Terms Beginning With 'c'

Currency Depreciation

  • January 19, 2021
  • Team Kalkine

Currency depreciation is the fall in the value of a currency relative to another currency in a floating exchange rate system. Floating exchange rate system refers to a foreign exchange system where the factors of demand and supply affect the value of the currency with minimal government intervention.

The value of a currency is always measured relative to another currency. Currency depreciation may happen because of various factors existing in the economy that move the value of domestic currency against the foreign currency. Economic decisions taken domestically also play an important role in affecting the value of a currency.

The opposite of currency depreciation is currency appreciation, where the value of a currency increases relative to another currency. Both currency appreciation and depreciation happen in a floating exchange rate environment.

Currency depreciation is different from devaluation where the value of the domestic currency is deliberately decreased by the government and central bank.

How does a currency depreciate?

Consider the following example: the exchange rate of GBP/AUD is 1.77, this means that 1 GBP is worth 1.77 AUD in the forex market. However, if the GBP/AUD exchange rate drops to 1.57 then GBP is said to have depreciated against the AUD. When the exchange rate drops to 1.57, the value of 1 GBP becomes equal to 1.57 AUD, which is lesser than the previous value of 1.77.

On the other hand, AUD is said to have appreciated against GBP, because one unit of AUD can be used to buy more GBP than what could be previously bought with it. Therefore, currency depreciates by 11.2%.

How does the supply of foreign exchange affect exchange rates?

Consider the following example showing the determination of exchange rate of Dollar in terms of Euro. The supply of Euro refers to the quantity of Euro available as foreign exchange, while the demand for Euro reflects its demand in the domestic country.

Considering the above diagram, the supply of Euro in the economy is increasing, while the demand for Euro remains the same. As more and more units of Euro are accumulated as foreign exchange, Euro depreciates while Dollar appreciates.

Therefore, the amount of foreign exchange available with a country affects the exchange rate of the domestic currency with respect to the foreign currency. As the units of foreign currency increase in a country, the value of domestic currency decreases.

What factors lead to currency depreciation?

A currency depreciation can occur because of domestic as well as international factors, these include:

  • Reduction of domestic interest rates: As the domestic interest rates of Country A decrease, it becomes less attractive for foreign investors to invest in that country. Thus, they sell off their assets in Country A to invest in other countries offering a higher rate of interest.

More and more investors would demand foreign currency in exchange for the domestic currency of Country A. Thus, the demand for the domestic currency falls in the foreign market. This leads to a depreciation of the domestic currency in the international markets, while the value of foreign currency increases.

  • Fall in the price of exports: As the prices of a good exported by country A falls, the foreign exchange held by the country decreases. On the other hand, the demand for domestic currency in foreign countries decreases. Therefore, the domestic currency depreciates.
  • Increase in the value of imports: As the value of imports increases, there is a net outflow of domestic currency of Country A to other countries. Therefore, the supply of domestic currency increases in foreign countries. This leads to an exchange rate weakness in the domestic currency.
  • Central Bank actions: If the Central Bank of Country A decides to purchase foreign assets using domestic currency, then the supply of domestic currency decreases in Country A. Therefore, this leads to a decrease in the value of domestic currency and subsequently its depreciation.
  • Inflation: When there is an inflation in Country A, the value of domestic currency decreases. Thus, the domestic currency would depreciate against all other currencies internationally.

How does currency depreciation impact an economy?

Currency depreciation can lead to the following:

  • Value of debt decreases: When a currency depreciates, then the value of debt instruments in the country would decrease. Thus, it becomes easier to pay off debt held by foreign countries in the domestic country as lesser amount of foreign currency is needed to repay the same amount of debt in the domestic currency.
  • Increased supply of foreign products: This may lead to an increase in the productivity in the economy. As the inflow of foreign products increases, their price may eventually rise. There is also the possibility of increased competitiveness in the domestic market due to increased supply of foreign goods.
  • Increased Output: As competitiveness rises in the country, it may lead to increased growth. This would lead to higher employment and higher output.
  • Interest Rates: When a currency depreciates due to inflation, then the decreased value of domestic currency may lead to an increase in interest rates. As the value of a currency declines, there may be an increase in interest rates to encourage saving in the economy. Thus, there may be an upward pressure on interest rates to combat inflation.

How can depreciation harm the economy?

Currency depreciation may lead to various disadvantages for an economy:

  • Due to increased foreign goods, there may be inflation.
  • Depreciation may also conversely decrease output and productivity if the domestic country is not able to raise its competitiveness to match the increased supply of foreign goods.
  • Domestic financial instruments may lose their value and the market for financial instruments may crash.
  • Capital markets may also be impacted negatively as net outflow of capital may lead to increased prices.

What is the Dark Web?  The dark web is one such portion of the World Wide Web which is not accessible by regular search engines. The dark web is considered a hotbed for criminal activities, and it is much more than that. Various websites exist on an encrypted network inside the dark web. Standard web browsers and programs cannot find these websites. Once inside the dark web, different sites and pages can be accessed like one does on the web. Scientists believe that the internet we see is only 4% of the entire ocean of the web, meaning the 96% consists of the "Deep and Dark Web".  The user interface used in the dark web is usually internet-based, but it utilises special software which is not part of the standard ones. There are dozens of web browsers to surf the internet, but they all work in the same way. These standard browsers use ports and protocols to request, transfer and view data on the Internet. The website you access may look familiar, but as you enter, it may be illegal or something familiar but otherwise not monitored by anyone else. Therefore, the deep web and the dark web are famous for being anonymous. Also read: Cyber Espionage Campaign: Strings that tie China, Australia and the US How to access dark web browser? In order to access a few areas which are restricted, the user may need a password and a process to follow. A special software called TOR (The Onion Router) or the Freenet has these non-standard connections. These browsers are unlike standard internet browsers and have a process to access. They allow the users to browse around the dark web and are focused on keeping the user identity anonymous. If hacked or accessed, the regular web browser can easily provide user information such as who the user is and whereabouts. Though the dark web is providing 100% anonymity, federal agencies have been successful in tracking down criminal activities on the dark web. It is often said that the person you are talking to on the dark web could either be an FBI agent or a criminal. Image: Kalkine   What happens inside the world of the dark web?  The dark web is famous for allowing sinister activities, but many users go on the dark web to access information which otherwise may not be accessible on standard internet. Such as users from extremely oppressive governments who cut access to the world for their citizens. Unfortunately, such confidential environments also provide open platforms to criminals, terrorists and other such individuals involved in illegal activities.   Hence, experts advise users to not access the dark web even out of curiosity as it is a lawless environment. There have been many incidents where innocent, curious users were trapped and forced to get involved in criminal activities or their digital devices hacked and compromised without their knowledge.  A study conducted by a University of Surrey researcher Dr Michael McGuires in 2019, Into the Web of Profit, shows that the dark web has become worse in recent times. Since 2016 of all the listings on the dark web suggested, 60% could harm companies. Everything illegal and criminal can be found on the dark web, it also has other legitimate options such as chess clubs or book clubs, but because of the anonymity, the user will not know whom he/she is interacting with. Inside the dark web, anonymity and lawless nature make the crimes which exist otherwise in our society hard to trace.  The payment procedure inside the dark web is also different from the World Wide Web. Most often, Bitcoin and Monero cryptocurrency are used for the transactions.    RELATED READ: Knock Knock! Cybercriminal at Your Doorstep   What’s the difference between the deep web and dark web? The dark web is part of the entire deep web and is hidden from regular browsing access. Most people confuse the deep web and the dark web as one entity. It is not. The deep web content includes anything hidden and restricted behind the security wall such as content which otherwise requires paywall or sign-in or blocked by the author. Content which cannot be easily accessible on regular internet such as medical records, membership websites, paid content are available on the deep web; hence it is also called Invisible Web.  No one really knows the total size of the internet, but the experts believe that the standard World Wide Web consists of only 4% internet, the deep web consists of 90% and dark web consists of 6% of the entire internet.  ALSO READ: Technology has changed the way we work amid the COVID-19 crisis: A look at in-demand technologies Image: Kalkine     Also read: It happens again, NZX being bullied by Cyber-attackers- Down for the fourth day   What kind of risk companies face due to the dark web?  The Into the Web of Profit report listed below threats various organisations around the world are facing, especially the ones who have weak or insufficient cybersecurity measures.   Malware attacks Distributed denial of service (DDoS) attacks Botnets Trojan, keyloggers, exploits  Espionage  Credentials access  Phishing  Refunds Customer data Operational data Financial data Intellectual property/ trade secrets    Also read: Cybersecurity and the Requirement of a Resilient Environment in Australia  Are there advantages and disadvantages to the dark web?  The dark web provides complete anonymity, the users get complete privacy to perform any activity, be it illegal or legal. Many countries in the world still have authoritarian regimes offering no civil rights to their people. To such oppressed lot, the dark web provides an opportunity to access news, information, data and also express their views. The dark web is also a perfect place for law agencies to map criminal activities while being undercover. It is also easy to commit gruesome crimes through the dark web as it is complicated and lawless. Criminals can easily use the dark web to compromise someone's privacy, steal data or private information or even hire someone to commit murder.  Do internet users need to be concerned about the dark web?  The simple answer is no unless the user is using the dark web. Study says that most young people visit the dark web out of curiosity. They do not want to indulge in any criminal activity but want to see how the hidden and secret world of the dark web operates. And that is where the possibility of the electronic device IP address getting hacked by other criminals to perform their criminal activities lies.  The earliest use of darknet dates back to the year 2000. Freenet was created at the University of Edinburgh based on a student research paper. Ian Clark wrote the paper in 1999 on the possibility of such an encrypted internet base. Freenet was created to oppose censorship and provide a platform for free speech. The most powerful dark web is TOR, and it was created by the United States government to have a secure encrypted communication in case of emergency and complete disaster. Even today, many law agencies are secretly active inside the world of the dark web to gain access in the criminal world and stay one step ahead.

What is Day Trading? Day trading is popular among a section of market participants. It is a type of speculation wherein trades are squared-off before the market close in the same day. An individual or a group is engaged in buying and selling of securities for a short period for profits, the trades could be active for seconds, minutes or hours.  One can engage in day trading of many securities in the market. Anyone who has sufficient capital to fund the purchase can engage in day trading. For a class of people, day trading is a full-time job.  Day traders are agnostic to the long-term implications of the security and motive is to benefit from the price changes on either side and make profit out of the asset price fluctuations within a day. They bet on price movements of the security and are not averse to take short positions to benefit from the fall in price.  Day trading is not only popular among individuals or retail traders but institutional traders as well, therefore the price movements are large sometimes depending on the magnitude of information flow and accessibility.  Everyone wants to make money faster, and many are inclined to speculate in markets, but it comes with considerable risk and potential loss of capital. People engaged in day trading also incur losses, and oftentimes outcomes are disheartening.  Day trading is a risky activity, similar to sports betting and gambling, and it could become addictive just like gambling and sports betting. Since the motive is to earn profits, the profits realised from day trading also tempt people to continue speculating.  People spend considerable time and efforts to make the most out of day trading. They have to continuously absorb and incorporate information flow, which has become increasingly accessible driven by new-age communications systems like Twitter, Facebook, forums etc. But not only information flows have been favourable, day traders are now equipped with best in class infrastructure to execute trades even on compact devices like mobile phones. The accessibility to markets is at a paramount level and gone are days of phone call trading and lack of information flows.  What are the essentials for Day Trading? Basic knowledge of markets With lack of basic knowledge of markets, day trading may yield unacceptable outcomes. It becomes imperative for people to know what’s on the stake. Prospective day traders should know about capital markets, and the securities traded in capital markets like bonds, equity and derivatives.  Buying shares and expecting a return from the price movements are on the to-do list for many. However, it is important to know about and risks and potential returns from speculating in capital markets.  After getting some basic knowledge about markets and securities, aspiring day traders should know how to analyse market prices of securities through fundamental analysis and technical analysis. Although day traders don’t practice fundamental analysis extensively, they spend considerable time to apply technical analysis, to formulate a entry and exit strategy.   Device and internet connection Trading is now possible on mobile applications as well as computer applications or websites. An aspiring day trader will likely begin with mobile phone given the accessibility, and laptops/computers are useful as scale grows larger and complex.  Internet connection is prerequisite to practising day trading, and it is favourable to have a fast internet connection to avoid glitches and potential problems. These perquisites are now available with large sections of societies.  Broker and trading platform A broker will facilitate a market for potential trades. The security brokerage industry has also seen a profound shift as technology has driven cost lower while competition is ramping up across jurisdictions. Large retail brokerages have moved towards zero commission trading in the U.S., and the same is seen being the trend across other geographies as well.  The entry of discount and online brokerages has perhaps given wings to the retail market participants as well as the retail market for security brokers. Robinhood has grown immensely popular in the United States, but there are many firms like Robinhood in other jurisdictions. Each country has some firms with business model on same lines as Robinhood.  Brokers now offer high-quality mobile applications and web services to clients, and trading security has never been so accessible. They also provide access to the global market along with a range of securities, including commodity derivatives, currency derivatives, CFDs, options, futures, bond futures etc.  Real-time market information flow   On public sources, market price information is at times not live due technical shortcomings, which will not work appropriately, especially for day traders. Brokers not only provide platform and market but several other services, including margin lending, real-time data, research.  Day traders closely track prices of securities and overall information flow to incorporate developments in bidding, and real-time data provides accurate prices throughout market hours.  Information flow largely relates to the news around the company, industry or economy. Day traders now have far better sources of information than the conventional sources, and sometimes these sources could be exclusive to a group.  What are the risks of day trading? Most of the aspiring day traders end up losing money, given the lack of experience and knowledge. They should rather only bet on capital that they are comfortable to loose, in short, they should avoid risk of ruin. Day trading is sort of pure-play speculation and application of knowledge, information flow, laced with good trading system is paramount. The only concern of day traders is movement in price, which contradicts from investments. Day traders try to time and ride the momentum in the price and exit the trade before momentum turns otherwise, which can happen frequently.  It consumes considerable time and induces stress on the individuals given the nature of security prices, which can move north and south abruptly throughout the day, hours, minutes and seconds. Day traders should have enough capital to trade in cash instead of margin.  Day trading on margin or borrowed money is extremely risky and has the potential to make a person insolvent, especially in cases of extreme risk-taking. The leverage associated with borrowed money magnifies profits as well as losses.  Aspiring day traders should equip themselves with adequate knowledge, competency and sound risk management process. Although fast money is dear to most, it is better to know what is at stake before jumping into markets with excitement.   

Earnings Before Interest Taxes and Amortisation (or EBITA) is an operating performance measure of a company, which assist investors in comparing companies stripped of their capital allocation decisions, post considering the depreciation into account.

Earnings Before Interest, Depreciation and Amortisation (or EBIDA) reflects the earnings of a company post adding the interest expense, depreciation & amortisation to the net income, and taking tax into consideration.

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