Which Of The Following Are Short-Term Drivers Of Currency Valuation

How accurately do GDP statistics portray the economy and why?

Just because they are official and numerical does not mean they are accurate. The term "domestic" in GDP unambiguously links to a nation state.

Why is economic data helpful in the investment process?

If an economy is doing well then certain companies will sell more of their product as household budgets also increase.

What 5 data inputs matters most to investors?

Economic growth, inflation, unemployment, business confidence, and housing.

How do you calculate GDP?

GDP= C + I = G + (X-M). C= Personal consumption. I= private investment. G= government consumption. X= exports. M= imports. (X-M)= net exports.

nominal growth (growth rate)

increases in production and increases in price

real GDP

isolates increases in production

If growth rate (nominal GDP) = inflation rate, then...

real growth rate is at zero.

If Nominal GDP rate > inflation rate, then...

Real Growth Rate is positive.

Is the economy cyclical?

Yes, there are quarters of growth and recession.

Recession

two successive quarters of negative real GDP growth

Inflation (CPI)

unveils the real growth in the economy. It can erode the value of bonds. It means that a unit of money tomorrow buys less than the same unit of money would buy today. This accounts for the rising cost of living. Increase in prices of goods and services that diminishes purchasing power of money.

What are the two sources for inflation reports?

GDP Report: based on whole economy. Consumer Price Index: based on representative basket of goods, and services, like food, housing and automobiles

How does time change representative inflation baskets?

With changes in technology. Like DVD players are replaced with online streaming.

If nominal GDP growth line or percentage is less than the real GDP, then...

there is deflation.

Why is unemployment so important to the US economy?

The fact that the US is largely a consumer economy leads to the tight connection between US employment and US GDP. An overall increase in unemployment depresses GDP growth. When the economy shrinks, employment declines.

Nonfarm payrolls

measure the change in the number of people with jobs and during a recession, this goes down. This is the unemployment report.

Business confidence (PMI):

business people make large investments and hire people when they think there will be additional demand in the future. BEST LEADING INDICATOR TO ALERT FORTHCOMING TURNING POINTS.

The Institute for Supply Management (ISM)

Surveys people in charge of buying goods and services for corporations about business conditions. It has the most widely followed index of US business confidence. Above 50= optimism. Below 50= pessimism.

Can PMI indicate GDP growth?

Yes, for most recessions shown, the PMI indicator dipped shortly before GDP decline. You can predict GDP decline.

why is housing a good economic indicator?

homeowners build houses, they need to believe that consumers can assume a 30-year mortgage. After buying a new house, people buy furniture, tvs, gaming systems, redo kitchens, etc. Housing against real GDP can also show a relationship= positive and positive

Where on the terminal can you find a chronological list of indicators that will be released after January 1?

World Economic Calendar

Which indicators get the most attention?

PMI and nonfarm payrolls (get most attention): January's number is published in February. If the Actual exceeds the estimate, that is a good sign! If it doesn't, it is a bad sign. Housing comes out every month and a half. CPI (inflation) released: middle of every month.

Is GDP important for economic growth?

No, "New news" moves markets, GDP is old news—released after we already know what is going on because of other economic indicators.

Analysts maintain estimates. What is in the Relevance column?

Volume of alerts set up for each indicator. The greater the investor interest, the greater the relevance. Both are at full strength for PMI and employment.

The Survey column

Contains the analyst consensus forecast for that indicator. Terminal has the analyst estimates, the actual previous rate, and the previous rate.

How do you calculate the Median Estimate for PMI?

Calculated by taking the average of the estimates from 80+ economists.

How do economists form opinions on long term future?

they look at demographic, government policies, and technologies.

Did BREXIT hurt the Euro economy?

To the surprise of pollsters, because there was widespread belief that it would harm the economy. Pessimistic estimates and view after the vote. (Looking at medium forecast on Real GDP). But, they were all surprised that consumer spending continued to be strong.

What is the Economics Surprise Monitor?

40 hand-picked, meaningful leading indicators for the US economy in the left hand column. You can see the date released, the actual value of each indicator, and the percentage by which the actual either exceed or missed the analyst estimate. If it is a positive surprise, the number is green. The aggregate of these numbers makes the Bloomberg US Economic Surprise Index. You can also chart the aggregate surprise. Also cyclical.
From 2009-2014, movements in the "surprise" index led the S&P 500, but it isn't a 100% bet that it will stay the same.

Why do investment banks create estimates?

They want to know when specific data points are a positive or a negative surprise. Surprises move markets, and market movements are the lifeblood of investment banks. While a successful financial institution will benefit the GDP of its host nation, and while the creation of economic estimates does help keep governments accountable, banks exist to make money.

Why do investors analyze the economy through the lens of economic indicators?

To make money and avoid losses. When economic indicators fail to predict a turning point (which they frequently do), investors can miss out on opportunities and/or lose money.

What is the Bloomberg trade flow map?

Bloomberg has a current trade flow map that shows total import by country on the outer rim and total exports by country on the inner rim. The rise in global trade has increased the amount of currencies transacted.

What is the "Bretton Woods Agreement"?

It was sealed by the Second World War allies in New Hampshire in the US, when they all agreed to lock their currencies to the US dollar. $35 per ounce with gold available on demand. President Nixon (in wake of Vietnam War) disbanded this gold to dollar match.

Who trades currencies?

Financial investors, corporations, travelers

What is pegged currency?

Countries have their currencies Pegged to currencies. Hong Kong is pegged to the US Dollar at 7.8 Hong Kong dollars= 1 Us Dollar. Danish crown is pegged to the euro. 7.46 Danish crowns= 1 euro.

What does it mean to not be able to defend your pegged currency?

With a pegged currency, governments fail to convince the market that the currency should be as strong as the peg.
If you can't defend your peg, the currency declined by 75% in six months. If you are pegged to the dollar, you can't defend it, then your currency declines and then it's harder to pay whoever you owe back because your money is worth less.

How are currencies determined?

By supply and demand.

What are the FX reserves?

A huge stack of cash with which to manipulate its value.

How did Hong Kong thwart an assault on their currency peg?

Donald Tsang sold the US dollar FX reserves of Hong Kong, bought Hong Kong dollars, and invested them on the Hong Kong stock exchange, making a fortune for government coffers and warding off speculators.

What are currency codes? Are they on the terminal?

Values for currencies that are not pegged expressed in terms of how much of one currency is needed to buy another.

What is the characteristic of a pegged currency pair?

The absence of change in the currency pair value. Over 5T dollars of currencies are transacted each day.

When are pegs problematic?

Pegs are problematic when the economic performance of the pegged currency deviates from that of the country it is pegged to.

when was the US dollar the strongest?

Strongest under Reaganomics: business-friendly policies such as deregulation and small government.

What are the 3 main currency drivers?

Surprise changes in interest rates, surprise changes in inflation, surprise changes in trade.

Why do surprise rises in interest rates strengthen the currency?

Surprise rises in interest rates in one country relative to another will cause the first currency to strengthen because global investors will want to invest in that bond. International investors frequently seek the countries with higher government bond yields. When they buy these bonds, they must buy the domestic currency, which lifts the value of that currency. When a central bank unexpectedly increases interest rates the government bond yields rise. This attracts investment from around the world, spurring demand for that country's currency. The currency therefore strengthens.

How might you tell how the currency of a country is doing

Look at a graph of its currency against the US dollar and then look at its inflation and the correlation.

If net exports are positive, what happens to the currency?

If net exports is positive, the country has a trade surplus and it will drive demand for the home currency because if countries are importing from them, they have to use their currency.

If net imports are positive, what happens to the currency?

If the net exports is negative, the country has a trade deficit and the demand for home currency diminishes. Any surprise in trade surplus or trade deficit can alter the value of a currency because it changes the demand for a currency.

If net imports are negative, what happens to the currency?

How is the Big Mac index a proxy for currency valuation?

The Big Mac index uses the prices of Big Macs around the world compared to the price of the Big Mac in the US as a proxy for currency valuation. Relative prices like these are long-term drivers of currency valuation.

What are the short term drivers of currency valuation?

Inflation, trade, and interest rates are short term drivers.

What is the principal goal to guard against inflation?

They want it at 2%--low but positive is a good thing because it keeps consumers purchasing power, keeps borrowing costs low, and provides a stable backdrop for business to make investment and hiring decisions.

Why is inflation targeting all psychological?

Because once expectations of price increases, they become engrained: workers expect prices to increase, workers demand pay increases, company wages go up, companies raise their prices, and then workers again expect prices to increase.

How do central banks regulate inflation?

Saving money becomes more attractive when banks hike up the interest rate than spending money. This helps regulate inflation.

How did deflation lead to the Great Depression?

ingrained price declines leads consumers to defer purchases. Consumers defer purchases to await lower prices, then company revenues decline, then companies let go of workers to cut costs, then prices need to decline and then the cycle continues.

How did Abenomics save Japan?

The Bank of Japan printed money to buy government bonds in the hope of kindling inflation. Japan's prices rose! This is why the yen began to fall against the US dollar shortly before inflation rose. After the Japanese stock market peaked in 1990, Japan entered a vicious deflationary cycle over the subsequent two decades. It was an attempt to break the cycle by weakening the yen to spur inflation and boost exports.

What is the target inflation rate?

2 percent

What are forward agreements?

Fixed income market Investors have the option of locking their currency exposure for long periods using the currency forward market. They do this because there is always someone to bet against. Those looking to hedge (reduce risk) or speculate (seek risk) look at the forward exchange rates for a selected currency pair. This comes in handy if you have money in the US and you want to buy abroad in a few years, you might want to lock in the euro to US dollar rate at the ten year mark, so that your money doesn't weaken. In ten years, you would get the exchange rate that you locked in on.

What is the biggest market in the world?

Fixed income market

What is the safest financial asset?

A US government bond

What was the biggest absolute deficit in history?

the 2008 financial crisis

Why do companies issue corporate bonds?

For companies, being financed with debt saves them money because bonds help lower a company's tax bill. Companies can borrow money for longer terms from the bond market than from banks.

What is a bond?

An I.O.U. makes fixed amount payments (called coupons) and a large payment at the end of the loan (the principal). Rigidity of repayment. They get more money than they invested at the end of their loan in the form of a principal. The price of bonds are determined in the marketplace and can go up or down. When a bond is bought at a new price, it leads the new owner to receive a different effective annual interest rate.

If interest rates go up, then bond yields go up, then bond prices go...

Down!

What is a bond yield?

equivalent to an interest rate on a bank account that would give you the same return.

What happens if the market believes that a government will have trouble paying the money back?

The price of the bond will be lower and therefore, the yield will be higher. This makes future borrowing more expensive for this government.

When do investors typically demand a higher yield?

To compensate for the elevated risk.

What is the Repayment schedule?

asking whether the lender thinks that, time-wise, the borrower will have the cash available when the repayments come due

What is the highest and lowest rating systems?

AAA and D.

What are the 3 biggest factors driving bond yields?

Creditworthiness of the borrower, inflation, and short term interest rates.

What are Treasury Inflation Protected Securities (TIPS)?

by comparing the price of this bond with the price of a similar non-inflation protected bond, investors can glean inflation expectations. The higher the expected inflation, the greater the investor demand for TIPS relative to normal bonds. Therefore, the greater the difference in yields between the two bonds. TIPS compensate the lender in the event of inflation, using CPI as a guide.

What is a country's output gap?

the difference between the economy's potential output and its actual output. Tightness in the economy frequently coincides with inflation, while slackness frequently coincides with deflation. Central bankers use this output gap measurement to detect an emerging inflation or deflation problem.

What does it mean to have a negative output gap?

the economy has slack and the central bank will be on the lookout for deflation.

What does it mean to have a positive output gap?

the economy is tight and the central bank will be on the lookout for inflation.

How do you calculate the output gap?

the economy is tight and the central bank will be on the lookout for inflation.

When is attractive to leave money in the bank?

when short term interest rates go up, it becomes more attractive to deposit cash. Rate hikes slow growth and contain inflation.

Why is long term debt more expensive to borrowers?

There is a greater chance of the borrower going bust, and the lender is more exposed to the corrosive effects of inflation. Inflation is also harder to predict when you look too far into the future.

Dow Jones Industrial Average Index

Calculated by adding together the share prices of the 30 constituent companies.

What is the Bloomberg Terminal built on?

Functions and securities. It is organized by asset class and common workflows of financial professionals.

What are securities?

The financial instruments you can analyze. You can load a security then run functions to find information. There are millions, organized by market sector.

ESNP

displays economic statistics of 60+ countries

ECFS

displays economic forecasts for identifying trends in global economies

FX24

currency pair trading 24/7

WBG

Big Mac Index

IFMO

World inflation monitor