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Archive for March, 2010

Yuan Exchange Rate

Posted by TFNG Admin On March - 24 - 2010
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China may allow the value of the Yuan (Renmibi) to rise later this year. China has kept the Yuan exchange rate low for years in order to sell cheaper products to the rest of the world. China’s use of a low Yuan exchange rate is merely copying what Japan and Taiwan have done for years. All three nations have bought substantial amounts of US treasury securities, which has helped keep the dollar artificially high. The Yuan, Yen and Taiwan dollar (also called the Yuan) all trade in the Forex market. If China allows the relative value of the Yuan to change it will be in response to internal affairs and not to foreign pressure. If the Chinese let the Yuan move higher it will cause a reshuffling of other currency pair values. Good Forex advice for 2010 will be to watch the Yuan.

Although China let the Yuan rise in value in the middle of the decade they have kept it pegged to the dollar for almost two years. A general consensus is that the Yuan would go up by more than a third its current value versus the dollar if allowed to float in the Forex market. In considering Forex trading and foreign currency risk the Yuan situation looms large. If the Chinese let the Yuan float you ought to buy Yuan now. If the Chinese let the Yuan float to its true value versus other currencies the question is if you want to own Yuan in a couple of years. The main reason for keeping the Yuan, Yen, and Taiwan dollar low compared to the dollar, as well as the Euro, is to be able to flood the consumer markets in North America and Europe with products that are cheaper than can be produced locally. This practice, along with a large, cheap labor pool has benefited China ever since it opened up to the world after Nixon’s visit in the early 1970’s.

China considers itself the Middle Kingdom and does not ever do things to please anyone outside of China. So long as a cheap Yuan has worked for them they have continued to depress its value versus other currencies. When China lets the Yuan exchange rate go up, or lets the Forex market do it, it is because of internal reasons. Right now China is dealing with debt issues (some hidden), serious social issues, and inflation. Raising the value of the Yuan versus other currencies will likely slow inflation in China avoiding the social and political problems of rising costs for a population that is still not paid a very high wage for its work. A sound Forex strategy and the Forex news about the Yuan could possibly guide the trader to profits this coming year as the Yuan rises in value.

When the Yuan exchange rate goes up the price of Chinese imports into North America and Europe goes up. It may be that Chinese exports will suffer and some of the huge currency flow from the rest of the world into China may be reduced. That may have a beneficial effect for many countries concerned about Forex and sovereign debt.

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PIIGS and Forex

Posted by TFNG Admin On March - 22 - 2010
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The matter of PIIGS and Forex has not gone away. For anyone who has not been watching, PIIGS stands for a number of Southern tier European countries and one island nation with dangerously large national debts. Portugal, Italy, Ireland, Greece, and Spain are all considered to be in risk of default. Because these are Euro Zone countries Germany and France may have to step in and provide loans. This situation has driven the Euro to new lows.  Debate ranges back and for on the subject of Forex and sovereign debt. Now England’s debt is calling its creditworthiness in question so the Pound is falling along with the Euro.

Traders are making comparisons to Greek debt and US debt as a fraction of GNP and wondering whether to discount the Dollar or the Euro based on debt. As usual Forex trading and opinions go together like jam and bread. Those who saw this coming have profited handsomely by betting against the Euro. Now the question is if the excessive debt of US states will cause a bailout making factors influencing the EUR/USD pair reverse and send the dollar into a slide.

For the astute trader your Forex strategy and the Forex news are not always on the same subject. For example Forex trading and the Dubai financial crisis was at the top of the news recently. PIIGS and Forex pushed this matter to the back pages. It should not remove this issue from consideration in Forex strategy. When the recession hit governments around the world responded by pumping money into credit markets, bailing out ailing banks, and even taking shares in financial giants like Citigroup to stabilize the financial markets. The effects of this unheard of amount of debt will be with us for generations and should be considered in Forex trading. Even large national matters such as Forex and health care affect national debt which in turn affects currency values. The issue with Dubai is not so much their debt but who will have to write off their loans.

As usual commentators are predicting the end of the Euro and the end of the European Common Market. Beware of extremes when formulating your Forex strategy. If the Euro goes away it will not be there to trade. However, there are too many good reasons for the European nations to continue to work together for the Common Market to fail. Because of these we can expect to see recurring situations like the current PIIGS crisis where Germany and France will need to step in to bail out their trading partners. In the meantime get used to the news of labor unions in Greece taking to the streets to complain about cuts in social benefits. In matters such as PIIGS and Forex remember that those who extend credit (Germany and France) will always require at least a show of fiscal austerity for their money. Good Forex advice is to ignore a lot of the daily sensationalism except as part of the bigger picture. Those who understood the debt situation and the political climate in many European countries saw the drop in the Euro coming and profited as it slid down in value. Those with technical expertise with Forex double bottoms saw the rebound of the Euro and went long on the Euro just in time. Those who understood that the EU is not going to disappear understood in advance that the Euro would come to a lower boundary and reverse despite PIIGS and Forex.

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Forex Double Bottoms

Posted by TFNG Admin On March - 3 - 2010
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Forex double bottoms, as well as double tops, are a strong sign that the market has tested a level and is going to change direction. The common interpretation of Forex double bottoms is that traders are buying en mass when the relative value of a currency pair gets to a given point. Forex double bottoms and double tops are trend reversal patterns. When Forex trading the Euro we will see times when the Euro falls in relation the dollar. Then it reverses and goes up only to reverse again and head back down. When it hits the second bottom is when traders will commonly go long on the Euro. Understanding the Forex markets includes understanding the use of common chart patterns such as the double bottom.

Forex double bottoms are one of the most common patters seen in Forex trading. Traders often describe double bottoms as testing and then retesting limits as well as repelling attacks as though trading were a military battle. What actually is happening is that traders are scalping profits on the way down and will continue to sell short (the Euro in the example we use) until the market reverses. Traders can profit using chart formations to plan their next buy or sell in a currency pair. Traders are also aware of fundamental factors influencing the EUR/USD pair. Whether it is Central Bank intervention or has to do with higher rates and the dollar in Forex trading there is often a bottom beyond which a currency will not fall. The support level seems to repel market movement, thus giving rise to the military terminology sometimes used.

Looking at the underlying mechanics of Forex double bottoms tells us that the relative values of currencies in a currency pair such as the EUR/USD are driven by both technical and fundamental factors. Good Forex advice is to use both sets of information in Forex trading the largest market in the world. Staying current on events that drive currency trading is a big part of how Forex trading and the Forex news are intertwined. Traders watch the news; they modify their trading and the resulting Forex market moves become part of the next Forex market news.

How to plan your trading day should include time to take in the news at the beginning as well as at the end of trading. If you are trading the EUR/USD pair you recently saw the Euro hit a double bottom and climb a bit. That made the news. However, that news was preceded by Chairman Bernanke’s testimony. The Fed Chairman will defend the recovery and job creation by keeping interest rates low. If inflation ensues the Chairman is less concerned that he would be if the US economy does not continue to recover. Traders seeing that the US could head into more inflation are less likely to buy dollars and more likely to support the Euro in their trades. Those trading the Euro are still concerned about Forex and sovereign debt as the PIIGS issue is still not resolved. Nevertheless trader concern about the Euro has a limit and the level when confidence in the Euro is strong was reached recently as the Euro hit a double bottom and reversed.

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Disclaimer - Forex, futures, stock, and options trading is not appropriate for everyone. There is a substantial risk of loss associated with trading these markets. Losses can and will occur. No system or methodology has ever been developed that can guarantee profits or ensure freedom from losses. No representation or implication is being made that using this methodology or system or the information in this site will generate profits or ensure freedom from losses.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN OR MENTIONED.

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