Here is the exerpt from reading 20, THE FOREIGN EXCHANGE MARKET:
" During 2010, the nominal yuan exchange rate against the US dollar (CNY/USD) declined by approximately 3 percent—meaning that the US dollar depreciated against the yuan".
To me, this statement seems to be illogic and wrong; For the ratio CNY/USD to decrease, either the numerator has to decrease or the denominator to increase.
Could someone explain me the rationale for this statement?
Given that the CNY/USD exchange rate fell, then you need less CNY to exchange for one unit of USD. Hence, it can be said that the CNY strengthened with respect to the USD, or the USD weakened with respect to CNY. I don’t see any numerator/denominator interpretation here. You’re given a quote for USD in terms of CNY, not separate quantities where one lives in the numerator and one in the denominator. Hope that helps!
FX can be confusing, esp. when currencies are changing places from numerator and denominator. The rule is this - always have the currency of interest in the denominator. Then, your pair will be logically structured - you have the price of the base currency in terms of the price currency be the FX rate. This has the nice property that when the price declines, the base currency (in the denominator) depreciates and vice versa.
In your example CNY/USD declines by 3%, which means the USD depreciated by 3%. Note that this is not equivalent to a 3% appreciation of the CNY. If the question was about CNY appreciation, you would need to get the CNY in the denominator first and then determine how much the currency appreciated.
FX always confuses me. For example below from recent news article on Turkish Lira plunge
“…USD/TRY rising 2.4% to 6.1616 some analyst says it could reach as high as 8 soon.”
So would it be correct to say TRY rose 2.4% to 6.1616 (means it depreciated by 2.4% against USD) and it would soon rise to 8?
If USD/TRY increased, it means the TRY appreciated, it didn’t depreciate. The currency in the denominator follows the movement in the rate.
Hm - something doesn’t seem right because I don’t think the Lira was appreciating recently…
I thought so too. Because as I see it you need more Lira to buy 1 USD and that would mean Lira is depreciating.
The confusion comes from how some currency pairs are stated on some exchanges. In some exchanges, the quotation is USD/TYR, even though they mean USD as the base currency and TYR as the price currency.
If you want to buy 1 USD with 6 Lira, the correct quote would be TYR/USD, with TYR as the price currency and USD as the base currency. The quote that you stated (c. 6 TYR per 1 USD) is exactly that TYR/USD quote. If that is increasing, then yes, the USD would be appreciating (and TYR conversely depreciating).
It makes sense. The main reason I was confused is that on forex markets the currencies are quoted as a ratio. For instance EUR/USD 1.15 implies that 1 euro costs 1.15 USD versus CFA curriculum explanation.
Just has nothing to do but remember )))
CFA Institute’s convention for quoting exchange rates is the reverse of what you see in the real world.
There’s nothing you nor I can do about that, so you simply have to learn their method.
Alright so just to clairify for CFA base curracy is on right side of the slash and for real world it’s on left side?
Suppose 1 CNY is equal to 1 USD, then (CYN/USD) = 1.0000 however if it declines -3% that means that you need 0.9700 CYN to buy 1 USD, you need less CYN to buy 1 USD, so the US dollar depreciated against the yuan, and the exchange rate would be (CYN/USD) = 0.9700. In real life however would be like (USD/CYN) = 0.9700 1 dollar buys 0.9700 yuan, it’s backwards in the CFA
Yup.