An importer wants to short the dollar …

Tywin Lannister decides to invest in the import/export business.  He wants to import certain goods from the United Kingdom and resell them in the United States.  He estimates that he will need 7.5 million British pounds (GBP) to purchase, package, process, and deliver his British goods to the U.S. 

At an exchange rate of $1.3740 per British pound, he estimates borrowing $10.305 million from his US bank.  The borrowed amount also includes his estimated profit.

To sweeten the deal with the prime brokerage division of his bank, he offers up $1.05 million dollars in cash and securities as collateral.

Lannister’s business venture so far in Great Britain is a success.  His take comes in (for the purpose of this discussion) at the estimated 7.5 million GBP which also includes his profit.  He would not mind expanding his profit so he hopes that the dollar weakens or depreciates. Fortunately for Lannister the dollar price of a pound has increased to $1.5801.  After converting his pounds to dollars, he realizes $11.85 million, and after repaying his loan, he takes home approximately $1.54 million in profit from his venture.

Lannister likely benefited from a number of market forces.  For example, incomes in the US may have been increasing faster than those in the UK thus increasing demand for the UK’s exports and currency.  The UK’s currency appreciates versus the US.

Prices in the US may have been rising rapidly when compared to prices in the UK. The resulting demand for lower priced UK products would have resulted in an appreciation of the UK’s products and currency.

In addition, interest rates in the UK may have risen higher than in the US, incentivizing the movement of money from the US to the UK resulting in an appreciated UK currency.

A trader’s sound monetary policy strategy will emphasize interest rate moves, but will not discount to zero the other market forces that impact currency values.  Lannister no doubt kept his eyes on all the factors, but given that a central bank is the “farmer” of its nation’s respective currency, Lannister, and any other importer, will pay close attention to the interest rate actions (monetary policy) of its central bank.

Alton Drew 23 September 2021

Interbank Market News Scan: China tightens regulations on foreign exchange market….

5 September 2021

Interbank. Chinese officials to tighten foreign exchange market supervision. https://www.forexlive.com/centralbank/!/chinese-officials-to-tighten-foreign-exchange-market-supervision-20210905

Interbank. Nigeria. Naira. Former Deputy Governor of Central Bank of Nigeria(CBN), Dr Obadaiah Melafia weekend attributed the dip of the naira in the foreign exchange market to the bad policies of President Muhammadu Buhari’s administration and the tensions across the country. “Nigeria is a failed state.” https://www.vanguardngr.com/2021/09/dip-of-naira-in-foreign-exchange-market-due-to-buharis-bad-policies-mailafia-alleges/

Interbank. Forex. So what fundamentals are impacting the foreign exchange markets? https://finance.yahoo.com/news/introduction-major-fundamental-influences-forex-080046373.html

Interbank. India. India’s management of foreign exchange reserves results in supporting 18 months of imports. https://www.deccanherald.com/opinion/panorama/management-of-foreign-exchange-reserves-1026066.html

Interbank. Russia. Russia’s central bank provides alternative economic forecast for the next 18 months; one of a severe down-turn vs. moderate inflation. https://www.themoscowtimes.com/2021/09/03/world-economy-could-face-2008-meltdown-russias-central-bank-warns-a74962

Interbank. Brazil. Digital real. The Central Bank of Brazil is still studying the creation of a Digital Real, according to statements given by Fabio Araujo, a representative of the institution. https://news.bitcoin.com/central-bank-of-brazil-researches-creation-of-digital-real/

Interbank. Dollar Index. As of 10:33 pm EST, the Yahoo Market Watch Dollar Index was at 92.16. https://www.marketwatch.com/investing/index/dxy/charts?mod=mw_quote_tab

Central bank decisions as of 5 September 2021, 11:25 pm EST

AUD/USD 0.7437

As of 11:01 pm EST, no Reserve Bank of Australia decisions impacting rates.

NZD/USD 0.7137

As of 11:13 pm EST, no Reserve Bank of New Zealand decisions impacting rates.

USD/JPY 109.8100

As of 11:20 pm EST, no Bank of Japan decisions impacting rates.

USD/CNY

As of 11:24 pm EST, no People’s Bank of China decisions impacting rates.

For a consultation on any regulatory or legislative discussions or announcements, please reach out to us at altondrew@altondrew.com for information on consultation rates and to reserve an appointment.

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Alton Drew

Interbank market news scan: Central banks

Follow the links …

China leads in precision-guided central banking. Does it work? https://www.economist.com/finance-and-economics/2021/02/13/china-leads-in-precision-guided-central-banking-does-it-work

Burkhard Balz of Deutsche Bundesbank on the future of central bank-issued digital currency. https://www.bis.org/review/r210211e.htm

Francois Villeroy de Galhou of the Bank of France on central banks’ role in the greening of the economy. https://www.bis.org/review/r210211g.htm

Currency pairsExchange Rate as of 4:15 pm 8 February 2021(1) As of 12:38 pm EST Exchange Rate as of 11 February 2021(2)
AUD/USD0.7656 0.7749
USD/CAD1.2781 1.2689
USD/CNY6.4664 6.4542
EUR/USD1.2035 1.2121
USD/INR72.8500 72.7080
GBP/USD1.3714 1.3820
USD/JPY105.4400 104.6800
USD/MXN20.1300 19.9915
USD/DKK6.1785 6.1327
USD/NOK8.5428 8.4619
(1)Federal Reserve; (2) Reuters

11 February 2021