Carry Trade Still Popular, but Doubt is Growing

It’s safe to say that the inverse correlation observed 

between the Dollar (and also the Yen)

and global equities is largely a product of the carry

trade. “The U.S. stock market bottomed and the U.S. Dollar 

Index peaked almost simultaneously in March. WhileU.S. stocks

are up more than 50% in that time, the Dollar Index (which measures 

the greenback’s value against the euro, the yen, the British pound, the

Canadian dollar, the Swedish kroner and the Swiss franc) is down nearly

12%,” observed one analyst.

On one level, this represents a return to 2008, prior to the explosion

of the credit crisis, when carry trading was THE dominant theme in

forex markets. However,there is one important difference. While 

the Dollar and Yen were the funding currencies then and now 

(due to their low interest rates), there has been a slight shift in the

currencies selected for the opposing/long end of the trade.

Traditionally, the most popular long currencies were those
 of industrialized countries, rich in commodities and backed
by high interest rates and often rich in commodities. To be
sure, these currencies have shined in recent months, certainly
 due in part to speculative (carry) trading.
“Strategists at Wells Fargo Bank in New York
‘believe that the gains in the dollar-bloc currencies
 (Australia, New Zealand, Canada) have run ahead
 of the gains in commodity prices.’ ” The Bank of Canada
 also noticed that “At the time of its last statement,
oil prices were about $75 a barrel, but now they are
 in the $60-to-$65 range. That suggests the currency’s
appreciation has outpaced the demand for its commodity exports.”

But the run-ups in the Kiwi, Aussie, and Loonie have been
 overshadowed by even more rapid appreciation in
 emerging market currencies. This shift is largely a product
of changes in interest rate differentials, which are now
 gapingly large between developed countries and developing
countries. Compare the 2.75%+ spread between the US and
 Australia, with the 8.5% spread between the US and Brazil or
12.75% between the US and Russia. For investors once again
becoming complacent about risk, the choice is a no-brainer.

Still, some analysts are nervous about this change in dynamic:
 “While the new carry trade may be less leveraged, it’s an
inherently riskier bet. As such, it’s more vulnerable to the kind
 of swift unraveling of risk appetite observed across all nations
and sectors in 2008, but which occurs with far more frequency in
 emerging markets.” Meanwhile, emerging market stocks have
behaved volatilely over the last few weeks (with Chinese stocks
even entering bear market territory), and some investors are
concerned that they may be temporarily peaking. There are also
 signs that bubbles may be forming in carry trade currencies,
 with bullish sentiment at high levels. Accordingly, one strategist
 suggests waiting out a 5% pullback in the Australian dollar, and
a 10% pullback in the New Zealand dollar before going back in.

There is also the outside possibility that the Fed will raise
 interest rates, which would crimp the viability of the US Dollar
as a funding currency.
Granted, it seems unlikely that the Fed will tighten within the
next six months, but investors with a longer time horizon could
begin to adjust their positions now, rather than wait until the 11th hour,
at which point everyone will be rushing for the exits.

Interesting Week in Forex Trading Arena

This week has been a strange and yet interesting week on the Forex Trading arena. The volume has been incredibly light, due to end of summer festivities in the US and Canada and Western Europe, however the flow of data and information has not ceased. 

We have seen officials declaring the recession is over, and yet only a few hours later a piece of data comes out that contradicts that idea. And we have seen the Dollar getting bounced around.

September in the stock market is normally the worst month, about an average of 3% loss are recorded each year since 1929. While October is the “crash month” (last year alone the market fell 13% in October) the downfalls are few and far between – so September is the hard month. 

A reason for this is that people come back from vacation and pull back their investments to gage the market and see what has happened – a portfolio reshuffle is how brokers define it. 

In the Forex though, it is different: A down market typically means a stronger currency and although this works out most of the time, this year, 2009, we are not seeing this trend.

The worries that investors have now are no longer just about which company will do better next year, or which company is poised for a breakout, the concern is based on governmental activities and it is affecting the Forex’s relationship to stocks. 

As currency is a true indicator of how strong a country is economically, traders have begun translating this into their stock holdings as well. Which company will be most affected by government legislation or which organization will fall under a new law or which bank will need money? 

The Dollar has been falling this month – in tandem with the US stock markets. The question remains for Forex traders, will this trend continue and if so, how low can it go?

Dollar experiencing a Seesaw Ride

The Dollar fell broadly on Wednesday, after an informal data release showed a higher than expected rate of unemployment. US employers in the private sector shed 298,000 jobs in August according to the ADP payroll report. 

The Dollar initially rose on risk aversion sentiment, however continued fears over the mounting governmental debt load along with a very light volume combined to bring the Dollar down in late session trading. 

The ADP jobs report is an early indicator of how the official government “non-farm payroll” (NFP) report will look. The NFP report is set to come out on Friday and includes both public and private industries. 

The consensus on the Forex market is that 225,000 jobs will be reported as lost, although with private industry alone shedding close to 300,000, the NFP is likely to disappoint.

At 11:00 PM GMT, the Dollar was down .42% to the Euro to 1.4282, down .9% to the Japanese Yen to 92.15, down .85% to the British Pound to 1.6286, down .05% to the Canadian Dollar to 1.1041, down 1.2% to the Australian Dollar to .8357 up .2% to the Kiwi to .6736 and down .55% to the Swiss Franc to 1.0594.

Sitting on the Fence – China and England Watching the Economy Go By

The Chinese stock market has all but collapsed the past several weeks, falling off nearly 25% in a six week span overall, capped by a 6.7% drop yesterday. The causes for concern in the Forex world relate specifically to the Dollar.

As you might recall from several weeks ago, I spoke of the Chinese selling off some of their US treasuries and diverting that money to support their commodity purchases.
This tactic is proving to be detrimental to the short term stability of the Chinese economy, as with the information on the stock exchange shows that industry is not moving, which means the metals and durable goods they are buying are sitting in warehouses, instead of feeding the economic machine.

For the US Dollar this is a signal that could spell out a difficult Fall/Winter once again, as China commits more money to helping their own corporations and diverts more and more funds away from Treasuries.

Already, the US has held three Bond issue auctions in which the Chinese bought nothing – a fact that is not getting as much attention at this stage as it should. I would bet, since my blogs have been a few weeks ahead of the mainstream news, that this will become a bigger deal in the coming months, as more auctions go by and China continues sitting on the sidelines.

Aside from this, we have the British Economy which is sputtering along, as it seems the politicians are doing nothing. Political sensitivity aside, the Sterling has been suffering because the establishment in Parliament is still trying to get over a spending scandal which dominated the headlines for two months. They are timid and afraid to do anything significant for fear of more backlashes, so they are also sitting and watching.

What Forex investors need is a clear sign from governments, that they are doing something, being proactive and working to turn the economy around instead of hoping that it will all by itself.

This week will be a slow one, many in the US are off for the week, and Europeans are spending the last week catching the remnants of the summer sun. The ECB meets this week – don’t look for anything shocking there – they too are catching rays.

The Coming Storm!

The Coming Storm!

So the world is beginning to think that it is all over and done with, that the financial crisis of 2008/9, which conjured up that of the 1930’s is waning and growth will soon return to the land. And for a while, I was thinking the same thing – and beginning to scare myself into believing what the politicians and biased TV pundits (analysts) have been saying. But not anymore.

Rumor has it that we all should be on the lookout for something that I warned about several months back – and the rumors are coming out of the Federal Reserve in the US and Bank of England as well. 

It seems as if much work is being done (behind the scenes so as not to cause an alarm), to stave off a commercial real-estate meltdown, which resulted from the drop in property prices coupled with lack of capital and consumer spending. 

Their efforts could quite possibly be thwarted by a large spike in foreclosure rates in the US and England. Many of these properties had mortgages on them that were a part of the Wall Street derivatives market – the same sort of investment tool that many credit with causing this crisis to begin with, but on a much grander scale. 

According to the Wall Street Journal, $700 Billion worth of these commercial mortgage backed securities are in serious trouble – and a collapse of them would cost close to five times that number to manage.

The effect that this would have on Forex trading is profound as just as the economy seems to have recovered from the tsunami, the aftershock comes and sets back all that has been done. 

The US Dollar and British Pound are very vulnerable, especially since they have spent so much time and effort playing down the amount of damage being done – while all along the crack was actually getting wider and spreading. 

Not only could a meltdown in this sector, which is inching closer to reality, harm the economies – it will adversely affect the currencies in the Forex market, as governments spend more money they do not have to fix it.

Global Recession - Is it really Over?

The Central Bankers of the world met this past weekend in Jackson Hole, Wyoming. Known for hoards of Deer, Elk, hunters and hamburgers, this relatively small frontier town became the center of the financial world for a few days – and will be widely remembered from this day forth as the place in which the global recession was officially declared over. 

Just don’t tell those 14% of industrialized workers who are without work, don’t tell those farmers who are selling items at 2/3rds less than what they were last year because of trade restrictions, and don’t tell the Central Bankers themselves, because in the end – the meeting and declaration was more politically motivated than factually motivated.

Jean-Claude Trichet, the EU Central Bank President, gave a speech that can be defined as optimistic, or if you are one of those protagonists, you could have derived a negative message from him. 

Ben Bernanke who heads up the US federal reserve was chipper and growth focused in his remarks – notwithstanding the actual numbers, he used words like “I feel” and “in my opinion” to describe the economic recovery – terms usually reserved for politicians and not numbers oriented Central Bankers. Good for him though as President Obama rewarded him with another term as Fed chairman for his efforts.

The Forex marketplace this week has been slow and light, most everyone is off in some vacation spot, perhaps hunting Deer and Elk or eating burgers. Forex traders have not been moving the markets these past few days – and neither has any news for the most part. 

The summer is winding down, quarter 4 is around the corner and the world is anxiously awaiting something to happen. In Europe, Germany’s growth and true recession exit is marred by the other EU countries that are still suffering double digit unemployment and negative growth. 

In the US everyone, including the politicians and policy makers are on vacation, trying to regroup and figure out how to spend another Trillion Dollars that they don’t have on a healthcare package. And in China, they are selling their Dollars (shhhhhh).

In a world in which the lines between fact and political fiction, it is difficult to pin just where this economy is going. Yes there is some signs that things are getting better, but there also so many signs that there is bad news on the horizon. 

In the past 3 months alone, 650 banks have closed in the EU and US – the pains are still there from last year. Unemployment numbers are still rising – and the politicians warn us this is going to happen for a while longer. 

But something is happening, we are reaching a critical point in which something will happen. My belief is that it will not be good, but it can turn out to be positive – the haze of summer is upon us and Forex traders and online Forex bloggers like me are looking for a break in the air – a little clarity – and we are not getting it from those who are charged with honesty and truthfulness.

Keep your eyes open – next week will be a good one for numbers. For this week, enjoy the quiet, it is usually like this before the storm.

Banks score big on the Economy

I have been so perplexed over the past week, hearing US Federal Reserve Chief Ben Bernanke give a rally cry to the bulls, watching the positive data (or so it was interpreted as) come out and give hope, and seeing the Dollar hold steady.

I really believed that the Dollar would begin a more dramatic cave. But as it seems this was not to be, not just yet. You have bad data still, you have China unloading their Dollars, you have 10% unemployment and the number is growing and yet it was the reports from the banks scoring record profits that kept the Dollar on its feet.

But I have a different outlook, as I have read over the balance sheets over and again of the banks and their multi-Billion Dollar profits.

When an economy is bad, more people live check-to-check, and even tend to extend themselves more than at any time. When an economy is healthy, Banks derive profits from investments and to a lesser degree, fees and customer charges.

Now, in a time where home, car and personal loans have been dry, the fact that the economic growth is negative, and that the questionable securities have not recovered as an investment tool, leaves it hard to believe that banks are able to grow so much last quarter.

Looking at their reports, I can tell you that it is obvious where they are making their money from, and it is not a good sign for the economy.

In the US, when a bank customer goes beyond their account balance, they enter an overdraft territory in which they are charged obscene fees for having the bank cover their charges.

Now, in the past it had been a standard that the customer needed to apply and request this overdraft, and this is not to be mistaken for a typical loan or credit line which are different animals.

The customer would agree that if they charged using their bank car, or wrote a check, and there was no money in the account, they would pay a per-transaction fee and an interest fee calculated and prorated on a month to month basis. The interest is anywhere between 8-18% and the fees can be as high as $10 per transaction.

Now, according to Citigroup, Goldman and Bank of America, it seems as if 60% of their revenue was derived from “customer fees” and increase of 36% from the average between 2002 and 2008. So I dug a little further and here is the fact.

The average bank customer is paying, with fees and interest on overdraft, about 35% per month. Keep in mind that with the high fees, if a customer goes to a pharmacy and charges 1n $8 box of band-aids, he can be charged $18 plus interest on the full $18 as it is calculated at the end of the month.

Think about it, you have no money in your account and you make three charges for $100 in total, with $30 in fees plus interest on the $130 in total, you owe the bank $138. You took $100 and owe more than 1/3rd of that on top of your principle.

What the key is here is banks no longer ask customers if they want overdraft, they automatically approve every customer for it up to a set limit – like $5000. So even if you have no credit, if you have a bank account you do – and this is how the banks are making their money – 60% of it for that matter.

How does this affect the Forex online trader? It is just evidence that some Online Forex blogger has presented to you that the picture is not black and white showing recovery, there are problems and it is growing – growing enough that people en masses are borrowing and the banks are raping them on it, it is making a bad situation worse and the repercussions will come back to haunt everyone involved. Just watch retail sales and consumer prices – these will be telling numbers in the next few weeks.

Forex News: Euro Update

Data reported on Friday showed that manufacturing activity contracted at a far slower pace than expected, and that the services sector decline seen over the past 11 months was flat in July, lifting the Euro a bit. 

Forex Online Investors have still not picked up on the good news from the Eurozone despite positive growth reports from France and Germany and this signals the insecurity with the reported growth on behalf of the investors due to conflicting statements from EU officials. 

The next few weeks can go a long way to shedding more light on the economic situation in Europe.

At the close the Euro was up .71% to the Japanese Yen to 135.2, up .5% to the British Pound to .8676, down .03% to the Canadian Dollar to 1.5487, up .1% to the Australian Dollar to 1.7155 and up .1% to the Swiss Franc to 1.5159.

China's Dilemma - Status Quo or Shine

The Australian and New Zealand Dollars have been fairing pretty well these past few weeks. Optimism about the state of the economy and the transparency of government efforts to save what they can of their thriving commodity export business has done them well. 

Forex traders are aware of the highs being made by these currencies, and specifically at the US Dollars expense.

The recent sale of US Dollars by China had done much to help these countries. With China being the primary buyer of their minerals and metals, the sale of US Treasuries signals China’s unwillingness to stop their rampant buying. I personally feel this is a mistake but I am glad they are doing it as it is helping the currencies I like to trade the most. The problem I see arising in the near term though is the rise in prices of core materials. 

The Chinese cannot continue funding their purchases by selling off their US reserves, it will only serve to hurt the value of the Dollar in the long run – and as holders of 3 Trillion Dollars worth, it is a significant amount that they have at stake.

China needs to come to terms with the state of the economy and slow down on their spending right now. This can help them in two ways:

1.The amount of buying they are doing is causing increased demand which is driving up prices, if they slow down, prices fall and they can save money.

2. The amount of money they are spending stockpiling raw goods could be better spent taking up larger stakes in the US Dollar, by doing so they increase their political influence and are in a better position to get what they want out of the US. 

As well, it will help their cause with World Bank members in their efforts to establish a global reserve currency.

Online Forex readers know all too well that things are not what they seem. The recent stock selloff in Asia has traders nervous. 

IT would go a long way to calming markets if China were to step up and seize the moment here – it could also change the way people think en masse about the US Dollar and Renminbi as a valuable trading tool.

US unemployment is bad - I told you so

I would normally not like to gloat about being right, but in this case I must. I wrote last week on Wednesday that the US unemployment numbers will disappoint and disappoint badly even though the “experts” (defined as those who make 100 times my salary) were on CNBC telling the world that the numbers will come in line with previous expectations. And what happened the next day seemed to shock those same “experts”. I cannot figure out why.

If you learn anything from me in reading these blog entries, it is that Forex onlinetrading is all about information. Forget candle sticks charts, technical support and resistance points, you need to see what is going on in the world and then, confirm that this is actually the truth. 

As we saw from the CNBC panelists, they are just so called analysts who are paid by their companies to “spin” the tale that best suits their employer. In order to bypass and neutralize them, we need to dig even deeper.

On Wednesday, the ADP (remember, the payroll service) came out showing that they had dropped over 470,000 jobs from their weekly rosters, which means 470,000 people were no longer getting paychecks. But Forex analysts don’t take this seriously because it does not suit their interests, they only look at the hard data. 

Well, the hard data came out on Thursday from the US government and guess what? 467,000 jobs were lost when the street was calling for 360,000 – over 100,000 jobs more than anticipated were dropped. But here is another lesson for you – and perhaps you can profit from this as well.

The US unemployment figures released last week do NOT include those who are no longer getting unemployment checks (In the US you get benefits for several months and then it stops), it does not include those who got part-time jobs (which is called under-employment as the money they make is not enough to sustain themselves – but they do not qualify for federal benefits) and it does not include those who were recently laid off (by my count there was at least 38,000 in the second half of June from the Auto dealers and manufacturers) as it takes three weeks to process these claims. 

SO what I am saying, is next month, you will see a revision upwards in the June number and while it is too early to tell how July will fare, I can almost bet that the ”experts” will be a bit more cautious with their predictions.

The funny thing is, the information that I get is more readily available to those you see on the TV. I am thoroughly surprised that not many more Forex Bloggers are reporting this either. I am no genius, I am not an expert – I am just someone who trades and wants to make sure I do the best I can to not lose my money. And information is key to making sure this happens.

A little perspective please - Internal Polls in the US showed that Obama’s Honeymoon is Over

So with President Obama’s popularity waning, I thought I would take this opportunity to correlate the issues facing America right now and its affect on the all mighty Dollar.

As Forex online traders (and offline) we live and die, profit or lose, based on the Dollar, so this fine Tuesday morning in the latter part of June, 2009 is a great opportunity to reiterate that you cannot believe just words and that real knowledge truly is power in our business.

Yesterday internal polls in the US showed that Obama’s honeymoon is over. His social policies are unpopular and receiving criticism even amongst his own political party.

In his first six months as president of the largest economy in the world, he has virtually nationalized the banking sector, the auto industry and is now trying very hard to do the same to the healthcare industry, as I mentioned yesterday.

His Treasury secretary, Timothy Geithner, has been trolling the world giving speeches meant to boost the confidence that the investing world has in the Dollar’s value – and has been laughed at during these speeches in China, and most recently in Italy this past weekend.

North Korea is warmongering, Iran is blaming the US for their political unrest, Al Qaeda is threatening to use Pakistan’s nuclear arsenal on the US (should they get hold of it), Russia and China are openly calling for a new reserve currency on a daily basis and Brazil has removed the dollar as the primary currency used in trade with other countries. et, all the while we read reports that the economy in the US is rebounding and that things are getting better – well we need to look at these numbers to see just how good it is getting.

Monday, the US announced that the numbers of people on welfare have risen at the fastest pace since the recession began and are now at levels unseen since Bill Clinton’s presidency. Last Thursday they said that unemployment was at its highest rate in the US in over 30 years – hitting over 10% in 1/5th of the 50 states that make up the US and that interest rates are at the highest levels in close to a decade.

Let’s focus on these rates for a minute and how important they are – the interest rates set mortgage rates and personal loan rates – meaning, people looking to buy big have to pay more – and they are not buying and this is causing a trickle down effect.

Last week, the US government auctioned off 160 Billion Dollars worth of Treasury Bonds and Notes, and for the most part it was a success – even with the highest rates in years. But look closer, the record debt sale that went on saw the US Federal Reserve (a.k.a. THE central bank) as the biggest customer for these bonds.

This means simply that the US bought their own debt and is paying a larger price for it as well. And it is specifically this information which have brought Obama’s numbers down sharply – it’s one thing to preach fiscal discipline and take over industry after industry in the guise of showing them fiscal discipline – yet it is completely another thing to put into practice something entirely different.

And this is where the US is right now - they are not practicing what they preach and as we saw in China, Italy, France and Germany, the US is being laughed at when they tell people that an investment in the US is a good investment right now.

We might hear the pundits telling us that everything is great in the US of A, but looking at it logically, the use of the Dollar as a long term investment tool is not looking that smart anymore.

We have seen on the Forex and watched online as the dollar has dipped and has lost value – the DAC index is off nearly 30% from its highs – this says volumes about the Dollar – no matter how much they try to show us that all is ok in the USA.

Be careful – and if you were like me, watch down under – their Dollars are looking pretty good in comparison.

The Foreign Exchange Market Differs From The Stock Market

View PDF | Print View
Total views: 158
Word Count: 437 

The alien interchange market is likewise known as the FX market, and the forex market. Syndication that takes place amongst two regions with dissimilar currencies is the basis for the fx market and the background of the Syndication in this market. The forex market is over thirty years old, traditionalistic in the early 1970's. The forex market is one that is not grounded on any one business or laying out money in any one business, but the retail and retail of currencies.

The divergence amongst the stock market and the forex market is the tremendous retail that occurs on the forex market. There is millions and millions that are traded daily on the forex market, almost two trillion dollars is traded daily. There is is much higher than the cash traded on the daily stock market of any country. The forex market is one that involves governments, banks, financial foundations and those similar types of foundations from other countries. The

What is traded, purchased and sold on the forex market is a thing that can easily be liquidated, meaning it can be turned back to cash fast, or often times it is really going to be cash. From one currency to another, the accessibility of cash in the forex market is a thing that can take place fast for any investor from any country.

The divergence amongst the stock market and the forex market is that the forex market is worldwide, worldwide. The stock market is a thing that takes place only within a country. The stock market is grounded on businesses and products that are within a country, and the forex market takes that a step farther to include any country.

The stock market has set business hours. In general, this is going to follow the business day, and will be closed on banking holidays and weekends. The forex market is one that is open in general twenty four hours a day because the tremendous number of countries that have part in forex retail, buying and retail are located in galore dissimilar times zones. As one market is opening, another countries market is closing. This is the continual method of how the forex market retail occurs.

The stock market in any country is going to be grounded on only that countries currency, say as an illustration the Japanese yen, and the Japanese stock market, or the United States stock market and the dollar. However, in the forex market, you're involved with galore types of countries, and galore currencies. You will find references to a variety of currencies, and this is a big divergence amongst the stock market and the forex market.