The Forex Nitty Gritty

In considering the rise of gold and continuing fall of the dollar we wonder out loud about the relationship between the US dollar and jobs in the USA. The USA has made a science out of sending, or forcing, jobs out of the country. Certainly wages are an issue and companies like to locate where they can pay their workers less. But taxes are an issue too and high corporate tax rates tend to drive business out of the country. The amount of money banked by US multinationals overseas is substantial with companies such as Cisco and Microsoft having somewhere in the range of $50 Billion. There has been talk of a   tax holiday in order to bring some of this cash home to the USA. There has also been talk of forcing these companies to use any tax holiday money to create jobs in the USA. A better means of creating jobs in the USA might well be to improve the long term investment climate instead of taking a piecemeal approach such as one that would apply to a tax holiday for offshore income coming home. The point of all this for Forex traders is that there is, in fact, a strong correction between the US dollar and jobs. Forex traders watch the Non-Farm payroll reports as higher employment tends to lead to a stronger dollar and fewer jobs to weaker dollar. Good Forex advice for traders is to look for signs of increased US employment. A good plan for the US government might well be to consider the relationship between the US dollar and jobs and so structure the tax code and laws of the land that the stronger incentive will be to create and maintain jobs at home.

The US has a double tax system on corporate dividends. Corporate profits are taxed and when paid as dividends are taxed again by shareholders. Capital gains are heavily taxed as well. One of the incentives for investors to buy stocks in some foreign countries is that both corporate taxes and capital gains taxes are substantially less than in the USA. Thus investment capital flees the USA and lands on foreign shores. The dollar goes down and jobs are lost. Looking at the relationship between the US dollar and jobs the US government might consider means of retaining job positions in the USA without another trillion dollar stimulus plan that will simply increase the ever mounting US debt burden. For those who believe that the US will be able to solve the relationship between the US dollar and jobs how to trade Forex successfully may well be to enter long term positions in the dollar. How to trade Forex for those who believe that the US will continue to stagger under a horrendous domestic debt burden may well be to short the dollar and buy Yen, Swiss francs, or even Euros or the British pound. In both cases many traders will likely wish to move in and out of positions rapidly as market volatility increases. As always we are not suggesting that traders buy or sell dollars. Rather our suggestion is that traders carefully evaluate the factors that drive the US dollar and jobs when trading the greenback.

More Resources

Recently, slower than expected European growth led to a fall in the Euro. Slower than expected European growth is not the only factor that is weighing on the Euro, however. The European sovereign debt dilemma continues well into its second year. The so called PIIGS crisis involves the threat of government default on debts in Portugal, Ireland, Italy, Greece, and Spain. Greece has taken up most of the news on this subject and recently agreed to extreme austerity measures in return for continued loans from European central banks and independent investors. Portugal has required bailout loans as has Ireland. Most recently Italy was in the news and analysts suggested that if support for Italian debt was not forthcoming that default on Italian bonds could be contagious with many governments defaulting on national debt. Thus the Euro has been up and down over the last two years. The growth of the EU economy has been a positive point in supporting the Euro and now the report of slower than expected European growth has hit the Euro at a bad time. How does the trader succeed at predicting Forex trends in such situations?

For that matter, what does slower than expected European growth have to do with Forex traders? First of all slower growth is still growth. Germany’s economy grew by a percent in the last quarter and overall Euro Zone growth was 2 percent in the last quarter. The concern of many is that the recovery from the recession is cooling off. Chinese industrial production has been off as has been production in North America. Traders looking to the medium to long term are trying to decide which currencies will prosper and which will falter if the world goes into a so called double dip recession. The Swiss franc is at all-time highs and has the Swiss central bank concerned about Swiss currency reserves, whose value is falling in relation to their own currency. In this complex situation it is of interest that despite the downgrade of US debt by the Standard and Poor’s credit rating agency that last week’s auction of US treasuries saw substantial demand and a fall in interest rates to levels not seen for more than two years. The Euro, like the dollar, is a major world currency and is the currency of the first or second largest economy, depending upon whether the US or Europe is in first place. The currency is very like never going to collapse. However, when those in charge of the economies of great nations do not show leadership, as with the dallying over the Greek bailout or the extension of the US debt ceiling it upsets markets.

It would seem that the combination of debt dilemmas and slower than expected European growth have caused a short term change in pricing. It does not, at the current time, imply a long term fall in the Euro. Traders are well advised to watch the next reports of European growth as well as the painfully slow resolution of the PIIGS debt crisis to see how this combination of factors affects Forex trading the Euro.

More Resources

The world awaits a meeting of the US Federal Reserve Foreign as foreign currency rates are likely to respond directly to the actions of the Fed. After the credit rating agency, Standard and Poor’s, downgraded US debt two things happened. Stock markets around the world fell and US treasury notes were in such high demand at auction that the ten year bond went for 2.3% percent, the lowest in three years. Although there is general consensus that both the US and Europe need to get a handle on their debt there is also an underlying concern that a policy of absolute fiscal austerity would plunge the USA, and the world, back into recession. Forex traders and investors are therefore very interested in whether or not the Fed drops interest rates in order to support the US economy or leaves them in place. Foreign currency rates will likely respond the any Fed announcement although the direction of foreign currency rates is not all that certain. The surprising interest in US treasuries tells us that the US dollar is still seen as safe haven currency and that US treasuries are still considered a safe bet. According to press reports Fed chairman Bernanke has been preping the market for likely Fed moves. After an urgent conference call with G7 financial ministers the GA7 issued a statement saying they would take “all necessary measures to support financial stability and growth”. But what will happen to foreign currency rates is there is an Italian debt default?

The situation in Europe is probably bleaker than in the USA. Thus foreign currency rates that include the Euro will likely favor the other currency unless the EU can staunch the flow red ink in Italy, which is the newest nation on the continent to threaten sovereign debt default. The Greek debt crisis, in fact the  PIIGS crisis (Portugal, Italy, Ireland, Greece, and Spain) has been brewing for over a year and has been a drag on the Euro. There is concern that if one of these nations defaults on its debt it could become contagious and there would be a round debt defaults across the globe. Foreign currency rates would become chaotic and, in all likelihood, favor the traditional safe haven currencies, namely the Swiss franc, the Yen, and, yes, the US dollar.

Watching short term foreign currency rates and trading with technical analysis as a guide can be profitable in foreign exchange trading and moves in foreign currency rates. For the long term traders need to look at the fundamentals and attempt to divine the intent of central banks, the US Federal Reserve, and national leaders as the debt crisis continues to simmer and threatens to boil over. A useful insight for traders is that while the S&P debt downgrade affected stock markets throughout the world it had an opposite effect on US treasuries and the US dollar. As civil war continues in Libya and threatens in Syria pro-democracy movements continue throughout the Middle East the world is a potentially unstable place and this will be reflected in foreign currency rates.

More Resources

Will the debt deal pending on Capitol Hill restore waning confidence in the US dollar? The US dollar has been the world’s most dominant currency since the end of the Second World War. Its old glory diminished over the years as the war ravaged economies of Europe and Asia returned to their former strength and more. US aid and economic partnership helped Japan become the world’s second largest economy, until the formation of the EU and rise of China knocked them down to fourth place. The European Union vies with the USA today as the world’s largest economy with China a rapidly growing but distant third. The world has used the dollar as a safe haven currency for sixty-five years but today the Swiss franc, Yen, mainland Chinese Yuan, Rupee, Brazilian Real, Ruble and other currencies are outdistancing the greenback. The problem for the USA and confidence in the US dollar is not only the resurgence of economies around the world. It is the continually mounting US debt. At 14.7 Trillion in debt the US is going to run out of borrowing authority. The cat fight on Capitol Hill these last weeks has been about what price politicians want to exact for their votes to increase the debt limit.
Currency traders have fled to the Swiss franc. Despite the economic havoc that the recent earthquake and tsunami wrecked on Japan the Yen is rising again versus the US dollar. Low confidence in the US dollar has had its side effects in stock markets around the world. With a belief that the dollar will continue to fall Japanese stocks have fallen. The working theory is that a weaker dollar will make imports from Japan more expensive in the USA and Japan will lose part of its export market. Swiss currency reserves held in foreign currencies have taken a beating as the dollar and Euro have fallen. Chinese banking officials have stated their intent to start reducing their holdings in US dollars and US Treasury securities. Considering that roughly 86% of currency transactions involve the US dollar the fall of the greenback affects the vast majority of Forex trades.
A trader may have confidence in the US dollar or not. What is important to successful foreign currency trading is buying or selling dollars, dollar options, or dollar futures profitably. The low confidence in the US dollar seems to stem for a general belief that the USA is incapable of getting its economic house in order. The dangerous game of “chicken” playing out on Capitol Hill these last weeks may play well in some home legislative districts but it has not played well on the world stage. Those doing business internationally want stable currencies and the threat of a lowered US debt rating and precipitous fall in the dollar has international traders and multinational corporations in arms. How to enter profitable trades in Forex of late has typically been to bet against the US dollar. Successfully dealing with US debt could change that. What remains to be seen is if the US is able to follow through with significant debt reduction measures to reduce debt. That could, at last, restore confidence in the US dollar.

More Resources