Fundamental Analysis

Currency Market Primer:
Currency markets do not set exchange rates between trading pairs. In theory this means that currencies are free to fluctuate. Nevertheless, this was not always the case. For example, exchange rates were fixed at a monetary conference called Bretton-Woods in 1944 based upon a decreed valuation to the price of gold, allowing for a 1% variance. This accord led to the formation of institutions to administer and oversee the process, which continue today in the form of the International Monetary Fund and the World Bank. In 1971, the United States effectively ended the system by decoupling the US from gold reserves and allowing for this free-floating exchange.
This act, followed quickly by the 1973 agreement between the U.S. government and Saudi Arabia to price all oil sales in U.S. dollar denominated contracts, took the world’s ‘reserve currency’ status to an entirely new level, best described as “exorbitant privilege.” 11
In the past, foreign exchange trading (called forex or Fx) was settled largely through banks and large traders. Fx markets were off limits to all but a few select corporations and the top high net worth individuals (HNWI). Today, forex markets handle $US 5 trillion per day and are open to everyone.
Although when speaking about foreign currency exchange we refer to a marketplace, the reality is that there is no one single exchange. The market is very fragmented as it is made up of sovereign banks, large corporate banks, forex trading companies and large corporations.
There is precious little room for arbitrage between exchanges. Published Fx rates are arbitrary points in time. Trades are based upon a single rate where some unit ‘p’ of X currency is traded for some unit ‘q’ of Y currency, plus a spread placed by the exchange. The next trade is usually some +/- delta of ‘p’ and ‘q’ of the respective currencies. Published averages are sometimes calculated off just a few large trades.12
Interbank Rate:
The interbank rate is used between large banks for executing currency swaps. The rate is calculated as the midpoint between the buy and sell rates, or the bid/ask spread. These bid/ask spreads are set by the brokers based on an order book of trades.
Consumer Exchange Rates:
When it comes to actual money exchanges, each organization sets its own rate. For example, VISA and MasterCard use a non-disclosed forex rate that is not discoverable and then on top of that they charge a 1%-3% fee for each transaction at either the point of purchase or ATM. This may be the interbank rate plus a set delta and then the added percentage that the consumer sees. Banks can sometimes go as high as 4%- 6% above the interbank rate, along with a fixed fee based on the amount of currency exchanged.
Interbank Rate:
The interbank rate is used between large banks for executing currency swaps. The rate is calculated as the midpoint between the buy and sell rates, or the bid/ask spread. These bid/ask spreads are set by the brokers based on an order book of trades.
When it comes to remittances, these rates are usually not even published. The conversion rate is just calculated and provided, and the high fees are added on top of that. The Company has received expressions of interest from many emerging market principals to facilitate remittance using DBK Coin and for good reason.
The reality is the exchange rates are floating, unstable, and arbitrarily set at the retail level. Banks and other financial institutions set their own FX rates. This is similar to when banks colluded to calculate the LIBOR rate, ostensibly based upon the cost of the money they borrow among themselves. Many other interest rates are based off this single metric. This includes the $US 350 trillion derivative markets.
Following the LIBOR scandal of 2012,13 wherein it was revealed that the rate has been manipulated for three decades, the rate’s current neutrality can also be reasonably questioned. Assuming it is no longer manipulated, then the rate becomes what the banks agree to charge each other. These rates are subject to manipulation. All of this impacts the value of a currency. No currency today has an inherent value in and of itself. Currency valuations are based on the confidence placed in them by the users of the currency. As a case in point, zero or negative interest rate policies are in place to force spending and consumption and zero and negative interest have the added consequence of robbing savers of their ability to build wealth.14 This has resulted in the massive move into equity markets in search of yield over that last two decades.
Exchange Rate Fluctuations:
Exchange rates fluctuate by the minute. Normally these are nothing more than noise and trader settlements. Usually in the course of any 24-hour period there can be 100 pip swings in price. Over time, these price fluctuations are not nearly as pronounced. A look at 10-year price movements in the top currencies versus the USD is telling:
Currency Pair
Average (2009-2018)
Spot price (2009)
Spot price (2018)
GBP/USD
$1.50
$1.57
$1.35
EUR/USD
$1.26
$1.39
$1.20
YEN/USD
$0.0102
$0.0107
$0.0091
CHF/USD
$1.04
$0.92
$1.03
Inflation:
Every currency has its own internal inflation rate that significantly impacts its citizens. According to the Bureau of Labor Statistics Consumer Price Index, prices in 2018 are 17.53% higher than in 2009.
Inflation (2009-2018)
Cumulative Price Change
17.53%
Average inflation rate
2.70%
CPI in 2009
214.537
CPI in 2018
252.146
Inflation in 2009
-0.36%
Inflation in 2018
2.70%
Forex markets recognize the inflation rates among currencies. These are adjusted in the rates and the costs passed on to the consumer. When inflation rates are low, the costs are effectively hidden. In the US for example, inflation is not a topic of conversation. However, it was once a daily topic. In countries that experience significant inflation, people change their behavior as it impacts their lives.
Macro-economic Issues:
In the following illustration, the citizens of these countries suffer a loss of purchasing power on a continued basis. As a result, they change their behaviors and spending patterns.
People around the world face daily challenges relating to the financial system. The global reach of the internet, cellular networks and smart phones now provides people worldwide with the potential to access the financial system in new ways. However, they still face high entry fees levied by traditional banking and payment platforms.
Approximately 2 billion people are excluded from the mainstream financial system due to high access costs. Most are denied access to the benefits of internet activity, online shopping and online financial transactions. However, what’s noteworthy is that these same excluded individuals send and receive $600 billion in annual remittances.
Most people have no alternative to using local fiat currency for their daily needs. Even within the financial system, the residents of these countries, approximately 2 billion people, use currencies that lost more than 10% of their value against the US dollar in 2018. This is very destructive to individuals and households long-term and inhibits their ability to maintain and improve their financial well-being.
There is a demonstrable need for a stable currency even relative to the USD, which functions as the go-to stable currency for the world.
Currencies with a 10% loss vs. US $ or greater in 2018:
% Change vs USD15
Venezuela
-99.99%
Sudan
-61.10%
Argentina
-50.50%
Turkey
-44.00%
Brazil
-20.70%
South Africa
-15.80%
Namibia
-15.80%
Russia
-15.30%
Sweden
-10.30%
India
-10.00%
Currencies with a 10% loss vs. US $ or greater in 2018 (Highlighted in RED)
15 Pension Partners 2018