"I'm disappointed," said an economist at Citigroup. "It's not as if we're trying to gauge policy priorities on a sunny day. I'd like to know how you're going to get inflation in an environment with suffocating financial restraint and pervasive slowing in demand."
Over the weekend, Bear Stearns, a prestigious American investment bank, hurriedly scrambled to find a buyer in order to avoid having to file for bankruptcy. While a buyer (JP Morgan) was ultimately secured, investors remained jittery, as the collapse of this magnitude is virtually unprecedented. When forex markets re-opened on Monday, the Dollar crashed against all of the world's major currencies, namely the Euro and the Yen. Furthermore, analysts are now beginning to view forex intervention as increasingly likely. It's still unclear whether the Bank of Japan or the European Central Bank (with or without support from the Fed) would spearhead any such intervention. At the breakneck speed at which events are unfolding, however, no one will be surprised if a plan is quickly cobbled together. The Wall Street Journal reports:
"Were such intervention to be seen, (the euro) could briefly trade down to $1.55, yet unless the (ECB) is prepared to back up such intervention with a rate cut, intervention will be futile," said [one analyst].
Read More: Dollar's Slide Keeps Pace
In recent periods of Dollar Weakness, all of the major currencies have been quick to capitalize- all but the japanese Yen. After a while, it became clear that the Yen was being held down by carry traders, who sold Yen in favor of higher-yielding, more risky currencies. It was long believed that the only thing that would shake the Yen loose from its moorings was not a Japanese interest rate hike or economic growth, but volatility in capital and forex markets. Sure enough, the explosion of the credit crisis induced a rapid appreciation in the Yen. Yesterday, it crashed through the psychological milestone of 100 for the first time since 1995.
But can the Yen sustain this momentum? On paper, if the Dollar continues to fall, it seems the answer is 'Yes.' However, Japan's economy is extremely dependent on exports. In fact, 50% of its 2007 GDP growth can be attributed to exports. With the Dollar crashing, Japan's exports are becoming less competitive, and its exports to the US (estimated at $150 Billion) are in jeopardy. In addition, Japanese consumers are notoriously tight-fisted, so it's unclear who would pick up the slack if the export sector falters. This begs another question: will the Bank of Japan be forced to intervene in currency markets (like it did in 1995) in order to prevent its economy from dipping into recession? The Wall Street Journal reports:
Its big budget deficit makes a stimulus package more difficult. Intervention -- which Tokyo also tried in 2004 during a bout of yen strength -- would fly in the face of efforts by the U.S. and other nations to let markets decide currency values.
Read More: Japan Economy Quakes Anew As Yen Soars Against Dollar
On January 31, 2006, Ben Bernanke officially replaced Alan Greenspan as Chairman of America's FedeCurrency Traders Dump Bernankeral Reserve Bank. At that time, the EUR/USD and USD/JPY exchange rates hovered around 1.20 and 118, respectively. For the first year of his tenure, Bernanke lived up to investor expectations and burnished his credentials as an inflation fighter by continuing a string of interest rate hikes begun by Greenspan. Fast forward to today, where the US economy is in tatters, inflation is raging, home and equity prices are slumping, and the Dollar has declined to $1.55 against the Euro and 100 against the Japanese Yen. Meanwhile, forex volatility levels are climbing rapidly, suggesting that the Dollar's troubles still havn't reached their climax.
Needless to say, currency traders- and a whole host of other investors and analysts- are furious with Bernanke. Many insist that he misled them, by downplaying the seriousness of housing jitters and insisiting stubbornly that inflation isn't a problem. Even now, he is lowering interest rates in order to spur the economy, but at the expense of price stability. As any experienced currency trader can attest, low interest rates and high inflation are a recipe for a weak currency. Reuters reports:
Bernanke "has sacrificed the dollar in an attempt to save jobs and U.S. business," said one analyst. "He had to do something, but at the same time he is only putting off the crisis. We will face tight credit for a decade and we will have stagflation."
Last week, the Bank of Canada lowered its benchmark interest rate by 50 basis points, to 3.50%. Though the move was widely anticipated by analysts, whose only uncertainty was whether the bank would cut 50 bps or 25 bps, investors nonetheless punished the Canadian Dollar. The reason cited by the Central Bank in its press release accompanying the rate cut was a sagging economy, due in part to a more expensive Loonie and the concomitant decline in exports. In addition, the Bank indicated that it will likely have to cut rates further over the next few months in order to avoid recession. In short, it doesn't look like the Canadian Dollar will upstage its 17% rise in 2007. Bloomberg News reports:
The central bank "has some very dovish words for the Canadian economy. Retaining the full easing bias and saying the risks to growth are intensifying have caught investors' attention.''
Read More: Canada Dollar Falls as Bank Reduces Rate, Signals It's Not Done
Over the last couple weeks, the Dollar has plummeted against all of the major currencies, falling below the $1.50 mark against the Euro for the first time ever. It seems investors are reacting to a spate of negative economic data which are painting an increasingly bearish picture for the US economy. In addition, the Fed seems likely to lower rates further while the ECB will maintain rates at current levels. For a brief period, talk of recession was actually helping the Dollar, as investors predicted that the global economy would be harmed more than the US economy, but it looks like that period has passed. As a result, the EU is growing increasingly alarmed, and the pressure is building for some kind of intervention. AFX News Limited reports:
Euro group president Jean-Claude Juncker said currency markets are overreacting to the short-term outlook for the US economy. " We don't like excessive volatility in exchange rates," Juncker said.
Read More: Euro group's Juncker says currency markets reacting too hastily to US outlook
Yesterday, the European Central Bank (ECB) maintained its benchmark lending rate at 4%. Meanwhile, America's Federal Reserve Bank has cut rates by 2.25% over the last six months. For years, the ECB existed entirely in the shadow of the Fed and conducted monetary policy accordingly, but in this latest downturn, it seems to have broken free. The reason for the split can be found in the Central Banks' different mandates: the Fed aims to promote growth, while the ECB is charged primarily with creating price stability. Thus, the ECB can easily avoid succumbing to analysts' expectations that it will ultimately lower rates. In addition, while EU politicians are pressuring the ECB to hold down the common currency, the ECB's mandate is actually supported by the expensive Euro because it lowers the cost of imports. The New York Times reports:
Mr. Trichet has long held that central banks do their best work when their threats to raise interest rates deter inflationary actions in the first place, avoiding the need for excessive swings in the benchmark rate. [He] called this concept “credible alertness.”
Read More: In Europe, Central Banking Is Different
Together with a consortium of large banks, Merrill Lynch recently formed ELEMENTS, which unveiled five new currency Exchange Traded Notes (ETNs). Before ML entered the market via ELEMENTS, there were only two banks offering currency ETF products: Barclays Capital and Rydex, whose funds are branded CurrencyShares and iPath, respectively. ETNs differ from ETFs in that the former represent a debt obligation whereas the latter represent a form of equity. In practice, however, since the risk of default is relatively low, the two types of securities are functionally equivalent. Both pay interest slightly below the benchmark interest rates of the currencies to which they are connected. The five new ELEMENTS ETNs are separately tied to the performance of the Canadian Dollar, Euro, Swiss Franc, British Pound, and Australian Dollar. Index Universe reports:
Why would anyone choose the new ELEMENTS ETFs? Because they make semiannual cash dividend payments to noteholders based on the interest income. The iPath ETNs, in contrast, incorporate that income into the value of the note ... a kind of "virtual interest" that is only realized when the noteholder sells.
Read More: Currency Market Gets More Competitive
Yesterday, the Forex Blog featured a story that explained how to make money when volatility is low. The consensus of the article is that investors must shift their strategy from trading to trending, which requires an adjustment in outlook from short-term to long-term. But given that volatility is low and that currencies often move laterally against each other, how do you know which direction to bet on, and accordingly, when to buy or sell? The answer requires some minor technical analysis, involving two of the most basic tools available: support and resistance. These terms represent approximate price levels within which a specific currency appears to be trading. The significance of these levels is usually arbitrary, and is likely grounded in psychology rather than any real math. Furthermore, once the pattern is spotted, the support and resistance levels often become self-fulfilling, keeping the currency rangebound. But, when, for whatever reason, the currency dips below or rises above the range, it is probably a signal that it is a good time to sell short or buy, respectively. Trading Markets reports:
Though support and resistance are rather basic when it comes to technical analysis, they can be extremely effective for dexterous traders. And really, sometimes, keeping things simple is the best course of action anyway.
Based on several indexes, volatility in forex markets is nearing historic lows. How can this be explained, given the enormous daily swings in equity and bond markets? The first explanation is that business cycles, and by extension, monetary policies, are gradually synchronizing across the industrialized world, especially among the USA, EU, and Japan. When inflation rates and interest rates are similar across different countries, this mitigates any theoretical need for changes in exchange rates. The second explanation is that the tremendous growth in forex volume ($3 Trillion per day and rising) is increasing liquidity and lowering volatility.
More importantly, is it possible to profit in a climate where volatility is lacking? The answer is "of course." It simply involves a shift in strategy. When volatility is high, trading is usually the most profitable strategy: using technical analysis and churning your "portfolio" on a daily basis. On the other hand, when volatility is low, then trending is probably the best bet. Don't forget: volatility is not the same as directional movement. If a currency appreciates every day by only a small increment and without any wild swings, volatility is low but the profit potential is high.
Read More: Making the Most of a Benign Environment
Two weeks ago, then-First Deputy Prime Minister of Russia, Dmitry Medvedev, commented publicly on a more significant role for the Russian Ruble in the global economy, and especially in the regional economy. Fast forward to yesterday, when Medvedev was elected the next Prime Minister of Russia, which means his ideas on forex are more likely to become policy. Medvedev has argued in favor of turning the Ruble into a regional reserve currency. This would first necessitate liberalizing its forex policy by permitting the Ruble to float freely; it is currently fixed to a basket of Euros and Dollars. Given the uncertainty surrounding the Dollar and the global economy at large, as well as the recent boom in Russia's economy, Medvedev clearly smells an opportunity. Neighboring (former Soviet bloc) countries could be persuaded to denominate their reserves partially in Rubles as well as to consider using Rubles in energy transactions. Reuters reports:
Russia, which receives most of its energy revenues in dollars, buys euros, pounds sterling, yen and Swiss francs to diversify its $478 billion gold and forex reserves, the world's third-largest.
Read More: Free Float Seen as Key For Reserve Currency
The three rules of monetary policy- goes the old adage- are inflation, inflation, inflation. Well, maybe not. But that is certainly the story in the Middle East; Saudi Arabia's official inflation rate is the highest in 12 years, and Qatar and the UAE have witnessed double-digit percentage increases, in annualized terms. Since their currencies are pegged to the USD, however, their Central Banks are unable to raise rates accordingly, leaving them with a tough decision: allow the currency to appreciate or watch prices spiral out of control. It is the same story being told in every developing country that pegs their currency to the Dollar, and the members of the Gulf Cooperation Council (GCC) are certainly not exempt. As the ranking member, Saudi Arabia will all but determine if and how the official forex policy changes. An announcement could come any day. The Gulf Times reports:
Mohammed al-Jasser, Saudi Arabia's deputy central bank governor, had said last month that the Gulf Arab states should maintain their currency pegs to the US dollar regardless of rampant inflation in the region or the impact of US rate cuts.
Read More: Saudi to mull forex policy as more US rate cuts loom
Recent news reports have painted a downright bleak picture of the US economy. Home prices are now falling. Equity prices are also falling, at an annualized rate of 20%. Meanwhile, energy and food prices are rising, dipping into what little purchasing power consumers can still claim. Somehow, as DailyFX, recently reported, the Dollar has held its own. Their reasoning is that there is a struggle being waged in forex markets between yield and growth. On the one hand are investors who are bearish on the Dollar because of interest rates that are headed downwards, despite already being low. On the other hand are investors who think that yield is comparatively unimportant, since the rate cuts are needed to shore up the economy. While interest rate differentials do not favor the US, the economic growth that they are intended to bring about tell a different story. DailyFX reports:
The only problem with this thesis is that 2 percent interest rates or 100bp is about as low as the market expects the Fed will go. If banks are forced to take more write-offs and the US economy deteriorates further, the Federal Reserve may be forced to go below 1.00 percent.
Read More: What Matters More For the US Dollar: Yield or Growth?
While the Chinese Yuan quickly ascended the ranks of the world's most important currencies, the Indian Rupee has not yet made it. But that might change in 2008, as the Royal Bank of India ("RBI") will be forced to decide between a more valuable rupee and price stability. Until now, the RBI has successfully pursued the "impossible trinity of a fixed exchange rate, independent monetary policy, and open capital account" through judicious use forex intervention and the issuance of sterilization bonds. Now, as prices are creeping up, the RBI has found itself constrained in its ability to hike rates because of the resulting pressure on its currency. Furthermore, the rupee has already begun to appreciate, costing jobs in certain export-dependent (and politically sensitive) industries. The Economic Times reports:
Monetary policymakers have been torn between letting the rupee appreciate and intervening in the currency markets to inject more rupee liquidity which could be potentially inflationary in nature.
Read More: Gazing through the crystal ball
Remember the expression "Goldilocks economy," used to to characterize the Fed's perennial aim of simultaneously pursuing economic growth and price stability? How about "stagflation," a term coined in the 1970s to describe a unique period in US economic history where low growth coincided with inflation. Now, these two scenarios are being juxtaposed as the Goldilocks economy gives way to stagflation. The Fed is trying to delicately toe the line, as equity and home prices sink while prices rise; one index suggests prices have risen over 7% year-over-year. The index more often cited, the CPI, reads 4.3%. Both of these figures exceed current interest rate levels.
What, then, is the Fed's proper course of action, especially as far as Dollar bulls are concerned? If it holds rates or contindfues to lower them, the economy could avert recession but prices would likely continue to climb, eroding the value of the Dollar. On the other hand, if rates are hiked to mitigate against inflation, a recession would almost become inevitable, and the Dollar would feel the drag of capital being pulled overseas. The New York Times reports:
“February may go down in history as the month that the previously indefatigable U.S. consumer finally threw in the towel, beaten by a combination of deteriorating labor market conditions, surging prices for food and energy and collapsing house prices,”
Although the Chinese Yuan is ostensibly allowed to fluctuate in value, the reality is that the size of its fluctuations and the pace of its appreciation are tightly controlled by China's Central Bank. Since its currency is still effectively fixed to the Dollar, China is severely curtailed in its ability to conduct monetary policy and must closely mirror US policy. Same goes for the rest of Asia, excluding Japan. While US monetary policy was relatively tight, as it has been for the last five years, this necessity didn't cause too many problems; most of these economies would have kept interest rates high irrespective of the US.
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.
Read More: Fed's Lower Rates Pressure China to Strengthen Yuan
Every month seems to witness the induction of a new country into the pantheon of those with burgeoning foreIran has Forex Reserves?x 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.
Read More: Iran's forex reserves top $76 bn
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."
Read More: Breakdown of Forex Correlations Has Market Participants on Guard
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."
Read More: China's trade surplus rises 22.6 percent in January
In testifying beBernanke Hints Rate CutsBernanke Hints Rate Cutsfore 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.
Read More: Dollar remains under pressure following Bernanke's testimony
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.
Read More: Dollar falls as Fischer says won't intervene in currency market
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.
Read More: Currency Market Strategy and Forecasts for February 2008
In its annual meeting, the G7 virtually ignored the situation in forex markets. In previous years, the G7 used the so-called "communique," which essentially functions as a summary of the meeting, to rebuke China for not allowing the Yuan to appreciate at a satisfactory pace. This year, the RMB has appreciated markedly- by 9% on a trade-weighted basis- and thus, the G7 opted not to apply further rhetorical pressure. In addition, several of the most prominent EU member states had hoped to work a discussion of the Dollar into the communique, but alas, any mention was notoriously absent. Analysts have speculated that this is due both to America's political indifference towards the valuation of the Dollar as well to a disagreement over what the correct valuation should be, if indeed it is undervalued. Thomson Financial reports:
"It was clear a few days ago that there was going to be no change in the (currency section) of the communique and that really spoke of a lack of consensus about mainstream currencies."
Read More: China spared ritual lambasting as yuan slips down G7 agenda
Last week, the USD recorded its best weekly performance since 2006, rising 3 cents against its chief rival, the Euro. Apparently, analysts are becoming increasingly pessimistic about the effect of the America recession on the global economy. The consensus is now that a dampened global economy will induce a trend towards risk aversion, which favors the world's #1 and #2 reserve currencies, the Dollar and the Euro, respectively. However, it also appears the near-term economic prospects for Europe are less rosy than originally forecast,. Thus, if last week is any indication, the Dollar should receive a larger proportion of risk-averse capital. Reuters reports:
"Despite a torrent of bad economic news the dollar has been on a tear this week, as the currency market recognized the fact that the slowdown in U.S. economic activity is likely to drag down growth in the rest of the G10 universe..."
Read More: Dollar set for biggest weekly rise since June 2006
At its meeting last week, the European Central Bank (ECB) held its Euro-zone benchmark lending rate at 4.00%. While the decision itself came as no surprise, analysts were nonetheless waiting with baited breath to hear what remarks would accompany it. Jean Claude Trichet, the Bank's President, eased up on hawkish comments he made the previous month, when he signaled that his primary concern was inflation rather than the risk of economic recession. This month, however, he changed his rhetoric markedly, indicating that the ECB was less willing to preempt rising price levels and would instead shift its focus to the possibility of a 'sharp slowing' of EU growth. Forbes reports:
Our view [is] that rate hikes are definitely off the agenda at this stage and by bringing a greater degree of uncertainty on the growth assessment, the ECB may be getting ready for a shift towards a more dovish policy language.
Read More: Euro sags after Trichet tones down hawkish stance
As talk and evidence of a US economic recession builds, the Dollar has witnessed a slight upswing. How to explain these seemingly contradictory trends? The rationale is surprisingly simple. While a US recession would predictably hit the US harder than other countries, it would still hamper growth abroad, especially in emerging markets that have come to depend on exports to the US to drive growth. Accordingly, investing in such emerging markets becomes relatively more risky than investing in the US, which is still considered to have the world's most stable investing climate from a long-term perspective. Thus, as risk aversion rises, so does the Dollar. Thomson Financial reports:
The combination of poor data weighed on stock markets in the US and Asia, while major bourses in Europe have all opened lower today. This meant the dollar gained support as investors shy away from riskier emerging market assets.
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.
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.
Read More: Fed rate cut conspiracy or power play?
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.
Read More: India expects to add $100 bn to forex reserve in FY'08
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.
Read More: Equities send dollar up
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.
Read More: Greenback is nearing bottom, currency experts say
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.
Read More: Fundamental analysis - Market Correlations
Today, the Federal Reserve Bank lowered interest rates for the second time in as many weeks, bringing its benchmark federal funds rate down to 3.00%. The Fed has now lowered rates by 2.25% since August. The move came as a relief to investors, who now see that the Fed is serious about preventing the economy from slipping into a full-scale recession. However, it remains to be seen whether the rate cuts will provide the necessary boost to the economy or instead prove too little too late. As far as the Dollar is concerned, the rate cuts carry two (conflicting) implications. On the one hand, the economy and stock market could rally, which would likely be matched by a Dollar rally. On the other hand, the interest rate differential between the US and EU is now a 1% and risk-averse investors hungry for yield will be hard-pressed to justify shifting capital to the US. The New York Times reports:
Many economists are far from convinced that even a combination of tax rebates and cheaper money would prevent a recession. And in a sign that bond investors are fretting that the moves could lead to higher inflation, yields on 10-year and 30-year Treasury securities edged up slightly on Wednesday.
Read More: Fed Cuts Key Rate as Stimulus Plan Advances
For at least the duration of the current administration, the official US stance towards its currency has been a "strong dollar" policy. In hindsight, it appears that this policy was entirely baseless, since its was directly undermined by the simultaneous easy monetary policy, and thus it stands to reason that US policymakers did not actually believe that a strong Dollar policy was necessary to pursue. In a recent op-ed piece published in the Wall Street Journal, one analyst outlines the case for a strong dollar, and by extension, why the depreciating Dollar is bad for the US economy.
First, since oil contracts are settled in Dollars, a weak Dollar has directly contributed to high oil prices, which has several negative economic and geopolitical consequences. Second, a cheap Dollar is eroding the purchasing power of US consumers directly by making imports more expensive and indirectly through inflation. Third, the weak Dollar shifts the balance of economic power in favor of US competitors, which don't need to grow as fast to keep pace with the US, in Dollar terms. Finally, the recent weakness threatens the long term reserve status of the Dollar, which has important implications for economic growth and jobs creation.
On the other hand, argues the analyst, the conventional wisdom that a declining Dollar is necessary to correct the current account and trade deficit is bunk, since much of the trade deficit is accounted for by intra-company trade and since the current account deficit is generally overstated and not connected to currency valuations. In short, he argues, it is in the best interest of the US to align its rhetoric with its economic and monetary policies such that the long term luster of the Dollar is restored.
Read More: The Dollar and the Market Mess
When America's dot-com bubble collapsed in 2001, the Federal Reserve Bank moved quickly to quell the panic by slashing interest rates. The European Central Bank (ECB), on the other hand, was adamant that it would not have to follow suit since the European and American economies were no longer so intertwined. Several months later, it became increasingly clear that the ECB was wrong, and it was ultimately forced to lower rates. Now, some analysts fear that history is repeating itself, as America's housing crisis threatens to run a similar course as the collapse of the stock market bubble. The Fed has lowered interest rates twice in the last few months, while the ECB has yet to act, insisting that its primary concern is inflation. For now, the interest rate differential is supporting the Euro, but if the ECB falls behind the curve, a stagnating EU economy could bring down the common currency. The New York Times reports:
But when it comes to the economy, Europe remains optimistic it can decouple itself and withstand collateral damage from a possible recession in the United States.
Read More: Why the European Bank Is Sitting Back
Last week, the Bank of Canada cut interest rates by 25 basis points, bringing its benchmark lending rate down to 4%. Fortunately for the Canadian Dollar, the rate cut paled in comparison to the 75 basis point move effected by America's Federal Reserve Bank. While the Bank of Canada offered a hackneyed rationale of "keeping aggregate supply and demand in balance" for the change in monetary policy, there is still some surrounding haze since Canadian inflation is rising and economic growth is strong. The currency had slipped below parity against its American counterpart, but is now slowly crawling its way back. If commodity prices remain high, the currency will likely push back across that psychologically important barrier of 1:1 with the USD.
Read More: Canadian dollar firms as BoC cuts rates
The South African Rand is not the subject of much analysis in the forex community, which typically confines itself to the majors and the BRIC currencies - Brazil, Russia, India, and China. But recently, the Rand found itself on the radar screen of at least one analyst, who pondered the implications of a growing trend towards risk aversion. It appears that the Rand has resumed a clearly identifiable downward path against the Dollar, a course which had been temporarily interrupted in the early years of the decade. Now, inflation is picking up again and investors globally are becoming more hostile towards risk, two factors which bode ill for the Rand. On the other hand, South Africa is rich in natural resources; judging from the performance of the Canadian Loonie and the Australian Dollar, commodity economies are still in vogue. The Times reports:
The curve ball for precious metals would be a sustained stronger dollar, unlikely while the US economy is in its current predicament and the Fed is cutting rates.
Read More: A warning to beware of banking on the rand
So-called 'Sovereign Wealth Funds' are the talk of the town, stealing headlines as part of a multi-billion dollar buying spree. Anecdotally, stories of these funds and other institutional foreign investors have made a big splash, epitomized by a few high-profile investments in struggling American investment banks. It no longer appears these stories were isolated, as suggested by some pretty compelling economic data. In 2007, total foreign direct investment into the United States totaled $400 Billion, which represents a 90% increase over 2006. In addition, the first few weeks of 2008 saw a frenzy of activity, which suggest this trend will continue. Investment in the US is being driven primarily by a weak Dollar and attractive stock market valuations. If the bad news on the US economy continues to pour in, analysts warn that foreigners could play an even larger role in mitigating against recession. The New York Times reports:
The weak dollar has made American companies and properties cheaper in global terms. Even as Americans confront the prospect of a recession, economic growth remains strong worldwide, endowing oil producers like Saudi Arabia and Russia and export powers like China and Germany with abundant cash.
Read More: Overseas Investors Buy Aggressively in U.S.
Last week, the New York Times published an article with the byline "Is the Federal Reserve’s chairman, Ben Bernanke too nice for the job?" Apparently, talk had been building on Wall Street that Bernanke was not tough enough to deal with the growing problems faced by the world's largest economy. Bernanke responded publicly in a speech in which he promised that the Fed would act quickly and decisively to confront such problems. Then on Tuesday, the critics were silenced peremptorily by a Fed rate cut of 75 basis points, the largest single cut in two decades. Moreover, Bernanke intimated that additional rate cuts could come as soon as next week.
It's unclear how this activity will affect the Dollar. On the one hand, it implies beyond a reasonable doubt that the US economy is indeed headed for recession. Bond yields are declining and the stock market has lost 15% of its value since October. On the other hand, the Fed has demonstrated that it is willing and able to take the necessary steps to avoid a hard landing at any cost. At the same time, investors around the world fear that a US recession will have an adverse impact on the global economy. And where do investors park their money during periods of global economic uncertainty? Answer: USA. Sure enough, the Dollar has already begun to rally after taking a big hit immediately following the rate cuts.
Read More: Fed Rate Cut Halts Market Free Fall
As Asian capital markets crash in unison, the Japanese Yen is rising at its fastest pace in years. Taken out of context, that sounds like a contradiction, since a positive correlation typically obtains between the strength of a nation's economy, capital markets, and currency. However, the Yen is unique, as most forex traders are doubtlessly aware. The Yen rises and falls with the whims of the carry trade, which in turn is tied closely to volatility. And in case you haven't noticed, global capital markets are seesawing to such an extent that by some measures, volatility levels have reached a nine-year high. One analyst has drawn a parallel between the current credit crisis and the 1998 Asian economic crisis, which also produced a Yen rally.
Read More: History Points to a Yen Rally
When Henry Paulson was appointed Secretary of the US Treasury last year, he made China and its purportedly undervalued currency a cornerstone of his economic plan. Lo and behold, several months ago, the Yuan suddenly accelerated in its upward path against the Dollar, rising at an annualized rate of 14%. Currency futures are now pricing in an 8% rise in 2008, while several economists are forecasting a 10% increase. Ironically, there are still American policymakers who think the Yuan is appreciating too slowly, as well as Chinese policymakers who reckon it is increasing too rapidly. Accordingly, the current pace probably represents a fair compromise. Besides, inflation is threatening the US, so a slow appreciation would enable the economy to adjust to higher prices in the long term. While China also faces rising inflation, it doesn't want to send investors the message that the movement of its currency is uni-dimensional, which would encourage further inflows of speculative capital. The Economist reports:
But Chinese policymakers have stressed the need for gradual adjustment. To show that the currency is not just a one-way bet, the PBOC may try to nudge the yuan a bit lower in coming days.
Read More: Revaluation by stealth
In a recent editorial published in the Wall Street Journal, the Chief Economist for Bear Stearns (an American investment bank) advocated intervention by America's Federal Reserve Bank on behalf of the Dollar. He reasons that the best way both to fight and inflation and alleviate the possibility of recession is to strengthen the USD. Current measures, which include lowering the discount rate and manipulating the money supply, are actually worsening inflation. As a result, institutional investors are moving their capital en masse outside the US in order to prevent the declining dollar from corroding their investment returns. While paying lip service to the prevailing wisdom that Central Banks are essentially impotent when it comes to managing currencies, he insists that strong rhetoric by the Fed could conceivably convince investors that it stood behind the "Strong Dollar Policy" it promotes. The Wall Street Journal reports:
By saying they want a stronger dollar, the Fed...could make it happen. Government policy makers have almost absolute control over perceptions of the future scarcity of dollars. This controls the demand for dollars almost as much as it does the supply, setting its value as much or more than rates do.
Read More: Markets and the Dollar
On January 24 last year, the Forex Blog reported with great fanfare that China's forex reserves had breached the epic milestone of $1 Trillion. [In hindsight, it turns out that the psychologically important barrier was broken several months earlier, but that is beside the point]. Less than one year later, China's forex reserves reached another important threshold, soaring past $1.5 Trillion. It appears that new reserves are being accumulated at an exponential rate, having increased $460 Billion last year and over $30 Billion in the month of December alone. By no coincidence, China's 2007 trade surplus of $262 Billion shattered the previous record and is expanding at a comparably supersonic pace.
Most analysts reckon that the country is locked in a vicious cycle: when its trade surplus grows, its forex reserves grow proportionately. Moreover, the lopsided trade imbalance th\at China maintains with most of the world ensures that the demand for Chinese Yuan exceeds the supply. In the short run, a more expensive currency equates to higher prices paid for its exports which only increases the trade surplus and forex reserves further, and exerts still more pressure on the currency to appreciate. Meanwhile, as the Yuan rises, the value of China's forex reserves, which are denominated predominantly in USD, falls. What a conundrum indeed! Xinhua News reports:
The value of Chinese RMB against the US dollars has appreciated by over six percent in 2007. The central parity rate of the RMB was 7.2672 to the US dollar on Friday.
Read More: Forex reserve tops $1.53 trillion
Since July, the Japanese Yen has notched a stellar performance in climbing 15% against the Dollar, without garnering much attention. Within the last week, however, analysts have begun to take notice, as the carry trade temporarily collapsed and the Yen appreciated by another 3%. 'But Japan's Central Bank is no hurry to raise interest rates,' you are probably wondering. 'What on earth is all the fuss about?' Volatility, the sworn enemy of carry traders has exploded. Global capital markets, including the US stock market, are in a state of turmoil. The financial services industry, the perennial bulwark of the US economy, is set to record its worst year in recent memory. Leading the way, so-to-speak, is Citigroup, which recently announced that it will write-down an additional $10 Billion in worthless subprime paper and will also receive a proportionately large infusion of capital. Cue exit music for carry traders. Bloomberg News reports:
"The global and risk environment is dominating yen pricing,'' said Chris Turner, head of currency research at ING Financial Markets in London. "There's risk aversion in the background.''
Read More: Yen Rises as Traders Pare Carry Trades on Credit-Market Losses
As we wrote last week, the direction of the Dollar may be influenced more by external economic events rather than by internal activity. Accordingly, it would behoove forex traders to direct their attention away from the Fed and towards the Bank of England and the European Central Bank, both of which face important monetary policy decisions later in the month. With regard to the Bank of England, futures markets have priced in a 2/3 chance that rates will be cut by 25 basis points. In the case of the ECB, the markets are expecting rates to be maintained at current levels. However, analysts will be scrutinizing the Banks' respective press releases and monitoring other developments in this area due to the implications for the US-EU-Britain interest rate differential. Reuters reports:
Some analysts think that hawkish comments from Trichet will be brushed aside with weaker economic data leading to the prospect of falling euro zone rates later in the year.
Read More: Pound down, others flat before ECB, BoE decisions
2008 is still in its infancy, which means the self-proclaimed forex experts can be excused for offering their projections on what the year has in store for the Dollar. If currencies were traded in a vaccum, the Dollar would probably trend upward, since many technical factors suggest it is oversold. From a fundamental standpoint, however, it is probably overvalued, per the laws of interest rate parity and purchasing power parity. Relative to other countries, though, it may be undervalued. From this standpoint, argue some analysts, the biggest impetus for a Dollar upswing will come not from good news emanating from the US, but rather from bad news emanating from the rest of the world. For example, the British economy, balance of trade, and monetary policy outlook is even more bleak than the US. The CEO of Airbus, one of the EU's most important companies, has threatened to shift production away from the EU if the Euro remains expensive. Finally, the Central Bank of China is allowing the Yuan to appreciate at a faster pace against the Dollar. As far as Dollar bulls are concerned, it might be best if the US government simply sits tight. The BBC reports:
"A lot of bad news is already priced into the dollar. It's elsewhere that the shocks could come from, perhaps from the European Central Bank, or the Bank of England."
Read More: 2008 - the return of the dollar?
Recently, most of the news regarding the Dollar has, frankly, not been positive. The housing crisis is beginning to take its toll on the broader economy. The Fed is planning to lower interest rates at its next meeting, which will eliminate the positive differential with Euro-zone rates. High commodity prices are driving inflation and eroding the value of the Dollar. But today, the news was good- at least as far as the USD is concerned. The Wall Street Journal leaked a document from the Bush Administration that mentioned tax cuts for households and businesses. The aim of the tax cuts, ideology notwithstanding, is to provide a stimulus for the reeling economy. As they say, what's good for the US economy is good for the Dollar. Reuters reports:
"Given the market's perception that a (U.S.) recession is looking increasingly inevitable, tax cuts and any stimulus measures offered by the authorities will obviously bode well (for risk appetite) ... It's more positive for the dollar because there is a sense that it may help avoid a recession."
Last week, the Institute for Supply Management released the results of its monthly manufacturing survey, which fell to a four-year low. Taken with testimony from bond expert Bill Gross, the picture is now quite bleak. In fact, economists are projecting that the US economy will slip into recession as soon as the first quarter of 2008; Gross believes that the economy is already in recession. As a result, futures markets have already priced in a 75% chance of a 25 basis point rate cut and a 25% chance of a 50 basis point move by the Fed at its next meeting, scheduled for the end of January. As expected, the Dollar is taking a beating in forex markets, as traders price in the effect of the rate cuts, which would create interest rate parity with the EU. DailyFX reports:
The minutes from the last FOMC meeting confirmed that growth is the Fed’s primary concern at the moment. The deterioration in incoming economic data has forced them to lower their growth estimates for 2007 and 2008.
Read More: US Dollar Falls as Traders Consider 50bp Rate Cut for January
In Venezuela, the inflation rate for 2007 is estimated at 20%, a slight increase over the 17% growth in prices that was observed in 2006. The nation, led by Hugo Chavez, plans to deal with inflation by dropping a few zeros from the currency's exchange rate. Currently, the official exchange rate is 2,150 Venezuelan Bolivars for every US Dollar. Under the revaluation, the new official exchange rate will become 2.15 Bolivars/USD. Critics charge that the change will not have any impact on inflation, especially since the market exchange rate implies a Bolivar that is three times less valuable than government rates. Chavez retorts that the revaluation is only one part of a broader, more sophisticated strategy. Down Jones reports:
The Central bank president had earlier in the year said the effect on inflation would be neutral, and most economists agree, but [Finance Minister] Mr Cabezas said "it's definitely going to have a positive effect" on the government's fight against price increases.
Read More: Chavez drops zeros to fight inflation
Last week, the Forex Blog recounted what happened across forex markets in 2007, in all of its drama. Now, we would like to offer a nice counterpoint, in the form of the major themes expected to dominate forex headlines in 2008, courtesy of Dow Jones. The list includes eight distinct themes, though there is some overlap. Three of the themes pertain directly to the USD, which is the currency most worth watching in the upcoming year. The fundamentals bode well for the Dollar; the economy has not suffered from the credit crunch nearly as much as economists feared; the cheaper currency has boosted exports; foreigners have proven surprisingly willing to finance the twin deficits.
Then, there is inflation, which has reared its ugly head in the US as well as abroad. Foreign Central Banks, especially in Asia, may have to tighten monetary policy in order to maintain price stability. Those countries with already-high interest rates, such as Australia and New Zealand, are expected to keep rates high. The next theme, accordingly, is the carry trade, which should continue its run due to the aforementioned high interest rates. Next is China, which will be watched on two fronts: its economy and its currency, both of which are expected to continue rising.
The final two themes pertain especially to the Middle East: currency pegs and Sovereign Wealth Funds. As the Dollar declined in 2007, several nations in the Mid East mulled the possibility of de-linking their respective currencies from the Dollar, but thus far, the status quo has obtained. Sovereign Wealth Funds also made a big splash in 2007 with several high-profile investments in the US, implicitly underscoring their their commitment to the Dollar. They represent a growing force in global capital markets, and will be watched vigilantly in 2008.
India is quickly becoming a major force on the foreign exchange reserve scene. While India doesn't fix its currency to the USD like China does, it still removes most foreign currency from circulation in order to mitigate against inflation. As a result, its reserves have ballooned to nearly $300 Billion, having increased by $100 Billion this year alone. India will now be faced with the same decisions that many other forex reserve hogs have been forced to reckon with, namely how to allocate its reserves. While India hasn't weighed in prominently on the issue as China has, analysts will be watching closely. The Economic Times reports:
Rate cut by the Fed in the US along with the positive perception prevailing about the emerging economies such as India has led to sharp rise in inflows, it said.
When making predictions for 2008, it is useful to put things in perspective by assessing predictions made at this time in 2007. With regard to the Canadian Dollar ("Loonie"), most analysts predicted a rise, but all dismissed the possibility of parity with the USD. Ultimately, the Loonie rose to 1.10 against the Dollar before ending the year just above parity. With this in mind, experts are predicting the Loonie will continue to appreciate in 2008, with forecasts ranging from modest to stellar. Some analysts believe the Loonie will continue to ride the wave of high commodity prices, while others expect the currency to benefit from a general weakness in the US Dollar. But if 2007 taught us anything, it's that these predictions should be taken with a grain of salt. The CanWest News Service reports:
Gartman, who two years ago predicted the loonie would reach parity with the U.S. greenback, says the Canadian dollar is poised to rise even further, but on its own merits, and not because of a run on the greenback, which he suspects is already oversold on world exchange markets.
What analysts have been warning of for years has finally come to pass: the USD officially occupies a sDollar Declines in Forex Reservesmaller portion of global foreign exchange reserves. According to a recent IMF reports, the fraction of reserves denominated in Dollars has fallen from 66.5% to 63.8% over the last year, with much of the difference offset by a proportional rise in the preponderance of the Euro. Analysts first began sounding alarm bells as early as 2003, when the Dollar fell nearly 15% against the Euro. However, it wasn't until 2006, when China began to accumulate reserves at an ever-increasing rate as its trade surplus exploded while at the same time the USD was tanking, that commentators began paying attention. 2007 brought several anecdotal reports that foreign Central Banks were both passively and actively diversifying their reserves. Now, it looks as though these were not isolated incidents, but instead part of a broader trend. AFP reports:
In recent months, several emerging-market countries, whose foreign currency reserves have ballooned as a result of such factors as high commodity prices and strong exports, have signaled their intention to further diversify their foreign exchange reserves to offset the US currency's depreciation.
Read More: IMF says dollar losing ground in global forex reserves
With the books closed on 2007, analysts are looking ahead to 2008. With regard to the Dollar, market sentiment is surprisingly upbeat, with expectations of a 5-10% appreciation. In blogging circles, the word "oversold" has been cropping up. Commentators cite a mix of technical and fundamental factors in their reasoning. Some economists expect the US trade deficit to decline marginally in 2008 and GDP to grow at 2-4%. These fundamentals, they argue, support a higher Dollar valuation. The price of oil has been singles out as a pivotal input in the US economic forecast. If the price declines by 20% or more, it could offset the still-unfolding housing crisis and provide much-needed support for the faltering economy. he EU could also take steps to support a Dollar appreciation. EU Government and Central Bank officials have voiced concern over the Euro's rise, and could intervene on its behalf via a change in interest rates. BloggingStocks reports:
"So far the ECB's deeds have not matched their words, but one gets the sense the ECB will take actions to strengthen the dollar and weaken the euro in 2008."
Read More: Experts see mild dollar rally in 2008 if economy holds up
Reading forex quotes correctly is essential to forex trading but it can be quite confusing for the new comer. Actually, they are quite simple to read and understand. Here is a guideline to reading forex quotes correctly.
Let us look at an example of how a forex rate quote looks like:
EUR/USD = 1.2526
The above looks simple enough, right? This is an example of a foreign exchange rate between the Euro and the US Dollar.
Do not forget that in all forex quotes, there are always two currencies quoted. The forex quote is displayed such because when you make a trade in forex trading, you are always buying one currency and selling another at the same time.
In all forex quotes, the first currency listed is known as the base currency while the second is known as the quote currency. Forex quotes are meant to show us the price relationship between the two currencies.
The foreign exchange rate gives us an indication of how many units of the quote currency we have to pay to get one unit of the base currency.
The above example shows us that the base currency is the Euro and the quote currency is the US dollar. The forex quote tells us how each currency is trading relative to the other. In order to purchase one unit of Euros you will have to sell 1.2526 units of US Dollars.
It should be easy to understand so far. Now let’s add an additional thing to our example and that is the bid ask spread.
Forex brokers are paid not on the trades placed in the forex market but on the bid/ask spread instead.
We shall add the bid/ask spread to our example above:
EUR/USD = 1.2526/1.2528
This can be simplified to:
EUR/USD = 1.2526/8
Forex brokers make their commissions by selling currencies at a slightly higher rate than they buy them. This is perfectly legal and all forex brokers do it, though the amount of the spread may vary.
As a forex trader, you will be buying at the bid price, which is the first price quoted. You will then sell at the ask price which is the second price listed. This difference between the two prices is called the spread which is retained by the forex broker as their profit on the trade.
In our above example, you will buy at 1.2526 and sell at 1.2528. The 0.0002 (2 pips) will go to the forex broker as a payment for executing the trade for you.
The bid/ask spread is an easy to understand and clear-cut way for calculating trading fees and expenses.
With a good understanding of how to read forex quotes correctly, it can go a long way in helping you achieve success in forex trading
Most people try to approach trading or investing by trying to "predict" the future price of stocks, commodities, currencies, or the market indices.
Different people have different methods. Some use fundamental analysis: looking at a company's health, balance sheets, earnings, the economy, etc. Others use technical analysis, trying to decipher trends and patterns in stock charts.
This is the wrong approach. It has been shown repeatedly for several decades that prices are not predictable, other than a general long term rising of the markets (due to the expansion of the country and world's economies. Of course, this long term tendency to rise has only been observed for the past couple hundred years, which means it is not guaranteed to happen forever.)
In any case, the unpredictability of the markets is well documented. One need only look at history. Money manager and traders, amateur and professional alike, have a track record that is no better than simply following an index fund. This has been shown time and time again. Read the book "A Random Walk Down Wall Street" for details.
If that's the case, one should just buy and hold an index fund, right?
Not a good idea either. If you buy an index fund at the "wrong time", it's entirely possible you would have to wait years or even decades to make any money. For example, if you had bought the Dow in 1929, you would have waited 25 years to break even. If you had bought New Zealand in 1987 you would have waited seven years.
Waiting a decade to see any return on your investment is hardly an investment.
What's the proper way to approach investing or trading? The proper way to tme your entries and exits according to the following basic tenet:
It is that simple.
How far is far? How fast is fast? To answer this, it pays to compare long term stock charts with short term ones. A good guideline is something called the 50% retracement rule. Google for it. Pick up a book on it. Or look at my other pages on this website to learn more about it.
Here are the other rules to go by:
Skeptical? Sound too simple to work? I challenge you to compare your returns trading this method, with any other method you may choose.
Passive investors will benefit GREATLY by being only a LITTLE active in watching the markets and by identifying major moves. Look at daily stock charts often. Look at 10-year charts every once in a while. Identify major moves and the retracements of those moves. Identify vertical zones on stock charts where you can expect to make profits by trading these retracements. Identify probable areas to BUY. Identify probable areas to SELL and SELL SHORT.
Under no circumstances should you just "Buy and Hold" because that's what your investment advisor tells you.
You management of your money should follow these guidelines, whether you actively trade individual stocks or you trade portfolios or mutual funds. The principle is the same and applies to ALL financial markets.
* Article Source: Common Sense Trading.
