This presentation is about explaining the critical factors which influences the valuation of a currency - determining strength or weakness. Rupee vs Dollar fluctuation and reasons for it. International Financial Management. Devanayagam

1. Factors Determining Strength Or
Weakness Of Currency – Rupee vs Dollar
International Financial Management
11th December 2014
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3. Currency - Definition
• “The money that is used in a particular country at a
particular time” (Source: Cambridge Dictionaries)
• The state of being commonly known or accepted,
or of being used in many places (Source: Merriam-
Webster)

5. Foreign Exchange Market (Forex)
• Two Basic form of analysis of currency (that is very
much similar to what is used in stock market)
• Fundamental Analysis
• Technical Analysis
• Fundamental Analysis
• Intrinsic Value of an investment
• Based on the economic conditions
• Uses of Technical Analysis
• Price is assumed to reflect all news
• Charts are the objects of analysis

7. Major Factors determining the strength or
weakness of currency
• Economic Indicators
• Interest Rates
• Economic Policies
• Stability

8. 1. Economic Indicators
• Economic indicators are reports released by the
government or a private organization that detail a
country's economic performance.
• Economic reports are the means by which a
country's economic health is directly measured.
• In Forex, as in the stock market, any deviation from
the norm can cause large price and volume
movements.

9. 1. Economic Indicators
• Four major factors, some of which are comparable
to particular fundamental indicators used by equity
investors:
• Gross Domestic Product (GDP)
• Retail Sales
• Industrial Production
• Consumer Price Index

10. 1.1. Gross Domestic Product
• Gross domestic product (GDP) is defined as “an
aggregate measure of production equal to the sum of
the gross values added of all resident institutional
units engaged in production (plus any taxes, and
minus any subsidies, on products not included in the
value of their outputs).”
World GDP
Annual
Gorwth rate
(%) 2013:
2.2%
Graph source:
worldbank.org/indicator

11. 1.2. Retail Sales
•The retail-sales report measures the total receipts of all retail stores in
a given country. This measurement is derived from a diverse sample of
retail stores throughout a nation.
•Revisions to advanced reports of retail sales can cause significant
volatility. The retail sales report can be compared to the sales activity of
a publicly traded company.

13. 1.3. Industrial Production
• This indicator shows the change in the production
of factories, mines and utilities within a nation.
• It also reports their 'capacity utilizations', the
degree to which the capacity of each of these
factories is being used.
• It is ideal for a nation to see an increase of
production while being at its maximum or near
maximum capacity utilization.
• Significant revisions between reports can be
caused by weather changes, which in turn, can
cause volatility in the nation's currency.

14. 1.4. Consumer Price Index (CPI)
• The CPI is a measure of the change in the prices of
consumer goods across over 200 different
categories.
• This report, when compared to a nation's exports,
can be used to see if a country is making or losing
money on its products and services.
• It is a focus that is popular with many traders
because the prices of exports often change relative
to a currency's strength or weakness.

17. 2. Interest Rates
• High interest rates help promote a strong currency,
because foreign investors can get a higher return
by investing in that country.
• However, the level of interest rates is relative. In
present scenario, interest rates on Current
Deposits, savings accounts and money market
accounts are very low right now.

18. Current Scenario in U.S.
• Interest rates on CDs, savings
accounts and money market accounts are very low
right now. So are U.S. Treasury bond rates and the
U.S. federal funds rate.
• Ordinarily, this would weaken the U.S. dollar,
except for the fact that interest rates behind other
major world currencies are also low.

19. 3. Economic Policies
• Tight fiscal discipline and anti-inflationary monetary
policies help promote a strong currency.
• Again, this is all relative – the U.S. has its fiscal
problems, but so do many other nations around the
world.

20. 4. Stability
• A strong government with a well-established rule of
law and a history of constructive economic policies
are the type of things that attract investment and
thus promote a strong currency.
• Higher investments in the domestic country result
in stronger currency.
• In the case of the U.S. dollar, its strength is further
augmented by the fact that commodities are
generally traded in dollars, and many countries use
the dollar as a reserve currency.

21. Indian Rupee – Current Scenario
• Rupee ends at 62.02/03 per dollar on Wednesday
(10-12-2014) vs 61.88/89 on Tuesday (09-12-2014)
• INR seen in 61.80 to 62.50 range over the week-traders
• INR declining for a third consecutive session on the
back of dollar demand from oil companies and
caution ahead of consumer price inflation data later
in the week.
• Foreign institutional investors sold Indian shares
worth 2.21 billion rupees on Tuesday, exchange
data shows, which also weighed on the rupee.

26. Business Implications of change in
Currency value
• The exchange rate will play an important role for
firms who export goods and import raw materials.
Essentially
• A depreciation (devaluation) will make exports cheaper
and exporting firms will benefit.
• An appreciation makes exports more expensive and
reduces the competitiveness of exporting firms.

27. Currency Valuation - Video

28. References
• World Bank, www.worldbank.org/indicator
• http://www.wto.org/english/tratop_e/devel_e/d1w
ho_e.htm
• The International Statistical Institute,
http://www.isi-web.
org/component/content/article/5-root/root/81-
developing
• Bureau of Labour Statistics (BLS)
http://data.bls.gov/timeseries/LNS14000000
• Wikipedia.org & International Monetary Fund
• Forbes

29. Thank you! 