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

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…

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

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.

One of the interesting things about the global economic meltdown is the opportunity it has presented for some currencies that would have been somewhat…well around the fringes, if you know what I mean.

Case in point – the Norwegian Krone. Do you know about the Norwegian Krone? Well, you’re not alone if you don’t. It’s only recently risen up the ranks because of all the uncertainty surrounding major currencies. All the regular names have suffered and recovered as this thing has moved along, but currencies like the Krone have definitely benefited more from the problems we have all been experiencing.

That’s the thing about upheavals; they shake things up. It’s really all about safety. America has been viewed as a safe place to put your money…whether that’s the US Dollar, or US based assets. The Japanese Yen has also done quite well. You might not gain too much in terms of return (interest rates are rubbish in Japan), but the risk is also low. So, when things have been bad, the US Dollar and the Yen have gained. When things have done well, the US dollar has suffered, except against the Yen. That’s because, the dollar is a higher yielder than the Yen. This is the way it has been.

Last week, we saw something different between the Dollar and the Yen. There is some consensus that the rate of things getting worse has reduced – whether that translates to things getting better is an open question – so the risk-takers have been out there, putting their money into the higher yielders…places where they will get more return in interest etc. This means the US Dollar has taken a beating, rightfully. At the end of last week, the Euro was at a 2-month high against the Greenback. Not a problem, right? Expected, right? Fine. Well, look the the Dollar Yen Forex pair. You would expect the Dollar to have strengthened against the yen. There should have been somehthing. No change would have been fine. It would have seemed pretty negative for the Dollar, but that would have been acceptable…sort of. Instead, the Yen is at a 9-week high against the dollar. That is a major indictment of the US economy.

The US is deteriorating in Creditworthiness. You know those folks out there that tell us what ranks as a great investment? Well, there is talk that they might be dropping the US from it’s “AAA” Credit Rating. That’s saying the US is in trouble. That’s saying that it might not be such a good place to stick your money ‘cos they can’t vouch for it 100%. That’s not good. It’s a double whammy. First, the Risk takers are coming back in, so safety is not such a huge concern; then now, the US is losing it’s badge as a safe place for investment. The Forex trading chaps agree. The dollar gained against pretty much nobody. This trend is even more likely to continue in the short term.

I started out this post talking about obscure currencies. Well, the Krone has been doing well. The Brazilian real has been doing great as well. Also, the South African Rand is another one. It’s time to start looking at the so-called Majors, and start “diversifying your portfolio” as regards to the Forex Pairs you trade. Keep that in mind as you do more trading.

This week in Forex Trading: It’s a holiday on the Monday in the US, so not much activity in the US; but there will be plenty elsewhere. The IFO surveys are coming out for Europe on Monday. The ECB is starting to worry about the strength of the Euro. It seems that a stronger Euro might make a recovery in Europe harder. We saw some reflection of this in the last couple of months, with the Swiss National Bank actually letting the value of the Franc fall against the Euro to help themselves and their exports. We might see the ECB officials making statements to this effect this week, so the strength of the Euro might wane a little. Maybe it will work more against the Pound, which has erased it’s losses against the Euro in recent times. So, we might see the Pound gaining more against the Euro.

We’re expecting some numbers in the US; the Consumer Confidence Index on Tuesday…also Durable goods and GDP on Friday. If some of these numbers can show that the US is doing better, then that might help the US Dollar against the Yen, IF there hasn’t been much negative news elsewhere.

Happy trading.

“Once bitten, twice shy” resonates pretty strongly with forex traders – most investors, in fact – in the current environment we find ourselves in. Things are starting looking up, in general, but some have been badly burned. This can produce fear, and the unwillingness to open positions. Paralysis, one might call it. However, there are opportunities currently. More and more forex traders have been taking them lately…against the US Dollar.

Just take a look at the Volatility index, courtsey of Yahoo Finance:

Yahoo finance Volatility Index

See how much it has fallen in the last week. That’s fear leaving the market, slowly being replaced by growing confidence. The mood is bullish…enough to allow the market shrug off some bad news.

The effect is evident on our Forex Pairs. EURUSD, GBPUSD, AUDUSD, NZDUSD etc. They are all up. The general consensus at the moment is that they will continue to rise, as long we don’t get any major negative news. However, since we have established previously that this thing is not completely over yet, there will still be some bad news to come. Care is still required.

How much care though? Some longer term traders – along with learner traders – have lost money in this environment. The quote “Nothing ventured, nothing gained” comes to mind. You have to put your money where your mouth is, or you’ll never make progress. The key is MONEY MANAGEMENT. If you ensure that you only risk 2-5% of your account per trade, then chances are that you will have many-an-opportunity to make some profit.

Don’t get greedy, even when things seem good.

Happy trading

At the start of Monday last week, it was clear the markets were riding high off the new wave of positivity that has captured investors. Some negetive numbers were even shaken off by this hugely positive outlook. The Risk Aversion trade was no where to be found. It seemed like there was some agreement among everyone that we were going to get out of this thing. I thought it might be the beginning of the end for the dollar, at least in the short term.

Not so. The Dollar fought back before the end of the week. I suppose there was good reason. While there is much hope that things are getting better (I should really say that the rate of getting worse is less), there are still issues. Some economists have urged caution. The recent rally in the Equity markets will not continue indefinitely. There will likely be another dip before we go back up. So it’s no surprise that bad news is still there.

The GDP numbers out of Europe were pretty bad…I’m talking a Growth rate that is the worst on record. What a way to bring everyone back down to earth. That overshadowed some not so bad news…like the fact the consumer prices rose slightly. The result of this was a beating at the hands of the dollar. The Single Currency did gain on the Swiss Franc though. It’s an interesting offshoot of steps the Swiss National Bank has been taken to devalue it’s currency. There was a bit of an uproar about this some time ago, but it seems everyone has forgotten. The Pound is in a similar situation as the Euro. Both of these forex pairs (EURUSD and GBPUSD) seem to be the most susceptible to news this week. We will have to watch carefully for any more disappointing news.

The Commodity pairs all got drubbed as well. A combination of dodgy economic data and a stall in Commodity prices. The Yen was the most triumphant currency for the week, gaining on everyone, in spite of the bad news on their economy. The Risk Averse trade is still helping the Yen, but we’ll see how much longer this lasts. There is a load of news for the Yen this week as well. A reaction is guaranteed.

It’s back to watching the news events closely. No telling where things are going to go…

You know the scene I’m thinking about. The one where a former great leader is surrounded by the same people off of whom’s misery he has derived his wealth and power for a long period of time. Now, he lies there, beaten and bloody. Everyone of them wants a piece of him. The poor guy has no where to go. He might not be responsible for everything that went wrong in their lives, but he’s an easy target now, so he gets it.

That dude is the US Dollar right now. The mighty dollar has benefited quite a bit from all the stuff that’s being going on. Falling Equity prices, poor commodity prices, cheap oil,bad economic news (even the ones in the US)…all round fear. It’s all been good for the Dollar. While we have seen some forex market pairs fight back over the last few weeks, last week was quite important.

A couple of things happened that could signal a more powerful shift in trading sentiment. First of all, you have the job numbers in form of Non-Farm Payrolls. They came in at 539,000 jobs. Now that’s lot, no lie. However, it was significantly less than the 590,000 that experts had estimated. This is good. Very good. We then have the results of the Obama Administration Stress tests which were quite interesting. There has been a lot of debate about these tests. There was skepticism by some about whether they were anything more that a PR stunt to cover up what was really going on. No one was really sure what metric would be used to score these institutions. It just didn’t add up. At the end of the day, the tests turned out alright. Some clarity was brought to bear on the financial system. In fact, the results were pretty much what people expected, in terms of the institutions that need help and those that don’t. No major surprises. It has boosted confidence, and it seems pretty clear that there will be no more major bank failures.

The US Government seems to have a plan on how to tackle the issues with the problem companies. If a company is not viable, then it must be restructured. Think Chrysler. Buy outs, Bankruptcy etc. The options are being used. I think more people (myself included) are fully convinced now that these money-sucking pits (supposed companies) will be allowed to fail if that is what it takes. Companies have been given deadlines to raise certain amounts of money, as proof that they can survice. If they don’t, then further steps will be taken. The Administration is now the strict parent. I am not entirely sure that putting a deadline on a drive for funds will work as intended, but it seems alright to investors…at least for now.

So it was a two-hit combo against the dollar last week. For this week, we have retail sales numbers to look forward to. Those are expected to be better. Mind you, this optimism is of the cautious variety. No one wants to jump the gun. However, it seems like the dollar will keep taking a beating. Commodities are on the rise. Oil is going up. Risk appetite is rising. Investors are starting to walk with a skip in their steps. It’s all good.

So, unless the dollar can make like Popeye and suddenly starting whooping everyone’s ass, I think the dollar will lose more ground. Popeye needs spinach to do his magic. Spinach here would be negativity. We are seeing less and less of that these days.

Happy trading.

First off, I am glad that the global pandemic didn’t quite happen. It was a near thing. I have to admit, I was really worried about it. I had to fly out from one of the New York Airports last weekend. I was suffering from a bout of Hay Fever…which means I was sniffing a little…and sneezing…and my eyes watered. End result: Nervous stares in my direction everytime any of those happened. Consequently, I worked extremely hard to avoid showing any symptoms. I also overdosed on a homeopathic drug I had purchased to supplement my one-a-day Claritin. That provided some relief…along with other side effects that I won’t discuss here.

The markets are also quite happy that Swine Flu has not evolved into anything as bad as some thought it would. It’s done some damage, and the danger is by no means over yet; but things are better. At least it’s one less thing to worry about in a recession.

In Forex Trading, The dollar did well against the Euro today, along with the Canadian dollar. Not so great against the Pound, but there was a subsequent pullback. There has been a lot of optimism lately. Oil has been picking up as well. Some have said that Oil will need to rise substantially, and hold those gains, for us to feel like we are out of the woods. All of this will be bad for the dollar. However, all of this is still a little premature.

We are seeing a little bit of a pause in optimism…at least until the news is out, or in. We have a European Central Bank rate decision. If rates are cut, the Euro will most likely lose value. Also, more job figures out of the US are expected. There will be large losses, as consistent with all we have seen this year. However, if the figures are worst than expected (bearing in mind that we are all getting a bit optimistic, and therefore have better expectations…a potentially dangerous thing today), then we can expect more negative sentiment. This will be good for the dollar.

One more thing that could cause problems: The results of Obama’s Stress Tests on the Banks. If more banks need more money, then that will be bad. It will undermine some of the progress that people think we have made. And yeah, it will be good for the dollar.

So, the dollar and yen remain the primary beneficiaries of strife and unhappiness. You know that friend you have that just ruins the mood when everyone is having a good time…well, that’s the Dollar.