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Archive for June, 2009

Forex Holiday Madness

We have the American Independence Day Celebration at the end of this week. Yay!! Yay for clogged highways. Yay for flight delays. Yay all round. Yay for a 4 day Trading week with an ECB rate decision, Employment numbers, Non-farm Payrolls, PMI, as well as Retail Sales from the World’s biggest economies. It’s going to be a pretty volatile trading week in the Forex Markets.

I talked about intervention in my last post. I mentioned that the Swiss had engaged in that substantially earlier on this year to stem the strength of their own currency. Well, they did the same again last week. This time they bought both the EUR/CHF and the USD/CHF. Take a look the graph below and you can see just how drastic an effect such an action can have, in the short term.


What this chart also shows is that trends are powerful things. It will take more than this sort of action on the part of one group (in this case, the Swiss National Bank) to unhinge an overall trend, start a new one. You can see that the dollar has lost substantial value against the Swiss Franc in the couple of days following the action of the Swiss National Bank. A little pullback is usually expected after such a move, but there are other factors at play here.

Most newsworthy is the statement coming out of China. They are making the call for a new reserve currency again. They did this before, but didn’t follow through with more words or action when Geithner visited some weeks ago. Infact, they seemed to take a step back. So, it’s a bit strange that they are back on that again. It was enough to make the dollar lose some more steam. I am not sure how far they will go down this path though. While the need to diversify out of Dollars is important and valid for them, China has something to lose if they keep pushing this line during a global recession such as we have now. In the short-term, they are still linked to the United States. If the dollar loses too much value, there won’t be a lot left to spend on products. China likes powerplays though, so we might continue to see more of this sort of behavior if they think they will gain some preceived leverage from it.

The Brazilian Real, meanwhile, continues to gain and gain. It’s performance this month is second only to the pound against the dollar. Check out this story on Bloomberg which talks about an IPO in Brazil that is helping to fuel this. Stocks there are doing great. Thus, the Brazilian Central Bank is still buying dollars, to reduce the speed of growth of the Real, and also to develop it’s foreign currency reserves.

However, if the trend is still dollar weakness, then it’s going to take more than buying dollars to stop it. The trend for this week is still for dollar weakness to continue. The Volatility index has dropped considerably this week. There are still signs that the economy is recovering. The dollar should still be on the way down. Expect to see more action from the Swiss if the Franc gains too much against the dollar though.

Happy Trading

On Chocolate and Intervention

An interesting concept in the world forex markets is that of Currency Intervention. That word has been thrown around a lot during this crisis at various parties…the Japanese, the Swiss, the EU, the Swiss again, more recently. So, what is intervention? More importantly, what are it’s effects?

Intervention occurs when a party with some power (think central banks, govenrments…even individuals) takes some action to influence (increase or decrease) the value particular currency against another. Obviously, there is some perceived value to be gained by the party who engages in this act, even if it doesn’t work out that way eventually.

“Verbal” intervention is a kind of warning shot, or statement of direction. It’s an expression of desire, or a stand on the part of the person or group with the power to influence things. This statement, on it’s own, is able to have significant impact on the value of a currency. Good examples of these might include those statements from Central Bank Officials in certain situations. For instance, in recent months we have seen the Brazilian Real and the South African Rand (amongst others) gain substantially in value against the dollar. While having a decent currency value might be good on some levels, a really strong currency can do a lot of harm, for instance to exports (A stronger currency means other countries have to convert more of their money to buy your products). Such a rise has caused concern. The South Africans haven’t done much, but they have said that some “steps” might have to be taken. While this isn’t the actual policy decision, it does indicate that they are willing to go through with some form of intervention to prevent their currency from continually strengthening. That, in itself, could help slow things down.

The Brazilians have actually been going through with it though. At the end of May 2009, they actively bought dollars against the Real to reduce the value of their currency. Exports again, their reason. In such a situation, it’s understandable. The effect is also limited. No one got their knickers in a twist over that. This was not the case with the Swiss. Switzerland is no stranger to Financial controversy (read the history of the Swiss Banking System). Earlier in 2009 (March, I think) they showed that, when it really comes down to it, it’s every one (or every European) for themselves. How? Well, they suddenly offloaded a bunch off their own currency (Need I say, Exports). This caused it to lose value…violently…against the dollar, but also against the Euro, which is where the trouble came in. Switzerland is part of Europe. This inherently selfish act was bad for it’s neighbors. More consideration was expected from them. But no. The Swiss were looking out for themselves. Talk about Self-Preservation.

Some countries go pretty far down the path of intervention. One of the most controversial…the Chinese. They have an “interesting” approach to this issue. When a consumer buys a product that is manufactured in China, the producers are paid in Dollars. These producers get the Chinese Central Bank to convert their Dollars to Yuan. This is a sale to the Central Bank by the Local Bank where the money is deposited. This process creates an excess of Dollars in the Chineses Central Bank. To balance this, the rules of trade say that the Chinese should sell the Dollars on the Currency Markets and buy the Yuan back. In this way, the Yuan gains it’s value back on the dollar until equilibrium is reached. Ah, if only things were that simple. They are not. The Chinese have no interest in seeing the Yuan gain value. So, they take the path less travelled. They take those dollars and buy US Based assets (All that talk of China owning a good chunk of American…this is where is stems from). The Dollar doesn’t lose value against the Yuan. To make up for this, they print more Yuan. Good times. They do have to worry about inflation though. However, that is something they can live with. It is for this reason that there was a bit of an uproar when Barack Obama’s new team came in. This policy has made it easier for China to weather this crisis. At the G20 meeting, also earlier this year, some people expected that China would get scolded…or at least some remarks about this. It didn’t happen.

The Europeans have been talking intervention in recent weeks as well. All of these strong gains against the dollar are starting to worry everyone just a little bit. It’s just comments from here and there for now. Intervention is not something to be taken likely. However, there is also some talk that the Swiss might be back at it again. That won’t go down well with the rest of Europe. I wonder if any of the European family have decided to boycott Swiss chocolate. Hmmm.

The thing is, intervention doesn’t always work. In fact, more times than not, its effects are only for the short term (let’s not talk about China). It tends to create a quick drop or rise, then the trend continues. This has happened a number of times. Sometimes, this small hiccup is enough for the instigators, I suppose. However, as a long term strategy, it would require more cooperation to succeed properly. The different countries would do better working in tandem. Unfortunately, it’s quite difficult for them to agree on this.

Like I said, it’s every man for himself…

But what does strength mean?

Once I became old enough to understand currencies, it became apparent to me that, from the point of view of the average person, a strong currency is what you want. I guess it kind of tallied with going out to England on holiday. With a stronger currency, there were more video games. With a weaker currency, I found that my luggage was noticeably lighter.

That view has changed as I have grown older. You don’t want to have a currency that is so weak that you need millions of units to buy anything bigger than a pack of crisps (just ask folks from Zimbabwe). However, there are downsides to having a really strong currency. Exports are a major point.

Currency strength is an interesting concept…Check this


Recently, faith in the Dollar has been put to the test. There have been doubts about the US and it’s ability to come out of this thing on top…doubts about America’s “AAA” rating. Then the job numbers came out today, and the US Dollar bounced back in style, gaining up to 1.8 % on the Euro at the end of what would have been a pretty horrible week, otherwise. What gives?

Over the last couple of weeks, as the global economy continues to move upwards (I think we can all agree that, at the very least, the bottom is in), we have seen a huge backlash against the strength of the US Dollar. The sentiment has flipped. Previously, we had people being pessimistic, and only coming out to play when there was significant good news. Now, everyone is getting in, and only slowing down when there is significant bad news.

So, yes the dollar’s weakness is, to a large extent, the by-product of confidence. The Volatility index has dropped considerably recently. It’s all good. However, there are other factors at play. This has been more evident in certain currency pairs than others.

Take the British Pound. It was clear that the drop in the Pound against the Dollar was much more extreme than circumstances demanded. At various instances in the last few months of the year, there was some back-and-forth between the UK and the rest of Europe as to who would fare better as the recession became more contracted. The UK suffered more, in the long run…and so did the pound. While fighting the trend when trading is not exactly a good idea, the pound was always going to stage a major comeback once all the negativity was reduced. And so it has…in a big way.

Last week, both the Pound and the Euro were helped along by their respective central banks. Why? Because there was no rate-cut. This is a signal that the banks think that whatever action they have taken is enough…that there is no need to do more. It means that things are getting better in their eyes. That was a big boost. Any rate-cut would have meant potential currency weakness. That didn’t happen. Instead, both currencies rose in value.

The same goes for the Commodity currencies. Australia, New Zealand and Canada…none of their economies took as much of a beating as the US. Once the dust settled, commodity prices were always going to rise, as was Oil. It has reached over a 7 month high now (Gas costs are starting to hurt my wallet again. oh, well. It was good while it lasted). Commodity prices will continue rise as well.

What we have been seeing here is normalization. The dollar got much too strong, not because of any real merit on it’s part, but simply because it was the safer choice. Now, it is no longer necessarily the only one. There was a bit of an uproar because of all the talk about the US losing it’s “AAA” Credit Rating. The fact is that things will not go back to normal here, or anywhere else for that matter, for some time yet. But things are getting better…everywhere. Naturally, people (particularly those who ran here in fear) will come out of US-based assets and spread them round. At some point, things will balance out.

Some normality returned because of the numbers out of the US. Though the unemployment is at historic lows, the rate of loss was just not as bad as people thought it would be. End result: The US will still be a leader on the way out of this thing. Forex Traders flocked back to the Dollar…some of their senses restored after good old-fashioned mob-mentality took over for a moment.

The US dollar might still have some value to lose before it returns to a reasonable level, but any sudden moves should be off the table…for now.

Happy Trading

Forex Heroes…Brazilian Real et al

It’s all getting a bit old now. The Forex Markets have been relatively predictable lately. The dollar is getting pounded. Everyone’s getting more confident in the economy…yada yada yada. But I guess that’s what is happening. People are just going to have to get used to the idea of a weaker dollar in the short term.

All the majors have been taking advantage of the fall of the dollar, including the yen. The dollar managed to fight back against the yen a little bit last week, but faltered. A steep drop followed. There are just too many speculators getting in on the action now. As I said, this is it, in the short-term.

There’s not much evidence that the US Dollar’s status as the preferred reserve currency has been crushed completely; however, there is some cause for worry. The main issue now: rumblings that Standard and Poor will drop the US’s AAA rating. It hasn’t been announced officially, but many see it as a foregone conclusion. Investors and traders can take a hint. They won’t wait for the sh*t to hit the fan. They are offloading the dollar as fast as they can.

It won’t go on forever. We should expect some pullback soon. If there is a major drop again early in the week, then a retracement should follow. The rate of the fall will slow. There just won’t be anybody left to sell the Greenback.

The guys that have benefited the most from this fall – in fact, from this whole economic meltdown – would have to be the outliers. I am talking about the South African Rand, the Brazilian Real and others like that. The Rand has climbed a whopping 11% against the Dollar in this month of May alone! It is now at the highest point it has been since early 2003.

The currency is strengthening so much that the Brazilian Central Bank is having to buy dollars to curb it. There’s good reason for this. They are afraid. While a strong currency shows some positive signs, especially in this case (where it is a result of investment in Brazilian stocks and other assets), there is cause for concern as regards exports. A strong currency means foreign countries have to pay more for Brazilian exports. That can only continue for so long, before they start looking elsewhere for other options. So they are buying dollars, and talking the Real down as well. This will also help to decrease the quantity of trigger-happy speculators out there who are interested in trading the Real against the Dollar.

When the people with the power to effect currency values (in this case, the central bank) start making comments that indicate they are willing to take strong action to change the trend, traders pay attention. You can often see this sometimes when a Central Bank announces a decision on whether or not to change the current interest rate. The markets might react in a particular fashion once the decision is announced, but the comments might change that. If a bank cuts rates (an action that would normally reduce the value of a currency in normal circumstances i.e. not these days), but then announces that it will be raising them shortly to address another issue. The currency might not fall as much, as traders will read the INTENT of the bank and might act on that instead. It’s just an example to highlight the fact that comments can be extremely important.

With that in mind, note that there will be 4 Central Bank meetings this week. Europe, England, Canada and Australia will be making rate decisions. These boys have all whipped the dollars ass this week. Changes to rates are not expected by any of their Central Banks. However, we come back to those comments again. What they say will be important. If there is negative talk, we could see some pullback in the trend. The dollar has fallen to pretty much everyone’s projected targets. Any excuse will do to gain, even if it’s just a little bit. That said, a further fall seems to be the more likely scenario this week. Not much further though.

Happy Trading.

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