Our students are going into a job market inundated with outdated processes. Manual and labor-intensive operations will force them to spend hours every week doing repetitive tasks that could be automated for much greater efficiency and accuracy, allowing them to focus on more fulfilling work. The majority of their time will be spent gathering data, while much less will be spent analyzing and providing insights to support strategic decision-making. For example, during these inflationary times, it is time for business faculty to start teaching the lost art of Price Analysis and Strategic Cost Management (in very different ways). I have asked a lot of business managers how they “prepare” to negotiate price increase requests from their suppliers. In particular, I was curious about how and where they get their data from (i.e., Chicago Board of Trade (CBOT), Chicago Mercantile Exchange (CME), Commodity Exchange (COMEX), London Metals Exchange (LME), New York Mercantile Exchange (NYMEX), etc.). Many said their suppliers provide that information. I am not convinced that using data from your suppliers is a form of “Preparation” for the negotiation process. Surprised by price increases? As much as 70% of current contracts have price increase provisions! In the WMU supply chain management program we teach our students to track commodity forward price curves. We now look at raw material market data from multiple sources, visualize and analyze historical pricing scenarios, and simulate planned purchases and what-if scenarios against forward price curves. How do we better prepare our business students to be job ready day one? Procurement organizations need processes and “tools” to mitigate and negotiate on these price increase requests in a strategic, data-driven manner (and academics need to do a better job of teaching it). Traditionally, we have worked very hard to help our students develop very sophisticated data analytics skill sets to manage these very large and complicated forms of information. Employers place a premium on these business analytics skill sets and would include: Advanced Excel (power query & pivot) & macros; 2. Data visualization (Tableau, Power BI & python w/ seaborn & matplotlib); 3. Data mining/RapidMiner, machine learning & data science; 4. Python & Jupyter notebook (data analytics & statistical libraries such as pandas, numpy); 5. Relational data models (Excel data model); 6. Graphic & statistical libraries (Seaborn, Matplotlib, Pandas, & Plotly). See our Business Analytics minor at: wmich.edu/infosystems/academics/analytics However, I would recommend complimenting the above skill sets with bringing in some cloud-based software and technology that gets us beyond manually updating and coding giant colored Excel spreadsheets. For example, I have been collaborating with N-Alpha and they have a cloud platform called materialx that I am bringing into the classroom (n-alpha.com/solutions/decision-support/). It gets us away from manually updating spreadsheets. Further, these technology software companies tend to be very supportive in helping faculty and students as these students will eventually become the future business professionals that actually use the technology (win-win-win, right?). And the technology is out there! We will soon have some white papers from our WMU SCM program based on the following price analysis & strategic cost management research. Some of our alumni are already testing and / or implementing these cloud-based services that allows procurement organizations, finance, and all other organizations that are exposed to raw material pricing changes, to stay on top of market pricing from multiple sources and proactively assess its impact on future raw material purchases. These technologies are also now serving as the basis for addressing price indexing implementations (formulas, alerts, etc.). It can all be done automatically and updated daily, saving hours from manually updating spreadsheets. These tools are quick and easy to use to prepare for price negotiations with suppliers, and often returns its investment (which is minimal to begin with) rapidly. These technologies also allow organizations to replace multiple spreadsheets and email threads with one tool that tracks pricing, facilitates collaborative decisions, revisiting past decisions and what led to them, and capturing organizational knowledge. I have asked many of my former students what are the most prevalent technologies used in your supply chain and business role. The two most common answers are Excel spreadsheets and email. It is 2023 now and we need to move further along. You could make a strong case that using antiquated business tools was a major source of supply chain disruptions the last few years. My former students keep telling me they are the “Excel Spreadsheet” generation. Excel works and they have very advanced spreadsheet skills. They also tell me that it gives them a competitive advantage in the workplace (i.e., people depend on their monthly report outs per se and very important people read them). The older managers have very weak Excel skills and even the younger graduates coming in have to play catch up to the people that are in their 30s and 40s (that have very advanced Excel skills). My former students also feel very comfortable with Excel. Many of these spreadsheets are their own creation and they find it empowering. In general, it works, it works well, it gets the job done, they feel comfortable with this version of technology while most others do not feel comfortable with it, the technology itself is cheap, and it gives them job security. Some said it took years to build up these spreadsheets, and now they are up and running. However, as I teach my current students, there are alternatives rooted in technology that will allow you to do things better, faster, and cheaper. Final Thought In talking with a colleague, we both agreed that many hiring managers do not have a full understanding of the Artificial Intelligence (AI) skill sets associated with our graduating students. Our business students told us many times that their hiring managers valued only the traditional Excel capabilities (i.e., lookup functions, pivot tables, etc. - however, that is NOT AI). Managers also greatly overlook the opportunities from other analytical solutions (skill sets that our students have). This makes it a bit difficult to sell the analytical techniques taught in classes that go beyond our Advances Excel and Predictive Analytics courses. For example, our data mining class is essentially a machine learning class for business, which is the core of AI. The course is designed to solve the problems that Excel falls short on. Hopefully we do a better job of training our students to “sell” the AI skills and managers become more open to embracing the benefits (which might require a culture change). Embracing and trying new technologies requires leadership that is willing to try new things. Otherwise, we keep using spreadsheets and email to manage very large and complicated data sets.
Large U.S.-based corporations often set the terms and conditions of a contract when doing business with a smaller foreign supplier. Based upon my experiences, large industrial customers which use foreign suppliers will choose to pay the foreign supplier in their currency if they think the U.S. dollar will strengthen during the life of the contract. The U.S. buyer’s costs decrease in this situation, and the foreign supplier is indifferent. However, if the U.S. dollar weakens, the U.S. buyer’s costs actually increase. Large U.S. industrial customers like to take chances because they can afford to. While I was with Delco Electronics (now a part of Delphi), we made all of our own circuit boards. The circuit boards went into radios and engine control modules (the brain for the engine). However, we did not have the capacity to meet all of our circuit board needs. One option was to add the required capacity by expanding our facilities in Kokomo, IN. The other option was to outsource our extra circuit board needs to another company. We chose the latter option since expanding our facilities would have resulted in idle capacity during an industry slow down. Delphi was predicting an industry slow down in the near future and did not want to add capacity which would sit idle. Delphi could not find any suppliers in the U.S. which could adhere to a strict quality-controlled production environment (the circuit boards had to be built in a dust free environment). However, we did find a supplier located in Japan which could meet our quality requirements. Delphi established a contract with the Japanese supplier and both sides agreed that payment would be paid in the foreign supplier’s currency (i.e., Yen). During the life of the contract, the U.S. dollar became weaker relative to the Yen. This meant that Delphi’s costs increased during the course of the contract. Delphi thought that the dollar would strengthen relative to the Yen (like it did during most of the 1980s, and it is happening again right now). Delphi guessed wrong and it cost them dearly. Furthermore, the auto industry flourished in subsequent years. Sales and the need for circuit boards actually increased during a time when Delphi thought they would decline. It would have been cheaper for them to expand their facilities and build the extra circuit boards themselves (rather than outsource them to a foreign supplier). Delphi should have paid the foreign supplier in U.S. currency. The U.S. buyer assumes no risk from exchange rates in this situation; however, the U.S. buyer also gets no reward from exchange rates. Small companies typically pay foreign suppliers in U.S. currency because they cannot afford to take any risks. Delphi has since hired an economist to help them predict what will happen to exchange rates. Delphi has become one of many companies in the U.S. which is outsourcing more and more of its material needs to foreign sources of supply. Now, smaller U.S. companies typically pay non-domestic suppliers in U.S. currency because they cannot afford to take these types of risks. The long-term win-win solution for companies of all sizes is to reduce risk for both sides. This can be done by having caps and bottoms on what will be paid based on exchange rate fluctuations. In other words, you have escalation clauses built into the price so as to share in the risk and rewards. Smaller companies can negotiate these types of contracts not only with their non-domestic suppliers (after all, you are the customer regardless of size), but also their non-domestic customers that might have a preference for making payment in their own currency. Exchanges rates are determined by the long-term supply and demand conditions of one currency relative to another. These conditions are influenced by almost everything on a continuous basis (e.g., interest rates, exports, imports, taxes, consumer spending, etc.). It is therefore very difficult to make predictions regarding exchange rate fluctuations. Hedgers try to do this in the currency market, but they seem to lose as much as they make. Save yourself the risk and do not be a hedger. Build clauses into your contracts that allow both sides to share in the risks and rewards. *************************************************** Help with exchange rate questions (focus on understanding the T/F questions)... Let’s say you just graduated from W.M.U. You have accepted a job offer from Boeing as an Assistant Buyer. The job takes you to Seattle, Washington. You will help Boeing identify suppliers to help meet its material needs. You must immediately find a supplier which can supply Boeing with electrical wiring harnesses. You find a supplier in Japan by the name of Toshiba. You have selected Toshiba because this company meets all of your cost and performance (e.g., quality, service, flexibility) expectations. You negotiate a contract to purchase these electrical wiring harnesses from Toshiba, which is based in Japan. You decide that the contract calls for payment to Toshiba in Yen (foreign currency). When the contract is signed, the exchange rate is 132.24 Yen per 1 U.S. Dollar. It just so happens that you agree to pay 132.24 Yen for each electrical wiring harness (how convenient). No exchange rate fluctuation clauses are built into the contract (the price for each electrical wiring harness will always be 132.24 Yen - whether the Dollar strengthens or weakens). The terms and conditions of the contract are eventually completed and payment by Boeing is made at a future date. However, the exchange rate on this future date is now 124.73 Yen per 1 U.S. Dollar. _____________________________________________________________________________________ As a result of exchange rate fluctuations… a. Toshiba’s revenues have actually increased for the contract, and Boeing’s costs have also increased. b. Toshiba’s revenues have actually decreased for the contract, and Boeing is indifferent. c. Toshiba’s revenues have actually increased for the contract, and Boeing is indifferent. d. Toshiba is indifferent, and Boeing’s costs have decreased. e. Toshiba is indifferent, and Boeing’s costs have increased. e. Toshiba is going to get the same amount of Yen per part no matter what happens. Toshiba will get 132.24 Yen for every part no matter what. Also, they are a Japanese company so they have their currency and do not need to exchange it for another currency. They are good to go. How about the American buyer (you)? Day 1 - $1 = 132.24 Yen Day future/later $1 = 124.73 Yen Has the dollar weakened or strengthened? Well, in the future, when you go the bank they will only give you 124.73 Yen for $1. Before, they would give you 132.24 Yen per dollar. So, in the future, the same amount of U.S. dollar gets you “less” Yen. That means it has weakened. You have to come up with more U.S. dollars to pay for the same part because you need more U.S. dollars to pay them the 132.24 Yen that you promised. _____________________________________________________________________________________ In the example above, did you make the right decision by calling for payment to Toshiba in Yen rather than U.S. Dollars? Explain. No. You decided to pay a foreign supplier in their currency. That means you have to go to the bank and exchange your U.S. money for yen. During the life of the contract, the dollar became weaker. That means you get less yen back for the same amount of U.S. money. That means you have to come up with more U.S. money to buy the same amount of material. You are costing your company more money. You should have been paying the foreign supplier in dollars. You will not be getting a merit raise this year. _____________________________________________________________________________________ In the example above, has the U.S. Dollar strengthened or weakened relative to the Yen? Weakened. Why? Day 1 - $1 = 132.24 Yen Day future/later $1 = 124.73 Yen Well, in the future, when you go the bank they will only give you 124.73 Yen for $1. Before, they would give you 132.24 Yen per dollar. So, in the future, the same amount of U.S. dollar gets you “less” Yen. That means it has weakened. You have to come up with more U.S. dollars to pay for the same part because you need more U.S. dollars to pay them the 132.24 Yen that you promised. _____________________________________________________________________________________ If payment to a foreign supplier is made in U.S. currency, and the dollar weakens, then the U.S. buyer’s costs increase and the foreign supplier is indifferent. True or False. False _____________________________________________________________________________________ If payment to a foreign supplier is made in foreign currency, and the dollar strengthens, then the U.S. buyer’s costs decrease and the foreign supplier is indifferent. True or False. True _____________________________________________________________________________________ If the payment to a foreign supplier is in U.S. currency, then the U.S. buyer assumes no risk and gets no reward from exchange rates. True or False. True _____________________________________________________________________________________ If payment to a foreign supplier is in foreign currency, then the U.S. buyer is worse off with a strong U.S. Dollar, and better off with a weak U.S. dollar. True or False. False
For more information: www.simecurkovic.com/2021/09/05/do-you-understand-exchange-rates-how-it-impacts-supply-chain-management-many-struggle-with-this-lets-practice/ www.simecurkovic.com/2021/04/29/multinational-management-101-and-supply-chain-management/
Another great read from the folks are Metal Miner (see below)...Remember, in general, when the dollar goes up in value, American stuff gets more expensive, non-American stuff gets cheaper... agmetalminer.com/insights/ ...But the USD also has a special relationship to metal prices. It has historically traded somewhat inversely, and the correlation is tighter between the USD and copper when looking at recent years. When the dollar goes up, commodities tend to fall. This also means the opposite is true: when the dollar falls, commodity prices tend to rise. In addition, and perhaps more significantly, the move could add more volatility to the USD and thus to metals prices. But the concern about de-dollarization involves lower liquidity and increased price volatility. Moreover, if demand for the USD falls, the dollar would likely depreciate relative to other currencies. Finally, a weaker dollar could lead to higher import prices, which would contribute to additional domestic inflation as global goods become more expensive. Analyst Commentary Is the Move Away from the Petrodollar a Larger Macroeconomic Indicator of Metals Prices? A fairly significant story that could have implications on global metals markets somehow has barely seen the light of day. The story involves a little-known agreement between Saudi Arabia and the US involving the pricing of a commodity, specifically oil, in petrodollars. The agreement, first signed in the early 1970’s required Saudi Arabia to price its oil exports in US dollars in exchange for military support and security guarantees from the U.S. The expiration of this agreement means the Middle Eastern nation can now sell oil in multiple currencies, including the Chinese RMB, Euros, yen and even digital currencies (two weeks ago we reported on the first Russian-Chinese metal trades conducted via crypto). What the non-renewal of the agreement implies is that the global shift away from the US dollar and toward other currencies could impact domestic inflation and U.S. interest rates, along with potentially lower demand for U.S. treasuries. All of this comprises the de-dollarization conversation happening in business and financial circles. So what does it mean for metals markets? With the exception of the Shanghai Futures Exchange, the two big exchanges, the LME and CME price metals in US dollars. When local currencies fluctuate against the dollar, the currency risk is typically born by the buyer. The rise of alternative currencies and crypto means buyers have other means of mitigating currency risk. Many global companies might even argue that this presents natural hedging opportunities to use different currencies. But the USD also has a special relationship to metal prices. It has historically traded somewhat inversely, and the correlation is tighter between the USD and copper when looking at recent years. When the dollar goes up, commodities tend to fall. This also means the opposite is true: when the dollar falls, commodity prices tend to rise. In addition, and perhaps more significantly, the move could add more volatility to the USD and thus to metals prices. But the concern about de-dollarization involves lower liquidity and increased price volatility. Moreover, if demand for the USD falls, the dollar would likely depreciate relative to other currencies. Finally, a weaker dollar could lead to higher import prices, which would contribute to additional domestic inflation as global goods become more expensive. As we have often repeated, volatility appears live and well. Source: MetalMiner Insights, charts & correlation analysis
Let's say... The dollar is rising, the dollar is appreciating, the dollar is getting stronger, more foreign currency for the dollar- what does all this mean? It is happening right now in the economy. If the dollar goes up in value, American goods become more expensive relative to foreign goods, or, foreign goods become cheaper relative to American goods. Therefore, exports fall, and imports rise (make sense? So, what happens to GDP?). This happened during the 1980s (and it is happening again right now). For example, a weaker yen compared to the dollar meant Japanese products were cheaper to buy for Americans. For example: 2014 - $1 = 100 Yen 2015 - $1 = 200 Yen First question, can you see that the dollar has gotten stronger since 2014? Why, the bank used to give you 100 Yen when you gave them $1, but in 2015 the bank will give you $200 Yen for the same $1. Your dollar is worth “more”. It has strengthened. Also, again, 2014 - $1 = 100 Yen 2015 - $1 = 200 Yen Let’s say a Japanese company sells a truck in America to an American for $1. The Japanese company goes to the bank with $1 and the bank gives them 100 Yen because that is what the exchange rate is in 2014. With 100 Yen the Japanese company is happy because they paid their bills and have some money left over. Let’s move forward to 2015. What could the Japanese company sell the truck for and still get their 100 Yen? This is VERY important to understand. The dollar has gotten stronger, so when the Japanese company goes to the bank with the dollar, the bank will give them more Yen (200 Yen now in this example). So, again, in 2015, what could you sell the truck for and still get 100 Yen? Answer: in this example, you could drop the price to $.50 and still get the 100 Yen. When the dollar gets stronger relative to other currencies, everything and anything that is American gets more expensive. Likewise, when the dollar gets stronger, everything and anything that is non-American gets cheaper. So, when the dollar gets stronger, the non-Americans lower their prices (because they can with a stronger dollar) and we buy more non-American stuff. Do you remember the GDP formula? GDP = C + G + I + (X-M) or Consumer spending + government spending + investment spending + exports - imports So, when the dollar gets stronger relative to other currencies, everything and anything that is American gets more expensive. So our exports go down because American stuff is more expensive, non-Americans buy less American stuff. Likewise, when the dollar gets stronger, everything and anything that is non-American gets cheaper. So imports go up because we buy more non-American stuff. Did you catch this part? When the dollar gets stronger relative to other currencies, everything and anything that is American gets more expensive. So our exports go down because American stuff is more expensive, non-Americans buy less American stuff. Remember 2014 - $1 = 100 Yen 2015 - $1 = 200 Yen Let’s say an American company like GM sells a truck in Japan to a Japanese consumer for 100 Yen. The American company goes to the bank with 100 Yen and the bank gives them $1 because that is what the exchange rate is in 2014. With $1 the American GM company is happy because they paid their bills and have some money left over. Let’s move forward to 2015. What does the American GM company have to sell the truck for to still get their $1? This is VERY important to understand. The dollar has gotten stronger (which means the Yen has gotten weaker), so when GM goes to the bank with the 100 Yen, the bank will give them less $ (because the Yen has gotten weaker). In this example, the bank will only give them $.50 for 100 Yen in 2015. So, again, in 2015, what would GM have to sell the truck for in Japan and still get $1? Answer: in this example, you would have to raise the price to 200 Yen to still get the $1 (you have to double the price of the truck). Now the Japanese consumer is saying, no thank you, too expensive. So, American exports go down, GDP goes down, some Americans lose their jobs. Keep in mind that the Japanese (Yen) and Chinese (Yuan/RMB) governments routinely and intentionally manipulate their currencies to make their currencies weaker relative to the dollar. Why? When the dollar gets stronger relative to other currencies, everything and anything that is American gets more expensive. People in Japan and China buy less American stuff and more of their stuff (imports go down in their countries). Likewise, when the dollar gets stronger, everything and anything that is non-American gets cheaper. So, when the dollar gets stronger, the non-Americans lower their prices in America (because they can with a stronger dollar) and we buy more non-American stuff (because they lower their prices because they can with the stronger dollar). So exports from Japan and China increase (we buy their cheaper stuff). Japan has been trying to export their way out of a recession for several years by trying to make its currency weaker relative to the dollar. It has not really worked. They have been in a very deep recession for a very long time. China pegs it currency against the dollar. Why? If it allowed its currency to float openly on the free market based on supply and demand conditions then it would be 30% stronger relative to the dollar. That means everything and anything that is Chinese would be 30% more expensive. What is China’s cost advantage? Answer, around 30%. That means they lose most of their cost advantage if they play by the same rules. I think it is an unfair trade practice when governments give their companies a cost advantage through currency devaluation because it has nothing to do with better, faster, cheaper. Let the best company win based on fair competition. Around half of America’s trade deficit is with two countries (China and Japan). However, our trade deficit as a % of our GDP puts a small dent in it (because we still export a ton, but we do import more than we export, that has been the case every year since 1976). OK, how about the reverse? This happened in general during 1991-2009… The dollar is declining, the dollar is depreciating, the dollar is getting weaker, less foreign currency for the dollar - what does this mean? American goods are becoming cheaper relative to foreign goods. This is what happened during the 1990s and all the way up to 2015. How do these changes impact the GDP (focus on the exports/imports part of the GDP formula)? The U.S. dollar has been weakening in value relative to the Euro over the last several years (until rather recently)? How does this impact the U.S. and Euro-Zone economies respectively? The Japanese government has been manipulating the Yen to try and weaken it relative to the U.S. dollar. What is Japan trying to do? When Japan weakens its Yen relative to the dollar, then everything and everything that is Japanese becomes cheaper. So, Americans buy more Japanese stuff because it is cheaper. Japan has been trying to export its way out of a recession for almost 20 years now by manipulating its currency. Again - The Chinese government has pegged their currency (Yuan/RMB) to the dollar. If China did not do this, its currency would be 30% stronger relative to the dollar (what would this mean to China's labor cost advantage? - Hint: anything and everything Chinese would be 30% more expensive). What is China trying to do (Answer: Protect its huge export market, especially to the U.S., is this free/fair trade?)? Ask a low skilled American manual laborer how this has worked out for them. Welcome to the global economy (good or bad, right or wrong). What makes up GDP? Do not forget this... Consumer expenditures (C) + Government Spending (G) + Investment Spending (I) + (Exports (X) - Imports (M))
This was pre-covid: Red alert, the U.S. dollar is roaring back and getting stronger again... money.cnn.com/2018/05/02/investing/strong-dollar/index.html Trump: The dollar will 'get stronger and stronger' money.cnn.com Just a few weeks ago, the dollar was falling and companies were celebrating the benefit to earnings. Will a rebound for the greenback be a problem for Wall Street?
Surprised by raw material price increases? At the WMU ISM supply chain management program we teach our students to track commodity forward price curves. Here's a quick video of Net Alpha's cloud based materialx Decision Support service that is being made available to our students in class as they prepare to become future SCM managers. Some of our alumni have experienced this new service and love it. It looks at raw material market data from multiple sources, visualizes & analyzes historical pricing scenarios, & simulates planned purchases & what-if scenarios against forward price curves. Our grads will be ready. Hey Supply Chain Management professionals, here's a one min video showing how easy it is to track changes in forward price curves of commodities and seeing how they may impact your future purchasing decisions. All done automatically and updated daily. Customers that have subscribed to our new materialx Decision Support service love it. www.linkedin.com/posts/sime-curkovic-61617a115_materialx-decision-support-accessing-and-activity-6916784411074080768-qFLD? www.prleap.com/pr/283694/net-alpha-announces-materialx-decision-support-a-cloud-based-service-for-supply-chain-management-organizations-that-enables Birmingham, MI - Net Alpha Financial Systems, LLC, the technology company developing solutions that are transforming the way manufacturers, producers, distributors, and brokers transact in raw materials, today announced materialx® Decision Support, a new cloud-based subscription service that enables supply chain management organizations to make better raw material purchase decisions. materialx Decision Support is designed to make pricing data for raw materials more accessible and usable to procurement and other supply chain management professionals. The service combines access to a rich set of market data sources with powerful analytical tools, data visualization, collaboration tools, simulation, and tracking capabilities, enabling more informed and collaborative decision-making than previously possible. With materialx Decision Support, companies can unlock new levels of organizational transparency to the impact of raw material pricing on their purchasing plans, easily involve all stakeholders in purchase decisions, deeply understand the potential economic outcomes of those decisions, and continuously improve decision-making processes by analyzing the impact of past decisions utilizing the data that was available at the time such decisions were made. "We've listened to dozens of procurement teams of various sizes in different industries that time and time again communicated similar challenges, especially following the last two years of the COVID-19 pandemic," said Eyal Mizrahi, CEO and Co-Founder of Net Alpha Financial Systems. "Procurement teams are often asked when they knew about a substantial price change for a critical raw material, how they reacted to it, and how the change was communicated internally. We built materialx Decision Support to enable answering such questions. Procurement teams that have seen our solution have recognized immediately how it can transform their current processes which usually involve partial data, many spreadsheets, and email threads. The new service can also allow them to capture and harness organizational knowledge in a way that wasn't previously possible." materialx Decision Support includes information feeds from Chicago Board of Trade (CBOT), Chicago Mercantile Exchange (CME), Commodity Exchange (COMEX), London Metals Exchange (LME), and New York Mercantile Exchange (NYMEX), with additional data sources to be offered in the immediate future, all of which can be evaluated, analyzed, modeled, and tracked through a single intuitive interface. Like all materialx platform solutions, it is a cloud-based service, so there is no software for customers to build, deploy, or manage, allowing customers to onboard within minutes. For more information on materialx Decision Support, please visit: n-alpha.com/solutions/decision-support About Net Alpha Financial Systems and materialx Net Alpha has developed a suite of software tools that help buyers and sellers of raw materials realize digital transformation with minimal investment. The company's materialx platform provides a suite of cloud-based services that transform how raw materials with variable and negotiated prices are evaluated, transacted, and settled. The services include materialx Decision Support for procurement and supply chain management organizations that wish to maximize the strategic value of raw material pricing data and collaborative decisions, as well as materialx Sales Engine, a transactional platform designed for raw material producers, distributors, and brokers that look to grow revenues by deploying a competitive online presence. The materialx platform-as-a-service is a low cost, rapidly deployable alternative to developing and managing expensive in-house systems. The platform was purpose-built to meet the information and transaction needs of buyers and sellers of raw materials through advanced evaluation and analysis, collaboration, negotiation, execution, and tracking tools. For more information, or to arrange a demonstration of a materialx solution, please visit www.n-alpha.com
www.visualcapitalist.com/sp/ranked-the-top-performing-major-currencies-2014-2023/ Ranked: The Top Performing Major Currencies (2014-2023) Monetary policy, geopolitical events, and economic conditions-among other factors-significantly influence currency performance in the foreign exchange market. Which major currencies have performed the best and worst over the last decade, and what are the reasons behind their movements? To answer this question, we partnered with OANDA to visualize a decade of highs and lows of the top eight most-traded currencies, by volume, according to the Bank for International Settlements. The U.S. Dollar: The Top Foreign Exchange Performer on Our List The U.S. dollar (USD) was the best-performing currency of the last decade, taking top spot in six of the last 10 years. Relatively stable economic activity and the role of the USD as the world’s reserve currency contributed to its general strength. Importantly, the USD also represents a safe-haven investment in times of crisis, meaning investors will often put money in the currency during periods of instability, such as during the 2014-2016 oil price shock. Post-COVID-19, the USD peaked in 2022 in response to aggressive interest rate hikes, though it came off its highs in 2023. Conversely, a failure to pass healthcare and tax reforms led to the 2017 “Trump Slump.” In 2020, record low interest rates in the U.S. and the nation’s difficulties combatting the COVID-19 virus contributed to its over-7% decline that year. The Japanese Yen: A Struggle Against Low Interest Rates The Japanese yen was the lowest performing currency in the group over the last decade, coming in last in four of the 10 years we analyzed. The long-standing gap between interest rates in Japan and the U.S. is largely to blame. Higher interest rates typically attract foreign investment, so Japan’s ultra-low interest rates since the late 1990s have deterred capital inflows, thus lowering demand for the currency. This has put downward pressure on the yen in favor of the USD. Other Foreign Exchange Movements The Canadian dollar (CAD), which has historically exhibited a strong correlation to oil prices, also suffered in the 2014 oil price slump. However, the link between CAD and oil has broken down in recent years. The British pound suffered in the wake of the Brexit vote, falling nearly 17% in 2016 to a 31-year low, as noted by The Guardian. The pound also underperformed in 2022 following the disastrous fiscal policy announcements that prompted the resignation of former Prime Minister Liz Truss. On the back of economic growth hitting a 10-year high, the euro performed exceptionally well in 2017, gaining almost 14% during the year. Understanding the Markets Price movements in the foreign exchange market are complex, but understanding how currencies have performed in the past, and the factors driving those changes, can help investors prepare. Learning how to manage risk, and having a trading plan, are also important.
www.visualcapitalist.com/major-currencies-2023-return/ Charted: How Major Currencies Performed in 2023 The U.S. Dollar Index peaked in fall 2022, the highest it had been in nearly two decades, rising in response to aggressive interest rate hikes. The index measures the value of the U.S. dollar against a basket of major currencies from six countries. A gain indicates the dollar is appreciating against the basket and vice-versa. The euro is the biggest component on the index and thus sways the index value and return. In 2023, the U.S. Dollar Index declined off its highs while still maintaining a fairly elevated level as interest rates have stayed steady. But how have other major currencies fared against the dollar? We visualize the returns of 12 currencies against the U.S. dollar, using data from TradingView. Ranked: Best and Worst Performing Currencies in 2023? By far, the best performing major currency of 2023 was the Mexican peso, which appreciated nearly 15% against the dollar. The peso appreciated significantly thanks to aggressive interest rate hikes by its central bank (currently at 11.25%) which pulls money into the country as investors chase better returns. However, the peso’s continued appreciation could negatively impact the competitiveness of Mexico’s exports. In tandem, Asian imports to the country become cheaper which can hurt the country’s domestic industrial sector. Here’s how other major currencies performed in 2023. www.visualcapitalist.com/major-currencies-2023-return/
www.zerohedge.com/markets/usd-really-too-big-fail?Weekly%20Newsletter%20Campaign&_hsenc=p2ANqtz-9ocWyUzFGvdtDAFpjB66F08vlZeGJSYDz68GvY9a6r0IihmzLVWOm4aWNZSTfb_DkAipWwESNPxgN7aiMNLnndQ-rAfw&_hsmi=316125731& Is The USD Really Too Big To Fail? Tyler Durden's Photo BY TYLER DURDEN SUNDAY, JUL 14, 2024 - 07:50 PM Authored by Matthew Piepenburg via VonGreyerz.gold, Between politics (driven by self rather than public servants), markets (driven by debt rather than profits) and currencies (diluted by over-creation rather than chaperoned by a real asset), it is fair to say we live in not interesting but surreal times. But amidst the surreal, the dollar, as many believe, is our rock, our immortal albeit often unloved constant. The USD: Too Big to Fail?
What a Stronger Dollar Means for U.S. Stocks A Strengthening Dollar May Boost Non-U.S. Companies By: George R. Evans, CFA, Chief Investment Officer, Equities, Portfolio Manager One can imagine President Donald Trump at least thought about tweeting that the night before the U.S. Federal Reserve raised its benchmark interest rate by 0.25%. Frankly, we were somewhat surprised at Trump’s silence on this matter given his frequent criticisms of Fed Chair Janet Yellen over the last year. But tweets or no tweets, the bond market’s reaction to the third interest rate hike in 10 years shows that the market has already discounted the likelihood of further interest rate hikes for the rest of the year. But in the meantime, the outlook for continued strength in the U.S. dollar has many investors questioning what that will mean for their foreign equity assets. This is a fair question, and one that is worth taking some time to think through. For U.S. dollar investors, a strengthening dollar does have the immediate effect of reducing the dollar price of non-dollar securities - including equity securities. But an equity security is more than a piece of paper. It represents a share of ownership in a company and a stake in that company’s present and future earnings. But how will a rising dollar impact those earnings? For companies that sell goods and/or services in the United States but are headquartered overseas, the initial earnings effect is positive. Strong dollar revenues are translated into weaker domicile currencies. This results in higher domicile currency earnings than would otherwise be the case. In a nutshell, as the dollar rises, so do reported earnings. But that’s just accounting. How a Strong Dollar Impacts a Non-U.S. Company’s Operating Costs What’s even more interesting is the effect that currency rates can have on a company’s competitiveness. A company that pays its operating costs in a weaker currency than that of its competitors is in an advantaged position. It enjoys lower operating costs than competitors, which will widen margins and result in higher profits. It also has additional pricing flexibility. Thanks to a weaker operating currency, this company has the option of lowering prices without suffering from narrower margins. Rather than taking on higher margins, it can decide to keep stable margins while trying to increase market share. Or the company may take the opportunity to look further into the future and use its increased financial flexibility to improve its market position and widen its defensive moat. Examples - depending on the industry - could range from expanding an after-sales service network to increasing research and product development efforts. The point here is that a stronger dollar, should it persist, will have an effect on companies around the world. For companies that are domiciled overseas - particularly those that compete with U.S. companies - that effect is potentially quite positive in terms of profitability and competitiveness.
Prepare for a multipolar currency world www.ft.com/content/f8f3b2cd-6690-4f26-b81e-e972751c8799?sharetype=blocked www.linkedin.com/posts/rohitsathe_prepare-for-a-multipolar-currency-world-activity-7054370546867691520-B9-M? Chief Procurement Officers should not only understand the fundamentals of foreign currency markets but also proactively support CFOs in managing a business's exposure to foreign currency risk! Unlike most advanced economies worldwide, China does not have a floating exchange rate under which the value of its currency is determined by market forces. From 1994 to 2005, China pegged its currency at about 8 yuan to the dollar. It then began to allow its currency to appreciate slightly against the dollar within a fixed limit before it shifted its peg to a basket of several currencies used by major trading partners, including the U.S. and its dollar. The People’s Bank of China allows its currency to trade in a 2% range around a midpoint it fixes against the dollar each day. www.foxbusiness.com/economy/could-us-dollar-lose-reserve-currency-status-china
Let's say... The dollar is rising, the dollar is appreciating, the dollar is getting stronger, more foreign currency for the dollar- what does all this mean? It is happening right now in the economy. If the dollar goes up in value, American goods become more expensive relative to foreign goods, or, foreign goods become cheaper relative to American goods. Therefore, exports fall, and imports rise (make sense? So, what happens to GDP?). This happened during the 1980s (and it is happening again right now). For example, a weaker yen compared to the dollar meant Japanese products were cheaper to buy for Americans. For example: 2014 - $1 = 100 Yen 2015 - $1 = 200 Yen First question, can you see that the dollar has gotten stronger since 2014? Why, the bank used to give you 100 Yen when you gave them $1, but in 2015 the bank will give you $200 Yen for the same $1. Your dollar is worth “more”. It has strengthened. Also, again, 2014 - $1 = 100 Yen 2015 - $1 = 200 Yen Let’s say a Japanese company sells a truck in America to an American for $1. The Japanese company goes to the bank with $1 and the bank gives them 100 Yen because that is what the exchange rate is in 2014. With 100 Yen the Japanese company is happy because they paid their bills and have some money left over. Let’s move forward to 2015. What could the Japanese company sell the truck for and still get their 100 Yen? This is VERY important to understand. The dollar has gotten stronger, so when the Japanese company goes to the bank with the dollar, the bank will give them more Yen (200 Yen now in this example). So, again, in 2015, what could you sell the truck for and still get 100 Yen? Answer: in this example, you could drop the price to $.50 and still get the 100 Yen. When the dollar gets stronger relative to other currencies, everything and anything that is American gets more expensive. Likewise, when the dollar gets stronger, everything and anything that is non-American gets cheaper. So, when the dollar gets stronger, the non-Americans lower their prices (because they can with a stronger dollar) and we buy more non-American stuff. Do you remember the GDP formula? GDP = C + G + I + (X-M) or Consumer spending + government spending + investment spending + exports - imports So, when the dollar gets stronger relative to other currencies, everything and anything that is American gets more expensive. So our exports go down because American stuff is more expensive, non-Americans buy less American stuff. Likewise, when the dollar gets stronger, everything and anything that is non-American gets cheaper. So imports go up because we buy more non-American stuff. Did you catch this part? When the dollar gets stronger relative to other currencies, everything and anything that is American gets more expensive. So our exports go down because American stuff is more expensive, non-Americans buy less American stuff. Remember 2014 - $1 = 100 Yen 2015 - $1 = 200 Yen Let’s say an American company like GM sells a truck in Japan to a Japanese consumer for 100 Yen. The American company goes to the bank with 100 Yen and the bank gives them $1 because that is what the exchange rate is in 2014. With $1 the American GM company is happy because they paid their bills and have some money left over. Let’s move forward to 2015. What does the American GM company have to sell the truck for to still get their $1? This is VERY important to understand. The dollar has gotten stronger (which means the Yen has gotten weaker), so when GM goes to the bank with the 100 Yen, the bank will give them less $ (because the Yen has gotten weaker). In this example, the bank will only give them $.50 for 100 Yen in 2015. So, again, in 2015, what would GM have to sell the truck for in Japan and still get $1? Answer: in this example, you would have to raise the price to 200 Yen to still get the $1 (you have to double the price of the truck). Now the Japanese consumer is saying, no thank you, too expensive. So, American exports go down, GDP goes down, some Americans lose their jobs. Keep in mind that the Japanese (Yen) and Chinese (Yuan/RMB) governments routinely and intentionally manipulate their currencies to make their currencies weaker relative to the dollar. Why? When the dollar gets stronger relative to other currencies, everything and anything that is American gets more expensive. People in Japan and China buy less American stuff and more of their stuff (imports go down in their countries). Likewise, when the dollar gets stronger, everything and anything that is non-American gets cheaper. So, when the dollar gets stronger, the non-Americans lower their prices in America (because they can with a stronger dollar) and we buy more non-American stuff (because they lower their prices because they can with the stronger dollar). So exports from Japan and China increase (we buy their cheaper stuff). Japan has been trying to export their way out of a recession for several years by trying to make its currency weaker relative to the dollar. It has not really worked. They have been in a very deep recession for a very long time. China pegs it currency against the dollar. Why? If it allowed its currency to float openly on the free market based on supply and demand conditions then it would be 30% stronger relative to the dollar. That means everything and anything that is Chinese would be 30% more expensive. What is China’s cost advantage? Answer, around 30%. That means they lose most of their cost advantage if they play by the same rules. I think it is an unfair trade practice when governments give their companies a cost advantage through currency devaluation because it has nothing to do with better, faster, cheaper. Let the best company win based on fair competition. Around half of America’s trade deficit is with two countries (China and Japan). However, our trade deficit as a % of our GDP puts a small dent in it (because we still export a ton, but we do import more than we export, that has been the case every year since 1976). OK, how about the reverse? This happened in general during 1991-2009… The dollar is declining, the dollar is depreciating, the dollar is getting weaker, less foreign currency for the dollar - what does this mean? American goods are becoming cheaper relative to foreign goods. This is what happened during the 1990s and all the way up to 2015. How do these changes impact the GDP (focus on the exports/imports part of the GDP formula)? The U.S. dollar has been weakening in value relative to the Euro over the last several years (until rather recently)? How does this impact the U.S. and Euro-Zone economies respectively? The Japanese government has been manipulating the Yen to try and weaken it relative to the U.S. dollar. What is Japan trying to do? When Japan weakens its Yen relative to the dollar, then everything and everything that is Japanese becomes cheaper. So, Americans buy more Japanese stuff because it is cheaper. Japan has been trying to export its way out of a recession for almost 20 years now by manipulating its currency. Again - The Chinese government has pegged their currency (Yuan/RMB) to the dollar. If China did not do this, its currency would be 30% stronger relative to the dollar (what would this mean to China's labor cost advantage? - Hint: anything and everything Chinese would be 30% more expensive). What is China trying to do (Answer: Protect its huge export market, especially to the U.S., is this free/fair trade?)? Ask a low skilled American manual laborer how this has worked out for them. Welcome to the global economy (good or bad, right or wrong). What makes up GDP? Do not forget this... Consumer expenditures (C) + Government Spending (G) + Investment Spending (I) + (Exports (X) - Imports (M))
Our students are going into a job market inundated with outdated processes. Manual and labor-intensive operations will force them to spend hours every week doing repetitive tasks that could be automated for much greater efficiency and accuracy, allowing them to focus on more fulfilling work. The majority of their time will be spent gathering data, while much less will be spent analyzing and providing insights to support strategic decision-making.
For example, during these inflationary times, it is time for business faculty to start teaching the lost art of Price Analysis and Strategic Cost Management (in very different ways). I have asked a lot of business managers how they “prepare” to negotiate price increase requests from their suppliers. In particular, I was curious about how and where they get their data from (i.e., Chicago Board of Trade (CBOT), Chicago Mercantile Exchange (CME), Commodity Exchange (COMEX), London Metals Exchange (LME), New York Mercantile Exchange (NYMEX), etc.). Many said their suppliers provide that information. I am not convinced that using data from your suppliers is a form of “Preparation” for the negotiation process.
Surprised by price increases? As much as 70% of current contracts have price increase provisions! In the WMU supply chain management program we teach our students to track commodity forward price curves. We now look at raw material market data from multiple sources, visualize and analyze historical pricing scenarios, and simulate planned purchases and what-if scenarios against forward price curves.
How do we better prepare our business students to be job ready day one? Procurement organizations need processes and “tools” to mitigate and negotiate on these price increase requests in a strategic, data-driven manner (and academics need to do a better job of teaching it). Traditionally, we have worked very hard to help our students develop very sophisticated data analytics skill sets to manage these very large and complicated forms of information.
Employers place a premium on these business analytics skill sets and would include:
Advanced Excel (power query & pivot) & macros;
2. Data visualization (Tableau, Power BI & python w/ seaborn & matplotlib);
3. Data mining/RapidMiner, machine learning & data science;
4. Python & Jupyter notebook (data analytics & statistical libraries such as pandas, numpy);
5. Relational data models (Excel data model);
6. Graphic & statistical libraries (Seaborn, Matplotlib, Pandas, & Plotly).
See our Business Analytics minor at:
wmich.edu/infosystems/academics/analytics
However, I would recommend complimenting the above skill sets with bringing in some cloud-based software and technology that gets us beyond manually updating and coding giant colored Excel spreadsheets. For example, I have been collaborating with N-Alpha and they have a cloud platform called materialx that I am bringing into the classroom (n-alpha.com/solutions/decision-support/). It gets us away from manually updating spreadsheets. Further, these technology software companies tend to be very supportive in helping faculty and students as these students will eventually become the future business professionals that actually use the technology (win-win-win, right?). And the technology is out there!
We will soon have some white papers from our WMU SCM program based on the following price analysis & strategic cost management research. Some of our alumni are already testing and / or implementing these cloud-based services that allows procurement organizations, finance, and all other organizations that are exposed to raw material pricing changes, to stay on top of market pricing from multiple sources and proactively assess its impact on future raw material purchases.
These technologies are also now serving as the basis for addressing price indexing implementations (formulas, alerts, etc.). It can all be done automatically and updated daily, saving hours from manually updating spreadsheets. These tools are quick and easy to use to prepare for price negotiations with suppliers, and often returns its investment (which is minimal to begin with) rapidly. These technologies also allow organizations to replace multiple spreadsheets and email threads with one tool that tracks pricing, facilitates collaborative decisions, revisiting past decisions and what led to them, and capturing organizational knowledge.
I have asked many of my former students what are the most prevalent technologies used in your supply chain and business role. The two most common answers are Excel spreadsheets and email. It is 2023 now and we need to move further along. You could make a strong case that using antiquated business tools was a major source of supply chain disruptions the last few years.
My former students keep telling me they are the “Excel Spreadsheet” generation. Excel works and they have very advanced spreadsheet skills. They also tell me that it gives them a competitive advantage in the workplace (i.e., people depend on their monthly report outs per se and very important people read them). The older managers have very weak Excel skills and even the younger graduates coming in have to play catch up to the people that are in their 30s and 40s (that have very advanced Excel skills). My former students also feel very comfortable with Excel. Many of these spreadsheets are their own creation and they find it empowering. In general, it works, it works well, it gets the job done, they feel comfortable with this version of technology while most others do not feel comfortable with it, the technology itself is cheap, and it gives them job security. Some said it took years to build up these spreadsheets, and now they are up and running. However, as I teach my current students, there are alternatives rooted in technology that will allow you to do things better, faster, and cheaper.
Final Thought
In talking with a colleague, we both agreed that many hiring managers do not have a full understanding of the Artificial Intelligence (AI) skill sets associated with our graduating students. Our business students told us many times that their hiring managers valued only the traditional Excel capabilities (i.e., lookup functions, pivot tables, etc. - however, that is NOT AI). Managers also greatly overlook the opportunities from other analytical solutions (skill sets that our students have). This makes it a bit difficult to sell the analytical techniques taught in classes that go beyond our Advances Excel and Predictive Analytics courses. For example, our data mining class is essentially a machine learning class for business, which is the core of AI. The course is designed to solve the problems that Excel falls short on.
Hopefully we do a better job of training our students to “sell” the AI skills and managers become more open to embracing the benefits (which might require a culture change). Embracing and trying new technologies requires leadership that is willing to try new things. Otherwise, we keep using spreadsheets and email to manage very large and complicated data sets.
Large U.S.-based corporations often set the terms and conditions of a contract when doing business with a smaller foreign supplier. Based upon my experiences, large industrial customers which use foreign suppliers will choose to pay the foreign supplier in their currency if they think the U.S. dollar will strengthen during the life of the contract. The U.S. buyer’s costs decrease in this situation, and the foreign supplier is indifferent. However, if the U.S. dollar weakens, the U.S. buyer’s costs actually increase. Large U.S. industrial customers like to take chances because they can afford to.
While I was with Delco Electronics (now a part of Delphi), we made all of our own circuit boards. The circuit boards went into radios and engine control modules (the brain for the engine). However, we did not have the capacity to meet all of our circuit board needs. One option was to add the required capacity by expanding our facilities in Kokomo, IN. The other option was to outsource our extra circuit board needs to another company. We chose the latter option since expanding our facilities would have resulted in idle capacity during an industry slow down. Delphi was predicting an industry slow down in the near future and did not want to add capacity which would sit idle. Delphi could not find any suppliers in the U.S. which could adhere to a strict quality-controlled production environment (the circuit boards had to be built in a dust free environment). However, we did find a supplier located in Japan which could meet our quality requirements.
Delphi established a contract with the Japanese supplier and both sides agreed that payment would be paid in the foreign supplier’s currency (i.e., Yen). During the life of the contract, the U.S. dollar became weaker relative to the Yen. This meant that Delphi’s costs increased during the course of the contract. Delphi thought that the dollar would strengthen relative to the Yen (like it did during most of the 1980s, and it is happening again right now). Delphi guessed wrong and it cost them dearly. Furthermore, the auto industry flourished in subsequent years. Sales and the need for circuit boards actually increased during a time when Delphi thought they would decline. It would have been cheaper for them to expand their facilities and build the extra circuit boards themselves (rather than outsource them to a foreign supplier).
Delphi should have paid the foreign supplier in U.S. currency. The U.S. buyer assumes no risk from exchange rates in this situation; however, the U.S. buyer also gets no reward from exchange rates. Small companies typically pay foreign suppliers in U.S. currency because they cannot afford to take any risks. Delphi has since hired an economist to help them predict what will happen to exchange rates. Delphi has become one of many companies in the U.S. which is outsourcing more and more of its material needs to foreign sources of supply.
Now, smaller U.S. companies typically pay non-domestic suppliers in U.S. currency because they cannot afford to take these types of risks. The long-term win-win solution for companies of all sizes is to reduce risk for both sides. This can be done by having caps and bottoms on what will be paid based on exchange rate fluctuations. In other words, you have escalation clauses built into the price so as to share in the risk and rewards. Smaller companies can negotiate these types of contracts not only with their non-domestic suppliers (after all, you are the customer regardless of size), but also their non-domestic customers that might have a preference for making payment in their own currency.
Exchanges rates are determined by the long-term supply and demand conditions of one currency relative to another. These conditions are influenced by almost everything on a continuous basis (e.g., interest rates, exports, imports, taxes, consumer spending, etc.). It is therefore very difficult to make predictions regarding exchange rate fluctuations. Hedgers try to do this in the currency market, but they seem to lose as much as they make. Save yourself the risk and do not be a hedger. Build clauses into your contracts that allow both sides to share in the risks and rewards.
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Help with exchange rate questions (focus on understanding the T/F questions)...
Let’s say you just graduated from W.M.U. You have accepted a job offer from Boeing as an Assistant Buyer. The job takes you to Seattle, Washington. You will help Boeing identify suppliers to help meet its material needs. You must immediately find a supplier which can supply Boeing with electrical wiring harnesses. You find a supplier in Japan by the name of Toshiba. You have selected Toshiba because this company meets all of your cost and performance (e.g., quality, service, flexibility) expectations.
You negotiate a contract to purchase these electrical wiring harnesses from Toshiba, which is based in Japan. You decide that the contract calls for payment to Toshiba in Yen (foreign currency). When the contract is signed, the exchange rate is 132.24 Yen per 1 U.S. Dollar. It just so happens that you agree to pay 132.24 Yen for each electrical wiring harness (how convenient). No exchange rate fluctuation clauses are built into the contract (the price for each electrical wiring harness will always be 132.24 Yen - whether the Dollar strengthens or weakens). The terms and conditions of the contract are eventually completed and payment by Boeing is made at a future date. However, the exchange rate on this future date is now 124.73 Yen per 1 U.S. Dollar.
_____________________________________________________________________________________
As a result of exchange rate fluctuations…
a. Toshiba’s revenues have actually increased for the contract, and Boeing’s costs have also increased.
b. Toshiba’s revenues have actually decreased for the contract, and Boeing is indifferent.
c. Toshiba’s revenues have actually increased for the contract, and Boeing is indifferent.
d. Toshiba is indifferent, and Boeing’s costs have decreased.
e. Toshiba is indifferent, and Boeing’s costs have increased.
e. Toshiba is going to get the same amount of Yen per part no matter what happens. Toshiba will get 132.24 Yen for every part no matter what. Also, they are a Japanese company so they have their currency and do not need to exchange it for another currency. They are good to go. How about the American buyer (you)?
Day 1 - $1 = 132.24 Yen
Day future/later $1 = 124.73 Yen
Has the dollar weakened or strengthened? Well, in the future, when you go the bank they will only give you 124.73 Yen for $1. Before, they would give you 132.24 Yen per dollar. So, in the future, the same amount of U.S. dollar gets you “less” Yen. That means it has weakened. You have to come up with more U.S. dollars to pay for the same part because you need more U.S. dollars to pay them the 132.24 Yen that you promised.
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In the example above, did you make the right decision by calling for payment to Toshiba in Yen rather than U.S. Dollars? Explain.
No. You decided to pay a foreign supplier in their currency. That means you have to go to the bank and exchange your U.S. money for yen. During the life of the contract, the dollar became weaker. That means you get less yen back for the same amount of U.S. money. That means you have to come up with more U.S. money to buy the same amount of material. You are costing your company more money. You should have been paying the foreign supplier in dollars. You will not be getting a merit raise this year.
_____________________________________________________________________________________
In the example above, has the U.S. Dollar strengthened or weakened relative to the Yen?
Weakened. Why?
Day 1 - $1 = 132.24 Yen
Day future/later $1 = 124.73 Yen
Well, in the future, when you go the bank they will only give you 124.73 Yen for $1. Before, they would give you 132.24 Yen per dollar. So, in the future, the same amount of U.S. dollar gets you “less” Yen. That means it has weakened. You have to come up with more U.S. dollars to pay for the same part because you need more U.S. dollars to pay them the 132.24 Yen that you promised.
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If payment to a foreign supplier is made in U.S. currency, and the dollar weakens, then the U.S. buyer’s costs increase and the foreign supplier is indifferent. True or False.
False
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If payment to a foreign supplier is made in foreign currency, and the dollar strengthens, then the U.S. buyer’s costs decrease and the foreign supplier is indifferent. True or False.
True
_____________________________________________________________________________________
If the payment to a foreign supplier is in U.S. currency, then the U.S. buyer assumes no risk and gets no reward from exchange rates. True or False.
True
_____________________________________________________________________________________
If payment to a foreign supplier is in foreign currency, then the U.S. buyer is worse off with a strong U.S. Dollar, and better off with a weak U.S. dollar. True or False.
False
For more information:
www.simecurkovic.com/2021/09/05/do-you-understand-exchange-rates-how-it-impacts-supply-chain-management-many-struggle-with-this-lets-practice/
www.simecurkovic.com/2021/04/29/multinational-management-101-and-supply-chain-management/
Another great read from the folks are Metal Miner (see below)...Remember, in general, when the dollar goes up in value, American stuff gets more expensive, non-American stuff gets cheaper...
agmetalminer.com/insights/
...But the USD also has a special relationship to metal prices. It has historically traded somewhat inversely, and the correlation is tighter between the USD and copper when looking at recent years. When the dollar goes up, commodities tend to fall. This also means the opposite is true: when the dollar falls, commodity prices tend to rise. In addition, and perhaps more significantly, the move could add more volatility to the USD and thus to metals prices. But the concern about de-dollarization involves lower liquidity and increased price volatility. Moreover, if demand for the USD falls, the dollar would likely depreciate relative to other currencies. Finally, a weaker dollar could lead to higher import prices, which would contribute to additional domestic inflation as global goods become more expensive.
Analyst Commentary
Is the Move Away from the Petrodollar a Larger Macroeconomic Indicator of Metals Prices?
A fairly significant story that could have implications on global metals markets somehow has barely seen the light of day. The story involves a little-known agreement between Saudi Arabia and the US involving the pricing of a commodity, specifically oil, in petrodollars. The agreement, first signed in the early 1970’s required Saudi Arabia to price its oil exports in US dollars in exchange for military support and security guarantees from the U.S. The expiration of this agreement means the Middle Eastern nation can now sell oil in multiple currencies, including the Chinese RMB, Euros, yen and even digital currencies (two weeks ago we reported on the first Russian-Chinese metal trades conducted via crypto).
What the non-renewal of the agreement implies is that the global shift away from the US dollar and toward other currencies could impact domestic inflation and U.S. interest rates, along with potentially lower demand for U.S. treasuries. All of this comprises the de-dollarization conversation happening in business and financial circles.
So what does it mean for metals markets?
With the exception of the Shanghai Futures Exchange, the two big exchanges, the LME and CME price metals in US dollars. When local currencies fluctuate against the dollar, the currency risk is typically born by the buyer. The rise of alternative currencies and crypto means buyers have other means of mitigating currency risk. Many global companies might even argue that this presents natural hedging opportunities to use different currencies.
But the USD also has a special relationship to metal prices. It has historically traded somewhat inversely, and the correlation is tighter between the USD and copper when looking at recent years. When the dollar goes up, commodities tend to fall. This also means the opposite is true: when the dollar falls, commodity prices tend to rise. In addition, and perhaps more significantly, the move could add more volatility to the USD and thus to metals prices. But the concern about de-dollarization involves lower liquidity and increased price volatility. Moreover, if demand for the USD falls, the dollar would likely depreciate relative to other currencies. Finally, a weaker dollar could lead to higher import prices, which would contribute to additional domestic inflation as global goods become more expensive.
As we have often repeated, volatility appears live and well.
Source: MetalMiner Insights, charts & correlation analysis
Let's say...
The dollar is rising, the dollar is appreciating, the dollar is getting stronger, more foreign currency for the dollar- what does all this mean? It is happening right now in the economy.
If the dollar goes up in value, American goods become more expensive relative to foreign goods, or, foreign goods become cheaper relative to American goods. Therefore, exports fall, and imports rise (make sense? So, what happens to GDP?). This happened during the 1980s (and it is happening again right now). For example, a weaker yen compared to the dollar meant Japanese products were cheaper to buy for Americans.
For example:
2014 - $1 = 100 Yen
2015 - $1 = 200 Yen
First question, can you see that the dollar has gotten stronger since 2014? Why, the bank used to give you 100 Yen when you gave them $1, but in 2015 the bank will give you $200 Yen for the same $1. Your dollar is worth “more”. It has strengthened.
Also, again,
2014 - $1 = 100 Yen
2015 - $1 = 200 Yen
Let’s say a Japanese company sells a truck in America to an American for $1. The Japanese company goes to the bank with $1 and the bank gives them 100 Yen because that is what the exchange rate is in 2014. With 100 Yen the Japanese company is happy because they paid their bills and have some money left over. Let’s move forward to 2015. What could the Japanese company sell the truck for and still get their 100 Yen? This is VERY important to understand. The dollar has gotten stronger, so when the Japanese company goes to the bank with the dollar, the bank will give them more Yen (200 Yen now in this example). So, again, in 2015, what could you sell the truck for and still get 100 Yen? Answer: in this example, you could drop the price to $.50 and still get the 100 Yen. When the dollar gets stronger relative to other currencies, everything and anything that is American gets more expensive. Likewise, when the dollar gets stronger, everything and anything that is non-American gets cheaper. So, when the dollar gets stronger, the non-Americans lower their prices (because they can with a stronger dollar) and we buy more non-American stuff. Do you remember the GDP formula?
GDP = C + G + I + (X-M) or
Consumer spending + government spending + investment spending + exports - imports
So, when the dollar gets stronger relative to other currencies, everything and anything that is American gets more expensive.
So our exports go down because American stuff is more expensive, non-Americans buy less American stuff.
Likewise, when the dollar gets stronger, everything and anything that is non-American gets cheaper.
So imports go up because we buy more non-American stuff.
Did you catch this part?
When the dollar gets stronger relative to other currencies, everything and anything that is American gets more expensive.
So our exports go down because American stuff is more expensive, non-Americans buy less American stuff.
Remember
2014 - $1 = 100 Yen
2015 - $1 = 200 Yen
Let’s say an American company like GM sells a truck in Japan to a Japanese consumer for 100 Yen. The American company goes to the bank with 100 Yen and the bank gives them $1 because that is what the exchange rate is in 2014. With $1 the American GM company is happy because they paid their bills and have some money left over. Let’s move forward to 2015. What does the American GM company have to sell the truck for to still get their $1? This is VERY important to understand. The dollar has gotten stronger (which means the Yen has gotten weaker), so when GM goes to the bank with the 100 Yen, the bank will give them less $ (because the Yen has gotten weaker). In this example, the bank will only give them $.50 for 100 Yen in 2015. So, again, in 2015, what would GM have to sell the truck for in Japan and still get $1? Answer: in this example, you would have to raise the price to 200 Yen to still get the $1 (you have to double the price of the truck). Now the Japanese consumer is saying, no thank you, too expensive. So, American exports go down, GDP goes down, some Americans lose their jobs.
Keep in mind that the Japanese (Yen) and Chinese (Yuan/RMB) governments routinely and intentionally manipulate their currencies to make their currencies weaker relative to the dollar. Why? When the dollar gets stronger relative to other currencies, everything and anything that is American gets more expensive. People in Japan and China buy less American stuff and more of their stuff (imports go down in their countries). Likewise, when the dollar gets stronger, everything and anything that is non-American gets cheaper. So, when the dollar gets stronger, the non-Americans lower their prices in America (because they can with a stronger dollar) and we buy more non-American stuff (because they lower their prices because they can with the stronger dollar). So exports from Japan and China increase (we buy their cheaper stuff). Japan has been trying to export their way out of a recession for several years by trying to make its currency weaker relative to the dollar. It has not really worked. They have been in a very deep recession for a very long time. China pegs it currency against the dollar. Why? If it allowed its currency to float openly on the free market based on supply and demand conditions then it would be 30% stronger relative to the dollar. That means everything and anything that is Chinese would be 30% more expensive. What is China’s cost advantage? Answer, around 30%. That means they lose most of their cost advantage if they play by the same rules. I think it is an unfair trade practice when governments give their companies a cost advantage through currency devaluation because it has nothing to do with better, faster, cheaper. Let the best company win based on fair competition. Around half of America’s trade deficit is with two countries (China and Japan). However, our trade deficit as a % of our GDP puts a small dent in it (because we still export a ton, but we do import more than we export, that has been the case every year since 1976).
OK, how about the reverse? This happened in general during 1991-2009…
The dollar is declining, the dollar is depreciating, the dollar is getting weaker, less foreign currency for the dollar - what does this mean?
American goods are becoming cheaper relative to foreign goods. This is what happened during the 1990s and all the way up to 2015.
How do these changes impact the GDP (focus on the exports/imports part of the GDP formula)? The U.S. dollar has been weakening in value relative to the Euro over the last several years (until rather recently)? How does this impact the U.S. and Euro-Zone economies respectively? The Japanese government has been manipulating the Yen to try and weaken it relative to the U.S. dollar. What is Japan trying to do? When Japan weakens its Yen relative to the dollar, then everything and everything that is Japanese becomes cheaper. So, Americans buy more Japanese stuff because it is cheaper. Japan has been trying to export its way out of a recession for almost 20 years now by manipulating its currency.
Again - The Chinese government has pegged their currency (Yuan/RMB) to the dollar. If China did not do this, its currency would be 30% stronger relative to the dollar (what would this mean to China's labor cost advantage? - Hint: anything and everything Chinese would be 30% more expensive). What is China trying to do (Answer: Protect its huge export market, especially to the U.S., is this free/fair trade?)? Ask a low skilled American manual laborer how this has worked out for them. Welcome to the global economy (good or bad, right or wrong).
What makes up GDP?
Do not forget this...
Consumer expenditures (C) + Government Spending (G) + Investment Spending (I) + (Exports (X) - Imports (M))
This was pre-covid:
Red alert, the U.S. dollar is roaring back and getting stronger again...
money.cnn.com/2018/05/02/investing/strong-dollar/index.html
Trump: The dollar will 'get stronger and stronger'
money.cnn.com
Just a few weeks ago, the dollar was falling and companies were celebrating the benefit to earnings. Will a rebound for the greenback be a problem for Wall Street?
Surprised by raw material price increases? At the WMU ISM supply chain management program we teach our students to track commodity forward price curves. Here's a quick video of Net Alpha's cloud based materialx Decision Support service that is being made available to our students in class as they prepare to become future SCM managers.
Some of our alumni have experienced this new service and love it. It looks at raw material market data from multiple sources, visualizes & analyzes historical pricing scenarios, & simulates planned purchases & what-if scenarios against forward price curves. Our grads will be ready.
Hey Supply Chain Management professionals, here's a one min video showing how easy it is to track changes in forward price curves of commodities and seeing how they may impact your future purchasing decisions. All done automatically and updated daily. Customers that have subscribed to our new materialx Decision Support service love it.
www.linkedin.com/posts/sime-curkovic-61617a115_materialx-decision-support-accessing-and-activity-6916784411074080768-qFLD?
www.prleap.com/pr/283694/net-alpha-announces-materialx-decision-support-a-cloud-based-service-for-supply-chain-management-organizations-that-enables
Birmingham, MI - Net Alpha Financial Systems, LLC, the technology company developing solutions that are transforming the way manufacturers, producers, distributors, and brokers transact in raw materials, today announced materialx® Decision Support, a new cloud-based subscription service that enables supply chain management organizations to make better raw material purchase decisions.
materialx Decision Support is designed to make pricing data for raw materials more accessible and usable to procurement and other supply chain management professionals. The service combines access to a rich set of market data sources with powerful analytical tools, data visualization, collaboration tools, simulation, and tracking capabilities, enabling more informed and collaborative decision-making than previously possible. With materialx Decision Support, companies can unlock new levels of organizational transparency to the impact of raw material pricing on their purchasing plans, easily involve all stakeholders in purchase decisions, deeply understand the potential economic outcomes of those decisions, and continuously improve decision-making processes by analyzing the impact of past decisions utilizing the data that was available at the time such decisions were made.
"We've listened to dozens of procurement teams of various sizes in different industries that time and time again communicated similar challenges, especially following the last two years of the COVID-19 pandemic," said Eyal Mizrahi, CEO and Co-Founder of Net Alpha Financial Systems. "Procurement teams are often asked when they knew about a substantial price change for a critical raw material, how they reacted to it, and how the change was communicated internally. We built materialx Decision Support to enable answering such questions. Procurement teams that have seen our solution have recognized immediately how it can transform their current processes which usually involve partial data, many spreadsheets, and email threads. The new service can also allow them to capture and harness organizational knowledge in a way that wasn't previously possible."
materialx Decision Support includes information feeds from Chicago Board of Trade (CBOT), Chicago Mercantile Exchange (CME), Commodity Exchange (COMEX), London Metals Exchange (LME), and New York Mercantile Exchange (NYMEX), with additional data sources to be offered in the immediate future, all of which can be evaluated, analyzed, modeled, and tracked through a single intuitive interface. Like all materialx platform solutions, it is a cloud-based service, so there is no software for customers to build, deploy, or manage, allowing customers to onboard within minutes. For more information on materialx Decision Support, please visit: n-alpha.com/solutions/decision-support
About Net Alpha Financial Systems and materialx
Net Alpha has developed a suite of software tools that help buyers and sellers of raw materials realize digital transformation with minimal investment. The company's materialx platform provides a suite of cloud-based services that transform how raw materials with variable and negotiated prices are evaluated, transacted, and settled. The services include materialx Decision Support for procurement and supply chain management organizations that wish to maximize the strategic value of raw material pricing data and collaborative decisions, as well as materialx Sales Engine, a transactional platform designed for raw material producers, distributors, and brokers that look to grow revenues by deploying a competitive online presence. The materialx platform-as-a-service is a low cost, rapidly deployable alternative to developing and managing expensive in-house systems. The platform was purpose-built to meet the information and transaction needs of buyers and sellers of raw materials through advanced evaluation and analysis, collaboration, negotiation, execution, and tracking tools. For more information, or to arrange a demonstration of a materialx solution, please visit www.n-alpha.com
www.visualcapitalist.com/sp/ranked-the-top-performing-major-currencies-2014-2023/
Ranked: The Top Performing Major Currencies (2014-2023)
Monetary policy, geopolitical events, and economic conditions-among other factors-significantly influence currency performance in the foreign exchange market.
Which major currencies have performed the best and worst over the last decade, and what are the reasons behind their movements?
To answer this question, we partnered with OANDA to visualize a decade of highs and lows of the top eight most-traded currencies, by volume, according to the Bank for International Settlements.
The U.S. Dollar: The Top Foreign Exchange Performer on Our List
The U.S. dollar (USD) was the best-performing currency of the last decade, taking top spot in six of the last 10 years. Relatively stable economic activity and the role of the USD as the world’s reserve currency contributed to its general strength.
Importantly, the USD also represents a safe-haven investment in times of crisis, meaning investors will often put money in the currency during periods of instability, such as during the 2014-2016 oil price shock.
Post-COVID-19, the USD peaked in 2022 in response to aggressive interest rate hikes, though it came off its highs in 2023.
Conversely, a failure to pass healthcare and tax reforms led to the 2017 “Trump Slump.” In 2020, record low interest rates in the U.S. and the nation’s difficulties combatting the COVID-19 virus contributed to its over-7% decline that year.
The Japanese Yen: A Struggle Against Low Interest Rates
The Japanese yen was the lowest performing currency in the group over the last decade, coming in last in four of the 10 years we analyzed.
The long-standing gap between interest rates in Japan and the U.S. is largely to blame.
Higher interest rates typically attract foreign investment, so Japan’s ultra-low interest rates since the late 1990s have deterred capital inflows, thus lowering demand for the currency. This has put downward pressure on the yen in favor of the USD.
Other Foreign Exchange Movements
The Canadian dollar (CAD), which has historically exhibited a strong correlation to oil prices, also suffered in the 2014 oil price slump. However, the link between CAD and oil has broken down in recent years.
The British pound suffered in the wake of the Brexit vote, falling nearly 17% in 2016 to a 31-year low, as noted by The Guardian. The pound also underperformed in 2022 following the disastrous fiscal policy announcements that prompted the resignation of former Prime Minister Liz Truss.
On the back of economic growth hitting a 10-year high, the euro performed exceptionally well in 2017, gaining almost 14% during the year.
Understanding the Markets
Price movements in the foreign exchange market are complex, but understanding how currencies have performed in the past, and the factors driving those changes, can help investors prepare. Learning how to manage risk, and having a trading plan, are also important.
www.visualcapitalist.com/major-currencies-2023-return/
Charted: How Major Currencies Performed in 2023
The U.S. Dollar Index peaked in fall 2022, the highest it had been in nearly two decades, rising in response to aggressive interest rate hikes.
The index measures the value of the U.S. dollar against a basket of major currencies from six countries. A gain indicates the dollar is appreciating against the basket and vice-versa. The euro is the biggest component on the index and thus sways the index value and return.
In 2023, the U.S. Dollar Index declined off its highs while still maintaining a fairly elevated level as interest rates have stayed steady.
But how have other major currencies fared against the dollar?
We visualize the returns of 12 currencies against the U.S. dollar, using data from TradingView.
Ranked: Best and Worst Performing Currencies in 2023?
By far, the best performing major currency of 2023 was the Mexican peso, which appreciated nearly 15% against the dollar.
The peso appreciated significantly thanks to aggressive interest rate hikes by its central bank (currently at 11.25%) which pulls money into the country as investors chase better returns.
However, the peso’s continued appreciation could negatively impact the competitiveness of Mexico’s exports. In tandem, Asian imports to the country become cheaper which can hurt the country’s domestic industrial sector.
Here’s how other major currencies performed in 2023.
www.visualcapitalist.com/major-currencies-2023-return/
www.zerohedge.com/markets/usd-really-too-big-fail?Weekly%20Newsletter%20Campaign&_hsenc=p2ANqtz-9ocWyUzFGvdtDAFpjB66F08vlZeGJSYDz68GvY9a6r0IihmzLVWOm4aWNZSTfb_DkAipWwESNPxgN7aiMNLnndQ-rAfw&_hsmi=316125731&
Is The USD Really Too Big To Fail?
Tyler Durden's Photo
BY TYLER DURDEN
SUNDAY, JUL 14, 2024 - 07:50 PM
Authored by Matthew Piepenburg via VonGreyerz.gold,
Between politics (driven by self rather than public servants), markets (driven by debt rather than profits) and currencies (diluted by over-creation rather than chaperoned by a real asset), it is fair to say we live in not interesting but surreal times.
But amidst the surreal, the dollar, as many believe, is our rock, our immortal albeit often unloved constant.
The USD: Too Big to Fail?
What a Stronger Dollar Means for U.S. Stocks
A Strengthening Dollar May Boost Non-U.S. Companies
By: George R. Evans, CFA, Chief Investment Officer, Equities, Portfolio Manager
One can imagine President Donald Trump at least thought about tweeting that the night before the U.S. Federal Reserve raised its benchmark interest rate by 0.25%.
Frankly, we were somewhat surprised at Trump’s silence on this matter given his frequent criticisms of Fed Chair Janet Yellen over the last year. But tweets or no tweets, the bond market’s reaction to the third interest rate hike in 10 years shows that the market has already discounted the likelihood of further interest rate hikes for the rest of the year.
But in the meantime, the outlook for continued strength in the U.S. dollar has many investors questioning what that will mean for their foreign equity assets.
This is a fair question, and one that is worth taking some time to think through.
For U.S. dollar investors, a strengthening dollar does have the immediate effect of reducing the dollar price of non-dollar securities - including equity securities. But an equity security is more than a piece of paper. It represents a share of ownership in a company and a stake in that company’s present and future earnings. But how will a rising dollar impact those earnings?
For companies that sell goods and/or services in the United States but are headquartered overseas, the initial earnings effect is positive. Strong dollar revenues are translated into weaker domicile currencies. This results in higher domicile currency earnings than would otherwise be the case. In a nutshell, as the dollar rises, so do reported earnings. But that’s just accounting.
How a Strong Dollar Impacts a Non-U.S. Company’s Operating Costs
What’s even more interesting is the effect that currency rates can have on a company’s competitiveness. A company that pays its operating costs in a weaker currency than that of its competitors is in an advantaged position. It enjoys lower operating costs than competitors, which will widen margins and result in higher profits.
It also has additional pricing flexibility. Thanks to a weaker operating currency, this company has the option of lowering prices without suffering from narrower margins. Rather than taking on higher margins, it can decide to keep stable margins while trying to increase market share. Or the company may take the opportunity to look further into the future and use its increased financial flexibility to improve its market position and widen its defensive moat.
Examples - depending on the industry - could range from expanding an after-sales service network to increasing research and product development efforts.
The point here is that a stronger dollar, should it persist, will have an effect on companies around the world. For companies that are domiciled overseas - particularly those that compete with U.S. companies - that effect is potentially quite positive in terms of profitability and competitiveness.
Prepare for a multipolar currency world
www.ft.com/content/f8f3b2cd-6690-4f26-b81e-e972751c8799?sharetype=blocked
www.linkedin.com/posts/rohitsathe_prepare-for-a-multipolar-currency-world-activity-7054370546867691520-B9-M?
Chief Procurement Officers should not only understand the fundamentals of foreign currency markets but also proactively support CFOs in managing a business's exposure to foreign currency risk!
Unlike most advanced economies worldwide, China does not have a floating exchange rate under which the value of its currency is determined by market forces.
From 1994 to 2005, China pegged its currency at about 8 yuan to the dollar. It then began to allow its currency to appreciate slightly against the dollar within a fixed limit before it shifted its peg to a basket of several currencies used by major trading partners, including the U.S. and its dollar. The People’s Bank of China allows its currency to trade in a 2% range around a midpoint it fixes against the dollar each day.
www.foxbusiness.com/economy/could-us-dollar-lose-reserve-currency-status-china
Let's say...
The dollar is rising, the dollar is appreciating, the dollar is getting stronger, more foreign currency for the dollar- what does all this mean? It is happening right now in the economy.
If the dollar goes up in value, American goods become more expensive relative to foreign goods, or, foreign goods become cheaper relative to American goods. Therefore, exports fall, and imports rise (make sense? So, what happens to GDP?). This happened during the 1980s (and it is happening again right now). For example, a weaker yen compared to the dollar meant Japanese products were cheaper to buy for Americans.
For example:
2014 - $1 = 100 Yen
2015 - $1 = 200 Yen
First question, can you see that the dollar has gotten stronger since 2014? Why, the bank used to give you 100 Yen when you gave them $1, but in 2015 the bank will give you $200 Yen for the same $1. Your dollar is worth “more”. It has strengthened.
Also, again,
2014 - $1 = 100 Yen
2015 - $1 = 200 Yen
Let’s say a Japanese company sells a truck in America to an American for $1. The Japanese company goes to the bank with $1 and the bank gives them 100 Yen because that is what the exchange rate is in 2014. With 100 Yen the Japanese company is happy because they paid their bills and have some money left over. Let’s move forward to 2015. What could the Japanese company sell the truck for and still get their 100 Yen? This is VERY important to understand. The dollar has gotten stronger, so when the Japanese company goes to the bank with the dollar, the bank will give them more Yen (200 Yen now in this example). So, again, in 2015, what could you sell the truck for and still get 100 Yen? Answer: in this example, you could drop the price to $.50 and still get the 100 Yen. When the dollar gets stronger relative to other currencies, everything and anything that is American gets more expensive. Likewise, when the dollar gets stronger, everything and anything that is non-American gets cheaper. So, when the dollar gets stronger, the non-Americans lower their prices (because they can with a stronger dollar) and we buy more non-American stuff. Do you remember the GDP formula?
GDP = C + G + I + (X-M) or
Consumer spending + government spending + investment spending + exports - imports
So, when the dollar gets stronger relative to other currencies, everything and anything that is American gets more expensive.
So our exports go down because American stuff is more expensive, non-Americans buy less American stuff.
Likewise, when the dollar gets stronger, everything and anything that is non-American gets cheaper.
So imports go up because we buy more non-American stuff.
Did you catch this part?
When the dollar gets stronger relative to other currencies, everything and anything that is American gets more expensive.
So our exports go down because American stuff is more expensive, non-Americans buy less American stuff.
Remember
2014 - $1 = 100 Yen
2015 - $1 = 200 Yen
Let’s say an American company like GM sells a truck in Japan to a Japanese consumer for 100 Yen. The American company goes to the bank with 100 Yen and the bank gives them $1 because that is what the exchange rate is in 2014. With $1 the American GM company is happy because they paid their bills and have some money left over. Let’s move forward to 2015. What does the American GM company have to sell the truck for to still get their $1? This is VERY important to understand. The dollar has gotten stronger (which means the Yen has gotten weaker), so when GM goes to the bank with the 100 Yen, the bank will give them less $ (because the Yen has gotten weaker). In this example, the bank will only give them $.50 for 100 Yen in 2015. So, again, in 2015, what would GM have to sell the truck for in Japan and still get $1? Answer: in this example, you would have to raise the price to 200 Yen to still get the $1 (you have to double the price of the truck). Now the Japanese consumer is saying, no thank you, too expensive. So, American exports go down, GDP goes down, some Americans lose their jobs.
Keep in mind that the Japanese (Yen) and Chinese (Yuan/RMB) governments routinely and intentionally manipulate their currencies to make their currencies weaker relative to the dollar. Why? When the dollar gets stronger relative to other currencies, everything and anything that is American gets more expensive. People in Japan and China buy less American stuff and more of their stuff (imports go down in their countries). Likewise, when the dollar gets stronger, everything and anything that is non-American gets cheaper. So, when the dollar gets stronger, the non-Americans lower their prices in America (because they can with a stronger dollar) and we buy more non-American stuff (because they lower their prices because they can with the stronger dollar). So exports from Japan and China increase (we buy their cheaper stuff). Japan has been trying to export their way out of a recession for several years by trying to make its currency weaker relative to the dollar. It has not really worked. They have been in a very deep recession for a very long time. China pegs it currency against the dollar. Why? If it allowed its currency to float openly on the free market based on supply and demand conditions then it would be 30% stronger relative to the dollar. That means everything and anything that is Chinese would be 30% more expensive. What is China’s cost advantage? Answer, around 30%. That means they lose most of their cost advantage if they play by the same rules. I think it is an unfair trade practice when governments give their companies a cost advantage through currency devaluation because it has nothing to do with better, faster, cheaper. Let the best company win based on fair competition. Around half of America’s trade deficit is with two countries (China and Japan). However, our trade deficit as a % of our GDP puts a small dent in it (because we still export a ton, but we do import more than we export, that has been the case every year since 1976).
OK, how about the reverse? This happened in general during 1991-2009…
The dollar is declining, the dollar is depreciating, the dollar is getting weaker, less foreign currency for the dollar - what does this mean?
American goods are becoming cheaper relative to foreign goods. This is what happened during the 1990s and all the way up to 2015.
How do these changes impact the GDP (focus on the exports/imports part of the GDP formula)? The U.S. dollar has been weakening in value relative to the Euro over the last several years (until rather recently)? How does this impact the U.S. and Euro-Zone economies respectively? The Japanese government has been manipulating the Yen to try and weaken it relative to the U.S. dollar. What is Japan trying to do? When Japan weakens its Yen relative to the dollar, then everything and everything that is Japanese becomes cheaper. So, Americans buy more Japanese stuff because it is cheaper. Japan has been trying to export its way out of a recession for almost 20 years now by manipulating its currency.
Again - The Chinese government has pegged their currency (Yuan/RMB) to the dollar. If China did not do this, its currency would be 30% stronger relative to the dollar (what would this mean to China's labor cost advantage? - Hint: anything and everything Chinese would be 30% more expensive). What is China trying to do (Answer: Protect its huge export market, especially to the U.S., is this free/fair trade?)? Ask a low skilled American manual laborer how this has worked out for them. Welcome to the global economy (good or bad, right or wrong).
What makes up GDP?
Do not forget this...
Consumer expenditures (C) + Government Spending (G) + Investment Spending (I) + (Exports (X) - Imports (M))