Corporate Profits Buoyed by Forex Gains

While the American economy is sputtering, US corporations are earnings record profits and stock market capitalization is soaring. These seemingly contradictory trends are being driven by the decline in the USD. Multinational corporations, especially those based in the US, are conducting a growing portion of their business abroad and subsequently, their foreign sales are booming. When corporations convert these profits from the currencies they are booked in back to USD, on which their financial statements are based, they are realizing the equivalent of a 5-10% bump from foreign exchange gains. Many of these companies are web-based, such as Yahoo, Amazon and eBay. Ironically, as the economy sags, betting on these types of companies may be akin to a bet against the USD.

Pound and Euro move in lockstep

In recent years, the British Pound and the Euro have begun to converge in value, so much so that both currencies have traded within 5% of each other for almost a year now. There are a couple of explanations for this trend. First, the relationship between the Pound and the Euro are largely symbolic. Perhaps, investors are grouping the two currencies together because of some perceived economic and/or political similarities. Second, it seems that all of the currencies that are supported by any semblance of sound economic fundamentals have risen against the USD, so it is possible that the Pound-Euro convergence is simply the result of both currencies simultaneously appreciating against the USD. Monetary policy and economic cycles are not aligned in Europe and Britain, so it doesn’t seem this link has any strong fundamental basis. Whatever the reason, in all aspects except for in name, the Pound has officially been absorbed into the Euro. The Financial Times reports:

From the euro’s launch in January 1999 until 2003, the pound initially traded in a wide 21.1 per cent range against the euro. Since then, volatility has been significantly reduced with the trading range falling to 8.6 per cent in 2004 and 7.1 in 2005.

Read More: Sterling in accord with the euro

China Increases Yuan Trading Band

China Increases Yuan Trading Band

In a sop to western policymakers, China recently announced that it would widen the Chinese Yuan’s daily trading band, from .3% to .5%. In theory, this means the Yuan will now be permitted to fluctuate by up to .5% per day against the USD. In practice, however, the Yuan’s daily rate of appreciation probably won’t exceed .05%, and only then on an especially volatile day. Two years ago, China revalued the Yuan and since then, the currency has appreciated at an annualized rate of 3%. However, the west was not mollified, and continued to pressure China relentlessly to allow the Yuan to appreciate further. Unfortunately for the west, this latest policy change is unlikely to have any practical impact on the valuation of the Yuan, as analysts are predicting the currency will appreciate by only another 3% this year. Bloomberg News reports:

The yuan never moved the maximum permitted under the previous limit. It moved 0.13 percent from the daily reference rate on April 16, the most this year, according to Bloomberg data.