economist at Berenberg Bank. "This discussion is likely to start in earnest in mid-October and come to a head before the next tranche for Greece is due in December."

As part of the proposed second bailout, banks and private sector investors agreed to take a 21% writedown on the face value of the Greek bonds on their books.

But there is now widespread speculation that bondholders may need to accept "haircuts" of up to 50% in order for Greece to recover. That would represent a significant liability for the European banking sector, which is already seen as woefully undercapitalized.

The threat of a banking crisis is one of the main reasons why euro area politicians have pledged to do whatever it takes to prevent a Greek default.

In addition, officials in Europe are afraid a messy default would lead to a so-called debt contagion that would undermine larger economies such as Italy.

Euro area governments are expected to unanimously approve a proposed expansion of the European Financial Stability Facility by the end of October. The revamped bailout fund will have greater flexibility to intervene in sovereign debt markets and provide financing for troubled banks.

But many analysts say governments will need to pony up much more cash in order for the *440 billion fund to be effective. Euro area officials have said they are working on ways to "enhance" the funds lending capacity, while ruling out an increase in its price tag.

"At some point, they will have to cough up money that is required," said Abolfathi. "There's a need for a big and credible fund so that markets don't bet against these countries and banks."

In the meantime, there are still serious questions about what a Greek default would mean. No euro area nation has ever defaulted, and analysts say a break up of the 12-year old currency union cannot be ruled out.

At the same time, it's not clear what Greece could do to boost its economic competitiveness after it defaults.

A government-fueled recovery seems unlikely, given that Greece would have difficulty borrowing money in the public market. Even after a default, Greece may be dependent on outside support for years to come.

Foreign exchange market intervention: methods and tactics

Introduction 

This paper focuses on the methods and tactics of  foreign exchange market intervention with an
emphasis on how the tactics of intervention can depend on intervention objectives and the
environment. The paper highlights the main features of the survey responses provided by emerging
market central banks on questions of the methods and tactics of intervention. Links are drawn to other

information about methods and tactics of foreign exchange market intervention.
King (2003), amongst others, makes the point that different objectives should involve different
intervention methods and tactics. Yet there is a considerable degree of consistency in the actual
choice of mechanics across the emerging market group covered by the BIS survey undertaken for this
meeting. This consistency appears not only within the emerging market group, but extends also to
developed countries.
1
 Specifically, spot transactions predominate; they are conducted with those
counterparties that operate in the deepest part of the market; and at times when the market is most
liquid. And where other intervention techniques are used, such as auctions of option contracts, by
design the central bank is also operating where the market is thickest.
Given the need to select methods and tactics to maximise the effectiveness of intervention, at one
level it is perhaps surprising that most central banks choose to transact at a time and place where their
relative size is minimised. At another level, however, the choice to operate in the thickest part of the
market reflects the importance that central banks attach to avoiding volatility and to maintaining
credibility.
The main area where different approaches and different attitudes are evident relates to the visibility of
intervention operations. This issue is given special attention.
As background, at the outset the channels through  which intervention is thought to influence the
exchange rate are discussed. Subsequently, choice of markets in which intervention takes place, the
preferred degree of visibility of intervention, and the choice of instrument and transaction method are
addressed in turn. Finally, some thoughts are offered on intervention size, frequency and timing. It is
perhaps around these issues that the general preference for plain  vanilla operations becomes most
apparent.
Methods and tactics: some background considerations 

Foreign exchange market intervention involves trying to change the value that market participants put 
on a particular currency. How to do this is not immediately clear, particularly as the foreign exchange 
market is far from homogeneous.  
High-frequency, high-pressure foreign exchange trading by market-making professionals is the part of 
the market most actively reported. In this market, prices seem able to be disturbed by even quite 
inconsequential pieces of news with little evidence of fundamental determinants working to establish 
an equilibrium value. 
For cross-border investors with medium- to long-term investment horizons, on the other hand, the 
immediate and near-term pressure of order flows on market-makers’ open positions is almost 
irrelevant. What matters is the likely accumulation of such foreign exchange flows over the investment

horizon. With this focus, economic fundamentals are likely to be more relevant.
2
 Even so, the 
short-term relationship between economic fundamentals and exchange rates is notoriously imprecise; 
simply extrapolating recent trends might be better (or less bad) than attempting to predict such 
developments from analysis of fundamentals. Some investors with medium-term horizons might thus 
turn to auto-regressive and “technical” prediction methods, which are certainly cheaper than 
fundamentals analysis in terms of time and effort. Order flow information might also be useful for 
cost-effective insights into the interaction between fundamentals and exchange rate behaviour. 
However, order flow information is most readily available to market participants least able or willing to 
use it - the institutions engaged in clearing customer orders. Such institutions typically operate with 
tight limits on net open foreign exchange exposures. In general, firms specialising as market-makers 
seek to make their income from “clipping the ticket” (crossing the bid-ask spread and generating fee 
income) and do not commit enough risk capital to provide for large speculative positions to be taken. 
The vast numerical majority of participants in the market, however, are firms engaged in commerce 
across currency boundaries, or financing their business in international capital markets, or investing in 
assets denominated in different currencies. They relate to the market as price-takers. Over time, their 
willingness to use those currencies will depend on the profitability of their cross-currency business, 
and change with variations in that profitability. It is through this mechanism that economic 
fundamentals of competitiveness and macrobalance will eventually shape exchange rate trends. It is 
these forces that fundamental investors are trying to anticipate. 
Finally, at least some of these agents just discussed will be attempting to second-guess the interests 
and behaviour of the others, adding to the complexity of the exchange rate determination process. 
Against that complex background, central banks must choose operational methods that effectively 
influence this heterogeneous group’s collective valuation of the currency. Economic theorists have 
attempted to identify the channels through which central bank actions might influence such valuations. 

What Is Forex ?

The foreign exchange market (forex, FX, or currency market) is a worldwide decentralized over-the-counter financial market for the trading of currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends. The foreign exchange market determines the relative values of different currencies.[1]
The primary purpose of the foreign exchange is to assist international trade and investment, by allowing businesses to convert one currency to another currency. For example, it permits a US business to import British goods and pay Pound Sterling, even though the business's income is in US dollars. It also supports speculation, and facilitates the carry trade, in which investors borrow low-yielding currencies and lend (invest in) high-yielding currencies, and which (it has been claimed) may lead to loss of competitiveness in some countries.[2]
In a typical foreign exchange transaction, a party purchases a quantity of one currency by paying a quantity of another currency. The modern foreign exchange market began forming during the 1970s when countries gradually switched to floating exchange rates from the previous exchange rate regime, which remained fixed as per the Bretton Woods system.
The foreign exchange market is unique because of
its huge trading volume, leading to high liquidity;
its geographical dispersion;
its continuous operation: 24 hours a day except weekends, i.e. trading from 20:15 GMT on Sunday until 22:00 GMT Friday;
the variety of factors that affect exchange rates;
the low margins of relative profit compared with other markets of fixed income; and
the use of leverage to enhance profit margins with respect to account size.
As such, it has been referred to as the market closest to the ideal of perfect competition, notwithstanding currency intervention by central banks. According to the Bank for International Settlements,[3] as of April 2010, average daily turnover in global foreign exchange markets is estimated at $3.98 trillion, a growth of approximately 20% over the $3.21 trillion daily volume as of April 2007. Some firms specializing on foreign exchange market had put the average daily turnover in excess of US$4 trillion.[4]
The $3.98 trillion break-down is as follows:
$1.490 trillion in spot transactions
$475 billion in outright forwards
$1.765 trillion in foreign exchange swaps
$43 billion currency swaps
$207 billion in options and other products

Forex scam

A forex (or foreign exchange) scam is any trading scheme used to defraud traders by convincing them that they can expect to gain a high profit by trading in the foreign exchange market. Currency trading "has become the fraud du jour" as of early 2008, according to Michael Dunn of the U.S. Commodity Futures Trading Commission. But "the market has long been plagued by swindlers preying on the gullible," according to the New York Times. "The average individual foreign-exchange-trading victim loses about $15,000, according to CFTC records" according to The Wall Street Journal. The North American Securities Administrators Association says that "off-exchange forex trading by retail investors is at best extremely risky, and at worst, outright fraud."
"In a typical case, investors may be promised tens of thousands of dollars in profits in just a few weeks or months, with an initial investment of only $5,000. Often, the investor’s money is never actually placed in the market through a legitimate dealer, but simply diverted – stolen – for the personal benefit of the con artists."
In August, 2008 the CFTC set up a special task force to deal with growing foreign exchange fraud. In January 2010, the CFTC proposed new rules limiting leverage to 10 to 1, based on " a number of improper practices" in the retail foreign exchange market, "among them solicitation fraud, a lack of transparency in the pricing and execution of transactions, unresponsiveness to customer complaints, and the targeting of unsophisticated, elderly, low net worth and other vulnerable individuals."
The forex market is a zero-sum game, meaning that whatever one trader gains, another loses, except that brokerage commissions and other transaction costs are subtracted from the results of all traders, technically making forex a "negative-sum" game.
These scams might include churning of customer accounts for the purpose of generating commissions, selling software that is supposed to guide the customer to large profits, improperly managed "managed accounts", false advertising, Ponzi schemes and outright fraud. It also refers to any retail forex broker who indicates that trading foreign exchange is a low risk, high profit investment.

The U.S. Commodity Futures Trading Commission (CFTC), which loosely regulates the foreign exchange market in the United States, has noted an increase in the amount of unscrupulous activity in the non-bank foreign exchange industry.
An official of the National Futures Association was quoted as saying, "Retail forex trading has increased dramatically over the past few years. Unfortunately, the amount of forex fraud has also increased dramatically."[15] Between 2001 and 2006 the U.S. Commodity Futures Trading Commission has prosecuted more than 80 cases involving the defrauding of more than 23,000 customers who lost $350 million. From 2001 to 2007, about 26,000 people lost $460 million in forex frauds. CNN quoted Godfried De Vidts, President of the Financial Markets Association, a European body, as saying, "Banks have a duty to protect their customers and they should make sure customers understand what they are doing. Now if people go online, on non-bank portals, how is this control being done?"

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