Currency Report

Yasir KhanSamer Kuwatly

Uthman KhawajaIdeen Razzaghi

Shana Uthayalingam

Japanese Yen

History

• During WWII, Yen was fixed to USD (Bretton Woods system)

• 1971-1973, US left gold standard, Yen became floating currency

• By 1980’s value went to ¥227

• 1985 – Plaza Accord

• USD is overvalued

JPY is undervalued!

• By April 1995, yen reaches ¥80 per USD

• Currently at a 15 year high

Overview

• 3rd most traded currency on the market

• Current Exchange rate: ¥82.9324 per USD

• As of July 22nd, ¥320 for a Big Mac

• Currency suffered from carry-trade effect

• Managed-float currency

• Exchange rate is managed via buying/selling in the open market

• Changes in interest rates affect the exchange rate

• 2006-2007: 0-1.1%2008-2008: 1.3-1.1%

• In 2006, the rates caused increase from ¥119 to ¥110

2006-2008

• Low of ¥122.64 (June 2007)

• High of ¥107.18 (Feb 2006)

• 2006-2008; one of the most undervalued currencies (of top 3)

Year 2006 2007 2008Jan 115.3 120.6 107.6

Feb 117.8 120.5 107.2

Mar 117.3 117.3

Apr 117.1 118.8

May 111.5 120.8

Jun 114.6 122.6

Jul 115.6 121.6

Aug 115.9 116.7

Sep 117 115

Oct 118.6 115.8

Nov 117.3 111.2

Dec 117.3 112.3

2006

• Lots of fluctuation

• YTM of US bonds was low compared to Japanese bonds

• Yields:

Japan: 1.3%

US: 4.3%

• Started to increase interest rates (end of 2006)

2006

• Repatriation of Japanese int’l profit back to Yen for tax purposes

• Led to appreciation of Japanese currency

• US projected account deficit of $800billion

• Put pressure on the USD

2007

• Carry-trade effect continues

• Japanese become safety net

• Yen becomes attractive for risk-averse investor

• ECB increases interest rate, making the Euro more attractive

Forecasting

• PPP method

• IFE/IRP method

PPP (BigMac Index)

• Used pricing of a Big Mac in Japan

IFE/IRP

• Relates inflation, nominal and real interest rates