Will Pound parity with Euro?

The Pound trades near three years low against dollar and trades near two years low against the Euro. Now, whether the Pound will parity with Euro?

Brexit deal:

Boris Johnson the new UK Prime Minister has started campaigning for hard brexit. But most of the experts are predicting if Boris sticks to hard brexit the Pound will have parity with Euro. Rather, if Boris by changing his mind goes for a softer brexit then the Pound will move higher or calling for an earlier election will push the Pound higher.

A hard brexit deal will also make the inflation rate move higher and therefore the Pound will tumble down further. The investors also shifted their investment from Pound to Euro or other currencies on the stand by Boris Johnson for hard brexit. Even the option investors perception also shows that the Pound will decline in effect of hard brexit.

Will U.K fall into recession?

 

Impacts of Pound – Euro parity:

If Pound parity with Euro, tourists will visit England and this will increase the restaurant business, retailers and leisure attractions. It also attracts the foreign investors for investing in UK and moreover the exports will increase as people will purchase goods as the Pound value is low.

In other way, the people in England have to think for foreign trips as their currency value becomes low. The business people and retailers can’t import goods and therefore they will struggle to run certain businesses. Banks also face problems on exchange value but home sales and loan business will pick-up but when the Pound recovers the banks will suffer to recover the loans.

What will happen if U.K moves out with No-deal Brexit?

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Will ECB initiate QE again?

The next ECB meet is to be held on September and that would be the last meeting for Mr. Mario Draghi, the present ECB president whose term is coming to an end in this October. In the earlier meet which was held on July 25, Mr. Draghi hinted for a stimulus package to be introduced again in the next meet. The factors for QE are:

Manufacturing and Inflation:

Mr. Draghi is totally frustrated with the manufacturing output. It’s declined in July from 45 to 43.1. It indicates that the economy is nearing to recession.  The reason for fall in manufacturing data is because of China as they are the largest importers for automobiles from Europe. The new orders also tumbled down to 2012 levels. The services and construction output in Eurozone is also falling down. The inflation rate is still below 2%, it is stable between 1.2 to 1.3%. To boost up the inflation to reach 2% annually and to improve manufacturing ECB has to initiate the stimulus package again.

What are the key factors to decide central bank rate?

 

Global factors:

The global factors like trade war and the Brexit in which the Britain will move out of European Union without an agreement and the global economy is slowing down as global central banks looking for rate cuts including U.S. This makes the ECB to think for stimulus package.

What affects the global market?

Bonds:

The German 30 year bond yield was down to a record low of 0.167%. The 10 year bond also fell down below  -0.4%. This is because of the deposit rate of commercial banks to central bank is -0.4% and their cash borrowing rate from central bank is zero. Draghi is will to purchase bonds as stimulus package but some of the members are opposing for bonds. German politicians, industrial chiefs has moved to court against ECB for fresh bond purchase. They say that the ECB’s move of bond purchase is illegal. Earlier in 2015, when ECB introduced the Outright Monetary Transactions the German politicians and industrial chiefs also challenged the ECB in court but it was ruled out by judges and favored the ECB.

How bond markets plays a vital role in economy?

So, ECB’s chances of re-introducing the QE in the next meeting is highly visible.

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What happens if Fed cuts interest rate by 50bps?

The Fed meet is to be held on 31st July 2019. Most of the experts expecting for 25bps rate cut but some more analysts expecting a rate cut for 50bps. Now what will happen if Fed cuts the interest rate by 50bps? Here we see:

Inflation:

The Fed members are very much worried about the inflation rate which is much below the expected target of 2%.  So no need of rate cut and if there is a higher rate cut then the inflation will grow higher which the Fed doesn’t want to happen.

What are the key factors influencing Forex Markets?

 

 

Bond Markets:

The long term bond yields are not satisfactory for the investors as the short term bond yields gives better returns than long term yields. The investors are not in a mood to pay higher premium for long term yields. This also makes the investors that a rate cut will occur.

How bond market related to economy?

Employment rate:

The employment rate had a growth and is much more than expected by the analysts. It is not a worry even if the Fed is announcing 50bps point cut.

How Non-Farm payroll plays an important role for the economy?

Economy:

The economy is strong for U.S when comparing to other countries. If the Fed has a bigger rate cut a threat for financial market bubble may be visible. Moreover the debt will increase and move for a beginning of recession phase.

Why monetary policy important for a country?

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Which are the weakest currencies in the world?

Currency means a system of money in used for common purpose in a country. It’s a medium for exchange of goods and services. A currency becomes weak when the country’s economy slows down. This occurs due to inflation, falling prices of commodities, monetary tightening and political instability. Here is the list of weakest currency around the world against dollar:

 

 

Iranian Rial(IRR):

Iranian rial is the least valued currency against dollar.

1USD = 42,105 IRR

The currency has lost four times of the real value in almost 15 months due to withdrawal of nuclear agreement and imposing of sanctions again. Its financial structure and corruption pulls down the currency to weaker zone.

 

Vietnamese Dong(VND):

Vietnamese Dong is the second weakest currency against dollar.

1USD = 23,208 VND

The country’s currency is undervalued subsequently till date. The Vietnam government is pushing hard to value their currency in to global market. The government is moving in a right direction to compete their currency along with their neighbours and expecting to hit soon like other Asian currencies.

 

Indonesian Rupiah(IDR):

Indonesian Rupiah is the third undervalued currency against dollar.

1USD = 13,980 IDR  

Due to the low value of old-style banknotes, by presidential decree of September 5, 2016, 7 new banknotes were issued in denominations from 1 thousand to 100 thousand rupiahs.

Indonesia is an economically stable and quite developed country in Southeast Asia. However, its money has a very low exchange rate. The financial regulatory authorities are trying their best to build their currency to a valuable currency but all their efforts end in failure.

 

Guinean Franc(GNF):     

Next Guinean franc adds the list by number four weakest currency versus dollar

1USD = 9,183 GNF

This currency became weak due to the biggest concern of inflation and poverty. The people who are living in the country considers their currency as a precious gift like gold, diamond.

 

Laotian Kip(LAK):    

Further added in the list is Laotian Kip which secures the fifth place.

1USD = 8759 LAK

The Lao is the only currency on this list which did not devalue but was originally issued with very low rate. Besides, since its issue in 1952, the currency did strengthen against US Dollar and continues to improve its value.

 

Sierra Leonean Leon(SLL):

Sierra Leonean Leon ranks sixth worst valued currency against dollar.

1USD = 9,125 SLL

Sierra Leone is a very poor African country, which applied many strategies to value the local money but ended in vain. Recently, a war took place and the periodic deadly Ebola virus.

 

Uzbekistan Sum(UZS):

Here comes Uzbekistan Sum entering seventh place for poor currency against dollar.

1USD = 8,620 UZS

The modern Sum was put into circulation with a ratio of 1 Sum equal to 1000 Sum-coupons from July 1, 1994 by Decree of the President of Uzbekistan.

As a result of the liberalization of their monetary policy from September 5, 2017, the exchange rate of the Sum against the US dollar is set at 1 USD = 8,100 UZS

 

Paraguayan Guarani(PYG):

This currency settles at eighth place in the race of weakest currency versus dollar.

1USD = 6,012 PYG

Paraguay is the second poorest country in South America. The country faces weak economy with high inflation, having low literacy rate and high unemployment and corruption plays a major role to obstruct the currency growth.

 

Cambodian Riel(KHR):

Cambodian Riel ensures ninth place in the least currency countered with dollar.

1USD = 4,083 KHR

This currency was amended in 1995 to replace Indochinese Piaster. But the monetary value was not a hit in their country because the people preferred dollar for their transactions. This made the currency weaker.

 

Ugandan Shilling(UGX):

The Ugandan Shilling captures the title for poor currency at number ten towards dollar.

1USD = 3694 UGX

In 1966, the Uganda Shilling first appeared, replacing the East African Shilling. The latter was the official means of payment in Kenya, Uganda, Tanganyika and Zanzibar.

The Uganda Shilling is a relatively stable currency. Over the past few years, its value hasn’t lost more than 5%.

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How does the central bank determine interest rate? What is affected by the Central Bank interest rate?

What is Central Bank Interest Rate?

The levies applied on loans as an interest rate by Central Bank is called Central Bank Interest Rate. It is also known as the price of money that is borrowed or saved.

How it is determined?

The interest rates are determined by the following:
Reserves:

The interest rate is determined by the reserves held by the Central Bank to show their economic growth. If the reserves are down the economy is slowing down and therefore they raise the interest rate or else vice versa.

What is Interest Rate?

 

 

Inflation and Unemployment:

It is one of the key factors to decide the interest rate. The spending power of the people increases the interest rate will be increased to stablise the inflation and the job rate also determines to apply the interest rate. Increase in job number is good for economy.

What are the key factors for interest rate?

Bonds:

Bonds which gives a considerable yields will boost up the central bank to decide the interest rate.

Loans and Home Prices:

The banking industry providing the Loans for consumers which helps the consumers to purchase home, vehicles will also helps the central bank to decide the interest rate.

What are Bond Market?

What are affected by the central bank interest rate?
The commercial banks are the most affected by central bank interest rate. When central bank increases the interest rate, the commercial banks will tighten all types of loan by increasing the interest rate for loans. As the commercial banks increase the rate the consumers purchasing of homes and vehicles will go down and spending power of consumers will be reduced and therefore the business people will get affected. The consumer and business people are unable to repay their loans and so the commercial banks are affected. Because of these factors the economy is getting affected as there is no business and there is no spending by people. When business is affected the currency value and stock price will move down and the country will fell into crisis.

So, the central bank interest rate plays major role for a nations development.

Which determines the interest rate?

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