Vietnam Nears Crisis

In what some analysts have termed 'an act of desperation,' Vietnam has devalued its currency, the Dong, by .5%. Negative pressure had been building above the Dong for months, due to a burgeoning trade deficit, sagging stock market, and a stratospheric inflation rate, most recently clocked at 23%. Unfortunately for Vietnam's economic planners, the black market exchange rate remains nearly 5% below the official rate. In addition, futures prices reflect the expectation that the Dong will lose 30% of its value over the next twelve months. At this point, Vietnam is simply trying to forestall a full-scale economic crisis. This will probably involve further devaluations of the Dong. The Times Online reports-

Analysts said that the rising risk of a sudden and crippling depreciation comes as the cracks in Vietnam’s vaunted “economic miracle” have grown too large to ignore.

Inflation or Economic Growth?

Global capital markets remain caught in a tug of war between inflation and economic growth. For most of 2008, the economic growth story prevailed as the Federal Reserve Bank cut interest rates aggressively to cushion the blow from the housing crisis. However, the pendulum soon swung to inflation and the Fed began to worry that perhaps it had lowered rates too far and may in fact need to hike them in response to surging food and fuel prices. In fact, the European Central Bank recently hiked its benchmark interest rates. Now, a slew of negative economic data threatens to shift the rhetoric back to the other corner. Securities and currencies have fluctuated wildly over this period, and investors remain unsure about which side the world's Central Banks will err on. Currency traders need to look no further than credit markets for a snapshot of the current consensus, which often presages changes in currency valuations. A quick and dirty analysis would place American and Euro-zone short-term bonds side by side and compare the yields (or prices), as a proxy for the EUR/USD exchange rate. The Wall Street Journal reports:

Two-year yields in all three markets have been on a wild ride in June, driven up by tough inflation rhetoric from central banks, then down again by renewed worries about the credit crisis and the state of financial markets.

Fed Increases Liquidity

In a bid designed to placate skittish investors, America's Federal Reserve Bank announced that it will extend the duration of its liquidity facilities at least through 2008 and possible into 2009. It is hoped that the continued enabling (which began several months ago) of certain Wall Street firms to borrow on especially favorable terms will prop up faltering credit markets. Given that both credit conditions and the economy at large continue to flounder, this move seems more symbolic than anything. Analysts are divided about whether this increased liquidity will serve as a complement or a substitute for a near-term interest rate hike. Futures prices had previously reflected a 65% chance that the Fed would hike rates in September, but the bet is now closer to even money. Reuters reports:

Others...think liquidity problems and inflation concerns are two separate issues. [One analyst] believes that the Fed is still on track to raise rates in September.

UK Housing Crisis Could Affect Pound

When one hears the phrase "housing crisis" uttered, the US immediately comes to mind. Not without reason, of course, since the US housing market is the largest in the world, and the scope of any US housing crisis is sure to dwarf a comparable crisis in any other country, in absolute terms. At the same time, let's not forget that prices in the UK, for example, began to decline earlier than in the US. In addition, as one columnist points out, the impact of the UK housing crisis may be relatively greater on the UK economy. While some of the statistics he quotes are dubious, housing and consumer debt (on a per capita basis) may in fact be larger in the UK than in the US. As a result, the ongoing correction in housing prices would be expected to punish the UK more than the US. The story could be the same for the Pound, vis-a-vis the US Dollar. Money & Markets reports:[One analyst] is...a long-term bear on the British pound and believes any rallies in the currency represent an opportunity to enter short at a better price. Selling the pound against the dollar with a 10-12 month time frame may present one of the best opportunities in the currency markets today.

Emerging Markets: To Hedge or Not to Hedge?

2008 has witnessed an explosion of volatility in emerging markets, affecting both debt and equity securities. Fluctuations have been especially dramatic in the forex markets, compounding the turmoil and skewing returns for foreign investors. The South African Rand and Brazilian Real, for example, have moved so violently that for both countries, a 10% gap distinguishes the returns earned by local and foreign investors. As a result, some institutional investors are re-examining their hedging strategies with regard to emerging markets. According to experts, currency hedging among equity investors is still rare because it is expensive and often complex. If hedging is undertaken at all, it is usually outsourced to a third-party. Some investors are quite dogmatic in their insistence that hedging is a complete waste of money, and argue instead that diversification (into different countries/currencies) represents a "natural" hedge. Since, the net change in exchange rates must ultimately be zero, a diversified, long-term approach to investing in emerging markets may automatically mitigate against currency risk. The Guardian reports:

"Currency movements tend to be noisy but over the long term they are just reflective of the economy and not the driver of economic performance."

Intervention Drawing Near

G8 finance ministers met last week to discuss the detrimental effects of rising (commodity) prices on the global economy. Oil prices and commodity prices have in some cases doubled over the last year, contributing to a nasty surge in worldwide inflation rates. While the Dollar was not technically a topic of the discussion at these particular meetings, it was broached tangentially because of the perceived relationship between the weak Dollar and high commodity prices. Accordingly, Central Bank intervention on the Dollar's behalf could theoretically be justified on the basis of both mitigating inflation and facilitating global macroeconomic stability. The "I" word hasn't been mentioned explicitly, but its likelihood increases with every up-tick of inflation and every down-tick of GDP. It is no surprise that in the weeks leading up the actual G8 conference, the Dollar has sustained its strongest rally against the Euro in nearly 3 years. Forbes reports:

Last week Federal Reserve Chairman Ben Bernanke flagged a change in Washington by linking the weaker dollar to inflation and saying he was watching the currency closely with the Treasury. Then U.S. Treasury Secretary Henry Paulson refused last week to rule out direct intervention in currency markets.

Euro Rallied on Trichet Comments

The euro rallied broadly after ECB President Trichet delivered surprisingly hawkish comments following a widely expected unchanged rate decision.

Trichet indicated that some ECB officials argued for rate hike later this year, and the central bank is in a state of “heightened” alertness” over inflation. His comments added to expectations for a rate move on its July meeting. The euro rose sharply from around 1.54 to as high as1.5562 versus the dollar, and gained more than half a cent to a 9-day high at 0.7956 versus the sterling. Also the euro advanced against the yen to test a key resistance at 165.

As Trichet’s statements dominated the market, other data released today were largely ignored. The Bank of England also left its interest rates unchanged at 5.0%. US weekly jobless claims fell 15k to 357k and continuing jobless claims fell slightly to 3.093m. The dollar edged up initially after the data but the following Trichet’s talk erased its gains quickly.

Dollar Slid after Jump in Unemployment Rate

The dollar slid across the board after a report showed US unemployment jumped to the highest since 2004. US non-farm payrolls fell 49k in May, in line with the estimate of a 50k loss. However, unemployment rate shot up from 5.1% to 5.5%, the largest month increase since 1986. The report showed the nation’s job market is still very weak and there is no sign that the market will turn in short term. After the report, the euro rose immediately from 1.5580 to 1.57 and extended its gains later. The dollar dropped 1 cent to close to 105.

The euro remained firm on higher expectations for a July rate hike after ECB President Trichet’s ultra hawkish comments yesterday. However, one thing should be aware of is that recent data all pointed to a slowing economy in euro zone. A report released this morning showed Germany industrial output dropped unexpectedly.

Canada job report for May was also released today. Unemployment rate was unchanged at 6.1% and jobs change lowered from 19.2k to 8.4k.

USD Rallies on Jawboning, Housing Data

The dollar rallied sharply against the majors at the start of the week as traders focused on US economic reports released in the morning, breaking through the 106-level versus the yen. Propping the greenback higher today was an unexpectedly stronger report on pending home sales, prompting speculation that the struggling US housing market may be bottoming. Pending home sales for April surged to 6.3%, far exceeding estimates for an improvement to -0.5% from -1.0% a month earlier.

Key highlights from the US economic calendar include the April trade balance, June consumer sentiment, the Fed’s Beige Book, retail sales, business inventories, and May CPI. Markets will focus closely on the US trade deficit and gauge the impact of soaring energy prices in recent months. Consensus estimates anticipate the deficit to expand to $60.0 billion, up from $58.21 billion from March. Retail sales are seen reversing the 0.2% decline in April, rising by 0.4%. Meanwhile, core retail sales are expected to remain unchanged at 0.5%.

The greenback also found support from US Treasury Secretary Paulson and NY Fed President Geithner, who both left open the option for central bank intervention. Nonetheless, we interpret the risk for government intervention in the currency market to prop up the do

Retail Sales Prop the Dollar

The greenback extended its gains versus the majors, rallying above the 108-level against the yen and 1.5380 versus the euro. The main catalyst for today’s move was a larger than expected improvement in May retail sales, with the headline reading improving by 1.0%, exceeding calls for a 0.5% increase from a 0.2% decline in April. The excluding autos retail sales jumped to 1.2%, versus estimates for an improvement to 0.7% from 0.5%. Weekly jobless claims crept higher to 384k, versus 357k in the previous week while April business inventories improved to 0.5% from 0.1% a month earlier.

With market sentiment anticipating the FOMC to shift to a tightening bias near the end of the year, traders will continue to closely scrutinize incoming US economic data. Philadelphia Fed President Charles Plosser echoed a similar tone to recent Fed comments, saying the FOMC needs to take preventive measures to ensure that “inflation does not get out of control”. Plosser said the current risk to inflation is serious and the Fed needs to act preemptively to contain it.

Economic data due out on Friday will provide additional clues on how quickly the Fed may need to move to contain inflationary pressures. The May CPI reading is expected to edge up to 0.5% from 0.2% a month earlier, and hold steady at 3.9% from the previous year. Core CPI is forecasted to rise to 0.2% from 0.1% in April and remain unchanged at 2.3% from a year earlier. Traders will also focus on the June University of Michigan consumer sentiment survey, which is expected to slip further to 59.5, versus 59.8 in May – which would be a fresh 18-year low.

Turkish Lira Set for Decline

2007 was a banner year for the Turkish Lira, which appreciated 21% against the US Dollar. However, in the year-to-date, the currency has returned nearly 10% of this gain, making it the third worst performing currency in the world. Turkey generally, and the Lira specifically, are considered by investors as proxies for emerging markets. The global trend towards risk aversion, as well as skyrocketing inflation, are hurting many such currencies. In Turkey, inflation is so problematic (9.4% at last count) that the Central Bank has raised its benchmark interest rate to 15.25%. Ironically, the more the Lira depreciates, the harder it becomes for the Central Bank to control inflation, causing the Lira to slide further as part of a self-perpetuating free-fall. In addition, the country is beset by political uncertainty, as the courts determine whether the nation's current government can stay in office. Bloomberg News reports:

"The recent political developments are likely to complicate policy-making and the investment climate. The deteriorating political backdrop will in turn undermine the prospects for restoring fiscal discipline and reviving the reform agenda."

Korean Won is Worst in Asia

In the year-to-date, the Korean Won has recorded the worst performance of any currency in Asia, having recently fallen to a 6-week low. The story is being driven as much by Dollar strength is by Won weakness. US equities have rallied over the last month, as investors may have been overly pessimistic in the previous months regarding near-term US economic prospects. In addition, the Fed has probably lowered interest rates for the last time, whereas the Central Bank of Korea has held its benchmark lending rate at 5% since the summer. This yield differential, which currently favors Korea, may narrow substantially over the coming months, as the Bank of Korea is forced to reckon with slowing growth and rising inflation. Bloomberg News reports:

Growth, at the slowest in more than three years last quarter, is losing momentum, the Bank of Korea said in a report on May 1. Policy makers next meet on May 8 to decide on the benchmark seven-day repurchase rate.

Chinese Exporters Dump Dollar

The anecdotal evidence that China is diversifying its forex exposure away from the Dollar continues to mount. To date, most of the focus has centered around the Central Bank of China, which is passively diversifying its reserves into European and higher-risk assets. Apparently, Chinese exporters are also getting nervous about the impact of a falling Dollar on their respective bottom lines. The RMB has risen 11% since the beginning of 2007, which means Chinese companies now receive 11% less on sales to destinations abroad than they did for equal-priced goods in 2007. As a result, some companies have taken to quoting prices in Euros or to adjusting Dollar-denominated prices every few months. Other companies are building assumptions of a more valuable RMB into their profit models, and setting prices accordingly. The New York Times reports:

“We are gradually increasing our emphasis on the domestic market until we can forget about the export market, because the profit margins on exports are so thin,” [said one exporter].

New Forex ETFs

WisdomTree and Dreyfus Funds recently unveiled five new currency ETFs in order to fill a broad gap in the emerging markets category. Previously, investors were limited to such mainstay currencies as the US Dollar, Euro, Japanese Yen, British Pound, Australian Dollar, Canadian Dollar, and Swiss Franc. These new ETFs will expand this list to include the Indian Rupee, Brazilian Real, and the much-anticipated Chinese Yuan. It will also offer products for the Euro and Yen, but these probably won't draw much attention. The RMB ETF, especially, will be pounced on by investors, who have been clamoring for years for a cheap and easy way to capture the upside of the Yuan's inevitable appreciation. In addition, all of the ETFs will also return modest yields based on prevailing interest rates in the representative countries. Reuters reports:

In the case of India, Brazil and China, the yields on the ETFs may differ from yields available locally due to restrictions on foreign investors.

Euro Could Replace Dollar

Two American economists recently conducted a computer simulation to determine how the role of the US Dollar as the world's reserve currency will evolve over the next decade. Their hypothesis- that the Dollar's preeminence would be maintained- was contradicted by the simulation leading them to conclude that the Euro will overtake the Dollar within the next 10-15 years. This may be hard for many analysts to stomach, since the Dollar's share in global currency reserves is 66%, compared to the Euro's 25%. In addition, the Dollar has held its title for nearly 150 years, and it's difficult to fathom its being replaced.

However, two factors have emerged within the last 10 years, lending support to the argument. First, the US twin deficits have exploded; the current account deficit approximates $800 Billion and the national debt is estimated at $9.4 Trillion. Second, prior to the inception of the Euro, there didn't exist a credible alternative to the Dollar. The Deutsch Mark and Japanese Yen initially seemed like potential candidates, but the German currency was folded into the Euro, and the Japanese economy has soured and taken over by deflation. Then there are peripheral factors, like US monetary policy, which is facilitating inflation and eroding the Dollar. There are also signs that a neo-imperialist foreign policy has overstretched the US, and foreign Central Banks are becoming nervous. The Financial Times reports:

Many developing countries will find it harder to maintain their dollar pegs. They may be reluctant to drop them now but there will come a point when the rise in inflationary pressures becomes unbearable.

Loonie in Trouble

In a recent article published in the Toronto Star, a Canadian columnist outlined five reasons why the Canadian economy is in trouble. Only a couple factors are unique to Canada, and several can be subsumed under the credit crunch, but the pessimists are sounding broad alarm bells. First on the list is the looming drop in prices for commodities, the cornerstone of Canada's economy. Oil recently sank below $100/barrel, and gold dropped 5% in one day! In addition, China is threatening to curb demand in order to rein in inflation.

The second and third causes for concern are a decline in bank credit and loss of confidence, respectively. Neither of these factors are endemic to Canada, as banks around the world have suddenly developed an aversion to risk and have tightened lending accordingly. Next, corporate expansion (namely of American companies) is stalling; Home Depot and Proctor & Gamble have already announced a temporary hold on opening new stores in Canada. The final factor(s) are American consumers, which collectively spend $9 Trillion per year. The recent tightening of wallets could spell massive trouble for Canada, since some of its provincial economies are primarily driven by cross-border sales to Americans.

In short, the Canadian economy could actually contract in 2008. But perhaps the resulting decline in Canada's currency, the loonie, would make Canadian exports comparatively more attractive and return the economy to firm footing in 2009.

Dollar Decline: Not a Sure Thing

Since 2002, the Dollar has lost 70% of its value, relative to the Euro. Meanwhile, the same factors that signaled bearishness in 2002 persist in 2008, or even worsened in some aspects. The twin deficits are still growing, though the current account deficit may be leveling off. The US economy is headed towards recession. Inflation is set to rise due to soaring commodity prices and a loosening of monetary policy. As a result, many investors are betting that the Dollar's slide will continue well into the near future.

However, prudent investors would be wise to "handle with care." While not entirely applicable to forex markets, efficient markets theory dictates that inherent in a security's current valuation is all relevant, publicly available information. Thus, all of the bad news listed above has already been priced into the Dollar, to some degree at least. The rule of diversification is in full effect when betting on forex. Thus, rather then putting all of one's chips directly behind one currency, an investors could buy foreign securities (stocks and bonds) instead, which also capture any currency appreciation (and depreciation). Investors can also purchase Treasury Inflation Protected Securities (TIPS), whose yield is linked to inflation and, thus, acts as a hedge against a declining Dollar. The Wall Street Journal reports:

While some market watchers believe the six-year dollar bear market isn't over yet, investors should recognize that trends in the currency markets are typically marked by volatile ups and downs along the way.

Fundamentals Harm Emerging Market Currencies

Since the inception of the credit crunch, one of the themes in forex markets has been the surprising strength of the Dollar. Despite growing economic uncertainty, the US is still viewed as a relatively safe place to invest. On the other hand, emerging markets, especially those with current account deficits, have witnessed capital flight and subsequent currency depreciation. The currencies of South Africa and Iceland, for example, have both experienced declines 20% since the start of this year. Risk premiums had fallen to historic lows prior to the credit crunch, and neither country experienced great difficulty financing its respecive deficits. However, investors are growing increasingly nervous and are shifting capital to countries with stable current account balances. The Financial Times reports:

Goldman Sachs says: "We have long argued that in times of global turmoil suppliers of capital are poised to outperform countries in need of capital. However, it is only since January 2008 that we have seen the current account theme really gain momentum in the FX market."

Barclays Introduces Carry Trade ETN

Through its trademark iPATH line of funds, Barclays Bank recently introduced a new ETN designed to mimic the carry trade. In accordance with this strategy, this note is linked to the performance of the Barclays Intelligent Carry Index, which aims sell low-yielding currencies and use the proceeds to invest in those that offer higher yields. This index holds varying combinations of the so-called G10 currencies, which includes all of the majors as well as the Norwegian Krona and Swedish Krona. Traditionally, carry traders have sold one specific currency (i.e. Japanese Yen) in favor of another currency (i.e. the New Zealand Dollar). By instead purchasing this note, which will trade under the ticker ICI, investors can buy a share of an entire portfolio, optimized expressly for this strategy. Comtex reports:

The index is composed of ten cash-settled currency forward agreements, one for each index constituent currency, as well as a "Hedged USD Overnight Index" which is intended to reflect the performance of a risk-free U.S. dollar-denominated asset.

USD: Worst Quarter in 4 Years

In the first three months of 2008, the USD notched its worst quarterly performance since 2004, falling over 8%. During the same period, the Dollar lost 10% of its value against the Japanese Yen and 6.4% against a broad basket of currencies. Forex analysts reckon the slide was so steep because investors have taken stock of the US economic situation and have concluded that recession is inevitable. The story is also being driven by interest rates. The Fed has already cut rates by 300 bps in the current cycle of easing, making the benchmark federal funds rate the lowest in the industrialized world, in real terms. Meanwhile, the European Central Bank is giving every indication that it will maintain rates at current levels in order to keep a lid on inflation. As a result, the Dollar could fall further, especially if the Fed continues to hike rates and investors use the currency to fund carry trades. Reuters reports:

[According to one analyst], "And to call a bottom now is still a very risky call. It's too early to say the worst is behind us and the dollar's in for a sharp rebound."

Forex Leads Equities

In recent months, the credit crunch has ignited a global trend towards risk aversion. As a result, a correlation has developed between equities, which serve as a proxy for risk, and certain currencies. The Forex Blog previously covered the link between the S&P 500 and the Japanese Yen, whereby the Japanese Yen moved inversely with the S&P as a decline in risk appetite led carry traders to unwind their positions. Perhaps, this connection can be seen in other currencies. Since the forex markets are open 24 hours a day and are the most liquid financial markets in the world, macroeconomic events are often priced into currencies before they are priced into equities. In addition, carry trading strategies have expanded beyond the Japanese Yen. In fact, the USD is now a decent candidate as interest rates are negative,when adjusted for inflation. Thus, an increase in risk appetite could simultaneously boost the S&P and punish the Dollar!

How Can An Offshore Company Be Used?

Listed below are just some of the ways our clients use their Offshore Companies. Intended as no more than a general guide, and avoiding technical terms, it is meant to give you an idea of how versatile offshore companies can be. Naturally, we can give you precise advice on how best to achieve your goals by using an offshore company. All you need to do is ask.

International Trading using an Offshore Company

How to use an offshore company

Import and Export transactions can be made significantly more tax-efficient if they're carried out through offshore companies. Using an offshore company as an intermediary between a seller and a buyer of products or services in different countries allows profits to be accumulated offshore. (This is often called Transfer-Pricing.) Such offshore-companies are generally called marketing or export consultancies, and, with nominees handling all offshore company administration such as phone calls, emails or faxes, the appearance of the company is greatly enhanced.

Although invoicing is invariably carried out via the offshore company, the goods can, nevertheless, normally be delivered direct from seller to buyer.

Such devices can be particularly beneficial for transactions between EU countries, with VAT accounting problems solved by registration in a suitable location, such as the UK or Southern Ireland, the onshore company then working in conjunction with another corporate vehicle, for example a Belize company.

Factoring of debts using an offshore company also offers possibilities to move money from a high-tax to a low-tax area.

Manufacturing

Some countries have a preferential tax-rate for manufacturers, and this can be exploited by establishing a manufacturing company in the appropriate jurisdiction and separating the manufacturing parts of the company's operations from its other functions by basing it in such a free-trade zone. Structured correctly, huge savings can be made.

Offshore Investment companies

An Cloud Worldwide Ltd is often used to make investments and accumulate wealth. Just as an onshore company can invest in stocks, shares, property or commodities, so can an offshore company. The only difference is that the offshore company doesn't have to pay tax on its profits, nor inheritance tax when it is passed on to heirs.

In many jurisdictions, Withholding Tax is levied on income remitted out of the jurisdiction, but the careful use of double-tax treaties can reduce or even eliminate tax on the investment income. This may enable the investor to make investments in high-tax countries from an offshore base with minimal tax liability.

In some countries, interest is paid gross on tax-free bonds or bank deposits and this can be integrated into the client's tax planning. In certain circumstances, interest may be rolled up without income being remitted, and, in some jurisdictions, death duties and capital gains taxes are not levied.

Most importantly, the use of an offshore company also protects the identity of the ultimate beneficial owner. Anonymity comes automatically with offshore companies, and is respected by the law in the offshore world

Offshore Holding companies

Offshore holding companies can handle dividend receipts from a spread of subsidiaries. This allows a group to centralise its resources and maximise tax benefits. Careful use of tax treaties is necessary to obtain the best results.

Various locations, both on and offshore, can be used, with the holding company funding subsidiaries in a tax-efficient manner.

Property-owning Companies Registered Offshore

Placing property into the ownership of an offshore company yields many immediate advantages, including the avoidance of Inheritance Tax and Capital Gains Tax. This is because the anonymously-owned offshore company changes hands in the event of death or re-sale, not the property.

Additionally, any subsequent sale is greatly simplified. In some countries the establishment of title is time-consuming and costly; but once title has been established for a company-owned property it never needs to be dealt with again. This is because the sale can be made by transferring the shares of the company, with title to the property remaining vested in the company. In other words, the company can be sold instead of the property.

Sales by share-transfer almost always save on legal fees, together with any transfer or value-added taxes that are levied in some countries. Government stamp-duties and capital gains taxes can also be avoided.

Probate

The ownership of a portfolio of investments through a single offshore holding company greatly simplifies probate procedures upon the owner's death. It is easy and anonymous to deal with an Offshore Banking in this way. Probate can be applied for in one offshore jurisdiction rather than in several different countries where the assets are located.

Legal fees are often significantly reduced and publicity can be avoided for high-profile individuals and families.

Consultancy and services

Consultants, financial advisors, real estate agents, musicians, security consultants, bodyguards and entertainers often receive much of their income from overseas.

This income can be remitted to an offshore company, which is the individual's employer, and, after paying only a modest amount for expenses, thus retains the bulk of the funds in an offshore account.

Employment overseas is often facilitated by the use of an offshore employment company. This can either employ an individual or a group of individuals working overseas. The employee keeps the bulk of his income outside the country of employment. This type of structure can also reduce currency exchange problems and circumvent a number of employment and residency obstacles. For further information on this, please see our Offshore Payroll section.

Offshore Ship and yacht ownership

It's often advantageous to pass ownership of a vessel to an offshore company. As well as securing significant tax benefits, it can also provide an easy registration procedure for yachts, which in certain countries can only be registered on the major national register with onerous compliance requirements.

We can provide a separate offshore company formation to operate or charter the vessel, thus separating ownership and income for additional tax benefits.

Intellectual property

Patents, copyrights, trade marks, franchises and other rights such as those in music, computer software and technical know-how can all be transferred to the ownership of a licensing company, either offshore or onshore. The licensing company enters into licence or franchise agreements with the original company owner and then receives royalty payments and licence fees.

Insurance companies

Most offshore centres will only accept registration of insurance companies which are subsidiaries of existing insurance groups, or which are very heavily capitalised. Nevertheless, in several first-class jurisdictions it is still surprisingly easy to register an insurance company that would not meet the capitalisation requirements of the UK.

Offshore Internet Trading

One of the fastest growing areas of international trade is the Internet. The international nature of the trade and the potential tax complications of dealing across borders can be solved by the creation of a specialist internet trading company offshore.

To obtain favourable tax treatment, it is best to locate the server physically offshore. However, you can still use a normal domain name.Your customers would not notice any difference, no matter where the server was hosted. We can assist with Web Design and Offshore Hosting or simply give you free advice if you require it.

Though the opinion is often expressed that such operations are 'all in cyberspace' and therefore location is not important, it remains a fact that regulation is increasing and planning should anticipate possible future developments. Although the Americans seem determined to keep the internet tax free, no one really knows how it will turn out long term. True to form, EU legislation concerning the sale of downloadable products and services relating to the payment of VAT is making things more complicated. An example of this is eBay: if you live in the EU you have to pay VAT on your invoices, but if your billing address is outside the EU you don't. This is the result of EU legislation which came into force in July 2003.

Asset Protection using an Offshore Company

An offshore company can be perfect for Asset Protection. Transferring title to assets to an offshore trust means that the settlor (the person who gives up ownership in favour of the trust) no longer visibly controls these assets. This means that they cannot be seized in cases of insolvency, marital proceedings, professional negligence, or by the taxman.

However, if the trust was set up intentionally to avoid a known current or future liability it may be set aside by the courts. Particular care is needed in the US and, since the 2004 budget, the UK is also looking closely at trusts.

Regardless of problems in some countries, trusts, when correctly structured, are excellent asset protection vehicles, and are extremely flexible in times of political and economic instability.

A further advantage of trust formation is that 100% anonymity is still possible and a trust can perform all the functions of a company without some of the restrictions that apply to companies.

Family wealth protection

Trusts are often used to safeguard family wealth by imposing conditions on the use and distribution of money and assets by present and future generations. Such arrangements may also replace a will in certain circumstances. Trusts can be used legitimately to avoid 'forced heirship' provisions affecting inheritance. Inheritance, capital gains and income taxes can all be minimised in this way.

Forex Forecast

Forex Forecast- try saying that three times fast! The Market Oracle, an online financial publication, has done even better, preparing a one-year forecast for all of the major currencies along with a detailed analysis of the major factors driving each currency in the month of February. The Dollar and Yen are projected to be the strongest performers in this time frame, benefiting from a trend towards risk aversion. It should be noted that this prediction is consistent with news reported by the Forex Blog earlier this week. On the other hand, currencies that have been propped up by the Yen carry trade, namely those of Australia, New Zealand, Canada and South Africa, will face selling pressure. The British Pound is projected to underperform slightly, due to an easing of British monetary policy, which will narrow the interest rate advantage claimed over the US.

Finally, the Euro is something of a wildcard. On the one hand, the EU economy is stagnating, and the ECB has hinted that rate cuts are a possibility. On the other hand, the Euro theoretically stands to inherit a significant amount of risk-averse capital, especially from foreign investors looking for a stable alternative to the Dollar. Accordingly, the Market Oracle forecasts a short-term decline in the value of the Euro but a long-term appreciation.

Israel Considers Intervention

The Israeli Shekel has surged over 15% against the Dollar in the last six months, and by over 20% in the last two years. Analysts have suggested that the appreciation is due to the strength of Israeli's economy vis-a-vis the US economy, which seems headed for recession. In addition, Israeli citizens have repatriated billions of dollars in capital that had been held overseas and invested it in Israel's financial markets, which in itself, has exerted much of the pressure on the Shekel. There is now a surplus in the balance of payments, which means more capital is coming in to Israel than is being taken out. As a result, Israeli exporters are getting nervous about the perceived consequences of a relatively expensive currency and are pressuring Israeli political leaders to take action. The Central Bank, understandably, is reluctant to do so. Haaretz.org reports:

"Intervening in [the currency] market is risky and inefficient," [said] Bank of Israel Governor Stanley Fischer...earlier this week.

Bernanke Hints Rate Cuts

In testifying before the Senate Budget Committee, Ben Bernanke, Chairman of America's Federal Reserve Bank, hinted strongly that further rate cuts would be necessary to stabilize the US economy. Last week, the Forex Blog covered an editorial which suggested that Bernanke knew something about the state of the economy that the American public did not, which his testimony seemed to confirm. Bernanke testified that the Fed is also committed to fighting inflation, but the emphasis was clearly on spurring economic growth. As a result, futures markets are pricing in a rate cut of 50 basis points, projected for the next month. The forex markets were unambiguous about the implications of this development for the Dollar. Thomson Financial reports:

'By highlighting the downside risks to growth, Bernanke confirmed prevailing aggressive rate cut speculation, which currently keeps the dollar under broad pressure,' said Antje Praefcke, currency strategist at Commerzbank.

China's Trade Surplus Expands Further

China's trade surplus grew 22.6% year-over-year for the month of January, on top of export growth of 26.7%. If there is any silver lining to what many policymakers would consider bad news, it is that growth in imports is slightly outpacing growth in exports. Unfortunately, that is unlikely to allay the critics, and there are still many of them. The argument remains unchanged- that China is not allowing its currency to rise fast enough. On paper, however, the Yuan has appreciated by 15% since China officially de-pegged it from the Dollar in July 2005. In addition, the G7 failed to scold China in its annual meeting, which suggests that economic policymakers are becoming less concerned with China's forex policy. Ironically, the revaluation of the Yuan is probably boosting the value of of China's exports in the short-term, because other countries are now paying more for the same quantity of imports. AFP reports:

The International Monetary Fund...urged the Chinese government to loosen the reins on the yuan. "We encourage a faster pace of appreciation that would be helpful for addressing China's key economic challenges and would also contribute to preserving global economic stability."

Canadian Loonie Defies Logic

Over the last few years, commodity prices, equity values, and interest rate differentials all favored Canada. By no coincidence, the Loonie rallied to such an extent that it soon reached parity with the USD. The relationship between these trends and the Canadian Dollar seemed so cut-and-dried that few analysts paid attention to anything else. In the last couple months, however, these relationships seem to have suddenly dissolved. For example, as the price of oil has begun to rise again, the Loonie has unexpectedly lost value. Meanwhile, the inverse correlation between risk aversion and the Loonie has lost all validity, such that if the S&P 500 increases, the odds that the Canadian Dollar will also appreciate is essentially an even money bet. The Canadian Economic Press reports:

"The breakdown is still quiet tentative but it’s weakened in the last few sessions. For Canada in particular there isn’t one story in the market. We have several different stories going on at the same time."

Iran has Forex Reserves?

Every month seems to witness the induction of a new country into the pantheon of those with burgeoning forex reserves. The new member for the month of February is...Iran? Most of the attention Iran receives is political rather than economic, but with oil prices recently topping $100 a barrel for the second time, you can bet that Iran will start appearing on the radar screens of more and more analysts. Iran's reserves currently total $76 Billion, which is unimpressive in itself, but represents a 30% year-over-year increase. Of more significance, perhaps, is that Iran is leading the charge against the Dollar by actively diversifying its reserves into Euros. It remains to be seen whether any "non-rogue" countries will follow suit. The Economic Times reports:

Iran, the world's fourth largest oil exporter and the second ranking in OPEC, has benefited from record crude prices which have helped it to weather domestic economic problems.

Yuan et al Must AppreciateYuan et al Must Appreciate

Since the Fed began loosening monetary policy over the last six months, however, many of the emerging economies in Asia, especially China, have been forced into a bind. On the one hand, lowering interest rates is exacerbating the problem of inflation. On the other hand, they want to keep their currencies stable so as not to limit economic growth. In short, Central Banks must determine which is more important: fighting inflation or promoting growth. According to some economists, these economies are so strong, having grown by nearly 10% collectively last year, that they can afford to slow down, if it will result in greater price stability. But the only way to stabilize prices is to drastically raise interest rates, which will put even greater pressure on their currencies to appreciate.

In addition, the Central Banks of Asia have amassed a staggering $4 Trillion in foreign exchange reserves. In the past, this has been a neutral, sometimes profitable activity. Since the Fed began cutting rates, the interest rate differential has been turned upside-down such that Central Banks are now losing money on each unit of local currency they sell in exchange for Dollars. According to one analyst, over $160 Billion has been lost since July 2006, and those losses will mount with each additional intervention.

Yen as Proxy for Risk Aversion

The US stock market has lost over 10% of its capitalization since reaching an all-time high in October of last year. Meanwhile, the Japanese Yen has climbed at least as much in proportional terms since bottoming out around the same time. Coincidence? At least one analyst doesn't think so. Because of the steadfast popularity of the carry trade, the Japanese Yen appears to have developed an inverse correlation with the US stock markets. The reasoning is actually quite simple. When aversion to risk is low, investors borrow in Japanese Yen and make investments denominated in other currencies, the Dollar for one. When risk-aversion increases, as it has in the current economic environment, investors have been quick to close out their carry trade positions, causing the Yen to rise. Maktoob Business reports:

If the situation of stock markets is improving, the USD/JPY is likely to be increasing. It means that more carry trade transaction are being carried out.

USD May Bottom Out

As far as Dollar bulls are concerned, all news is bad news. An economic recession seems inevitable. Interest rates are already negative in real terms, and are now the lowest in the industrialized world, save Japan. It's still unclear how much subprime debt will be written down by financial companies before all is said and done. But analysts from Brown Brothers Harriman, an investment bank, think the Dollar's multi-year decline is coming to an end. There are two main reasons underlying their rationale. The first point is purely technical- that the all of the bad news and in fact, the worst possible scenario, has already been priced into the Dollar. The second point is fundamental- that the speculative hot money that has poured into the US as foreign investors take advantage of a weak Dollar and that is sustaining the US current account deficit is now transitioning into long-term foreign direct investment. The Financial Post reports:

In addition, BBH believes that in a weak dollar environment, foreign companies will now start looking to move production and sourcing to the United States, following the successful example of Japanese auto makers.

Kiwi Rises and Falls with Risk Aversion

Most of the world's major currencies are affected by a variety of technical and fundamental factors, such that only taking into account one factor is tantamount to using P/E multiples as the sole basis for purchasing shares of stock. The New Zealand Dollar, which barely qualifies as a major currency seems to be one of the few exceptions to this common sense rule. The preponderance of carry traders involved in trading the Yen ensures that the NZD inversely tracks the Japanese Yen. In addition, the demand for Kiwi is directly proportional to appetite for risk, such that when risk aversion declines, the Kiwi increases, and vice versa. The reasoning is quite simple: the Kiwi boasts the highest interest rates in the industrialized world. Because the investment climate in New Zealand is less stable than in other industrialized countries, New Zealand often witnesses capital flight during periods of global economic uncertainty. The New Zealand Herald reports:

Gains in equities markets emboldened investors to take chances, prompting use of the low-yielding yen to buy assets in higher-yielding currencies like the kiwi in carry trades.

India Projects Forex Reserve Growth

Those who make a living tracking and betting on the foreign exchange reserves of Central Banks officially have a new player to keep tabs on: India. Nearly 17 years ago, India's reserves dipped below $1 Billion, and government ministers began sounding the alarm bells. In comparison, fiscal 2007 witnessed a rise of $47 Billion in India's reserves, bringing the total to $280 Billion. The government is projecting an even greater increase in 2008, estimated at $100 Billion. Now, the challenge is what to do with all of the reserves; investors will be tracking developments in this regard because of the implications for the currencies of which the reserves are denominated in. The Dollar and Euro are currently jockeying for position; while the Dollar is way ahead, the Euro is quickly closing in.

Why the Fed Cut Rates

It seems self-evident that the Fed is easing monetary policy because it is trying to stimulate the economy and shore up confidence in capital markets by making credit less expensive. Dig a little deeper, however, and a more nuanced picture begins to emerge. Conspiracy theorists believe that the Fed knows something that investors don't, perhaps that the subprime mortgage situation is more serious than the public is being led to believe. Accordingly, the theory goes, it is trying to prevent a complete collapse of the financial system. Another theory holds that the Fed is cutting rates because it has nothing to lose by doing so. Inflation is still low, from a historical standpoint, and the Fed may be trying to inject liquidity into the financial markets before it is too late. Yet another theory holds that the Fed is deliberately targeting a weak Dollar and high commodity prices, as the former benefits the US directly by narrowing the trade imbalance, and the latter benefits the US indirectly by helping emerging market economies, which are relatively more dependent on commodities. The Chicago Tribune reports:

An increase in exports was one of the positive features of Wednesday's disappointing fourth-quarter report on U.S. gross domestic product. The cheaper dollar is a major factor in export growth, both in terms of current sales and expansion of overseas market share by U.S. manufacturers.

China is Earning Negative Carry

China's foreign exchange reserves currently approximate $1.5 Trillion, the majority of which is denominated in USD. Moreover, the Central Bank of China earns interest on every Dollar it adds to its reserves but must also pay interest on every RMB note that it must issue to offset the Dollars. Since the Fed began easing monetary policy, the amount of carry (the difference between what the Central Bank receives on Dollars and pays on RMB) earned by the Central Bank has completely inverted, such that it now loses 250 basis points on average for each Dollar exchanged for RMB.

Based on the rate at which China is currently accumulating reserves, this amounts to between $5 Billion and $10 Billion per month, depending on which method of accounting is utilized. Furthermore, this trend has been exacerbated because China is accumulating reserves at a faster rate than its economy is growing. Some analysts have speculated that this could turn into a major political issue, with important implications for the RMB/Dollar exchange rate. The Financial Times reports:

The renminbi has started to appreciate more rapidly in recent months, rising at an annualised rate of about 20 per cent, compared with 6-7 per cent over the whole of 2007. In the longer-term, say economists, China will have no choice but to allow its currency to appreciate faster, even in the face of entrenched domestic resistance.