13/8/ · August 13, Strategy. Forex trading PDF is the process of buying or selling currencies with the intent of making a profit. Forex traders usually buy a currency if they 28/10/ · Forex trading is a global market that trades currencies and commodities. The forex market is open 24 hours a day, 7 days a week. There are three types of forex trading: spot, Among the different types of forex traders are a swing trader, a position trader, and a day trader. What Is Forex Trading Example? A currency exchange (foreign exchange) involves 18/8/ · What is Forex Trading? Forex trading means buying and selling foreign exchanges for the purpose of making profits. Though the trading industry was mostly focused on expert ... read more
economic monetary policy. Section 02 Key drivers of currency movements Key indicators A closer look at some indicators Stock market Even day and swing traders will find it valuable to keep up with incoming economic reports from the conditions major economies.
Stock markets have a significant impact on exchange rate movements because they are a major place for high-volume currency movements. When foreign investors There are times where sentiment in the equity move their money to a markets will be the precursor to major moves in the forex market. If the stock equity market is particular stock equity rising, investment dollars generally come in to seize the opportunity. Alternatively, falling equity market, they convert markets could prompt domestic investors to sell their capital in a their shares of local publicly traded firms to take advantage of investment opportunities abroad.
domestic currency and To understand this further, let's imagine that the push the demand for it UK economy is booming, and its stock market is higher, making the performing well. Meanwhile, in the United States, a lackluster economy is creating a shortage of currency appreciate. investment opportunities. In this type of environment U. investors will feel When the equity more inclined to sell their U. dollars and buy British pounds to participate in the markets are outperformance of the UK economy.
When they elect to do so, it results in the outflow of capital experiencing recessions, from the United States and the inflow of capital however, foreign into the United Kingdom. pushing the domestic currency down. Section 02 Key drivers of currency movements Key indicators The most overrated indicator GDP is no longer a big deal GDP report has also become one of least important economic indicators on the U.
calendar, as it has led to some of the smallest relative movements in the EURUSD. One possible explanation is that GDP is released less frequently than other data in our study it comes out quarterly versus monthly , but in general, the GDP report is more prone to ambiguity and misinterpretation.
For example, surging GDP brought about by rising exports will be positive for the home currency; however, if GDP growth is a result of inventory buildup, the eﬀect on the currency may actually be negative. Also, a large number of the components that comprise the GDP report are known in advance of the release. Section 02 Key drivers of currency movements Most volatile news reports That traders should follow closely Volatility and profits in forex are measured in pips.
The bigger the volatility the more pips and money a trader can make from a certain trade. Keep this chart by your side and make sure to mark these reports in your calendar! Unemployment indicator, showing if U. employment is growing or not. interest rates. Inflation indicator. for month prior to the release of the report.
Section 02 Key drivers of currency movements Economic indicators What you need to know about them Part 1 What are Economic Indicators? Economic indicators are snippets of financial and economic data published regularly by governmental agencies and the private sector. These statistics help market observers monitor the economy's pulse - so it's no surprise that they're followed by almost everyone in the financial markets.
With so many people poised to react to the same information, economic indicators have tremendous potential to generate volume and move prices. It might seem like you need an advanced economics degree to parse all this data accurately - but in fact traders need only keep a few simple guidelines in mind when making trading decisions based on this data.
Mark Your Economic Calendars Watching the economic calendar not only helps you consider trades around these events, it helps explain otherwise unanticipated price actions during those periods. Consider this scenario: it's Monday morning and the USD has been falling for 3 weeks, with many traders short USD positions as a result.
On Friday, however, U. employment data is scheduled to be released. If that report looks promising, traders may start unwinding their short positions before Friday, leading to a short-term rally in USD through the week. Know exactly when each economic indicator will be released. You can find these calendars at the New York Federal Reserve Bank's site. What does This Data Mean for the Economy? You need not understand every nuance of each data release, but you should try to grasp key, large-scale relationships between reports and what they measure in the economy.
For example, you should know which indicators measure the economy's growth gross domestic product, or GDP versus those that measure inflation PPI, CPI or employment strength non-farm payrolls. Not All Economic Indicators can Move Markets The market may pay attention to diﬀerent indicators under diﬀerent conditions. That focus can change over time and from one currency to another.
For example, if prices inflation are not a crucial issue for a given country, but its economic growth is problematic, traders may pay less attention to inflation data and focus on employment data or GDP reports.
Section 02 Key drivers of currency movements Economic indicators What you need to know about them Part 2 Watch for the Unexpected Often the data itself may not be as important as whether or not it falls within market expectations. If a given report diﬀers widely and unexpectedly from what economists and market pundits were anticipating, market volatility and potential trading opportunities may result.
At the same time, be careful of pulling the trigger too quickly when an indicator falls outside expectations. Each new economic indicator release contains revisions to previously released data.
Don't Get Caught Up in Details While your macroeconomics professor may appreciate all the nuances of an economic report, traders need to filter data to focus on the numbers that can inform their trading decisions.
For example, many new traders watch the headlines of the employment report, for example, assuming that new jobs are key to economic growth. That may be true generally, but in trading terms non-farm payroll is the figure traders watch most closely and therefore has the biggest impact on markets.
Similarly, PPI measures changes in producer prices generally - but traders tend to watch PPI excluding food and energy as a market driver. Food and energy data tend to be much too volatile and subject to revisions to provide an accurate reading on producer price changes. There are Two Sides to Every Trade Just remember that no trader's knowledge can be complete all the time. You might have a great handle on economic data published in Europe - but there are times when data published in the U.
or Australia might have a surprising impact on your currency market. Doing your homework before trading any currency can help you make better decisions.
unemployment rate is expected to increase. Imagine that last month the unemployment rate was at 8. With a consensus at 9. economy, and as a result, a weaker dollar.
They will go ahead and start selling oﬀ their dollars for other currencies before the actual number is released. What the heck! This is because the big players have already adjusted their positions way before the news report even came out and may now be taking profits after the run up to the news event. The market players thought the unemployment rate would rise to 9.
Now that the report is released and it says something totally diﬀerent from what they had anticipated, they are all trying to adjust their positions as fast as possible. This would also happen if the actual report released an unemployment rate of The only diﬀerence would be that instead of the dollar rallying, it would drop like a rock! Since the market consensus was 9. looks a lot weaker now than when the forecasts were first released.
Instability in the world likelihood of Clinton becoming the next market prods investors to pull out of their president, Lim Say Boon, chief investment financial positions, leading to currency oﬀicer at DBS Bank Ltd.
in Singapore, wrote depreciation. in a report. The Super Tuesday results are being seen as "an outcome for continuity over the disruption threatened by Trump and Sanders," he said. You must remember that investors hate uncertainty!
Similar eﬀects have occured with Clinton and Obama. For Trump the upward trend was also there due to his promise to lower taxes and increase government spending on infrastrucure. Section 02 Key drivers of currency movements Market psychology The golden rule of economic indicators The currency rates often start moving even before the actual data comes out due to forecasts and market sentiment!
Sentiment analysis is a kind of FX analysis that concentrates on indicating and consequently measuring the overall psychological and emotional state of all participants of the foreign exchange market. This kind of Forex analysis strives to quantify what percentage of FX market participants are bullish or bearish, in other words being optimistic or pessimistic. If the forecast promised a positive growth and the actual data comes out even better than forecasted, it amplifies the rise of the currency even more.
Overlap between two The Foreign Exchange market operates 24 hours a day, making it nearly impossible sessions for a single trader to track every market Generally, whenever there is an overlap in movement and respond immediately at the market e. In period. For instance, every morning during order to devise an eﬀective and London Open session. Euro pairs are active time-eﬀicient investment strategy, it is and if you have a good strategy, you could important to understand how much get pips.
liquidity there is around the clock to maximize the number of trading opportunities during a trader's own 2.
News Release market hours. Fundamentals drive the market. During News Release, volatility is experienced and Besides liquidity, a currency pair's trading some pairs could move over pips range is also heavily dependent on depending on the type of news. For example geographical location and macroeconomic Non-Farm Payroll is the most volatile news factors.
release and dollar based currency pairs could move hundreds of pips in seconds. Knowing what time of day a currency pair However, trading news is risky if you are not has the highest or narrowest trading knowledgeable about it. volatility will undoubtedly help traders improve their investment utility due to better capital allocation. Central Bank Govenor's Speech High volatility oﬀers lucrative profit Speeches from these guys could make pairs potentials to short-term traders.
Lower go hundred's of pips and even change volatility under 80 pips per day is better market sentiment with eﬀects lasting into for risk-averse traders, because there are months.
However, its risky to trade these less iregular market movements caused by speeches except you are subscribed to some aggressive intraday speculation.
Section 03 Forex timing What Are the Best Times to Trade Forex We strongly advice you to avoid all resources that traders can then purchase currencies from tell you Forex market is a fairy-tale place where diﬀerent continents.
The timing in forex trading is is usually the most active as it involves many crucial! countries of the European Union. The US market comes next, so the time when the London session The Forex market is open 24 hours a day, but it is intersects with the US session usually provides the not active all this time!
In Forex trading money is biggest returns. Expert traders consider 10 AM to made when the market is active when traders are be the best time as this is the period when the bidding on the prices so it is crucial for you to London market is preparing to close the trades learn about the most productive hours of the day and traders are getting ready to move to US and of the week for trading the forex!
This creates big swings in currency prices thus opening great opportunities for profit. There are three major trading sessions of the Forex market: London, US and Tokyo session. Fridays are busy as well, but only until PM and during the second half of the day the movements can be very unpredictable.
While it is crucial to understand when is the best time to analyze the charts and make the bids, it is equally important to know when NOT to open positions.
A thin market also comes with higher commissions spreads for each trade due to the decreased liquidity. In simple words: if you want to sell a currency, it is harder to find potential buyers, so the broker or bank must increase the commission as it takes a risk of not finding a buyer so quickly.
A good example of chaotic trading is shortly before, during and shortly after important news events. In these times of uncertainty, the currency rates can swing wildly and unpredictably, thus messing up trading by creating execution lags, triggering stop-loss orders, etc.
Usually, the higher the liquidity, the lower the volatility, and therefore the tighter the spread Spread is like a commission that you pay for the trade.
However, even major pairs can experience wider than normal spreads during volatile periods, such as interest rates announcements, GDP reports, unemployment figures, to name a few examples. There will also be wider spreads during oﬀ market hours, when there is only a fraction of the participants in the market, so the liquidity is lower.
This can be seen when the markets open for the Asian session, at GMT Sunday, for example. This widening occurs typically around news announcements or oﬀ-market hours. Most forex brokers allow you to trade all weekend, but spreads will be significantly wider during weekends when liquidity is almost non-existent. Dealing desk or market making brokers are going to widen their spreads coming into economic announcements to oﬀset the risk they take on by filling orders.
Unfortunately, banks do the same thing, so an average forex broker could be better, but only marginally. What happens before or during important announcements. The volatility jumps before important anouncements and the drastic movements can hit the stop-losses, resulting in a lost trade and investment.
wild swings based on rumours etc. So I generally close the position or wait out the increased spread unless it is really pumping. This should not be a problem if you are trading the higher time frames as your stop will probably be quite large and so increasing it by 5 or 10 pips probably won't be too significant risk increase better yet - factor in the widened spread when you calculate your position size as you know that if the trade works out you will be holding for a few days or more, in which time there will be anouncements.
If you can't be at your computer when the news anuncement hits, I would suggest leaving your stop wider for the periods that you can't manage the trade unless there are no announcements over that period. If you are trading lower time frames however, your stops will inevitably be smaller and the increase in stop size may substantially increase your risk. In this case, you may have to decide to close the position before the anouncment or close enough of the position so that the increased stop will equal the same loss as the originally intended loss.
But make no mistake - you will have to widen your stop. The spread will get you. Even if the announcement is in your favour, price generally whips up and down at least a few pips before taking direction. If your stop is anywhere near price just prior to news, chances are you will be taken out not matter what the result. Just be aware of the anouncement times and factor this in when deciding wether or not to take a trade. It may often seem that these indicators are contradictory.
Analyses of longer time periods show tendencies, ignoring accidental changes, whereas daily, hourly ir minute graphs help in choosing the moment to open and close positions. Example Multiple time frame analysis time X Let us look at a daily graph. What do most traders do when they see such a curve?
Aug Sep Okt Nov Dec Conclusion For successful and precise market analysis, you must use at least time frames! Section 04 Time frames Time frame choice of pros The shortest time frame that traders should start looking at when their trading day starts are daily charts, even if you are trading on a 5-minute time frame!
The most common form of multiple time frame analysis is to use daily charts to identify the overall trend and then use the hourly charts to determine specific entry levels.
As a matter of principle, all good traders I know use 2—3 time frames 3 being the best spaced enough so that each timeframe above encompasses 4—8 bars from the lower time frame. Even then, I prefer to switch to the other time frames to be really sure about what to do. It attempts to predict price action and trends by analyzing economic indicators, government policy, societal and other factors within a business cycle framework.
If you think of the markets as a big clock, fundamentals are the gears and springs that move the hands around the face. Anyone can tell you what time it is now, but the fundamentalist knows about the inner workings that move the clock's hands towards times or prices in the future. What is Technical Analysis Unlike fundamental analysis, technical analysis focuses on the study of price movements.
Technical analysts use historical currency data to forecast the direction of future prices. The underlying belief behind technical analysis is that all current market information is already reflected in the price of that currency; therefore, studying price action is all that is required to make informed trading decisions.
In a nutshell, technical analysis assumes that history will repeat itself. Beware of "Analysis Paralysis" Forecasting models are both art and science, with so many diﬀerent approaches that traders can get overloaded. It can be tough to decide when you know enough to pull the trigger on a trade with confidence. Many traders switch to technical analysis at this point to test their hunches and see when price patterns suggest an entry.
Look for Fundamental Drivers First The fundamentals include everything that makes a country and its currency tick. From interest rates and central bank policy to natural disasters, the fundamentals are a dynamic mix of distinct plans, erratic behaviors and unforeseen events. No one will ever win the age-long battle between technical and fundamental analysis.
Prior to the mids, fundamental traders dominated the FX market. However, with the advent of new technologies, the influence of technical trading on the FX market has increased significantly. Nowadays the best strategies tend to be the ones that combine both fundamental and technical analysis. Textbook perfect technical formations have failed too often because of major fundamental news and events like U. nonfarm payrolls. Most individual traders will start trading with technical analysis because for some it is But trading on fundamentals alone can also easier to understand and does not require be risky.
There will oftentimes be sharp hours of news and fact checking. gyrations in the price of currency on a day when there are no news or economic Technical analysts can also follow many reports. currencies and markets at one time, whereas fundamental analysts tend to focus on a few This suggests that the price action is driven pairs due to the overwhelming amount of by nothing more than flows, sentiment, and data in the market.
pattern formations. Nonetheless, technical analysis works well Therefore, it is very important for technical because the currency market tends to traders to be aware of the key economic data develop strong trends. Once technical or events that are scheduled for release, and, analysis is mastered, it can be applied with in turn, for fundamental traders to be aware equal ease to any time frame or currency of important technical levels that the general traded.
market may be focusing on. However, as we already noted - it is important to take both strategies into consideration, as fundamental analysis can trigger technical movements such as breakouts or reversal in trends. Technical analysis, on the other hand, can also explain moves that fundamentals cannot, especially in quiet markets, causing resistance in trends or unexplainable movements.
Wang, who started trading futures in , said he supplements his fundamental analysis of commodities supply and demand with simple forms of technical analysis.
One of his favorite measures is the day moving average. But he closed out the last of those positions on Wednesday, responding to local speculation that producers of coke and coking coal will be allowed to ramp up production. Dollar pair Single currency or Fiber - Euro Swissy - Swiss Franc Loonie - Canadian Dollar Aussie or Ozzie - Australian Dollar Kiwi - New Zealand Dollar Barnie - U.
Natural resources often constitute the majority of the countries' exports, and the strength of the economy its currency can be highly dependent on the prices of these natural resources. These correlations makes them easier to trade. currency, the U. That means gold prices tend to have an inverse relationship to the USD, oﬀering several ways for currency traders to take advantage of that relationship. For example, if gold breaks an important price level, you'd expect gold to move higher. With this in mind, you might sell dollars and buy Euros, for example, as a proxy for higher gold prices.
These two major biggest oil consumer — the United States. currencies tend to strengthen as gold prices Because the US is largely dependent on oil, rise. You might consider going long these the rise and fall of the commodity will have currencies when gold is increasing in value, an eﬀect not only on the Canadian Dollar but or trade your GBP or JPY for these currencies also on the US Dollar — the higher the price of when gold is on the rise.
oil, the higher benefits Canada gets, and the more disadvantaged the US becomes. The TABLE 1. last Tuesday of each month at 9 A. is the release time of the announcement. Traders looking for leading indicators of a housing recovery will likely see it in increases in hous- ing prices tracked by this monthly index, posted at www.
Detailed housing data can also be found at www. ALSO WATCH HOUSING EQUITY SECTOR STOCKS Another way for the forex trader to get a grip on housing data is to watch equities that are housing related. For example, Lennar Homes is a leading home builder. Its stock price and earning forecasts offer good clues regarding the direction of the housing market and by inference interest rate policies Figure 1.
Chart courtesy of Aspen Graphics, www. When these housing equity stocks start probing their weekly support, resistance, and trend lines, the trader will have clues as to a potential change in the housing market.
HOUSING DATA AND GREAT BRITAIN As discussed earlier, housing provides a strong indicator regarding interest rates throughout the world. For example, as ended, the situation in Great Britain re- garding housing indicated a very strong housing market and therefore supported sen- timent of interest rate increases by the Bank of England. In , housing prices in- flated by nearly 10 percent in Great Britain.
Economist Diana Choyleva believed prices could rise by as much as 15 percent in In other words, expectations of an interest rate cut in Britain would require evidence of a slowdown in housing price increases. The trader trading the British pound should watch British housing data very carefully and gain an edge in shaping trading strategy.
A useful web site for staying on top of British housing data is www. SUMMARY Tracking changes in how an economy is growing is clearly an important part of gaining a sense of whether a currency will be strengthening or weakening. The relationship of growth and currencies applies throughout the world. An increase in interest rates tends to strengthen the currency. The trader needs to go further than just knowing what the rate levels are.
They trader needs to assess whether the economy is strengthening or weakening. Housing data is one of the most important areas that affect the decision to increase rates, keep rates the same, or decrease rates. The forex trader should keep track of housing data when trading a currency.
I Much progress has been made over the decades. In the period of through , inflation levels in industrialized countries were near the 7. A decade later, in , inflation levels ranged at the much lower level of 3 percent. Many central banks, in fact, announce inflation targets. In fact, Bernard Bernanke, the successor to Alan Greenspan, has favored formal inflation targeting for the U.
Central banks around the world monitor inflation and raise interest rates to try to slow down inflation. Central banks often include in their statements accompanying in- terest rate decisions that they will be vigilant over potential risks of inflation.
A fear of lingering inflation tends to generate in the market the anticipation of higher rates, and therefore works to support the buying of a currency.
That is also why strong retail prices tend to undermine bond prices. Bondholders fear increased rates because they reduce the attractiveness of the bonds they hold, and the market lowers the prices of the bonds in order to equalize the yield of the old bonds with the new interest rates. Inflation is the ever-present yet stealthy ghost that spooks the forex market and chal- lenges central banks.
It is particularly difficult to track. even among the best economists on how to measure and detect inflation, and as a result there are many data sets relating to inflation. Central banks all over the world are trying to get an accurate answer to the question of what is true core inflation? This level of complexity in measuring inflation sets up the forex market for surprises when data comes along that inflation has not been contained. Surprises can be ex- pected.
For example, in December , when inflation data rose the highest in 30 years, it provided a boost in the dollar value as more traders were betting that the Fed would not decrease rates, or might even increase rates. The challenge to getting a true measure of inflation has also been a focus of recent activity in Britain. The Office of National Statistics is introducing a new inflation calcu- lator that allows persons to calculate their own inflation measure!
In other words, the other measures [such as the Retail Price Index RPI , the Retail Price Index excluding Mortgage Payments RPIX , and the Harmonized Index of Consumer Prices HCIP ] are still in force, but there is recognition that inflation needs more measures for an accurate assessment. This confusion and debate over how to detect inflation in Great Britain un- derscores the issue is an international one.
The Monetary Policy Committee of the Bank of England www. htm offers more details on this subject. D in economics to follow inflation data. There are many key measures of inflation that are tracked. But you have to check the central bank web sites. The best way to do this is to ﬁrst check the web site of the central bank.
They contain a great deal of information on inﬂation and inﬂation policy. Core inflation refers to the components of inflation that are more durable and not a result of temporary events, such as a hurricane.
Core inflation excludes food and energy prices, which vary temporarily. The PCE is now the favorite measure used by the Federal Reserve. However, in an at- tempt to be even more accurate, economists have gone further and developed a trimmed PCE, which is designed to give a truer view of inflation.
Table 2. The Producer Price Index PPI is another key measure that is reported and tracked. The PPI measures what businesses charge one another for everything from iron ore and diesel fuel to cases of soda pop. The U. Bureau of Labor Statistics generates PPI data for over different product categories, reflecting price pressures among differ- ent industries. A net PPI figure, of course, is more general in nature www.
In November , the PPI surprisingly rose 2 percent higher than the month before. The index had not risen by that much in a single month in more than 32 years, since the energy and stagflation crises of the mids. The fact that the PPI and the core infla- tion may differ adds to the uncertainty of the true condition of the economy regarding inflation.
The Consumer Price Index CPI tracks consumer price changes given a fixed basket of goods and is part of the data set watched by traders in all countries. Bureau of Labor Statistics provides comprehensive data on inflation and, in fact, tracks the vari- ous inflation rates.
It conducts extensive sampling of 87 urban areas, 50, homes, and 23, retail establishments. From time to time, the CPI basket changes to more accurately reflect new items TABLE 2. available in the economy. Tracking gold, the Commodity Research Bureau, and other commodity indexes and patterns will also help you get a handle on inflation. We look at the commodity-currency connection in Chapter 5. The main point here is that the forex trader needs to pay serious attention to inflation rates and expectations of inflation rates, because they are a key to discerning what the central banks fear, and a clue to whether they will raise interest rates.
Which Countries Have Inﬂation above the Target Rate? Take the indicators or economic data releases coming out and group them. Which are leading? Which are lagging? Which are coincident? Which countries have inﬂation rates over 2 percent? Which country has a central bank policy to increase inﬂation? Countries that are experiencing economic growth generate more jobs in their economy. Con- sumer spending therefore increases.
In turn, the demand for housing increases as peo- ple have more disposable income and can better afford housing. The transactions of a modern economy intimately involve global flows of capital as exports and imports are part and parcel of the vitality of an economy. The term economic growth is really a wide category. How is economic growth measured and tracked by the forex trader? The rate of economic growth or development of a country is mainly measured es- sentially by its gross domestic product GDP , so news about GDP becomes an essential ingredient in shaping trader sentiment about the value of a currency.
A slowdown or ex- pected slowdown in GDP translates into anticipation that interest rates will not go higher or may even decrease. The importance of economic development statistics in currency trading is evidenced by the fact that whenever an economic data release is scheduled, the currency market hes- itates in its price movements and then often moves vigorously when the news surprises the market.
In fact, one of the best times to trade is after a news release. Technical strate- gies for trading the news will be thoroughly explored in a later chapter. Traders can gain insight into economic growth and development data by following several sources that track global economic growth, such as the Organisation for Eco- nomic Co-operation and Development www.
org , the Group of Seven, www. ca , and the World Trade Organi- zation www. A growing econ- omy has new job creation and lower levels of employment. An economy that is slowing down or showing signs of slowing down has increased jobless claims, a declining rate of job creation, and higher unemployment levels. Whenever job data is released by governments, the forex markets react. There are many layers of information regarding employment data.
Manufacturing Employment Payroll Employment of Wage and Salary Workers Total Population of the United States U. Employment in Service-Producing Industries Civilian Unemployed for 15 Weeks and Over Civilian Unemployed for Less Than 5 Weeks Median Duration of Unemployment Unemployed: all civilian workers Unemployment Rate U.
Employment in Construction U. Employment in Finance, Insurance, and Real Estate U. Employment in Goods-Producing Sectors U. Employment in Mining U. Employment in Services U. Employment in Transportation and Public Utilities U. Employment in Retail Trade Industry U. Employment in Wholesale Trade Industry For more information on job data, visit the following web sites: www. com www. As long as the world is dependent on hydrocarbon-based energy, oil prices become a factor in stimu- lating or delaying economic growth.
In the near term, higher oil prices result in reducing economic growth expectations as well. Higher hydrocarbon prices portend increases in transportation costs and the per- unit cost of outputs in the economy, and therefore become an inflationary factor in the costs of goods. One of the most important as- pects of oil prices is that the market reaction to oil price increases often tends to overem- phasize its importance, particularly for the U.
econ- omy. translates into only a 3. A quick rise in oil prices, or even just the fear of a rise, offers trading opportuni- ties. Hurricane Katrina is a good example, as we saw some countries benefit from high crude oil prices, while others did not. The result impacts currency prices as well.
Closely tracking oil is important in shaping currency-trading strategies. See Figure 3. Oil has another impact. Oil-producing countries have amassed huge sums of money, and what they do with their increasing petrodollars impacts currency values.
FIGURE 3. Source: CQG, Inc. Copyright © The economies of Organization of Petroleum Exporting Coun- tries OPEC nations are accumulating current account surplus due to petrodollars that are nearing 30 percent of their GDP! If oil producers start to shift into nondollar assets such as the euro and pound sterling, the dollar fundamentally weakens. This has already begun. OPEC and Russia data showed that the dollar holdings were cut from 67 percent to 65 percent. It was not a coincidence that the highs of the euro coincided with the last known shift of oil producers from dollars to euros.
It is also not a coincidence that the Canadian dollar strengthens when oil prices increase and weakens when oil prices decline. We can see that crude oil patterns have had wide ranges and are likely to continue to have such swings.
This will benefit the forex trader. YIELD CURVE AND ECONOMIC GROWTH As Arturo Estrella and Frederic S. Source: Federal Reserve Bank of New York. Guessing what phase of the business cycle an economy is in is a great game. Is the economy going into a recession? However, sentiment about an expected recession is not stopped by lack of data. One of the most important measures that traders track is the shape of the yield curve. The yield curve is defined as the difference between the year Treasury note and the 3-month Treasury bill.
We see here the key role that interest rates play in reflecting expectations in the market. The Federal Reserve Bank of New York published an important study of the yield curve and recessions, which included a table relating probability of recession to the yield curve Table 3. A separate study see Figure 3. We can see that the yield curve provides an important barometer for the future GDP growth.
With regard to the yield curve, what is particularly important to track for the forex trader is the shape of the yield curve. Is it flat? Is it upward sloping? Is it inverted? These are the key patterns to observe. In normal times, people are willing to pay more for longer-term maturities and bonds. This is a natural reaction to the fact that there is more risk over a longer period of time.
But a slowdown or fear of a recession causes the market to demand higher interest rates for short-term borrowing. The yield curve becomes inverted. Short-term interest rates become greater than longer-term rates! Note: The ﬁgure plots 4-quarter GDP growth together with the quarter term spread upper panel and the 1-quarter short rate lower panel lagged 4 quarters. common interpretation is that when the yield curve inverts, a recession is coming.
An inverted yield curve situation makes it difficult for the central banks to increase rates and more likely, in fact, that rates may decrease. Such a situation becomes negative for the dollar or any currency involved.
A flat yield curve indicates uncertainty about the economy. On December 27, , the yield curve inverted for a few days for the first time in five years. Also, there is no guarantee that an inverted yield curve will always predict a recession, but when the yield curve inverts, the forex trader should be very vigilant.
Strategies favoring a weaker dollar or currency pair should be considered. The formula for those who want to set up an Excel spreadsheet is www. federal reserve. bond, the 3-month yield, and the federal funds rate at www. On March 21, according to the current model, the probability of a recession due to the relationship between the year and 3-month bond yield curve was 52 percent. Table 3. One month later, on April 21, the data showed that the probability of a recession was even lower, at These proba- bilities are the results of models.
They are not guarantees but do give insights into what the professional economists are thinking. A further visualization of the relationship between a recession and the yield curve as developed by the Federal Reserve researchers is shown in Figure 3.
Obviously, a great FIGURE 3. Federal Funds Rate for 50 Percent Probability of Recession Occurring in Next 12 Months. Source: www. deal of work is being constantly done by economists to try to pinpoint the probability of a recession. At the same time, ask yourself the question: Is the dollar getting stronger or weaker?
Doing this assignment will help you sharpen your understanding of sentiment toward the dollar and whether that sentiment reﬂects economic fundamentals. This chapter provides a review of key China developments that every trader should know about. Watching Chinese economic developments is likely to become a daily pastime for many traders all over the world.
China is impacting every region of the world and every industry. This occurred after a 21 percent increase in imports from China to the 25 countries forming the European Union Financial Times, March 23, , p. exports to China grew almost percent, while U. exports to the rest of the world rose by only 16 percent. During that period, China accounted for roughly 25 percent of total U.
Fred Bergsten, Bates Gill, Nicholas R. Lardy, and Derek Mitchell, China: The Balance Sheet: What the World Needs to Know Now about the Emerging Superpower. New York: PublicAffairs, CHINA REVALUES YUAN: A TURNING POINT? On July 21, , after more than a decade of strictly pegging the renminbi to the U. dollar at an exchange rate of 8. This was the beginning of a long-term strategy to integrate China into the world economy by easing the abil- ity of capital to flow into and out of the country.
The ability to exchange currency is a key factor in this process of integration. The revaluation signaled that China was begin- ning to allow the strengthening of its currency. As of March , the renminbi value was at approximately 7. This means that it takes fewer renminbi 6 percent to con- vert to one dollar since revaluation. Many economic studies believe that a free-floating Chinese currency would appreciate by 20 percent.
The five currencies are the U. dollar, the yuan, the yen, the Korean won, and the pound. However, the exact weighting of these currencies in the basket is not being disclosed and there may be other currencies included. Even though the Chinese currency known as the renminbi does not float on the mar- ket, and it is tied to the dollar within a narrow price, the influence of China on global currency flows is profound.
There is increasing pres- sure on China to allow the renminbi to increase in value, either through a wider managed envelope or through a full float.
A full float is highly unlikely because the Chinese gov- ernment is not interested in giving up control of its economy, which would occur in a full float. Any increase in the value of the renminbi could result in a significant benefit to exporters in the United States and Japan. In recent years, even speculation that the Chinese were about to allow the renminbi to increase in value led to price moves that strengthened the Australian dollar and the yen. China is becoming a global economic power that impacts the economic development of the world.
It is the processing plant of the world, wherein many product components are imported and then put together. But just over 40 percent of its trade is with Asia. Federal Reserve chairman Bernard Bernanke at the Chinese Academy of Social Sciences Beijing, China, December 15, : The emergence of China as a global economic power is one of the most important developments of recent decades.
For the past twenty years, the Chinese economy has achieved a growth rate averaging nearly 10 percent per year, resulting in a quintupling of output per person [see Figure 4. Currently, however, this process is not balanced.
The Chinese export more than they import, and therefore accumulate a great deal of cash. dollars will have a major impact on the direction of the U. The Chinese State Admin- istration of Foreign Exchange SAFE is the key agency on the future of these dollar reserves.
For the forex trader, following Chinese developments and intentions on global trade and currency policies can be rewarding because it can point the way for new trad- ing opportunities.
One big effect could result from a possible slowdown in the China economy. RMB 12, 10, 8, 6, 4, 2, 0 60 80 90 00 70 65 75 85 95 19 19 19 20 19 19 19 19 19 FIGURE 4. Sources: National Bureau of Statistics, China Statistical Yearbook ; National Bureau of Statistics Plan Report. cover the U. budget deficit. An economic crisis in China has the potential to raise the U. interest rates, thereby placing major additional costs on U.
businesses and individual consumers and producing dislocation in the U. It could also exacerbate Chinese domestic political tensions in an unpredictable fashion. October 30, If a possible slowdown in China worries U. assets worries them even more. dollar around the world. This is historically an extremely high level that no other country has been able to sustain for any significant period.
The danger is that the U. economy could suffer a precipitous decline if the ability of the United States to borrow ever-greater amounts should end abruptly. Inter- est rates and inflation might suddenly soar as the dollar fell and the stock market crashed.
Since the Chinese growth rate of over 10 percent per year GDP generates a voracious appetite for resources such as oil, copper, steel, iron ore, cement, and Ag complex, the countries that provide these resources experience a demand for their dollars. When China buys copper from Australia, renminbi must be converted into Australian dollars.
This provides support for the Australian dollar and the Australian economy. Since China imports major resources such as copper from Australia, the aussie would be affected by a potential Chinese slowdown. Also, Japan, a significant trading partner of China, and its currency will often weaken or strengthen on expectations of a Chinese slowdown or sustained growth.
Chinese influence has begun to extend also to Africa. For example, Chinese exports are beginning to shift to the Suez Canal, rather than going around Africa. This is causing Turkey, Italy, and other nations to invest in Egypt to tap into Chinese export to Europe.
In the coming years, the trading world will focus on whether China can control its growth rate, avoid inflation, and increase its currency float. Traders need to keep track of key per- formance parameters such as Chinese GDP and inflation projections, as well as Chinese interest rate decisions. Between and July , China increased its interest rates to reach a level of 6.
Whether this will work is unknown. But as China, which is now the seventh largest econ- omy in the world and the second largest in purchasing power parity, becomes more of a consumer economy, the status of the Chinese economy will become easier to monitor.
Companies such as Home Depot, Wal-Mart, Kingfisher British , and Best Buy are en- tering the Chinese market, and many other firms are acquiring Chinese companies. As a result, the coming years will provide more reliable data on Chinese consumer spending and growth. The Shanghai Composite Index is very sensitive to whether the ren- minbi will strengthen.
Their value would increase Wall Street Journal, March 22, , p. com and ﬁnd the latest value of the renminbi in the quote table that is supplied.
It is listed as the symbol CNY as shown in Figure 4. Is it getting stronger or weaker? FIGURE 4. Commodities are key resources in world growth, and they impact global inflation. This chapter focuses on what the forex trader should know about the commodity connection to currencies. GOLD Gold price movements are important for currency traders to understand. But gold is also a commodity on its own, adding strength or weakness to currencies of countries that produce gold.
South Africa, of course, is the leading producer of gold, but its currency, the rand, is not floating, so traders can look to the Australian dollar and the Canadian dollar for trading those cur- rencies when gold patterns provide trading opportunities.
Gold price action can also be a misleading guide to the currency trader. In recent years, Gold has attracted a great deal of investment demand from exchange-traded funds ETFs. In , ETFs were buying 20 tons of gold, and this rose to tons in The trader who looks at gold prices rising may interpret it as a reaction to the dollar, when it actually can be reacting as a function of investment demand.
Figure 5. Dollar Index USDX. Central banks have an important role regarding gold. They hold gold as part of their reserves see Figure 5. FIGURE 5. the USDX. reserves, and 15 percent is in gold. The key variable that can affect currency prices is whether a central bank will increase its gold reserves and thereby decrease its reserves of dollars or another currency. As a result, rumors of central banks increasing gold reserves can disrupt currency prices.
The idea that gold is important to currency moves is sound, but needs to be qualified and put in the context of world events. Sometimes gold acts as a store of value in times of crises. But the correlations between gold moves and currency moves provide a great deal of variation. The trader needs to be vigilant regarding what factors are moving gold. At the end of the day, in the words of Phillip M. Source: Phillip M. Hildebrand, member of the Governing Board, Swiss National Bank. For example, copper plays an important part in the industrial development of China.
As the world grows, more copper is in demand. The forex trader has to ask the question: Who benefits from copper demand? To answer this question, we should look at who produces copper.
Australia is the second largest producer of copper, and since its currency is freely floating, the Australian dollar can be traded. The commodity connection with currencies is particularly strong for the Australian dollar, the New Zealand dollar, and the Canadian dollar. A closer look is presented in our section on currency personalities. CRB INDEX Traders looking to track the commodity and currency relationships should follow the Commodity Research Bureau CRB Index.
The CRB Index consists of a basket of com- modities and provides a useful measure of potential inflationary pressure. When com- modity prices rise, this price increase can spread into the economy by increasing the costs of production and goods. This inflationary tendency is closely watched by central banks.
We can see in Figure 5. EQUITIES AND FOREX The relationship between currencies and equities is an area of interest that is becoming increasingly evident and important for traders to become knowledgeable about.
In all equity markets around the world, exporting sectors benefit from a weaker home currency or the expectation of one. DaimlerChrysler, Renault, and Peugot suffer share declines when the euro surges beyond expectations.
As we noted in our section on China Chapter 4 , when there is specula- tion that the renminbi will increase, many Chinese equities increase in stock value due to expectations that their assets will increase in value. housing sector equities have a direct link to forex. Dow Jones Industrial Index suffered its worst day in four years, was a direct example of the link between equities and forex.
The sell-off was precipitated by a sudden fall in the dollar against the yen. This decline caused a liquidity crisis as hedge funds needed to sell equities to release funds to buy back their positions in the yen.
See Chapter 1 for a discussion of this event. As globalization increases, strong currency moves will impact equity markets as it did on February In a real sense, tracking equities where their dollar earnings are important can benefit a trader in providing leading indicators of forex price moves. The relationship between the dollar and the equity markets is further underscored by the Dow Jones Industrial Index reaching historic highs.
This occurred as the USDX entered into an extended downtrend see Figure 5. Why has the relationship been in- verse between the equity market and the value of the dollar? A deeper look reveals the answer.
As the dollar value declines versus other currencies, the companies that export to the rest of the world benefit from increased sales, as exports become more attractive to foreign buyers. Additionally, multinational corporations having assets abroad experi- ence an increase in the dollar value of those assets.
the Dow. Are any of these commodities in a channel pattern? These reports are results of extensive profes- sionally designed surveys that are conducted on a regular basis in many countries. When these survey results are released, they provide important information on expecta- tions regarding the economy of a country. This information is seriously assessed by cen- tral banks in determining their next moves in controlling inflation.
Growth in business or consumer confidence has inflationary potential, while a decline in business or consumer confidence portends economic slowdown. When these releases come out, they move the market, especially if the results are surprising. Beyond having an impact upon their release, confidence indicators can also provide a leading indicator for the forex trader. If business confidence is at its highest in years, the market will interpret it as positive for the currency because greater confidence in- dicates expansion and growth of an economy.
Where there is expectation of expansion and growth, there is the concomitant expectation of interest rates not going lower and possibly going higher. These confidence surveys are not perfect predictors of resulting currency moves. They are one of the most important ingredients in the mix of fundamen- tal forex factors. Some of the important confidence indicators are listed on page 42 and should be fol- lowed. Their release times are tracked in the numerous economic calendars available, and strategies for trading these economic data releases should be learned by traders.
It is interesting to note that every major country has its version of investor and busi- ness confidence indicators. These form in effect a leading indicator about currency directions. de r IFO Business Climate Survey www. de r Institute of Supply Managers www.
aspx U. Sentiment Indicators r Consumer Confidence www. htm r Fed Beige Book released two weeks prior to Federal Open Market Committee meet- ings, eight times a year r ISM Nonmanufacturing www. cfm r Empire State Manufacturing Survey monthly report, www. html r Chicago PMI ISM Nonmanufacturing released on the third business day of the month, can be found at www. cfm r Philadelphia Business Outlook Survey monthly, www. com and Find the Next Business or Consumer Conﬁdence Report Release Time Watch what happens upon the release to the currency pairs.
This chapter focuses on how a trader can gain an understanding about the strength and weakness of a currency. The concept of a trade- weighted currency basket is introduced as well as how to obtain the latest trade-weighted information and data that can be directly used in trading.
TRACKING CURRENCY STRENGTH: HOW STRONG IS A CURRENCY? We can be convinced that currencies reflect world opinion about how well an economy is doing or expected to do.
The next step in fundamental analysis is to be able to make a judgment about a particular currency itself. Ultimately, the question arises for the trade: How strong is the currency? In spot forex trading, the trade itself is always a paired event of one currency against another. But when a trader makes a judgment about the strength or weakness of a currency by only comparing one currency against another usually the U.
dollar , the conclusion can be misleading as to the global strength or weakness of the currency. When trading majors where the U. dollar is part of the pair, the comparative question becomes: How strong is the U. dollar against that currency? question of how strong a particular currency is on its own terms without reference to another pair, the trade-weighted index TWI is used by economists and should also be used by currency traders. The TWI represents how well the currency of a country is doing against a basket of other currencies.
The currencies included in the TWI are those that reflect the major trading relationships with the index currency. Each currency receives a weight in the index that reflects its importance. For example, in Table 7. We can also see that Canada and many other nations have a very small percentage compo- nent of the TWI.
Each year the central bank and economists adjust the weights to reflect changing realities of international trade. As China increases its trading relationships around the world, it will receive more weight in TWIs.
The point is that the TWI represents a way TABLE 7. dollar pound sterling 5. By knowing the TWIs of each currency, the forex trader can detect a strengthening and weakening of a currency and also get a sense of how a currency can be impacted by events in countries of their trading partners.
Many traders often ask the question: What do you think of the U. dollar or yen, pound, or euro? One important way of answering is from the perspective of the TWI.
Each currency gains a trading personality, and knowing the TWI for each currency is very useful, because it will reflect the big picture much more accurately. Most recently, the International Index Company issued a new product line called iBoxxFX® , which are indices that are, in fact, trade weighted.
They allow an average forex trader to take a snapshot of the strength of a currency without the noise of the forex market. Table 7. Notice how each currency index reflects the varying importance of its different trading partners. We will see shortly that these trade weights are a clue to defining the fundamental personality of a currency. Before that time, it was pegged to the dollar, and before that it was pegged to the British pound. By floating its currency, the market sets the value of the currency and the cen- tral bank can avoid the necessity of intervening by buying and selling dollars to keep the currency value.
But a floating currency also permits capital to float out of a country. The fear of floating is great among totalitarian regimes and emerging countries that want to maintain control of their economy. By looking at the aussie TWI see Table 7. The role of Australia as a global trading country makes it an attractive currency to trade. The recent years of economic expansion have created strength in this currency. The currency in had a strong upward trend, which, from a world trade perspective, re- mains intact.
The Australian dollar is almost as equally sensitive to the Japanese economy as it is to the euro or the U. Important also to consider are commodity-related events such as movements in cop- per and gold. Australia is a major producer of both of these commodities and is affected by price patterns. Figure 7. TABLE 7.
We can see how the movements are in sync, visualizing a strong correlation between commodity moves and the aussie-dollar pair. It shows that in , these commodities began to diverge down while the aussie FIGURE 7. iBoxx® is a registered trademark of International Index Company Limited. FIGURE 7. continued strengthening. When a trader sees divergence from the traditional relation- ship, questions arise.
Why would the aussie continue to be strong if copper is weak? The answer was that there was great strength in other sectors of the Australian economy, making copper less important. The fundamental personality of the aussie is that of a commodity- and trade- dependent currency.
The aussie will be affected by global economic growth and, in particular, Chinese growth. China is now the second largest buyer of Australian exports, making the aussie more sensitive then ever before to the direction of the Chinese economy. A special feature of the aussie is that it has a multiple fundamental personality. It can be considered an Asian currency, reflecting Asian growth, and it can be consid- ered a currency that also is impacted by the United States and Europe.
This means that the forex trader should seriously look to trade the aussie pairs such as the Australian dollar—Japanese yen AUDJPY and Australian dollar—euro AUDEUR , as well as the traditional Australian dollar—U. dollar AUDUSD pair. Growth will, however, be held back in by the effect of a drought on the agricultural sector.
The cycle of growth that the aussie is in will be certainly tested. Events in China and the commodity markets will be important factors to watch. Source: Guy Debelle, head of the International Department, Australian Foreign Exchange Market, November significant over the coming year are events in Japan.
If Japan raises its interest rates, the aussie will suffer because the conditions for the carry trade will decline. The Japanese rate of 0. If this spread changes, so will the condi- tions encouraging a stronger aussie. In recent years, it has been very rare for the aussie to depreciate against the yen. This made the risks of an unhedged carry trade very low. But the risk of carry trades providing a big decline remains very real. Domestically, the Australian economy entered with year lows in unemploy- ment at 4.
The Reserve Bank of Australia increased rates to 6. At the end of , inflation rates were at 3. The combination of domestic growth and global growth makes trading the aussie in the coming years a lot of action. dollar receives a weight of 86 percent in the trade- weighted basket. Refer to Table 7. Therefore, when the U. economy slows, the Canadian economy also suffers. When oil prices increase, the Canadian currency benefits.
From a fundamental point of view, trading the Canadian dollar against the U. pair is the most effective way to play this currency. A useful web site for tracking the Canadian economy is www. New Zealand is almost a classic example of how fundamentals can drive currency movements. The New Zealand economy is small. Since its consumer economy is small, the fundamental char- acteristic that affects its economy is whether its exports can grow. Therefore, interest rates and the resulting currency valuation are key to its future economic vitality.
Data show only 4 percent of the New Zealand firms do any exporting. But this level was recognized as having risks of slowing the New Zealand economy.
In fact, the New Zealand Central bank intervened for the first time since and sold the New Zealand dollar on June If it tries to raise rates further to slow down inflation, it can choke off exports and cause a major contraction. The fundamentals point to a mixed situation that can go either way. As a result of this uncertainty, the kiwi offers potentially very many trading strategies, as the currency will be extremely sensitive to central bank actions as well as surprises in economic data.
The forex trader looking to trade the kiwi can explore trading the dollar pair U. dollar—New Zealand dollar USDNZD , as well as the kiwi against the aussie NZDAUD , the yen NZDJPY , or the euro NZDEUR.
MEXICAN PESO The peso is a currency that offers potential for trading more than ever. The OECD projects a GDP growth in Mexico of 3. Importantly, inflation is projected to be just above 3 percent www.
Additionally, the peso is strengthened by its ability to attract capital flows. It is useful to note that those traders who sell the U. dollar and buy the Mexican new peso MXN in the USDMXN pair, receive interest rate payments. So the peso can be used as a carry trade currency pair. The second major factor is the U.
Mexican exports are at a level of over 80 percent to the United States, and there is a high inflow of capital coming from Mexicans living in the United States. Oil also needs to be considered. Like Canada, Mexico is a net exporter of oil and attracts petrodollars. A major negative factor is business confidence. The Mexican busi- ness climate is often marred by inefficiencies, and the political economy generates a great deal of negative sentiment.
Another factor emerging is Asian competitiveness. If Mexican interest rates fall, the peso could weaken substantially; if the U.
economy slows, Mexican growth will suffer. Based on this fundamental picture, trading the Mexican peso should be considered mainly against the dollar, and trading this pair using longer-duration charts is more advisable see Figure 7.
JAPANESE YEN Japan is the second largest developed economy in the world. To understand Japan today, one has to have a sense of where the Japanese economy has come from. In , the Nikkei Index, which is a price-weighted index of the top stocks on the Tokyo exchange, peaked around 39, In , the Nikkei Index fell by 39 per- cent, and in March , it was at the 17, mark, still quite a way from the highs of the previous era.
auction prices, and surges in sales of luxury brand bags and jewelry. The Nikkei had tripled in price in the 45 months prior to its peak. Also, metropolitan land prices tripled between and Compare this to the same period growth rate of other nations, shown in Table 7. The Japanese stagnation had many causes, but a major contributor was the Japanese consumer. Studies e. Household disposable income declined, household wealth declined, and, coupled with uncertainty about the future, the result was low confidence in prospects of strong growth.
Once the forex trader appreciates what the era of stagnation was like in Japan, he or she will have a greater understanding of why Japan today is still not on firm footing of renewed growth. For example, household disposable income had a growth rate of only 0. Household wealth declined by an average 0.
Interestingly enough, there is data showing that the proportion of people saving for old age rose from The data from Japan underscores the importance of consumer confidence. This makes it diffi- cult to stimulate growth through traditional monetary measures such as lowering inter- est rates. Another important characteristic was that prices were actually in deflationary mode, and when prices keep falling there is little incentive for consumers to purchase since they expect cheaper prices.
It was before the emergence of the retail forex market. But the era of stagnation also holds clues as to whether Japan will experience robust, uncertain growth or retreat again into stagnation. Much will depend on the interest rate decisions of the Bank of Japan and business and consumer confidence surveys because the core cause of stagnation was lack of consumer confidence and spending. Therefore, the core of recovery will be a recovery in consumer spending.
But it is not easy to stimulate the Japanese consumer. This means that the forex trader should carefully watch consumer confidence and inflation data coming out of Japan for clues as to whether Japan is overcoming deflationary fears. One such clue oc- curred in March when, for the first time in 16 years, Japanese land prices showed an increase. Other clues will be necessary before the Japanese inflation rate moves beyond its current 0.
Also important is export data on Japan. Stimulating exports becomes a critical factor in determining the ability of the Japanese economy to grow. However, any extreme level of weakening of the yen would help exports. But remember that too weak a yen against, for example, the euro may help Japanese exports but would undermine European exports. The forex trader should note that where there are beneficiaries to a currency direction, there are also losers.
The Japanese finally increased interest rates to 0. But the interest rate differential between Japan and other nations is still quite steep. Even if the Bank of Japan increases rates to 0. This uncertainty in the Japanese economy creates a great deal of increased rang- ing behavior in the currency. Traders of the yen should almost always expect the unex- pected because economic news from Japan has a built-in greater potential to surprise us.
Also important to consider is the growing impact of China on the Japanese prospects for growth. A weak yen, in contrast, stimulates Japanese export growth. Export growth data therefore becomes very important in affecting sentiment toward the yen.
With regard to Japan, perhaps the best word to describe current conditions is un- certain. The uncertainty whether the Japanese consumer economy is strong enough to grow, combined with the uncertainty of whether Japanese interest rates will rise, dom- inates trading of the yen. The complexities facing the Japanese economy also involve aging workforce and potential shortages in labor. All these factors make trading the yen more challenging than the other currency pairs.
CARRY TRADE The Japanese big picture implications are profound. With interest rates at 0. This is where Japanese investors can borrow at extremely low rates and place the capital in bonds of other nations and receive a net gain in interest rates.
New Zealand and Australia have been major beneficia- ries of the carry trade. For example, New Zealand interest rates are almost the highest in the world, at 8. It therefore is a major attraction for the low-interest-rate costs of borrowing yen. A popular way to do this is called the Uridashi bond. The total flow of such bonds is in billions more. These bonds are of short duration, most being two to three years.
If the market perceived that Japanese rates will increase, the huge amount of carry trade money outflow could suddenly decline. On February 27, , this is ex- actly what happened, with a sudden sell-off of the dollar against the yen. This caused simultaneously a sell-off of the Dow Jones Industrial Index as big funds got out of equity positions to cover losses in their previous selling of yen. Even gold sold off during this crisis.
Refer back to Figure 1.
edu no longer supports Internet Explorer. To browse Academia. edu and the wider internet faster and more securely, please take a few seconds to upgrade your browser. Foreign exchange, popularly known as 'Forex' or 'FX', is the trade of a single currency for another at a decided trade price on the over-the-counter OTC marketplace.
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Need an account? Click here to sign up. Download Free PDF. Forex for Beginners: How to Make Money in Forex Trading Currency Trading Strategies. Rajiswaran Muniandi. Continue Reading Download Free PDF. Related Papers. How To Trade Dollar. Download Free PDF View PDF. All rights reserved.
Table of Contents 1. Making Money in Forex Trading 2. What is Forex Trading 3. How to Control Losses with "Stop Loss" 4.
How to Use Forex for Hedging 5. Advantages of Forex Over Other Investment Assets 6. The Basic Forex Trading Strategy 7. Forex Trading Risk Management 8. What You Need to Succeed in Forex 9. Technical Analysis As a Tool for Forex Trading Success Developing a Forex Strategy and Entry and Exit Signals Thousands of people, all over the world, are trading Forex and making tons of money.
Why not you? All you need to start trading Forex is a computer and an Internet connection. You can do it from the comfort of your home, in your spare time without leaving your day job.
And you don't need a large sum of money to start, you can trade initially with a minimal sum, or better off, you can start practicing with a demo account without the need to deposit any money. Once you consider to start Forex trading, one of the first things you need to do is choose a broker, choosing a reliable broker is the single most critical factor to Forex success.
There are dozens of online brokers out there but your best bet is to go with one of the leaders. Here are 2 online brokers that are reputable and are most suitable for beginners and pros alike: 1. Forex Inc - The best broker for US residents If the link doesn't work, copy and paste the following URL into a browser: www. eToro - accepts worldwide traders except US residents If the link doesn't work, copy and paste the following URL into a browser: www.
Now I would strongly encourage you to go and visit these broker's sites right now even if you are not yet decided whether you want to go into Forex trading. because each provides tons of free education materials, videos and best of all a demo account that allows you to practice Forex trading for free without the need to deposit any money. Simply go to each of these brokers, register for a free demo account and start "trading" - by actually practicing and experiencing it firsthand you'll be able to decide whether Forex trading is for you.
In any case, before starting to trade for real, it is advisable that you practice with a demo account. Once you build some skill and feel more comfortable with the system you can start trading gradually for real money. Now which of the two brokers you should choose? while both are reputable and reliable they do have some differences. For starter if you are a US resident you should choose Forex Inc, as eToro does not accept US residents. Here is a summary of the specific advantages of each of them.
Choose based on your personal preferences: Forex Inc www. It has several different account levels that make it easy for anyone to open an account. Forex Inc is an excellent broker suitable for beginners and pros alike.
eToro www. You can also communicate with other traders including the top traders. What is Forex Trading Foreign exchange, popularly known as 'Forex' or 'FX', is the trade of a single currency for another at a decided trade price on the over-the-counter OTC marketplace.
In essence, Forex currency trading is the act of simultaneously purchasing one foreign currency whilst selling another, mainly for the purpose of speculation. Foreign currency values increase appreciate and drop depreciate towards one another as a result of variety of factors such as economics and geopolitics. The normal objective of FX traders is to make money from these types of changes in the value of one foreign currency against another by actively speculating on which way foreign exchange rates are likely to turn in the future.
In contrast to the majority of financial markets, the OTC over-the-counter currency markets does not have any physical place or main exchange and trades hours every day via a worldwide system of companies, financial institutions and individuals. Because of this, currency rates are continuously rising and falling in value towards one another, providing numerous trading choices.
One of the important elements regarding Forex's popularity is the fact that currency trading markets usually are available hours a day from Sunday evening right through to Friday night. Buying and selling follows the clock, beginning on Monday morning in Wellington, New Zealand, moving on to Asian trade spearheaded from Tokyo and Singapore, ahead of going to London and concluding on Friday evening in New York. The fact that prices are available to deal hours daily makes certain that price gapping whenever a price leaps from one level to another with no trading between is less and makes sure that traders could take a position each time they desire, irrespective of time, even though in reality there are particular 'lull' occasions when volumes tend to be below their daily average which could widen market spreads.
Forex is a leveraged or margined item, which means that you are simply required to put in a small percentage of the full value of your position to set a foreign exchange trade. Because of this, the chance of profit, or loss, from your primary money outlay is considerably greater than in conventional trading. Currencies are designated by three letter symbols.
The first currency is the base currency and the second currency is the quote currency. The price, or rate, that is quoted is the amount of the second currency required to purchase one unit of the first currency. As we see, the US dollar is represented in all currency pairs, thus, if a currency pair contains the US dollar, this pair is considered a major currency pair.
Pairs which do not include the US dollar are called cross currency pairs, or cross rates. One of the most interesting movements in the Forex market involving the British pound took place in the September 16, That day is known as Black Wednesday with the British Pound posting its biggest fall. the US dollar currency pairs. The general reasons for this "sterling crisis" are said to be the participation of Great Britain in the European currency system with fixed exchange rate corridors; recently passed parliamentary elections; a reduction in the British industrial output; the Bank of England efforts to hold the parity rate for the Deutschemark, as well as a dramatic outflow of investors.
At the same time, due to a profitability slant, the German currency market became more attractive than the British one. All in all, the speculators were rushing to sell pounds for Deutschemarks and for US dollars.
As a result, the pound returned to a floating exchange rate. Another intriguing currency pair is the US dollar vs. It is traded most actively during sessions in Asia.
From the mid 80's the Yen ratings started rising actively versus the US Dollar. In the early 90's a prosperous economic development turned into a standstill in Japan, the unemployment increased; earnings and wages slid as well as the living standards of the Japanese population. And from the beginning of the year , this caused bankruptcies of numerous financial organizations in Japan. As a consequence, the quotes on the Tokyo Stock Exchange collapsed, a Yen devaluation took place, thereafter, a new wave of bankruptcies among manufacturing companies began.
The above started an Asian crisis in the years that led a Yen crash. It resulted in a tumble of the Yen-US dollar pair from Yens for one US dollar to The global economic crisis touched almost all fields of human activities. Forex currency market was no exception. Though, Forex participants central banks, commercial banks, investment banks, brokers and dealers, pension funds, insurance companies and transnational companies were in a difficult position, the Forex market continues to function successfully, it is a stable and profitable as never before.
The financial crisis of has led to drastic changes in the world's currencies values. During the crisis, the Yen strengthened most of all against all other currencies. Neither the US dollar, nor the euro, but the Yen proved to be the most reliable currency instrument for traders.
One of the reasons for such strengthening can be attributed to the fact that traders needed to find a sanctuary amid a monetary chaos. Ask and Bid When traders want to place an order on the Forex market they should be aware of the currency pair as well as the price of this pair.
A Forex market price of a currency pair is denoted by two symbols, Ask and Bid, which have specific digital notations. Consequently, a trader sells the currency standing second. Bid price is the lowest price in the quotation of the currency pair, at which a trader sells the currency standing first in the abbreviation of the currency pair. Respectively, a trader buys the currency standing second.
Seem complicated? This means that you can buy 1 euro for 1.
28/10/ · Forex trading is a global market that trades currencies and commodities. The forex market is open 24 hours a day, 7 days a week. There are three types of forex trading: spot, 18/8/ · What is Forex Trading? Forex trading means buying and selling foreign exchanges for the purpose of making profits. Though the trading industry was mostly focused on expert 13/8/ · August 13, Strategy. Forex trading PDF is the process of buying or selling currencies with the intent of making a profit. Forex traders usually buy a currency if they Among the different types of forex traders are a swing trader, a position trader, and a day trader. What Is Forex Trading Example? A currency exchange (foreign exchange) involves ... read more
I believe the investors. In this type of environment U. The person learning to trade forex or trying to improve his or her trading will benefit from a gain of knowledge of these fundamentals. Enter the email address you signed up with and we'll email you a reset link. looks a lot weaker now than when the forecasts were first released. Trading currencies productively requires an understanding of economic fundamentals and indicators. r When is the next Treasury International Capital System report coming out?The US market comes next, so the time when the London session The Forex market is open 24 hours a day, but it is intersects with the US session usually provides the not active all this time! Put simply, in order for a trader to maintain position and place a trade, the trader needs to put forward a specific amount of money first — this is what is forex trading pdf margin. It can be used as a hedge against the EURUSD trade; it can also be used as a method for buying dollars. Buying and selling follows the clock, beginning on Monday morning in Wellington, New Zealand, what is forex trading pdf, moving on to Asian trade spearheaded from Tokyo and Singapore, ahead of going to London and concluding on Friday evening in New York. Should you have held onto your position a bit longer for more profits?