Introduction to Currency Market

Foreign exchange market seen in graph

Foreign Exchange Market

In the world, the currency used for each country is different. The currency used for economic activity is one in each country. However, if you trade with a foreign country, paying foreign currency if you buy things, selling goods will also receive foreign currency. Therefore, it is necessary to exchange their own currency into foreign currency, and conversely exchange foreign currency into home currency. Also, when foreign investment is made, exchange their domestic currency into foreign currency, and when collecting investment funds exchange foreign currency with home currency. In this way, the more active the economy goes across the border, the more currency exchange is done. In general, the exchange of currencies made by individuals and companies is done through financial institutions. The financial institution exchanges currencies according to customer's order, but the financial institution also exchanges currencies with other financial institutions. This intermediary function is conceptually called a foreign exchange market, and the exchange rate is called the exchange rate.

See movement of foreign exchange

Foreign exchange is the exchange rate of bilateral currencies. In Japan, exchange ratios to the yen are paying attention, but internationally, the exchange rate at the dollar which is the base currency is a representative index. Since currency exchange is the exchange ratio between two currencies, it depends on which currency exchange ratio you see to see the value of a certain currency. In the world economy, it is common to look at the exchange rate with the dollar, which is the key currency. In Japan, we often see the value of foreign currency (currency other than yen) in yen. Exchange rate, which is the currency exchange rate, is constantly changing due to changes in demand and supply of bilateral currencies in the exchange market. Let's take a look at the past 30 years movement of advanced currencies with a lot of transactions in the world economy.

Currency in yen denomination

In the domestic market, the value of foreign currency is often expressed in yen. Since both domestic exporters and import companies trade yen and foreign currency, we will pay attention to foreign currency movements in yen denominated in yen as the business performance and impact on the Japanese economy.

Movement of major currency in 30 years against the yen

The overall movement seen in the yen is divided into two patterns: dollar yen and other currencies (cross circles). The dollar has repeatedly rising and falling in the past, but as a general trend, the dollar depreciated against the yen. In particular, the dollar's depreciation has advanced since 2007, and at the time of the Lehman shock in 2008, the dollar's depreciation sharply declined. However, compared to other currencies, the fluctuation in the vertical direction is small.

In the cross circle other than the dollar, currencies other than the dollar in the past are comparatively similar in the past. This is because the cross circle is calculated as the product of the dollar denominated rate of the currency other than the dollar and the dollar yen rate, so the movement of the rise and fall of the dollar yen rate is largely reflected in the movement of the cross circle rate. Vertical fluctuation also becomes larger than fluctuation of dollar circle.

Currency to see in dollar

The dollar is the world's primary currency. Only the dollar can be said as the only cash in the world economy. Therefore, the value of the currency expressed in dollar denomination represents the standard of currency value in the world. In exchange transactions, there are few direct transactions between currencies other than dollars. For transactions between currencies other than dollars, it is done by converting the currency A to dollars and converting that currency into the currency B. Each currency is traded with dollars. For this reason, the exchange rate on the dollar internationally represents the value of currency.

Movement of major currency in 30 years against the dollar

Looking at long-term currency movements of around 30 years, the yen and the Swiss franc are rising for the dollar over the long term. The euro, the pound, the Canadian dollar, the Australian dollar have similar behavior in the long term. These currencies can be regarded as highly interlocking, but at the same time, it can be seen that the dollar is up and down relative to these currencies in general. The developed country currency is divided into yen / Swiss franc group and other developed country currency pair such as euro, pound.

Looking at short-term movements such as the position of mountains and valleys of the chart, the euro and Swiss franc have high correlation. This is influenced by the fact that the Swiss central bank intervened in foreign exchange to keep the ratio of euro and Swiss franc constant. The euro, pound, Swiss franc, Canadian dollar, Australian dollar will move in conjunction. It can also be seen that the dollar is rising or descending against other developed country currencies. On the other hand, the only yen in the developed country currency has another movement.

The yen and the Swiss franc rose in the last 30 years. Interlockingness can be seen in the movements of the yen and the Swiss franc. Other developed country currencies are movement in the box area. As a movement common to developed currencies, it fell from 1980 to 1985, bottomed out in 1985, rose from 1985 to 1995, fell from 1995 to 2002, declined in 2002, As the Lehman shock in 2008 plummeted except for the yen and the Swiss franc, it is now recovering. It can be interpreted that the common movement in the developed country currency is a change in the value of the dollar. In other words, the value of the dollar peaked in 1985 and 2002. The German currency was moving high, even in conjunction with the European currency. In the long run, the yen, the Swiss franc and the German mark were rising. It can be inferred that the currency value was linked with the economic growth of the country.

The overall movement is divided into two patterns: yen dollar and other currencies (euro etc.) dollars. The Swiss franc and the euro move in unison. Swiss francs, pounds, Australian dollars, Canadian dollars will be in order from highest degree of linkage with the euro. From 1999 to July 2008 the euro and the yen had a weak positive correlation, but after July 2008 strong inverse correlation (yen sharply increased, other currencies plummeted). In recent years, interlocking is seen between the yen and the Swiss franc.

The fact that the other currencies (euro etc.) show similar movements to the dollar is that the foreign exchange is moving due to the factor of the dollar side rather than the fact that exchange rates are driven by factors of other currencies (euro etc.) Respectively.

The yen dollar has smaller fluctuations in the vertical direction than other currencies. In general trends, it tends to rise while repeating up and down movements. On the other hand, as for the currency versus the dollar other than yen, the overall trend is rising while repeating up and down movements.

As for the correlation with other euro dollars in the other currencies, the Swiss franc has a correlation of 0.9 to 1, which is extremely high. Swiss francs, pounds, Australian dollars, Canadian dollars, yen, in order of highest correlation. The yen may be inversely correlated with the euro dollar.

Exchange rate volatility

Foreign exchange fluctuates from moment to moment. The intensity of fluctuation is called volatility. Statistically, the fluctuation rate of exchange rate is collected for a certain period and standard deviation is taken. Standard deviation of 20 days was calculated in order to see the variation of the fluctuation rate of the daily fluctuation rate of the exchange rate. Looking at the magnitude of volatility, you can see the extent of fluctuations in exchange rates.

Looking at the magnitude of the volatility (degree of fluctuation) of major currencies seen against the yen, it is almost constant until the fall of 2008, but it sharply increased at the time of the Lehman shock in autumn 2008. Looking at the magnitude of volatility in terms of currencies, Australian dollar, Canadian dollar, pounds, euro, Swiss franc and dollar, in order of the highest volatility.

The volatility of major currencies seen against the dollar was nearly constant until the fall of 2008, but it has risen rapidly (especially the Australian dollar) in the fall of 2008. The volatility is higher for Australian dollars than for other currencies, and the other currencies are not much different. The volatility rates are in the order of largest, in order of Australian dollar, pound, Canadian dollar, euro, Swiss franc, yen.

Movement of the value of the dollar

By using a weighted average index based on the trade ratio between the US and foreign countries, we can capture the change in the absolute value of the dollar. Looking at the weighted average index in major currencies, we have peaked in 1985 and 2002, but the value of the dollar has declined in 40 years. In the early 1980s, the dollar appreciated from the late 1980s to the early 1990s, from the latter half of the 1990s to 2002 the dollar appreciated, and then the dollar weak age Are alternately repeated. The relationship between the current account and the value of the dollar is consistent because the current account balance is in deficit and the depreciation of the dollar continues as a general trend although the coincidence of vertical movements is weak. When comparing the interest rate and the dollar, it is understood that the real interest rate of the 10-year bond and the value of the dollar are highly interlocked.

Yen, currency in currency other than dollar

Given that there are few transactions between currencies other than dollars, to measure the value of a currency in another currency, divide it by the dollar denominated price of one currency and the dollar denominated price of another currency Can be calculated. To see a certain currency in yen, multiply the dollar-denominated price of the currency by the yen dollar rate.

Composite index

The exchange rate represents the relative value between the two currencies. Focusing on a currency, we only know the relative relationship with another currency (usually dollars) to measure the movement of that exchange. For example, to measure the movement of the value of the yen, the value of the yen rises or falls with respect to each, looking at the dollar, against the euro, against the pound. In order to measure its value by focusing on a currency, a composite index is used to synthesize several exchange rates and express the change in value of one currency over the other currencies. Representative examples of synthetic indices include the following.

Effective exchange rate

Weighted average of the exchange rate of the trading partner country and your country by the ratio of trade. Represents the value of your country's currency as seen from the trading partner. By changing the exchange rate, you can see how much your country's trade will be affected. Although it is one of the indicators of the value of currency, since it is a weighted average based on the ratio of trade volume, the effective exchange rate calculated in each country differs in the calculation formula itself. It is not a ratio of the amount of currency transactions in international financial markets, so caution is necessary.

For the yen, the Bank of Japan calculates the index of major currencies against the dollar, while the Fed is calculating the index of major currencies. Looking at this, the yen and the dollar show a contrasting movement. While yen moves up and down somewhat, value increases almost consistently over the long term. Meanwhile, the dollar has declined in value almost consistently over the long term.

Real exchange rate

The exchange rate represents the exchange rate between currencies, but from the viewpoint of purchasing power of currency, it is also necessary to consider the influence of price changes. Taking the dollar as an example. If the exchange rate is 1 dollar = 100 yen, this means that you can buy a 1 dollar item with 100 yen cash. If prices rise by 3% in the US, it will be impossible to buy the same thing if it is about 103 yen. On the other hand, if the inflation rise is 1% in Japan, you can not buy the same thing if there is no 1.01 dollar. The actual exchange rate is the one that reflects the difference of inflation rate between Japan and the US at 2% in the exchange rate and calculates to 1 dollar = 102 yen.

Real effective exchange rate

The real effective exchange rate is one that reflects price changes in the effective exchange rate. Calculate the real exchange rate between the two countries by adding the relative change of bilateral price to the exchange rate between the two countries. Calculate the real exchange rate of your country by weighted average of the real exchange rate of your country and the partner country by the ratio of trade.

Simple addition synthesis exchange rate

Indicates an index with a composite index that is a simple addition of the rates for the yen and dollar, with respect to other developed country currencies (euro, pound, Swiss franc, Canadian dollar, Australian dollar). As a synthetic index, the effective exchange rate is representative, but it is an index weighted by the country's trade ratio, so it is a difficulty that the calculation method differs depending on each country. We think that synthesizing rates simply rather than the ratio of trade is suitable for expressing the value of currency in international financial markets.

The Dollar Composite Index is a simple addition of changes in exchange rates between the dollar and other currencies. Looking at it, it increased from February 1999 to February 2002, it fell from February to 2004 in 2002, it rose in 2005, it declined from 2006 to July 2008, and it has risen since July 2008 are doing.

The yen comprehensive index is a simple addition of changes in exchange rates between yen and other currencies. Looking at it, it increased from 1999 to 2000, it fell in February 2001 - July 2007, it has risen since July 2007, and it has risen sharply since July 2008.

What is the value of currency?

Consider how the value of yen changes over time. The first thing to check is the exchange rate with the dollar. In terms of both trade and investment, the exchange of yen and foreign currency is the most common dollar. 70% of imported goods and 60% of export goods are transactions in dollar denominated transactions. Changes in the exchange rate with the dollar are noted from the magnitude of the impact on the Japanese economy. Also, the dollar is the global currency of the world, it is natural to express the value of the currency by comparing it with this "standard". Even when comparing values ​​with currencies other than dollars it is easier to compare if they are dollar-denominated. What should be checked next is the effective exchange rate. Since it is a weighted average in the trade ratio, it is easy to capture the impact on trade. If the yen appreciates at this rate, it means that imported goods can be purchased cheaply, and export goods receive fewer circles. At the real effective exchange rate, we further adjust the inflation, which makes it easier to grasp the true value of the currency. The movement of the yen as seen by the dollar yen rate is the yen's high trend, as mentioned above, and this trend is getting stronger in recent years. On the other hand, when looking at the real effective exchange rate, even if it is on a strong yen trend, it is not that too strong. Then, which index is appropriate is considered to be the simplest dollar yen rate. In the modern day, the synthetic index is changing in value, the motive for currency trading is stronger in terms of trading in international financial markets than for trade, synthesis in trade ratio and consideration of movements in price level The necessity is getting smaller.

Meaning of comparison with dollar

Representing currency in dollars assumes that the value of the dollar is unchanged. In fact, however, it is natural to think that the dollar is the currency of the United States, and it changes like the currencies of the US economy, monetary policy, international finance, and other currencies. Therefore, if the exchange rate of the yen dollar changes, it is unknown whether the yen's value improved or the dollar value went down. However, looking at the movement in dollar denominated in other currencies, we can infer the change in the value of the dollar. The aforementioned major country currency (denominated in dollars) has been moving in the past for a long time. This suggests that currency exchange in local currencies is moving due to the circumstances of the dollar rather than the fact that exchange rates are moving due to circumstances of individual countries. The circumstances of the dollar are mainly (1) the situation in the US economy, (2) the US monetary policy, and (3) the risk of the world economy.

In the situation of the domestic economy, if the economy is in a booming situation, the demand for dollar money necessary for economic activity will rise and the dollar's demand in the foreign exchange market will tend to rise against the dollar and foreign currency depreciation. On the contrary, if the economy is in recession, the demand for currency of the dollar decreases and the dollar tends to become higher against the dollar. In the US monetary policy, if monetary easing low interest rates, the movement to sell low interest currency dollars in the currency markets and buy high interest currencies will increase and the dollar will rise against foreign currencies. If the supply of dollars increases due to monetary easing, the dollar depreciation will be higher due to changes in supply and demand. In the case of monetary tightening, it is the opposite movement. With the risk of the global economy, as political and economic risks increase, dollars, which are key currencies and cash in the global economy, are more likely to be bought and the dollar's foreign currency deprecies.

Properties of each currency

yen dollar

In terms of long term, it is increasing almost consistently. This trend is especially noticeable in recent years. Whereas the currencies of other developed countries behave similar to the euro, only the movement of the circle is peculiar. Short-term interlocking is low, but in the long run it is similar to the Swiss franc. The feature of the yen is that it is seen as a safe currency. Traditionally it was said to be "emergency dollars", and the dollar was bought when the international economy became unclear. This means that the dollar, which is the key currency, is cash, and the other currencies are risk assets against the dollar, which means cashing in emergency situations. However, in recent years, when the economy becomes uncertain or emergency happens, yen is bought against the dollar and the yen becomes high. This trend also applies to the Swiss franc but in the relationship between the yen and the Swiss franc the yen is more bought. In analyzing data, we can see the movement of long-term interest rate differential between Japan and the US and the linkage of exchange rates. Long-term interest rates in Japan are low and fluctuations are small, so for convenience, even if you look at US long-term interest rate movements, interlocking with foreign exchange is high.

Euro doll

In terms of currency trading volume, euro and dollar are the biggest. For this reason, in international finance, the movement of the euro doll will represent the movement of the exchange market. It not only shows the change in the value of the euro but also the change in the value of the dollar. The movement of the euro can be divided into three stages. At the beginning of the introduction of the euro, it continued to drop significantly against the dollar. It is said that due to the euro's consolidation of many European currencies currency outside the euro zone was bought for investment opportunities. After that, the euro rose as the world economy recovered after the collapse of the IT bubble. The euro's interest rate was high, bought as representative of high interest rate currency. However, it subsequently plunged and rebounded by subprime shock, but this time it fell again due to the Greek issue. It is easy for the euro to go up and down even with the remarks of the central banker. Focusing on the price level, as inflation advances, it tends to react with higher interest rates and higher euro. Even in the United States, interest rates are determined by paying attention to inflation, but attention should be paid to energy prices. In the United States, where energy is a necessity, it is difficult to raise interest rates in the euro area due to economic slowdown due to sluggish consumption as the price of energy rises, but in the euro area, it is likely to raise inflation due to rising energy prices and raise interest rates.

Australian dollar

The Australian dollar is highly interlocking with the euro, but the volatility is high, and the up and down movement is the most intense among the developed country currencies. The Australian dollar is a representative of high-interest currencies. The rate for the dollar, which is the key currency, is a measure to measure the degree of the carry trade to the high interest currency (selling the low interest currency in high interest currency) alongside the dollar yen. The Australian dollar is also a popular currency for individual investors, and it also serves as a measure for the degree of risk of individual investors, both domestically and overseas. When risk-oriented, the Australian dollar is bought and rises. On the contrary, the Australian dollar will be sold and fall as risk aversion takes place. The Australian dollar, along with the Canadian dollar, is also a resource currency, and it tends to be hilred as international commodity prices rise.

Swiss Flanders

Swiss francs are said to be safe currencies alongside the yen. In the past, the dollar in the base currency was also the safe currency, but now it is Swiss franc and the yen. As investors' risk aversion orientation gets stronger it gets bought and rises. If you look at the Swiss Franc circle, you can see which of these two are considered more safe currencies. In addition to the yen, the Swiss franc is representative of the low interest rate currency, but in recent years the dollar of the base currency has also become low interest rate, which is not a feature of the Swiss franc and the yen. Switzerland is not a Euro member country in the neutral country, but due to exchange intervention by the Swiss central bank, the ratio with the euro has been kept constant. Investors also buy and sell Swiss francs knowing this, so even if there is no exchange intervention by the central bank, it will be linked with the euro.

Factors driving exchange rate

If you look at the movement of the exchange rate in the past, you can see that the up and down movements are repeated. What are the factors driving the exchange rate? Consider several factors.

Relationship with the economy

If the economy of the country develops, generally, if demand for money increases, domestic investment expands, exports grow, demand for exchange to the home currency occurs and the currency value increases. Given the globalization of the current economy, it is difficult to think that only one country will develop economically, it is easy for any developed country to develop economy or suffer from a recession. In this case, the exchange will be affected by the relative relationship of changes in economic power. If the country is economically developed from a certain country, its own currency tends to be higher against the currency of a certain country. However, the movement of economic development can change from moment to moment and can not be predicted, so the current market does not always indicate the relative relationship of changes in economic power.

Relationship with GDP

A representative indicator of the scale of the economy is gross domestic product (GDP). Focusing on that change (growth rate) rather than the absolute level of GDP, if economic growth is large, the demand for currency in that country will increase. Therefore, the value of currency is considered to rise. However, the value of currency is relative, and if economic growth also occurs in the country of currency from which value is measured, it is necessary to look at the relative relationship of economic growth. The figure below shows Japan's GDP, US GDP, dollar yen rate. Although the hypothesis is as described above, the actual dollar-yen rate seems not to be linked with the difference in economic growth between Japan and the US.

Relationship with the balance of payments

Exchanging currency and obtaining foreign currency is when you do business with foreign country. Transactions with foreign countries are recorded in the balance of payments statistics. The point of interest is the trade balance and income balance. If the trade balance or income balance is in surplus, it means that the company exports the product to earn foreign currency, or that foreign currency such as interest / dividend etc is obtained from foreign investment, and each should exchange into the local currency Is expected. Therefore, if the trade balance and income balance are in surplus, it is easy for the country's currency to be easily bought and to rise.

Relationship with interest rate

If the interest rate of country A is higher than the interest rate of country B, it is better to operate currency of country A and operate in country A than operating in country B. Therefore, the currency of country B will be sold and the currency of country A will be bought. The currency of the country with the high interest rate has a higher value than the currency of the country with the low interest rate. Then, how high will it be? There are two ways of thinking.

One is the arbitrage price. If country A has higher interest than country B, the one who operates in country A's currency one year later will benefit from operating in currency of country B. In that case, since everyone tries to operate in the currency of country A, the currency A rises in price, but how far will it rise? The extra interest rate on B currency obtained if you get the A currency is offsetting with the expected return on B currency in A currency. A currency will rise until the return from A currency equals the return from B currency.

Another is the change in the interest rate differential. The current interest rate differential is already known to market participants. It can be said that the price formed in the market already incorporates the interest rate difference of each country. If you do not change the interest rate difference, the exchange rate will not change. Indeed, even though the policy rates decided by the central banks of each country do not change, interest rates (for example, long-term interest rates) other than policy interest rates are formed on a market every moment, so the interest differential will move. Foreign exchange also moves accordingly.

Policy rate and dollar yen rate

In economics, the above theory is called an asset approach and is seen as a major determinant of exchange rates. Look at the actual data on the relationship between the dollar yen rate and interest rates in Japan and the United States. Since the policy interest rate in Japan is sticking to nearly zero, we will cover only the US policy rate (FF interest rate). It can also be regarded as a proxy variable of the difference between the US and Japanese interest rates. Looking at the long term of 30 years, the FF interest rate has a large peak around 80 years and then shows a downward trend while moving up and down. In the first half of 30 years, there is no correlation between interest rate and dollar yen, but in the second half, some interlockingness can be seen. Especially ten years in recent years, there is a correspondence to the rise and fall of the FF interest rate and the change of the exchange rate even if there is a time difference.

US long-term interest rate and dollar yen rate

The interest rate ranges from short-term interest rates such as policy interest rates to long-term items like international ten-year objects. The figure below shows the 10-year US Treasury bond rate and the dollar yen rate, which are typical indicators of US long-term interest rates. Before 2001, we can not see the correlation, but since 01, interlockingness is observed. Especially since 2007 the movement is almost the same, interlocking is remarkable. The coordination between the 5-year Treasury bonds and the dollar yen rate will be higher. Generally speaking, interlocking with the dollar-yen rate is noticeable on US Treasury bonds 2-year interest rates.

Relationship with prices

There is a general way of thinking about why the absolute level of foreign exchange is decided. It is a purchasing power parity hypothesis. This is one of the hypotheses, and it does not mean that the exchange rate is actually determined in this way.

The purchasing power parity hypothesis is one thing's one way of thinking. I regard the value of things the same no matter where in the world goes. If one is 100 yen in Japan, exactly the same one in the US is 1 dollar, 100 yen = 1 dollar. This ratio varies from good to good, and it is also hard to find exactly the same thing in Japan and the United States. Therefore, for convenience, we will pay attention to the relative movement of the price level. For example, if the price level in Japan rises by 1% from last year and the price level in the US rises by 3%, a price difference of 2% will be added in one year. If the same thing is sold in Japan and the United States, this 2% is achieved by the exchange rate of dollar yen being 2% higher than the yen.

When analyzing the long-term chart of the dollar, this hypothesis is said to have a certain degree of consistency. Even if it seems that the hypothesis is established by long term span of 20 to 30 years, the exchange rate fluctuates greatly even in a shorter period. There is no accountability for the change. Also, in combinations of currencies other than the dollar yen, it is not necessarily consistent even in the long term, and it may be considered as one of the idea of ​​foreign exchange fluctuation.

Relationship with stock price

Stock prices will rise as the economy develops. Since economic development usually continues, the period during which the stock price is rising will be longer, but because the exchange rate is determined by the relative relationship between the countries, it will not rise for a long time like the stock price. Also, in the case of stock price, there is interlocking, stock prices in any country will rise, but since currencies are determined by relative relations, the currencies of any country do not rise, and with the stock price There is no linkage.

Relationship with central bank's behavior

Currency intervention

The central bank will conduct currency intervention to adjust the exchange rate. If intervention is local currency selling, buying foreign currency, foreign exchange reserves will be accumulated. It is rare that we hold this foreign currency in cash for a long time, and we often buy and operate foreign bonds. At this time, foreign currency trading occurs when you try to purchase a foreign currency you own from another country's receivables. The central bank handles a large amount, so that action leads to currency fluctuations.

Interest rate policy

In monetary policy, the central bank intervenes in trading in the interbank market and leads the short-term interest rate to the target interest rate. Long-term interest rates are induced indirectly by induced short-term interest rates. The short-term long-term interest rate is raised and lowered by raising and lowering the target interest rate, and the interest rate differential relative to foreign countries will expand or shrink. Changes in interest rate differences will bring about changes in exchange rates.

Quantitative easing policy

By controlling not only the short-term interest rate but also the amount of money that the central bank supplies, it brings about the same effect as interest rate control. Central banks purchase various receivables and financial instruments and supply money to bring down the interest rates of the target countries and affect the exchange rate by reducing (or expanding) the currency interest differential. Not only the direct effect of lowering interest rates due to purchase of bonds but also the decline in the value of money itself (rise in prices) due to the expansion of the circulation of money and the relative decrease in value against foreign currencies will result in a decline in the domestic currency. A relative change in money supply between bilateral nations will cause a change in the exchange rate.

Relationship with corporate behavior

Companies importing and exporting are generally paid in foreign currency at the time of import and foreign currency at the time of export. In recent years, the globalization of the economy has progressed, and many companies are making profits not only in their own country but also in other countries. The profits earned in foreign currencies are often converted to their own currency for the purpose of paying for domestic costs, domestic investment, internal reserves, etc. Expansion of overseas earnings is a factor in the domestic currency appreciation. If the tax system is changed by industrial policy, the domestic return may be affected and there is a possibility of changing the exchange rate.

Seasonality of foreign exchange fluctuation

It is said that companies and financial institutions conduct exchange transactions at a fixed time in business for business purposes. Corporate activities are divided by yearly, yearly, quarterly, so it is easy to do exchange settlement at that timing. Specifically, in Japanese companies, it is in March at the end of the fiscal year, September at the end of the half year, June and December at the end of quarter. Western companies are December at the end of the year, June at the end of the half year, March and September at the end of the quarter. At this timing exchange profits listed overseas for their own currency. Therefore, in terms of dollar yen, the yen appreciates in March, the yen weakens in June, the yen appreciates in September, and the yen depreciates in December. The impact of the end of the quarter can not be said either way. However, if you examine it with actual past data, it does not necessarily apply.

Companies tend to exchange foreign currency at regular intervals in business. For example, when the fiscal year approaches, exchange foreign currency into your local currency. Demand for currency also has seasonality throughout the year. Generally, as the end of the year comes closer, demand for dollars will increase in Christmas sales etc. For this reason, the dollar gets higher. Also, in Japan, as the end of the fiscal year comes closer, the demand for currency will increase as a means of settlement, so it is said that the yen will rise.

If you examine it with actual exchange data, the above does not apply in many cases. The one-year seasonality of the dollar is high performance: June, February, April and low performance: October, September, May, November.

Short-term factor

The exchange market moves every moment on a daily basis. What is the daily fluctuation factor? Currency markets are priced by relative relationships between currencies, unlike other risk assets. Although it can be seen in the same row as other risk assets in dollar terms, it only represents the relative relationship between the target currency and the dollar.

Response to economic information

In response to the economic information that is released daily, the exchange market reacts instantaneously. Generally, if the information is a positive surprise, the country's currency will be bought and rising. Conversely, if the information is a negative surprise, the currency of that country will be sold and fall. However, as the risk appetite gains, as the risk appetite gains, as the risk appetite gains, with the penetration of recent carry transactions (buying high-interest currencies by selling low-interest currencies and acquiring profits from interest rate differentials), high-interest currency Is bought and the risk appetite weakening (becoming risk averse) tends to sell high interest currency due to a decrease in carry transactions and an increase in reverse trading. Economic information will change investors' attitudes towards risk, thereby causing exchange fluctuations. When investors become risk appetite, yen and Swiss franc are bought and rise as the euro and the Australian dollar are bought and risen, becoming risk averse, and rising.

Changes in long-term interest rates

As the interest rate difference narrows / expands, the high interest rate currency rises / falls.

Change in policy interest rate

As policy interest rates rise, it is expected that the long-term interest rate will rise along with it, the currency will rise. Also, even if the policy interest rate does not rise at present, if it is expected to rise in the near future, it will rise by the previous buy now.

Remarks of key people

As the financial manager of the government and executives of the central bank make remarks on the policy interest rate, the exchange moves accordingly. Unlike the long-term interest rates at which prices are formed in the market, central banks are determined at discretion, so it is important to grasp what the central bank thinks in anticipating the policy interest rate. The important person's remarks give clues. There is also an intention to try to incorporate changes in the future policy rate into the exchange market by saying also by the key people.

Modeling exchange rate fluctuations

Currency exchange can be modeled in the same way as other financial products. Represent the fluctuation rate over a certain period as a probability distribution normal distribution. It can be said that the approximate normal distribution is fitted by ease of handling of the distribution rather than the distribution of the variation rate being a normal distribution. In terms of probability distribution, we assume that everyday fluctuations occur independently and randomly, but how about it? If everyday fluctuation is an independent event, the standard deviation of the fluctuation rate on day N should be multiplied by N times the standard deviation of the daily fluctuation rate. In actual data, N is larger than the root N times when N is large. In other words, it can not be said to be an independent event, and the market tends to be biased towards one direction.

World economy and foreign exchange

Currency moves as world economy moves

If the world economy moves with economic growth, depression and inflation, the supply-demand relationship of the necessary currency for the economy will change and the exchange rate will fluctuate. Changes in monetary policy and foreign exchange policy in each country expand and contract interest rate differences, and move foreign exchange through currency intervention. If investors' attitudes towards the world change, for example risks increase, currencies bought for risk avoidance are bought and currencies bought by risk appetite are sold.

If the exchange moves, the world economy will also move

For example, if the yen appreciates with the dollar yen, imports become cheaper and imports increase while export is suppressed and production of export type manufacturing industry can be suppressed. Declining prices of imported goods will have an effect of curbing inflation. Declines in exports will keep the economy down, economic slowdown and low inflation will occur. This will encourage monetary easing. Increased imports and price declines the competitiveness of domestic domestic enterprises, and in overseas markets, the appreciation of the yen has also resulted in a decline in the price competitiveness of Japanese exports in the country, It will be disadvantageous in competition with companies. Rising domestic currency means an increase in the value of currencies, but for Japan, which is the exporting country, this will lead to a decline in manufacturing performance and a decline in the overall Japanese economy.

Financial Market and Foreign Exchange

When there is a correlation between two financial instruments, there are cases where it can be considered that there is a causal relationship between the two rather than equal. For one, it is natural to think that if the amount of trading is greatly different, the movements of large trading markets will affect the market with less trading. Another thing is to think that due to what precedes in time, what will follow will be affected. In the exchange market, trading value is extremely large, and other markets often move due to exchange movements.

Commodity and Foreign Exchange

If the dollar depreciates, the item will be higher. In the international commodity market, products are often denominated in dollars. Even if the value of the dollar declines, if the value of the product itself does not change, the dollar-denominated commodity price will rise. As an indicator of the dollar, euro dolls are representative. Looking at past data, the depreciation of the dollar against the euro has led to higher crude oil prices and higher gold prices.

Bonds and Foreign Exchange

As stated earlier, when interest rates move due to fluctuations in bond prices, the relationship between bonds and foreign exchange is a change in exchange rate between bilateral countries and the exchange rate moves. Bond trading value is large, bond movements affect foreign exchange, but as the exchange rate moves, for example, when the dollar becomes high, converting US Treasuries into their own currencies increases and the price of US Treasures go down (Interest rates rise ).

Stocks and Foreign Exchange

There is a correlation between stocks and exchange rates. However, it is impossible to clarify a definite causal relationship that causes either of them. In Japan, in general, the combination of stock weakness and the appreciation of the yen, the stock's appreciation and the yen's deprecation are often used. The interpretation is that if the yen weakens, the performance of exporting companies will rise and the Japanese economy will be lifted to raise the stock price. In the case of yen appreciation the opposite is true. This is because the exchange rate causes the share price to be a result. In addition, it can also be interpreted that foreign investors will sell Japanese stocks for profit determination and bring down the stock if the yen appreciates. From the perspective of risk, if the yen is bought with risk avoidance, if the risk of the world economy increases, the yen will rise and the stock will be weaker. In this case, there is a correlation between the both because of the causal relationship with the risk rather than the causal relationship.

How the exchange market works

Market structure

Foreign exchange is moving day and night in one world market. A lot of currencies are traded, but exchange of currencies can be considered as many as the number of combinations. Exchange of currencies in 10 countries has 10 × 9 ÷ 2 = 45 ways. The more combinations there are, the more difficult it is to find a replacement partner. Therefore, actual transactions are "common currency" and currency of each country only needs to think about exchange with that common currency. If you exchange currencies between country A and country B, you can do it in two stages: exchange of common currency with country A, exchange of common currency and country B currency. Currently the common currency is the dollar. Therefore, to evaluate the value (price) of a currency, it is standard to look at the dollar-denominated price. In terms of market transaction size, the dollar accounts for more than half of the total. The next is euro. Since the euro has appeared, the ratio of the euro has increased. Next, continue with yen, pound.

Although financial institutions are the main participants in the exchange market, individual investors (FX transactions) are increasing recently, and the degree of influence of individual investors is increasing. Financial institutions are basically provided with currencies to customers, and in the form of cover transactions, financial institutions themselves often do not take positions. For this reason, even if the purchase price is large, selling and buying are balanced, and in many cases it does not affect the raise or lower of the market.

As for the movement of speculative sources, CME's built-in information is helpful. Looking at the trend of positions when looking at the non-commercial sector with CME's built-up ball. However, this shows past results and can not be predicted in the future.

Quantity of exchange transaction

The volume of currency trading is larger than any other market, global stock market, bond market, and commodity market, enormous transactions are done every day. Liquidity is one of the important factors in trading, but the exchange market is a market that fulfills this. However, it is the currencies of developed countries that have many transactions, and the currencies of developing countries are limited in transaction volume. The currency is an exchange of two currencies, but most transactions are with dollars. Transactions between developed country currency and dollar, developing countries and dollars are common. The Bank for International Settlements publishes transaction volumes between currencies. According to it, the transactions between the dollar and the euro are the most common, followed by the dollar and yen, the dollar and the pound. There are many currencies around the world and the number of combinations is enormous, but in terms of trading volume it accounts for the majority of the whole in certain currency transactions.

One day in the exchange market

The three major currency markets are London market, New York market, Tokyo market. The currency trading volume is roughly 4: 2: 1, the London market is the largest. Therefore, fluctuations in exchange rates will increase the movement in the London market. In the London and New York markets, it often runs during the opening hours. Also, in the Australian market opened in early morning time of Japan, trading is thin and foreign exchange fluctuation tends to be large.

• 7 o'clock - 8 o'clock: traded in the Australian market. Price movements tend to be large.
• 8: 00 ~ 16: Traded in the Tokyo market. At 10 o'clock mid price settlement is called, the rate of the day of the financial institution window is decided, so the rate at this time is easy to note.
• 16 o'clock to 21 o'clock: traded in the London market.
• 21:00 to 6:00: traded on the New York market.

Currency trading is done around the world, so it is 24 hours. However, the transaction does not continue 24 hours a day, but it is mainly traded in the morning afternoon time zone of a developed market with a large market scale. It is New York market, London market, Tokyo market. Especially when the New York market and the London market overlap, the market moves easily. Also, the time zone when the amount of transaction is extremely small also moves greatly. Specifically, it is the time zone of the Australian market in the early morning of Japan time, the New York market closed and the Tokyo market opened, 6:00 am to 8:00 a.m. Especially during the early morning of Monday it tends to fluctuate greatly.

Foreign Exchange Market Participant

speculators and real demand sources

It is divided into real demand source and speculative source. As real demand sources, exporters / importers, financial institutions, etc. speculators are institutional investors, hedge funds, individual investors, etc. For exporters and importers, if it is an exporters, foreign currency obtained by sales etc. is often used for domestic currency, if importer, domestic currency is converted to foreign currency and used for payment of imported products. In exports, about 50% is denominated in dollars, and imports are about 70%. Demand for money by importing and exporting is proportional to the amount of export and import, and the supply and demand is decided. Therefore, if current account surplus is high, demand for converting foreign currency into yen is large, and if it is current account deficit, demand for converting yen into foreign currency becomes large.

speculators move with a different idea from the supply-demand trend of real demand sources. Buy it if it is likely to rise, and sell it if it is likely to fall. Therefore, pay attention to the movement of actual demand sources. Actual demanders often buy and sell currencies depending on the necessity irrespective of future market expectations, and it is easy to predict trends from economic conditions and seasonality. Therefore, it is easy to move in such direction. One of the indicators to look at the trends in speculative buying and selling is the non-commercial sector building ball released by the Chicago Mercantile Market.

Bank

Banks play a central role in exchange transactions. Even with a foreign exchange market, there are not exchanges somewhere, but transactions in the interbank trading system, so to speak, electronic transactions. For individual transactions, the business dealer is conducting a transaction by the bank. Recently there are exchanges. The corporation deals with the bank. Banks buy and sell in accordance with customers' orders in consignment trading, except when they conduct speculative transactions (self-trading) themselves. At this time, we will conduct cover transactions so that the banks will not bear exchange rate fluctuation risk. Cover trading is to make reverse trading with other banks immediately after buying position and selling position are formed by client transactions with other banks, to zero the position. If you set the position to zero, there is no exchange risk. Banks gain profits by making a difference between the selling price and the bid price in transactions with customers. It buys from the customer cheaper than the market price and sells it high. In this way, even if you conduct currency transactions according to customer's request, you can obtain a certain profit without risk. Because of the cover transaction, transaction volume will increase because the same amount of transactions of selling and buying are done between banks many times. Therefore, while the exchange market is a very large market, most of it is a small number of speculative trading that will affect the price formation of the market with the same amount of transactions sold or bought.

Individual

From traditional exchange trading, there are many transactions by banks, but recently attracting attention is personal transactions. As a feature of individuals, there is a reverse trade as well as stock trading. Under the hypothesis that the price will go up and down a certain price range, buying is put down when it falls to a certain extent, and on the contrary when it rises to a certain extent selling is put in. If individual buying and selling increases, it will be a deterrent effect on market fluctuations. Individual transactions are said to be about 20% of total foreign exchange transactions, and there is a possibility that the market fluctuation has been suppressed to some extent. Even looking at the chart on the exchange rate, we have not experienced exchange rate fluctuations as much as we have in recent years. The fluctuations seem to be getting smaller year by year. Popular among individuals are dollar yen, Australian dollar yen, pound yen. As individual exchange transactions increase, the influence on foreign exchange formation is also increasing. Individuals will focus on swap points. Swap points receive or pay interest differentials between the two countries. If you buy a low interest rate currency (typical yen is yen) and buy high interest currency (typically Australian dollar, euro), you will pay the interest rate of low interest rate currency and receive the interest rate of high interest rate currency. In this case, it will be deducted. Aiming at acquiring this swap point, yen is sold when interest rate difference exists. In other words, as the number of individual transactions increases, the yen weakens. Actually, in the 2000s, personal transactions rose sharply, but the yen weaked sharply.

Company

Japan imports energy such as crude oil, food such as cereals, and industrial raw materials. In the importers such as petroleum traders, cereal dealers, manufacturing industries, etc., they procure foreign currencies in the foreign exchange market and use them for payment for settlement of imports. About 70% of imported goods are said to be dollar-denominated. Therefore, importers have changed the yen to dollars in the foreign exchange market. It can be procured inexpensively for importers as the appreciation of the yen appreciates, but on the contrary it becomes an increase in the burden when it becomes yen. For this reason, there are many transactions (futures trading) to exchange yen and foreign currency at a predetermined rate at the exchange futures market to prepare for future yen depreciation. If you sell yen for import amount in the futures market, you can trade at this fixed rate in future. In this way, making foreign exchange markets, especially the futures markets, prepare for foreign exchange fluctuation is called exchange contract. On the other hand, Japan is exporting industrial products. Many manufacturing companies are exporters. About 50% of export goods are said to be dollar-denominated. In the case of exporters, if the yen appreciates, the amount received when foreign currency is exchanged for yen will drop, so it is necessary to prepare for the risk of yen appreciation. Exporters will make exchange contracts for dollar-selling yen buying on the futures market and fix the exchange rate.

Monetary policy and foreign exchange

Monetary policy not only determines the policy interest rate, but also the impact on inflation expectations and macroeconomic changes. Interest rates, inflation and macroeconomic trends have a major impact on exchange rates.

History of exchange policy

After the war, currency trading was a fixed exchange rate system for a while for a while. For example, it traded at a fixed rate of 1 dollar = 360 yen. As the global economy developed and currency exchange trading increased, it became difficult to continue the fixed rate in currency trading due to differences in trade volumes, economic scales and degrees of development in their respective countries. In response to this situation change, we moved to a floating exchange rate system that decides exchange rates of currencies with supply and demand of the market. In dollar yen, the rate which was 1 dollar = 360 yen became sharply high yen, it reached the dollar 70 yen range. After that it ran within the range of 80 to 120 yen, but now it is in the highest sphere. In developed countries, it shifted from fixed exchange rate to floating exchange rate, but in developing countries there are still many countries currently fixed exchange rate with dollar (dollpak system). In some countries, there is a controlled exchange rate system in which market intervention is made so that the rate with the dollar falls within a certain range even if it is not fixed.

Dollpaque system

In effect, the world's key currency is the dollar. Trade is more dollar-denominated. If the exchange rate between your country and the dollar fluctuates, the exports and import prices you saw in your own currency will fluctuate and will greatly affect your country's economy in trade. For this reason, there are many countries in the developing countries that adopt a fixed exchange rate system so that central banks exchange interventions and maintain exchange rates between their own currencies and dollars constant.

Interlocking with euro

In Europe, the euro has been adopted in many countries. For this reason, in the European non-euro countries, the central bank's exchange intervention to keep the rate of the local currency constant against the euro, which can be regarded as the key currency in Europe, in order to curb the influence on intra-European trade is there. It is said that Switzerland is intervening so that the ratio of the Swiss franc and the euro fits within a certain amount by the central bank.

Monetary policy, floating exchange rate, currency management

Monetary policy, floating exchange rate and currency control can not be decided independently. If we try to fix the exchange rate with the dollar, we must adjust the policy rate to dollar. If there is a difference in interest at a fixed rate in a state that is not monetary controlled, if you operate in a high interest rate currency and return to a low interest rate currency at a fixed rate after a certain period of time, profit is surely obtained, so high interest currency is bought, The fixed exchange rate can not be maintained. In other words, free policy rates can only be realized as currency control or floating exchange rate. In order to control domestic inflation, the interest rate policy is effective, therefore it is a choice whether to control currency or float.

Currency intervention

If the rate of the home currency relative to the base currency (usually the dollar) fluctuates dramatically in the exchange market and moves in an undesirable direction for your country, the central bank can intervene in the exchange market and control the exchange rate is there. This is called exchange intervention. If you think that your home currency is going down too much, the central bank will sell your dollar on the exchange market and buy your own currency. If you think that you are going up too much, buy a dollar by selling your home currency. It is easy for central banks to prepare their own currencies, but since foreign currency dollars can be prepared only for hands, dollar buying intervention is easy, but dollar selling intervention is limited. For dollar selling intervention, you must store enough foreign currency before that. Motivation of foreign exchange intervention is often not clear. Firstly, in order to prevent influence on domestic economy, the influence of high currency is totally different between exporters and importers. Intervention behavior differs depending on whether the central bank emphasizes export or import. Reasoning of intervention is also likely to be unclear. Rapid exchange rate fluctuations generally affect trade settlement and international transfer of funds, which is generally not favorable. Therefore, in order to suppress sudden exchange rate fluctuations, market intervention is often carried out for that reason. However, in reality, attention is focused on the absolute level of foreign exchange based on the degree of change and sometimes intervening to correct the absolute level so that it will be advantageous to the domestic economy.

International cooperation

The exchange market is not a closed market in our country. It is traded around the world. Dollar yen is also traded mainly in the Tokyo, London and New York markets for 24 hours. Foreign currency trading volume done in the world is enormous, and foreign exchange intervention is not effective even if it is done only in one country. Therefore, if common recognition can be made about the need to control currencies by foreign exchange intervention in the major countries of the world, the central banks of each country may exchange intervention of the same purpose in the local exchange markets. In the case where cooperation is conducted in Japan, the United States, Europe, the intervention effect becomes large. Even without direct market intervention, if the central banks of the nuclear countries cooperate and implement monetary policy, they can indirectly exert influence on the exchange market. Foreign exchange moved greatly in the past through coordination through finance ministers and central bank governors of developed countries.

Properties of dollar yen rate

Considering that 50% of exports and 70% of imports are dollar denominated for Japan, even if there are various combinations of foreign currency and yen rates, the dollar yen rate will rise prominently and the Japanese economy It has a big influence on. Analyze the fluctuation mechanism of the dollar yen rate. In the past, when it was fixed rate system, 1 dollar = 360 yen, there was no need to think about fluctuation of exchange rate. After the shift to the floating exchange rate system, the yen became sharply higher. Even though there are short-term up and down movements, long-term trends are consistently high yen. The reason for this is that Japan, which was relatively weak compared to the United States in the past, had economic development since then, which is the primary reason. If the Japanese economy develops, trade will become active and the value of the currency will increase in the foreign exchange market. Meanwhile, the United States has also achieved sustainable economic development, but the value of the yen has been rising as the relative difference has shrunk since the time when there was an overwhelming difference. It is common in countries other than Japan that the value of the country's currency increases as the economy develops. With the exception of China, which is the management market, the currencies of emerging economies, especially in Southeast Asia, have become high currencies due to economic development. Another reason is that exports have largely increased mainly in the manufacturing industry. Although imports are also growing, exports are higher, and the trade surplus continues to be in surplus. Japanese companies' overseas expansion has also increased, and interests and dividends received from overseas are also increasing. As foreign currencies acquired in economic activities, especially dollars increase, the movement to return to the domestic domestic market will expand. The second reason is that the demand for yen buying by real demand sources is continuously rising.

Reason why the yen appreciates even in the short term

Differences in the reactivity of currencies against economic risks change the exchange rate. Prior to the Lehman shock, Japan was a low interest rate and the United States was a high interest rate. For this reason, a method of procuring with a low interest rate yen, switching to a dollar on the exchange market, and operating at a high interest rate (carry transaction) was actively conducted. As carry trade increases, the yen's selling pressure rises and the weaker yen continues. If the economic risk rises in this state, the dollar-denominated financial products will be sold, converted to yen, and the opposite trading that repays and compresses the risk asset will suddenly increase. Also, since carry transactions are generally known, if it is expected that the handling of carry trades will increase due to the increased risk, triggering yen buying by speculators. Secondly, changes in the interest rate differential between Japan and the US will change the exchange rate. If the difference in interest rates opens, the attractiveness of carry trades will increase and the yen will depreciate in the foreign exchange market. If the interest rate difference narrows, the attractiveness level will be lowered, the carry trading will be suppressed, or the reverse trading will increase, resulting in the appreciation of the yen. Currently, both the yen and the dollar have almost zero policy rate, but the higher the short-term to the longer term, the higher the interest rate in the US. Therefore, medium- and long-term interest rates always fluctuate, and the interest rate differential is expanding or shrinking. The central bank in the United States not only brings the policy interest rate close to zero, but also the medium- and long-term interest rates are inducing lower, so the interest rate difference tends to shrink. So the yen appreciated.

The relationship between the dollar and economic indicators

Relationship with consumer price

Prices and currency values ​​are said to be relative relations. Inflation is a rise in prices, but it can also be interpreted as a state in which the value of currency has declined against the value of goods. If there is a difference in inflation between the two countries, the value of the currency of the high inflation country will be worth less than the currency of the low inflation country. I will analyze the relationship between the value of yen and the consumer price index in Japan and the United States. In the United States, prices are rising continuously, but in Japan the rise has stopped since 1993. From 1980 onwards, we can open up the inflation rate in Japan and the US, and it is reasonably expected that the Japanese yen with a low inflation rate will appreciate against the dollar. The actual rate is consistent with expectations. However, even in the 1970s when there was no difference in inflation, the yen appreciated, the difference in inflation rate between the latter half of the 1990s and the early 2000s expanded in the first half of the 1990s, So it can not be said that there is strong explanatory power.

Relationship with current account balance

If the current account balance is in surplus, the ability to convert foreign currency received as a result of trade and investment works to the local currency, and if it is in the deficit, payment for trade and investment is large, so sell your own currency and obtain foreign currency Power works. Therefore, it is expected that the currency of the current account surplus country will appreciate against the currency of the deficit country. From 1985 onward, we can compare the current account of Japan and the US. Japan consistently has a current account surplus, while the US continues to have a consistent deficit, although there are differences in degree. The relationship between the yen's value and the current account is consistent. It is an exception only at the time of the Lehman shock, it is assumed that another factor worked at this time. Although the deficit has expanded since 1990 in the US, the economy scale of the United States is bigger than Japan and the cause of the current account deficit is not caused only by the balance of Japan, so the extent of the deficit and the extent of the appreciation of the yen are not directly linked.

Relationship with nominal interest rate

Operation in high-interest currency countries only obtain interest differentials, rather than using funds in low-interest currency countries. Therefore, when the interest rate differential increases, the operation in the high interest rate currency is further preferred and the currency becomes high. Let's see the relationship between US interest rate change and exchange rate. Movement of the 10-year bond rate, which is a representative index of policy interest rate and long-term interest rate, rapidly increased until 1981, and has been gradually declining since 1981. Since 1985, since the US interest rate declines and the yen is increasing, the relationship between the US interest rate and the yen can be seen to be inverse correlation. However, since it can not take a certain relationship before 1985, its explanatory power is weak.

Relationship with real interest rate

Substantial interest rates change according to the degree of inflation. Next, let's see the relationship between the real interest rate and the yen. Looking at real interest rates, even before 1985, when the nominal interest rate was not explanatory power, you can take a look at the inverse correlation relationship between yen and real interest rate. In international diversification investment, the nominal interest rate will be noted. Inflation of the investing country does not affect investors unless they reside in the country of investment. So why is there a relationship between the real interest rate and the value of the currency? The real interest rate is the nominal interest rate minus the inflation rate. The real interest rate goes down as inflation goes. It can be thought that the combination of the portion in which the change in the nominal interest rate affects the currency value and the portion in which the inflation affects the currency value are affecting the real interest rate and the currency value.

Relationship with stock index

The foreign exchange market moves from the evening to the nighttime where the London market and the New York market are open from the size of its trading. The stock market opens in Japan after the dollar yen moves a lot. We think that the movement of the dollar yen influences the stock price rather than the fact that the stock market move affects the dollar as the exchange market is larger than the stock and the stock market opens after the exchange moves It is natural. Let's compare the movements of the dollar yen and the stock price index, which represents the average movement of the stock price. In the Japanese economy, export-type industries such as electricity, machinery, automobiles and so on occupy a large proportion. If the yen appreciates, the performance of the exporting enterprises will decline, and conversely if the yen becomes more favorable, the performance will be improved, so it is expected that the combination of yen appreciation = stock weak, yen weak = stock price. Looking at the data of 30 years, it is surprisingly only 5 years in the latter half of the 2000 that the yen appreciation = the weak yen and the weak yen = the stock price. For the past five years, the exchange rate and stock price index are neatly similar. Other than the 25 years from the 1980s to the early 2000s, there is no positive correlation. Rather it was an inverse correlation between 1985 and 1988, 1997 to 2005. Yen appreciation = stock price, yen depreciation = weak stocks. However, looking at the big trend since 1990, although it moves up and down, it is becoming a trend of yen appreciation = stock weak.

Seasonality of dollar yen

Actual demand, which is the investment entity of the foreign exchange market, is an importing and exporting enterprise. It is conceivable that corporate activities are trading currency at a fixed time with one year as one unit. For example, it is often said that Japanese firms are likely to be in the middle of September and March when closing at the end of September and March, because the exchange of dollars earned overseas for yen due to settlement processing will result in a strong yen, Christmas And in the December where the end of the year comes, the dollar demand will increase worldwide and the dollar will rise. Let's compile monthly the rate of change of dollar yen and see. Looking at a year, it is characteristic that it tends to become high in the second half of the year from the first half of the year. Especially in the fall, the yen tends to become high. For the first half of the year, the odd month is the yen appreciation and the even month is the depreciation of the yen in the memorial, but it is not the tendency fixed when looking at the long term. I will verify March and September December which are frequently said points. As the end of March comes closer, the yen is not high, but as the end of September approaches, it is remarkably high in yen. It can not be said that the dollar will rise in December. Connecting the rate of change in each month and making it into one graph, the dollar appreciated in the first half of the year, and the dollar weakened in the second half of the year.

Solving the mystery of exchange rate fluctuations

Currency exchange theme nature

There are stock markets, bond markets, commodity markets, etc. in the market consisting of buyers and sellers. Stocks, bonds, goods, etc. are represented by currency and are traded between stocks, bonds, goods and currency. If risk is conscious, stocks, bonds, goods are sold and cash is preferred. The point that the exchange markets are largely different from them is that the currency represents the relative value between currencies and there is no cash to escape when the risk is conscious. It is not a relative relationship, absolute value is measured in cash like stocks, bonds, goods etc. If a currency is sold another currency is bought. Stocks, bonds and commodities fluctuate upward and downward depending on the risk, while the movement of foreign exchange becomes complicated. Let's chase time series on what kind of theme attracts attention and exchange movements appear.

In the era of strong US economy, dollar was bought more than the euro and yen, and the dollar appreciated. When the global economy got big boom, the high interest currencies such as the euro, the pound and the Australian dollar were bought. Yen is a representative of low interest rate currency, buying high-interest currencies by selling low-interest yen yen, carry transactions flourished. As the dollar's interest rate rose, carry transactions became active even between the dollar circles, and the yen depreciated against the dollar. For the euro and Australian dollar, which are higher interest currencies, the dollar depreciation high interest rate currency continued. In Japan, FX transactions expanded, yen depreciation by individual investors, yen depreciation advanced further due to purchase of foreign currency. However, as the US currency 's dollar confidence fluctuated due to the subprime mortgage problem in the US, the yen appreciated due to the reversal of carry transactions and the euro appreciated by the escape from the dollar. Concerns over the global economic downturn suggested that monetary easing in developed countries progressed, but the dollar's rate cuts preceded and that in Europe was relatively solid, Japan already had no room for interest rate cuts at low interest rates, the difference in interest rates between Japan and the US narrowed As a result, the sharp appreciation of the yen and the euro rose. Prices of dollar-denominated commodities, especially crude oil prices soared with the depreciation of the dollar soared, but following the US, the recession in Europe was confirmed, the euro plummeted from the reaction to the surge. The destination of money escaped from the dollar and the euro concentrated on the yen and the Swiss franc which was originally low interest rate currency and was also the carry currency. Money concentrates on the yen than the Swiss franc with strong linkage with the euro, while other developed country currencies fell, only the yen sharply increased. After that, it turned out that the Japanese economy was also seriously affected, the yen was sold but temporary, it rose again. When the Lehman shock took place, flight into the dollar, the only cash in the world economy, occurred as a tough emergency dollar, dollars were bought, and other developed country currencies fell. However, yen was an exception, the yen appreciation continued. After the collapse of the Lehman shock, the world economy began to recover, so that the euros that had been sold began to be bought. With the rise in long-term interest rates in the US, yen began to be sold again. As the economic recovery weakened in the United States, quantitative easing in the United States was implemented and the dollar fell as a whole. Interest in the US monetary policy tends to be focused on the foreign exchange market, with repeated policy interest rate cuts, low interest rates lowered, large quantitative easing lowers the value of the dollar, relative to other currencies is higher became. Long-term interest rates in the US further declined, the yen appreciation advanced.

Actual demand and speculation

The yen appreciation is big news. Currently it is 76 yen per dollar, it is at the highest level ever. It is said that the appreciation of the yen exacerbates the profitability of exporting companies and has a negative impact on the Japanese economy earning by exports. As a result of this "unfortunate yen appreciation" "criminal search", hedge funds that conduct speculative transactions are listed as a winning ball. According to the data of the Chicago Exchange that can read the situation of speculative transactions, you can see that if the speculators buy yen, the yen appreciates the yen appreciation. This is the reason why speculators are the perpetrators of the appreciation of the yen, is only the speculators the cause of the appreciation of the yen? If you look closely at the data of the Chicago Exchange, it is certain that the speculators are overshadowed when you oversee the yen, but on the contrary when the speculators are selling over, it is not becoming weaker. When speculators sell yen, it shows that there are participants to buy it. That participant, assuming that speculators do not turn to the selling side when buying yen, so that the yen rises sharply as a result and speculators absorb it when selling yen, Consistency can be seen. I can guess that this participant is always buying yen. What is this entity? The exchange rate of yen in recent years has risen almost monotonically over a long period of 10 years except for 2007. The speculators, mainly foreigners, are aiming to raise profits by foreign currency settlement of yen, so if you buy yen, someday you will settle the yen. I will not continue to buy yen. In other words, in a certain period, selling and buying are the same amount. In the short term, it affects the raise / lower of the yen exchange rate, but in the long term the impact on the market price is neutral. On the other hand, actual demand sources that trade yen in business activities such as trade are not premised on reverse trading. For example, if an export company changes the dollar earned overseas into yen, there is no reverse trading (yen selling dollar purchase). If you buy a yen, you keep buying and selling it if you sell it. Looking at Japan's recent international balance of payments statistics, you can see that the income surplus surplus has increased significantly. The surplus in the income balance indicates that interest and dividends obtained through overseas investment have been remitted to the country. In this process the dollar is circle . In other words, domestic companies that earn overseas investment are increasing the amount of yen buying year by year. For this reason, the yen appreciates over the long term. Speculators are only shaping up and down movements in short-term exchange rates. The true leading role of the yen appreciation is not a speculative but a Japanese company.

Monetary policy

The US side factor is the impact of monetary easing taken to restore the US economy. Policy interest rates and short-term interest rates are maintained around zero. Long-term interest rates are historical low standards. In order to maintain low interest rates, the central bank supplies a large amount of dollars to the market. If a large amount of dollars are circulated in the world, the value of the dollar, that is, the relative value against other currencies will decline. Declining against other currencies will also decrease against yen. The so-called carry trade, which funds are raised in low interest rate currencies and operated in high interest rate currencies, is a way to stably generate profits if exchange fluctuations are small. Declines in interest rates (rise in US Treasury prices) will control new US Treasury investment from Japan and increase the sale of US Treasury bonds and domestic return of funds. As a result, yen will be bought and the yen will be high. Previously, when the difference in interest rates between Japan and the U.S. was large, a method of selling a low-interest yen yen to turn it into a dollar and operating at a high interest rate spread, resulting in a weaker yen, but due to the recent decline in interest rates in the US As the interest rate differential between Japan and the US narrowed down, the yen appreciation continued. It is a low inflation age in developed countries. As inflation does not result, the low interest rate condition has continued. The interest rate in the United States has been on the trend of declining interest rates over the last 20 years, and the possibility that the difference between the US and US interest rates will expand again in the future is small. In other words, it is expected that the yen appreciation will settle, which is hard to become the yen's depreciation.

Theoretical price

There is a "theoretical price" in the exchange rate, and there is a way of thinking that the exchange rate that moves daily in the market will eventually converge to the theoretical price. One of the theoretical prices is the purchasing power parity hypothesis. The value of goods is the same in any region of the world, that is, the price is common to all parts of the world. Assuming that the price of a certain item is 100 yen in Japan and exactly the same item was sold for 1 dollar in the United States, the value of the product is considered the same in Japan and the US, and as a result, 100 yen = 1 dollar is a reasonable exchange rate It is the rate. Although it is simple as a theory, there are points to keep in mind. Even for the same goods, transportation costs and tariffs differ if the place of production is one and the selling place is around the world, the same value (price) can not be said strictly with the same goods. Secondly, the question is whether the same item is the same value anywhere in the world. The market price is determined by supply and demand. Demand and supply change with time all the time, so the price will change as well. If so, it is not unnatural even if the supply-demand relationship of goods changes depending on the place. Value (price) may be different because consumer income level, raw material price, transportation cost etc are different depending on the region. In this case, we can not think of yen denominated price and dollar denominated price as equal on the premise that the value is the same. However, even if you can not calculate absolute exchange rates, you can calculate the change in exchange rate theoretically. If the yen denominated price of a product rises by 5% and the dollar denominated price is unchanged, it is interpreted that the yen fell 5% against the dollar. In the movement of the price of individual goods, it may move with the circumstances of the product-specific supply-demand relationship, so we calculate the theoretical movement of the exchange from the movement of the consumer price index that represents the overall movement of various goods. For example, when the Japanese consumer price index rose by 1% in 1 year, in the United States, if 3% in the same period, the value of the dollar fell 2% (3% - 1%) against the yen . In theory, it will be 2% higher in a year. Looking at the changes in the consumer price index in Japan and the United States over the past 20 years, the Consumer Price Index in the US has consistently increased 2 to 4% every year , While the consumer price index in Japan is -1 to 1%, which means that the value of the yen is rising consistently relatively. Because the theoretical value of the yen has been rising for the dollar much, it is explained that even if the actual exchange rate, the yen becomes high as a long-term trend.

Inflation

The theory that the difference between the US and Japan in the consumer price index causes a change in the exchange rate seems to have some explanatory power in long-term statistics. However, it does not explain short-term movements. If it is a theory to explain long-term exchange rate movements, explanatory power is required not only for the dollar yen but also for exchange rates of other currencies. In the case of Euro dollar, the difference in consumer price index between Europe and the US is not as much as Japan and the United States. But the exchange rate of the euro doll has fluctuated greatly. In the case of euro yen, the consumer price index rose in Europe, flat in Japan or declined. According to this theory, the euro yen will fall all the way. Although the Euroyen has been declining due to the recent Euro crisis, the Euroyen has been rising until the Lehman shock. What about emerging-market currencies and dollars, or emerging-market currencies and yen? In general, emerging countries have higher inflation rates than developed countries such as Japan and the United States, according to theory emerging country currencies will fall from developed country currencies. At the actual exchange rate, emerging market currencies are falling at the time of the Lehman shock and the euro crisis, but in other periods emerging market currencies have been rising all the time. Generally, in countries where the economy is growing greatly, the inflation rate tends to be high. The central bank maintains interest rates high to curb inflation. High interest rate currencies are attractive to investors and are more likely to be bought in the exchange market. As the economy develops further and the possibility of inflation increases further, the currency will be bought in the exchange market due to the demand growth of the country's currency due to economic development and the expectation of further high interest rates. Even if interest rates are high, the real interest rate will be lower if it is inflation. Real interest rates are important for their citizens, but for foreigners, only nominal interest rates are important as they will not live in that country. The high inflation rate currency has a high nominal interest rate, which makes it easier for foreigners to buy. For this reason, it can be said that the theory that the exchange rate of currencies with a relatively low inflation rate rises is not the case.

Relative Relationship

Currency represents the relative value of two currencies. If the dollar's yen appreciates, the yen's value went up against the dollar, which is also the fact that the value of the dollar fell against the yen. Even if the yen and the dollar are the currencies, the exchange will move. Together with the movement of other exchange rates, we can see which currency movement was great. Looking at the charts of the yen dollar, the euro dollar, the pound doll, the Swiss Flemish, we see that there is a certain tendency in the past. Euro dolls, pound dolls and Swiss flanders will do the same. This means that the dollar is changing relative to other currencies, rather than the synchronized movement of currencies other than dollars. On the other hand, the yen dollar moves differently from them. The yen seems to behave differently with other dollars such as euro. There is an effective exchange rate as an indicator to measure the value of the currency itself. Looking at the effective exchange rate, the dollar is declining in the long run and the yen is rising trend. It can be described as the movement of the dollar. The effective exchange rate is the effective exchange rate excluding the effect of prices. Since Japan is zero inflation and the foreign countries such as the US are inflation, the yen seen at the real effective exchange rate is not the yen appreciation as much as the dollar yen trend. Because domestic prices are kept inexpensive, when exporting domestic products, we will work to alleviate the price competitiveness disadvantage due to the appreciation of the yen against other countries that continue to rise in prices.