Pragmatic Capitalism

Capital for Living a More Practical Life

Can large Exporters drive FX changes through price changes ?

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Some people are saying the exchange rate can be a function of what large exporters are doing with their prices. Not large exporters responding to the exchange rate.

ER = f(P) “exchange rate is a function of price”.

The exchange rate is a composite index of the current real terms of trade between two nations if the govt/CBs are not involved directly.

If the govt/CB delegates the exchange function to the member banks… banks have effectively fixed capital within the periods of time or frequency of price strategy changes by the producers so they have to adjust other parts of the balance sheet (other than capital) in the face of significant price changes by producers. so they will acquire or shed currency reserve assets in the face of rising or lowering prices of the inventories they are financing to maintain a constant capital – asset ratio.

So if the Japanese Auto makers increased their prices in $ terms in the US. Then USD/JPY would fall. Or if they cut their prices it would rise.

Therefore these huge exporters when they do this drives the FX market.

What is your take on this Cullen? True, possible, no way ?

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Posted by Derek Henry
Posted on 03/01/2017 8:25 PM
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I’ve always disputed the idea that FX prices are determined by exporters. I think exporters are price takers and currency traders (mainly big banks and central banks) are price setters. Big corporations mainly just care about the specific goods they’re trading. And while this influence prices the sheer volume of trading in these goods cannot even come close to the price discovery of the traders and central banks. So corporations are price takers trading on the fringe of where the more influential traders operate while taking in aggregate market conditions.

I’m not sure that gets at your question though? Let me know.

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Cullen Roche Posted by Cullen Roche
Answered on 03/02/2017 5:21 PM
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    I think it has more to do with when the Central banks are passive. Which they have been lately compared to the past. The flows don’t matter because it is always about the price and not quantity.

    If you sum those flows from one time to the next then you get a quantity of sorts. But what if all of those Transactions take place at the same price?

    Then the price is unchanged.

    for the price to change there has to develop some sort of imbalance (supply/demand shock?) or an authority has to change the prices (price aggressivity.) the implication is that changes in the pricing strategy of multinational firms creates some form of imbalance. This imbalance I suspect is in the system of finance/banking supporting the trade and somebody there ends up needing to shore up USD positions due to their seeking to remain within USD system regulatory compliance as prices of financed products are reduced in USD terms.

    If a EZ “capitalist” lowers its price in USD terms it is a devaluation for everybody over there associated with the efforts. “capitalists” or “ownership class” included.

    If BMW made cars wholly in China that they sold in US last year for $40k, and then this year they lowered the price to $35k to sell more, then this will show up in a devalued EUR in USD terms. They have devalued the unit price of the EZ franchise’s output in USD terms (price) but they can still end up “making more money” (quantity).

    I don’t fully understand how it works but it seems to evolve around the commercial banks and what they have to do to fund their positions when the large exporters price changes.

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    Posted by Derek Henry
    Answered on 03/02/2017 6:44 PM
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