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Study Session 5: Economics: Monetary and Fiscal Policy, International Trade, and Currency Exchange Rates

Confusion regarding FX explanation in the CFA textbook

Here is the exerpt from reading 20, THE FOREIGN EXCHANGE MARKET:

” During 2010, the nominal yuan exchange rate against the US dollar (CNY/USD) declined by approximately 3 percent—meaning that the US dollar depreciated against the yuan”.

To me, this statement seems to be illogic and wrong; For the ratio CNY/USD to decrease, either the numerator has to decrease or the denominator to increase. 

Could someone explain me the rationale for this statement? 

EURUSD pair is trading at 1.1392.

Pressure from the dollar on the euro continues - with EURUSD falling to a yearly low of 1.1500 at the end of last week. At the moment, the pair is trading at 1.1392.

According to the chart, it appears as though an inverse head and shoulders is forming on the daily timeframe (D1):

The image shows that currently EURUSD is making its first attempt at a breakthrough of the neckline. I first mentioned this almost two months ago in my online currency market reviews.

Interest Rates and Currency Appreciation

Hi

I’m a little confused now with the interaction of currency exchange rates and interest rates.

If I put my monetary policy hat on (and quite dashing it is, I might say) I get that if I raise interest rates, money comes flowing into the country / currency and that strengthens the exchange rate because more people want my currency so the “price” of that currency goes up.

Question about one of the schweser live mock exam

I got this question wrong on the Schweser mock exam and I don’t understand why the answer is Capital account but not Current account. 

Q: A Canadian firm purchases the rights to extract oil from a field in Mexico. Which balance of payments account will reflect this transaction

A: Capital account

B: Current account

C: Financial account

Exchange rate

“A developing country that maintains a fixed value for its currency relative to the Canadian dollar is experiencing a decline in its economic activity, and its inflation rate falls below the level of inflation in the Canada. The most likely result of the developing country’s actions to maintain the fixed exchange rate target is that its:

  1. foreign exchange reserves will decrease.
  2. short-term interest rates will fall.
  3. money supply will contract.

Solution

forward exchnage rate Quote

These statements use two different formula for forward quotes:

1) For example, a forward quote of +25 when the USD/GBP spot exchange rate is 1.4158 means that the forward exchange rate is 1.4158 + 0.0025 = 1.4183 USD/GBP.

2) A forward exchange rate quote of +1.78%, when the spot USD/GBP exchange rate is 1.4158, means that the forward exchange rate is 1.4158 (1 + 0.0178) = 1.44 USD/GBP.

How do I figure out when to multiple and When to add the Forward Quote to the exchange rate??

Thanks

Tight vs easy monetary/fiscal policy

Need a quick clarification as to what tight and easy refer to for both monetary and fiscal policies. I think I understand fiscal policy (tight means revenue > spending and vice versa) but I’m a bit confused as to the CFA’s definition for monetary policy.

Forex

Is there an easy way to remember the statement below?

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Forward Contracts Arbitrage

When a given forward rate is less than that implied by interest rate parity, the price currency is considered overvalued. Thus we borrow the base currency, invest it at the price currency interest rate, and convert it back to the base currency by selling the futures contract.

How would we manipulate an arbitrage opportunity if a forward rate is more than that implied by IRP, i.e. when the price currency is undervalued?

Exchange rates (Economics)

Hello, can someone please explain why Schweser notes describe USD/EUR currency pair as 1.41 for example, the “price” they state is always the first currency in pair, so they explain it like 1.41 USD for 1 EUR, which in my opinion is incorrect.