FX Market and Economic Growth

Afternoon! Just having my first day of fasting.. Boy I'm sleepy.

Oyeah, I won best net overall of golf yesterday, played 81 with handicap 25, I played net 56. hua ha ha... has any pro player played 56 ? only amateur can do it.. he he he..

Back to FX Market.
Read a couple of articles on Financial depth and economic growth, and they say the relationship is quiet (or quite?) strong. Means, the deeper the financial market, the higher the economic growth.

Sholat dulu ah... be back later..

Hi..
Mohsin Khan and Abdelhak Senhadji in their paper Financial Development and Economic Growth: An Overview, DEc. 2000, mention that "The results in this paper confirm the strong positive and statistically significant relationship between financial depth and growth in the cross section analysis."
What can be inferred from this sentence? As I mentioned earlier, the deeper the financial market, the higher the economic growth. It also means that, the deeper the FX Market, which also part of financial market, the higher the economic growth. How can be the FX Market depth influence the economic growth. Well, I think it simply because of the deeper the FX market means, the higher the volume of FX transactions, the higher the FX supply and demand, reflects the higher market players want to transact (could be to fulfill their FX needs for export/import), means the higher the economy's movement --> means growth.

Therefore, Indonesian FX market must be deep, to reflect the economic growth. What happen in Indonesia right now is that growth is high, but no movement in the fx market... well, what can you say? its Indonesia....

NDF

What is NDF? After googling, I find out that it stands for Non-Deliverable Forward. man.. What is that? It's pretty similar with futures transactions, but OTC. You buy forward, and sell forward, at the settlement date, you net them, and settle the rate spread. Well, isn't life beautiful? It makes hedging transactions easier. In an emerging market like Indonesia, free float regime but highly regulated, NDF's transaction is increasing. People outside Indonesia, who want to invest in onshore market, do hedge their open rupiah position with NDF (source: people in the industry).

Because of it's high demand, NDF even signficantly corelated with USD/IDR in onshore market.

Let's discuss this later... sleepy...

FX Market Again..taken from the street

hmm... traffic jam.. have some thoughts to share...

Domestic forex market is currently shallow because of several reasons:
1. Demand for FX Transactions is thin. According to data, FX Transactions is dominated by banks who transact with other banks. Meanwhile, transactions done by domestic corporates and individuals is relatively small, although some corporates have transacted around $200 mio per day.
2. The FX transactions for hedging purpose are relatively small too, compare to spot market. What can be inferred from this? people are using natural hedge, or worse, people do not hedge. They use spot transactions to fulfill their currency needs, and open their position to market risk.

update again later

More on Domestic FX Market

What is futures contract? Wikipedia said: "a futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a specified price". Well, for me its more of a speculative transactions. Info from BIS that only a small portion of futures contract are delivered (I forgot the exact number), even on FX. So, what can be concluded from that fact? It's speculation. People are buying and selling futures contract, and a few days later the reverse the contract, and settle the margin in domestic currency. Let say USD/IDR is transacted in BBJ or for the sake of argument, CME. What will happen to the spot market? What will happen to the volatility of USD/IDR? Christian Jochum and Laura Kodres' "Does the Introduction of Futures on Emerging Market Currencies Destabilize the Underlying Currencies" Feb 1998 mention that "to a large degree support hypothesis taht the behavior of the spot market is not destabilized by the futures market". Is it?Let's discuss this later. I have to go now...I'm back...In his research in Feb 1998, Mr. Jochum used Mexican Peso, Brazilian Real and Hungarian Forint, where these countries are having manage floating regime. Meanwhile Indonesian RUpiah is Freely floating. Managed FLoating currencies is totally different from free floating. In Managed floating regime, movement of a currency is heavily monitored, and therefore is heavily intervened. They have a cap and floor ban (i thing its around 5% up and below the level). While free floating is only slightly monitored, and is slightly intervened by the central bank. With managed floating, every movement is limited, and therefore there is no significant volatility, and therefore whatever the independent variable are, it will not significantly effect the movement of the managed floating currencies. I think that's what happen in the research. I've gone through the research at a glance, and I don't see any intervention counted in the research.Blog again later...

Domestic FX Market

Hmmm. I don't know about you but my thoughts about domestic forex market is sucks. They're shallow, unpredictable, and very volatile. Well, according to data, it has never been better, even before the financial crisis. Data mentioned that before crisis FX turnover touched $4.5 billion per day (that would be around what.. $1 triliun per year?), and now it is around $3 billion per day (source: BIS 2007). But this is much better than that of just after the crisis, which is only slightly above $0.5 billion (should we say hooray??). Although it gets better, some people say that Indonesia's FX market is fall behind other countries in Asia, including Thailand. Thailand FX market has surged to be around $6 bio per day, and China.. hmm.. china, china... oooh china. It simply amazing to see China's growth and their ability to withold their outstanding economic performance. But if we discuss china here, it would be OOT, so I would ignore China's amazing achievements. China has touched around $15 bio per day in FX Market. And we don't have to mention Singapore, Hong Kong and Japan. They're considered mature. Oyeah I heard today Vietnam's inflation is surging drastically, is it true? I have to check tomorrow's paper...So what happen here? What happen in Jakarta? Just a thought for today. I'll update whenever I have time...