BIS Global Turnover and Currency Pairs

Every three years since 1989 the Bank for International Settlements (BIS) produces a survey which is acknowledged as the most informative on the size and structure of the global foreign exchange markets. It relies on global Central Banks to collect data from their own banking system which totals approximately 1,300 banks and it is then collated by BIS.
Global Turnover and Currency Pairs

Since the last survey in 2010, FX market activity per day has increased from US4$ trillion to US$5.3 trillion in 2013. The growth in global turnover figures are telling when you go back to 2003 – figures at current exchange rates:

2003 – 2007 – 72% increase
2007 – 2010 – 19% increase
2010 – 2013 – 35% increase

Although they are percentage figures it is not surprising that between 2003 and 2007 there was a significant increase in economic activity especially in the US$ which is the most traded currency. The Global Financial Crisis followed this period and subsequently the percentage increase dropped below the 35% average that has been evident in past triennial surveys. The recent increase does signify a recovery of sorts and a return to the norm.

Within the last three years the make-up of global FX trading has changed with the trading activity of the Japanese Yen increasing markedly as well as currencies in emerging markets namely the Mexican peso and the Chinese renminbi. However the US dollar remains unchallenged as the dominant currency on the global economy – foreign exchange deals with the US$ on one side of the transaction represented 87% of all deals. (Remember because there are two sides to each transaction so total trades add up to 200%). In the USD/JPY pair there was a significant increase in activity (70% from last survey) and at 18.3% they are closing in on the lead pair USD/ EUR that stands at 24.1% see graph. This is one of the reasons for the increase in the Yen to 23% of Global FX.

Although the Euro is the second most important currency its role has diminished with the debt crisis in Europe. Since 2010 it has lost 6% of the Global FX market and now stands at 33.4% the lowest value since the introduction of the common currency in 2002. Furthermore in currency pairs it has increased much less than its USD equivalent, which dominates the top ten pairings.

With the relatively high interest rates over the last three years the Australian and New Zealand dollars have sustained their increase in global FX trading. The Reserve Bank of Australia has had its cash rate at very high levels – 4.75% from 3rd November 2010 to 2nd November 2011, which has attracted ‘hot money’. However the presence of the Canadian dollar, the Swedish krona and the Swiss franc has decreased in activity.

Turnover by currency pairs


The above is a brief extract from an article published in this month’s econoMAX – click below to subscribe to econoMAX the online magazine of Tutor2u. Each month there are 8 articles of around 600 words on current economic issues.



Stockmarkets on the rise

Stockmarkets are starting to reap the benefits of significant quantitative easing and record low interest rates by Central Banks worldwide. In the US for instance there have been three doses of QE and the Federal Reserve indicated that they will keep rates low until 2015 as well as buy $40bn worth of mortgage backed securities.

But this is not the primary reason for the positivity in markets. Central Bank interest rates form the basis of global rates in trading banks, bonds etc. and with 10-year Government Bonds, which is considered a safe investment, at low yield levels investors are looking elsewhere for greater returns on their money. Even Bond rates in the struggling economies of Europe have dropped (Table 1). This indicates that investors are more comfortable about these economies in that the country doesn’t have to offer higher yields on Bonds to attract investors. With this low return on the Bond market investors are attracted to the higher yields on stock markets (Table 2).

Bond and Staockmarkets 2013


The above is a brief extract from an article published in this month’s econoMAX – click below to subscribe to econoMAX the online magazine of Tutor2u. Each month there are 8 articles of around 600 words on current economic issues.


Behavioural Finance – what is it?

Behav FinAs with behavioural economics the conventional view of finance assumes that markets are efficient and that the price of shares, bonds and other financial instruments are a reflection of the fundamental economic values that they represent. Behavioural finance is all about understanding why and how financial markets are inefficient. If there is a difference between the market price of a share or bond and its fundamental value then in conventional economics no one can make money in financial markets by exploiting the difference.

Why are financial markets not efficient?

In an efficient financial market, share and bond prices move up and down according to the information about changes in the real economy. However this information must be accurate and unbiased and if there are errors people should be able to identify them. Additionally this information should be updated regularly so only the objective information affects people’s decision-making – Bayseian Updating.

Bayseian Updating

This refers to people who are willing and able to modify their beliefs based on new, objective information. However in their decision-making, rationality of individuals is limited by the information they have and people don’t always know what good or objective information on the financial markets actually looks like.

Random Walk Hypothesis

This refers to the idea that financial asset price movements follow a random walk. This was made famous by Burton Malkiel who wrote “A Random Walk Down Wall Street”. He argued that past movements in asset prices don’t provide the information required to predict future prices. Basically you can’t get rich by beating the market although by selling advice to those who believe you can beat the market might earn you a high salary.

Some behavioural economists largely support this perspective that financial asset prices largely follow a random walk. Consequently using simple heuristics (enabling someone to work something out for themselves) as an investment strategy is an intelligent move. Other behavioural economists, such as Robert Shiller, state that there is easy money to be made on stock markets by smart investors which implies, along with bubbles, that financial markets are inefficient. This assumes that you can make money from market inefficiencies and the past can predict the future. Shiller argues that people can’t predict day-to-day changes in stock prices but it doesn’t mean that smart investors can predict nothing at all.

Irrational Exuberance

In 1996 Alan Greenspan, former chairman of the US Federal Reserve, used the term irrational exuberance to describe one of the greatest increases in the US stock market. The Dow Jones Industrial Average increased from 3,600 points in early 1994 to just under 12,000 by the start of 2000. This boom and bust during this time was dominated by tech stocks – shares in IT related companies. Shiller believes that irrational exuberance is the psychological basis of speculative bubbles in contrast to a price increase based on increases in fundamental values. Speculative bubbles encourages investment confidence and enhances animal spirits of investors who are being motivated by the excitement and the behaviour of others. Economists John Maynard Keynes and John Kenneth Galbraith emphasized psychological and sociological factors as well as the spread of misleading and overconfidence-breeding information, as a key to stock market booms and crashes.

In society today consumers do not have the ability or the perfect information to understand complex alphabet soup of financial investments from Collateral Debt Obligations (CDO’s) to Credit Default Swaps (CDS’s). Too often people’s decision making is influenced by the behaviour of others including experts and those at the higher end of the income ladder. However you don’t have to look much further than former head of the NASDAQ Bernard Madoff to see how someone who had immense respect amongst investors was in reality running a ponzi scheme.


Behavioural Economics for Dummies – Morris Altman. 2012




Is Spain going to go the Greek way?

With increasing debt, out of control unemployment and a general strike Spain has some serious economic problems. However, before the financial crisis of 2008 Spain was seen as a prudent member of the Eurozone with GDP debt being half that of Germany at 36%, and a well regulated financial sector. But since the aftermath of the financial crisis it has been all downhill for the Spanish economy with unemployment now at 24% and public debt at 66%.

Causes of the downturn

Like most economies before the financial crisis Spain had access to cheap credit. This was especially prevalent since entering the Eurozone interest rates, which were set by the European Central Bank ECB) in Frankfurt fell from 12.75% in 1995 to 3% in 2005.

The result
Spain’s banks and households realising that they had massive debts whose collateral was overpriced housing. Property values have fallen 27% and the building of new home is down 80% and given the size of the construction sector mentioned above this has some major implications for the Spanish fundamentals.

The Spanish economy is in serious trouble. With unemployment at 24% and the subsequent fall in consumer spending can it get much worse? Well, rating agency Standard & Poors have proceeded to downgrade Spain to BBB+ rating, which means “adequate payment capacity” and is only a few notches above a junk rating.


The above is a brief extract from an article published in this month’s econoMAX – click below to subscribe to econoMAX the online magazine of Tutor2u. Each month there are 8 articles of around 600 words on current economic issues.


Banking Crisis = Sovereign Debt Default

In the book “This Time is Different” by Carmen Reinhart and Ken Rogoff (2009), they have studied a number of different types of financial crisis including:

• Sovereign debt defaults, which occur when a government fails to meet payments on its external and domestic debt obligations, and
• Banking crises, when a country finds that a large part of the banking sector has become insolvent and there is a loss of confidence by the consumer which can often lead to a run on the bank

A high occurrence of global banking crises has historically been linked with a high frequency of sovereign defaults of external debt. The graph below plots the share of countries that have gone through a banking crisis against the comparably calculated share of countries experiencing a default or restructuring in their external debt.

The data suggest that if there is a surge in a banking crisis there is the strong likelihood that this will be accompanied by sovereign debt defaults. Research has shown that real central government debt typically increases by about 86 percent on average (in real terms) during the three years following the crisis. It is therefore hardly surprising that there has been a sharp increase in sovereign defaults in the current global financial environment.


The above is a brief extract from an article published in this month’s econoMAX – click below to subscribe to econoMAX the online magazine of Tutor2u. Each month there are 8 articles of around 600 words on current economic issues.


Aussies – do they have plan B?

The world economy still struggles to release itself from the shackles of recession. The US economy has had only a very small increase in growth and European economies still struggle with the sovereign debt issue. However, Australia continues to grow, largely as a result of the strong demand for its commodities from the number two economy in the world, China (see graph for Australian export destinations).

In the October 2010 edition of econoMAX (online magazine of Tutor2u) I discussed the boom in the Australian economy and the challenges that lay ahead – bottlenecks in the labour market and a need for huge investment in ageing infrastructure, and a widening of income disparities between states and sectors in the so-called two-speed economy. But what would be the impact on the Australian economy if China started to contract and their growth levels slowed? How dependent is Australia on China’s insatiable demand for commodities?

A recent IMF paper simulated the impact of a Chinese economic downturn and looked at three

1 A change in the export-led economy to one that more domestic consumption based;
2 A temporary slowdown caused by an over-inflated property market or financial distress;
3 A recession in leading developed countries

Although the Australian economy will be affected by a downturn in the Chinese economy it does have the policy instruments (monetary and fiscal policy) available to be able to stimulate growth and return the economy to the positive slope of the business cycle.


The above is a brief extract from an article published in this month’s econoMAX – click below to subscribe to econoMAX the online magazine of Tutor2u. Each month there are 8 articles of around 600 words on current economic issues.


Canada opts out of Kyoto

The Kyoto Protocol was initially adopted on 11 December 1997 in Kyoto and Canada was one of the proactive countries in its implementation. However, on 13th December 2011, Peter Kent, the environment minister, announced that Canada was withdrawing from the agreement becoming the first country to do so. So, why the reversal of the commitment to the cause of reducing CO2 emissions?

From its inception, Canada’s Kyoto target was a 6% total reduction in CO2 emissions by 2012 relative to 1990 levels. However, all the positive rhetoric did not materialise and Canada has struggled to control, let alone, reduce its emissions. Between 1990 and 2009 emissions were 17% higher as free market policies of the Prime Minister Stephen Harper started to become much more prevalent in the economy.

It seems that the Canadian government is more concerned with the health of their economy rather than the planet. With rising oil prices it will make it even more attractive to extraction of oil from the Alberta tar sands – the only worry being that it will increase considerably the CO2 emissions in the atmosphere. It’s a choice of more growth or increasing CO2 emissions.


The above is a brief extract from an article published in this month’s econoMAX – click below to subscribe to econoMAX the online magazine of Tutor2u. Each month there are 8 articles of around 600 words on current economic issues.


Aid or Remittances? – that is the question.

To give an indication of the scale of remittances, the World Bank has estimated that in 2010 the volume of remittances was three times that of official aid – $375bn as opposed to $125bn. The consumer has considerably more sovereignty and the sender is confident that the money will be used effectively which might not be the case with

Below are some examples of the importance of remittances in some developing countries:

Sri Lanka – remittances > tea exports receipts
Nepal – remittances > tourism receipts
Morocco – remittances > tourism receipts
Egypt – remittances > revenue from the Suez Canal

Although remittances do generate substantial income they will never replace aid as some poorer countries will always require assistance from their developed counterparts. A challenge to those countries that receive remittances is to guide this flow of money into projects that will benefit their country as whole rather than just the individual. One of the key questions a country must ask refers to the opportunity cost of losing a productive worker to a developed country but gaining the income of that worker in remittances.


The above is a brief extract from an article published in this month’s econoMAX – click below to subscribe to econoMAX the online magazine of Tutor2u. Each month there are 8 articles of around 600 words on current economic issues.


US Productivity on the up.

Job creation has been a major concern for the United States economy as it tries to avoid a double-dip recession. US President Barack Obama recently promised to implement new tax incentives for companies that create jobs within the domestic economy – rewarding those that bring jobs into the US and eliminating tax breaks for companies that move jobs overseas. Although the unemployment rate in the US fell to 8.5% in December 2011, the lowest since February 2009, it is the impressive productivity figures which have gone largely unnoticed.

What are the reasons for this:

1. In 2012, with the weak economic conditions workers are concerned about job security so therefore tend to work longer hours and become more innovative in performing their job. This may involve them taking on more responsibility by doing other tasks.

2. When the recession bites, firms really have to think hard at how they can still maintain a revenue stream at the same time as seeing off the competition. This is where they become more innovative and risk further capital investment in order to remain solvent.

3. Panicked by the 2008 financial crisis and deepening recession, U.S. employers cut jobs pitilessly. They slashed an average of 780,000 jobs a month in the January-March quarter of 2009.

“My sense is there was much more weeding out of the weakest workers — the ones they didn’t want,” Kenneth Rogoff – Harvard University
The above is a brief extract from an article published in this month’s econoMAX – click below to subscribe to econoMAX the online magazine of Tutor2u. Each month there are 8 articles of around 600 words on current economic issues.


A different resource curse

Nigeria, the eleventh largest producer and the eighth largest exporter of crude oil in the world, typically produces over 2.4 million barrels per day (b/d) of oil and natural gas liquids. However, according to the IMF, while the Nigerian economy has benefited $800 billion dollars in oil revenue since 1960, this has added basically nothing the Nigerian economy or the standard of living of the average Nigerian. In fact the World Bank estimates that since 1960 $100 billion of the $800 billion in oil revenues have gone missing.

For most economies that have natural endowments like oil or minerals, there is the risk of the economy experiencing the ‘resource curse’. This is when a natural resource begins to run out, or if there is a downturn in price, manufacturing industries that used to be competitive find it extremely difficult to return to an environment of profitability. According to Paul Collier, Nigeria has a resource curse of its own, the civil war trapin which 73% of the low income population have been affected by it, as well as a natural resource trap- where the so-called advantages of a commodity in monetary value did not eventuate – on average affecting only 30% of the low income population. It seems that in Nigeria there is a strong relationship between resource wealth and poor economic performance, poor governance and the prospect of civil conflicts. The comparative advantage of oil wealth in fact turns out to be a curse. governments and insurgent groups that determines the risk of conflict, not the ethnic or religious diversity. Others see oil as a “resource curse” due to the fact that it reduces the desire for democracy. You can read the full version of this article by going to the econoMAX website below:


Cooperation rules in the Italian Province of Emilia-Romagna

On Radio New Zealand ‘Sunday Morning’ programme Chris Laidlaw spoke to economist Stefano Zamagni about the success of the the northern Italian province of Emilia-Romagna. The province is possibly best known as the birthplace of the slow food movement, a movement which symbolises the idea of quality over quantity. With a population of just over four and half million the province has one of the highest levels of GDP per capita in Italy and was recently ranked second with regard to the quality of life. Unemployment numbers are among the lowest in Europe and the gap between high and low income groups is much narrower than that of its neighbouring provinces. It also has the highest concentration of cooperative businesses in the world with the cooperative sector responsible for a quarter of the provinces GDP and unusually a large proportion of those cooperatives are worker cooperatives – businesses owned and managed by their employees?

The Emilia-Romagna Model
The region of Emilia-Romagna has a co-operative sector that employs approximately 600,000 people – this accounts for over 40 per cent of the businesses in the region. Furthermore there exist over 325,000 manufacturing enterprises which make it one of the most concentrated industrialised areas in the world. However, what is significant about these enterprises is that 90 per cent of them employ fewer than 50 workers. The region now has the highest GDP per capita, the lowest unemployment rate, and the highest output of research, innovation, and overall performance in the EU. Testament to this is Emilia-Romagna featuring in the top ten of Europe’s 122 economic regions. According to Stefano Zamagni (former economist at the University of Bologna) the success of Emilia-Romagna is due to “Economic Democracy”. In the 1970s a movement driven by academics and community activists sought to challenge the paradigm of the country’s highly corporatised private and public sectors and bring about a more democratic and accountable system for running the economy. A left-wing coalition government in the 1970s instigated a period of restructuring in which the new ruling government transferred the control of social services and economic development to the country’s 20 administrative regions. You can read a longer version of this post in the June edition of econoMAX

Game Theory: Penalties and the 2008 UEFA Champions League Final

In the recent edition of econoMAX (online magazine of Tutor2u) I wrote a piece on the game theory of penalty kicks in soccer. Below is an extract from it and an example of game theory in action from the 2008 UEFA Champions League Final between Manchester Utd and Chelsea.

As we approach the business end of the football season in Europe and with the potential impact of penalty kicks deciding matches, it might be appropriate to consider the relevance of game theory – economists hold in high regard the penalty kick as a real-life example of game theory. Technically the kicker and the goalkeeper play a zero-sum game – any gain for one player is exactly offset by the loss to the other side – plus one goal for me is minus one goal for you. The situation that kickers face in a penalty kick is a simultaneous-move game where they have three alternative strategies: shooting right, left, or centre. Similarly the goalkeeper also has three alternative strategies: dive to the right, dive to the left or remaining in the centre of the goal. In defining the sides of the goal researchers use the “natural side” of the kicker (which is the goalkeeper’s right, if the kicker is right-footed, and the goalkeeper’s left, if the kicker is left-footed) and the “opposite side”. Labeled like that, the strategies of both kicker and goalkeeper will be to choose the natural side of the kicker (NS), the centre (C) or the opposite side (OS).

From the data collected by Basque economist Ignacio Palacios-Huerta he calculated the proportion of successful penalty kicks. It shows the success rate of penalty takers when they went to their natural side and opposite side when the goalkeeper went his natural side and opposite side (see right). Notice that when the kicker went NS and goalkeeper OS the success rates was 95% – the remaining 5% missed the target. Similarly when the kicker went OS and goalkeeper went NS – 8% missed the target.

2008 UEFA Champions League final – Chelsea v Manchester Utd.

If you have read Soccernomics you will be well aware of the events that unfolded in this game. Ignacio had been recording how penalties were being taken and wrote an academic paper on strategies that players and goalkeepers employed. A mutal friend of Ignacio and Chelsea manager, Avram Grant, brought the two men together and subsequently Ignacio sent Grant some facts regarding Man Utd in particular about their goalkeeper Van der Sar. There were 4 main points:
1. Man Utd goalkeeper (Van der Sar) tended to dive to the kicker’s natural side (ie GK’s right for a right footed kicker)
2. Van der Sar tends to save penalties that are hit at mid-height
3. Man Utd midfielder Cristiano Ronaldo often stops in his run-up and if he does the ball is kicked towards the right hand side of the keeper. It was important that the Chelsea goalkeeper, Petr Cech, does not move early. When goalkeepers moved early Ronaldo always scored.
4. If you win the toss you take the first penalty. 60% of teams going first win the game.

Man Utd’s Rio Ferdinand won the toss and went first – not a good omen for Chelsea. Looking at the penalties and relating it to Ignacio’s research we see the following:

1. Ballack – OS – left. Van der Sar dives left – GOAL
2. Belletti – OS – left. Van der Sar dives right – GOAL
3. Lampard – OS – left. Van der Sar dives right – GOAL
4. Cole – NS – left. Van der Sar dives left (as advised by Ignacio ball hit hard and low) – GOAL
5. Terry – OS – left. Van der Sar dives right – NO GOAL – hit the post
6. Kalou – OS – left. Van der Sar dives right – GOAL

Up to this point all Chelsea right footed players had taken on the advice of Ignacio and hit to their opposite side – Van der Sar’s left.

Man Utd
3. Ronaldo – paused in his run-up. Petr Cech stayed upright for as long as possible and dives right – NO GOAL – saved.

Sudden death
It seemed that Chelsea’s strategy of going to Van der Sar’s left had been hatched by someone on the Utd bench. As Anelka prepared to take Chelsea’s 7th penalty Van der Sar pointed to the left corner. Now Anelka had a terrible dilemma. This was game theory in its rawest form. So Anelka knew that Van der Sar knew that Anelka knew that Van der Sar tended to dive right against right footers. Instead Anelka kicked right but it was at mid-height which Ignacio warned against. – Soccernomics Page 127

7. Anelka – NS – right. Van der Sar dives right – NO GOAL – saved

If Anelka had taken Ignacio’s advice would Chelsea have won? Below you can see the drama unfold on YouTube.

Competition for Boeing and Airbus

Robert Nutter wrote an informative piece in the Sept edition of econoMAX (online Economics magazine of Tutor2u) on the airline production duopoly. Duopoly is a form of oligopoly and exists in a market when two companies control nearly all the market share of a product or service. The $1.6 trillion market for passenger aircraft has been dominated by Airbus and Boeing for over 20 years with Airbus accounting for 47% of the market in 2009 and Boeing 43%. Thus whenever we fly with airlines such as Air New Zealand or JetSar the chances are we are being carried in one of a range of planes produced by these two firms such as the Airbus 320 or the Boeing 737.

These two aircraft manufacturers use non price competition as they battle for market share in the short haul and long haul passenger aircraft market. While price is obviously a factor for airlines purchasing their airliners they also look for increased fuel efficiency, lower emissions, low maintenance costs, reliability and design as key selling points. The high research and development and marketing costs would seem to suggest this is not a contestable market that will remain a duopoly. However there are increasing threats to the dominance of Airbus and Boeing, particularly in the area of the market dominated by the Airbus 320 and the Boeing 737. Embraer, the Brazilian manufacturer, the Russian aircraft manufacturers United Aircraft Company and Sukhoi as well as China’s Comac and Bombardier from Canada will probably challenge the big two in the year’s ahead forcing them to spend more on R&D than they previously planned.