Lately the Foreign Exchange market has made a roller coaster ride seem boring.
Currency pairs stay in 5 hour quiet lulls, and then either blast off, or drops off a cliff. Economic news, commodity prices, or Central Banker jawboning may cause prices to move at a 90 degree angle and change the global capital flows in mere minutes. I keep trying to write some commentary and by the time I am finished my outline, bigger and broader news hits the market. This week is going to be no different.
Fannie Mae and Freddie Mac, the two government sponsored entities (GSE’s) that back the majority of US home mortgages are currently going thru solvency questions. These two entities provide an enormous amount of liquidity to the mortgage market and without them, mortgage rates would be significantly higher. Over the weekend, the US Federal Reserve and the Treasury Department assured investors that the US Government is backing the two GSE’s and stands ready to even buy equity stakes in Freddie Mac and Fannie Mae!!! At what point does the US Government exhaust its ability to help the ailing mortgage companies, and other financial institutions? Lets think of the currency implications for all the “bailing out” that the Fed and Treasury have done lately………
Every time the US Fed announces that they will “open up the window” to another type of financial institution, what the Fed is really saying is, “We will take on your securities and lend you cash that you can then use to continue your business activities.” The Fed is effectively both printing money (a job formally reserved for the US Mint), and spending your tax dollars on securities that the big financial institutions do not want to hold anymore. What happens when you print too much money? You get two effects: 1) a devaluation of the currency (falling US Dollar), and 2) Inflation.
The Federal Government needs to clarify their supposed strong dollar policy with real obtainable goals, not just their usual stance of jawboning and looking like a paper tiger. Unfortunately, we do not see this coming in the near future, just more verbal confirmation of a “strong dollar policy”. That being said, all is not lost for the US Dollar…..
For many years, most EUR bulls have used the prospects of higher interest rates to justify the currency’s rally. We believe this is coming to an end!!! The slowdown in the Eurozone economies will cause the interest rate differential between the US and Eurozone to close in the coming year thru expected ECB rate cuts. Our opinion is going against prevailing market sentiment which is aligned with the ECB’s Trichet continued hawkish stance on inflation. But we believe that the Euro currency does not have too much higher to climb verse the US dollar. We are hoping to see some sign of US Dollar bulls capitulation in coming weeks as our market sentiment signal that it is time to put on our long-term short EUR/USD position. Note we do not have a hard target level, just searching for signs of capitulation in the market
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Monday, January 5, 2009
FOREX ROLLER COASTER
Sunday, January 4, 2009
What is traded in the Forex market?
The instrument traded by Forex traders and investors are currency pairs. A currency pair is the exchange rate of one currency over another. The most traded currency pairs are:
EUR/USD: Euro
GBP/USD: Pound
USD/CAD: Canadian dollar
USD/JPY: Yen
USD/CHF: Swiss franc
AUD/USD: Aussie
These currency pairs generate up to 85% of the overall volume generated in the Forex market.
So, for instance, if a trader goes long or buys the Euro, she or he is simultaneously buying the EUR and selling the USD. If the same trader goes short or sells the Aussie, she or he is simultaneously selling the AUD and buying the USD.
The first currency of each currency pair is referred as the base currency, while second currency is referred as the counter or quote currency.
Each currency pair is expressed in units of the counter currency needed to get one unit of the base currency.
If the price or quote of the EUR/USD is 1.2545, it means that 1.2545 US dollars are needed to get one EUR.
Bid/Ask Spread
All currency pairs are commonly quoted with a bid and ask price. The bid (always lower than the ask) is the price your broker is willing to buy at, thus the trader should sell at this price. The ask is the price your broker is willing to sell at, thus the trader should buy at this price.
EUR/USD 1.2545/48 or 1.2545/8
The bid price is 1.2545
The ask price is 1.2548
A Pip
A pip is the minimum incremental move a currency pair can make. Pip stands for price interest point. A move in the EUR/USD from 1.2545 to 1.2560 equals 15 pips. And a move in the USD/JPY from 112.05 to 113.10 equals 105 pips.
Margin Trading (leverage)
In contrast with other financial markets where you require the full deposit of the amount traded, in the Forex market you require only a margin deposit. The rest will be granted by your broker.
The leverage provided by some brokers goes up to 400:1. This means that you require only 1/400 or .25% in balance to open a position (plus the floating gains/losses.) Most brokers offer 100:1, where every trader requires 1% in balance to open a position.
The standard lot size in the Forex market is $100,000 USD.
For instance, a trader wants to get long one lot in EUR/USD and he or she is using 100:1 leverage.
To open such position, he or she requires 1% in balance or $1,000 USD.
Of course it is not advisable to open a position with such limited funds in our trading balance. If the trade goes against our trader, the position is to be closed by the broker. This takes us to our next important term.
Margin Call
A margin call occurs when the balance of the trading account falls below the maintenance margin (capital required to open one position, 1% when the leverage used is 100:1, 2% when leverage used is 50:1, and so on.) At this moment, the broker sells off (or buys back in the case of short positions) all your trades, leaving the trader "theoretically" with the maintenance margin.
Most of the time margin calls occur when money management is not properly applied.
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Wednesday, December 24, 2008
Low Spread Forex Trading
The are some forex brokers who offer a low spread on forex trading. Be sure to check out FX Club's Zero Spread deal. Imagine you can trade with Zero Spread?
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Most forex brokers offer a 3 pip spread on the EUR/USD currency pair. EToro offers 2 pip spread on the EUR/USD currency pair. (Click here to visit eToro).
Oanda offers a 1.5 pip spread on the EUR/USD currency pair. Click here to go to Oanda. Oanda now also has a sliding scale on the EUR/USD forex currency pairs. At certain times you can trade as low as 0.9 pip spread on the EUR/USD.
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Note that the spread on currency pairs will differ. The most frequently traded currency pairs will have the lowest spread.
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Monday, December 22, 2008
EUR/USD Fluctuations Continue
EUR/USD retraced back to 1.4200 levels today after some very disappointing housing data came out in U.S. Overall situation continues to remain uncertain with the EUR/USD ranging between 1.4050 and 1.4250. It now formed a clear plateau pattern on the daily chart marking some major break in the Euro vs. Dollar struggle.
Housing report for September showed a further downfall in this economics sector with the decrease in both housing starts and building permits numbers exceeding pessimistic market forecasts. There were 1,191k housing starts (against 1,285k expected) and 1,226k new building permits (against 1,300k expected) this September.
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