The Forex Nitty Gritty

The Forex Industry’s Nasty Secrets Finally Revealed!

Archive for September, 2011

Volatile Foreign Currency Rates

Posted by TFNG Admin On September - 28 - 2011

Volatile foreign currency rates are driving Forex traders to the US Dollar – USD. The US congress is back to having problems deciding if it will extend the debt ceiling and Europe is still dallying over a bailout of its struggling members’ debts. Worrying about another dip to the recession the currencies of Asia’s export driven economies are falling among generally volatile foreign currency rates. Versus the US Dollar the British Pound – USD GBP, went down last week as did South Korea’s Won – USD KRW, the India Rupee – USD INR, and the Chinese Yuan – USD CNY. Currency speculators are betting on a continued rise of the US Dollar and the fall of most other currencies. Traders are consulting both fundamentals and Forex technical strategies in order to profit in today’s volatile markets.

There are two roots to this dilemma. One is the sovereign debt crisis in Europe and the other is the continually mounting US debt. Both situations have traders concerned. Traders for companies doing business internationally are especially concerned as currency risk is a major concern during times of volatile foreign currency rates. International businesses will typically buy currency options in order to hedge currency risk. Trading options on the falling Euro has been profitable for those who purchased puts on the Euro in the EUR USD currency pair. Shorting the Euro also worked but entailed a potentially higher risk. The reason is that in options trading the trader’s risk is limited to the price of the options contract. If currency rates move contrary to expectation the trader can exit the contract at a loss or simply let the contract expire at a loss but that is the limit of his losses. A trader who shorts the Euro, for example, could be hurt if the Euro rebounds after a successful resolution of the EU sovereign debt dilemma. The other advantage of options trading is the leverage it offers traders. A trader need never own either currency. He only needs to buy an options contract and then execute the opposite trade in order to gain his profits when dealing with volatile foreign currency rates.

Volatile foreign currency rates, upward for the dollar, make US assets more valuable. It also makes US products more expensive overseas. In general Asian exporters are interested in a strong dollar but speculators don’t want to get caught in a market of volatile currency rates and falling Asian currencies. In the last week of so several currencies fell versus the dollar. The concern is that a renewed recession in Europe and possibly the USA will dry up the export market for these nations and directly affect their economies. As this situation demonstrates confidence in the dollar is a relative thing. The dollar has generally fallen against many currencies for years. This has led to more successful economies in these export-driven nations. It has also resulted in these nations holding a large amount of US debt. As interest rates fall with successively lower interest rates at Treasury note auctions anyone holding Treasuries has seen an appreciation of about 25% in their investment, a good reason to consider the dollar as a safe haven currency.

More Resources

    Foreign Exchange Trading, Forex, Forex Tips, Forex Trading, Forex Trading Tips

    Trading the AUD

    Posted by TFNG Admin On September - 23 - 2011

    Forex traders trading the AUD do well to keep their eye on the commodities markets, specifically coal, iron ore, copper, gold, natural gas, wheat, cattle and uranium. Australia is a large island nation (sixth largest in the world) with a relatively small population (22 million being number 55 in the world. It is blessed with abundant natural resources and proximity to the growing industrial powers of Asia. Thus Australia only suffered one quarter of negative growth during the current worldwide recession and has seen its currency, the Australian dollar – AUD – go up from 1.3285 to the USD in 2006 to 1.0902 to the USD in 2010 (CIA Factbook). How to trade currency such as the AUD always has to do with understanding the fundamentals that drive currency rates. Trading the AUD also has to do with reading market sentiment as the actions of many traders and businesses hedging currency risk come together to create a market price. The proximity of China, Japan, and Korea, especially, to Australia and its natural resources provides the Australian economy with advantages that can result in the ascent of the AUD. This ascent may not be only versus the USD, EURO, and YEN but against the Chinese Yuan. The perception of continued growth lends itself to profits for those who understand day by day market sentiment in trading the AUD.

    Trading the AUD can be similar to trading the Real – BRL, Rupee – INR, Yuan – CNY, or Ruble – RUB. Brazil, India, China, and Russia all have growing economies. These nations also have economies that are substantially smaller than that of the USA or the EU. This situation gives these nations substantial room to grow and prosper. It trading the AUD it is not important that there are a lot more US dollars or Euros than Australian dollars in the world. The only important factor for those trading the AUD is the relative value of a currently falling EURO versus a rising Australian dollar or the strengthening of the USD dollar against the Australian dollar. Although the AUD is commonly quoted against the USD it can be traded against any major currency, including the Yen, Euro, Swiss franc – CHF, British Pound – GBP, or Canadian Dollar – CAD. Trading the AUD against another generally rising currency such as the Real, Rupee, or Yuan will typically not be as profitable as trading the AUD against a currency that is in trouble, such as is the case with the EURO today. A Forex trader considering how to short the EUR may, at times, do better shorting the Euro against the AUD than against the USD.

    A long term consideration in trading the AUD is that Australia is a net exporter of both raw commodities such as coal and wheat as well as an exporter of finished steel products and processed meats. As Asia leads the world out of the recession Australia is ideally situated to do business with and China, Japan, and Korea as well as other prosperous Asian nations like Singapore and Taiwan or the most populous Islamic nation in the world, Indonesia. As always we are not suggesting that traders buy or sell AUD but offer an example of thinking through the fundamentals of a major world currency. Trading the AUD can be profitable but a successful Forex trading system requires thoughtful preparation, discipline, and timing.

    More Resources

      FX Trading, Forex, Forex Trading, Profitable Forex Trading Tips

      Options on the Falling Euro

      Posted by TFNG Admin On September - 14 - 2011

      Put options on the falling Euro – EUR – are the most active that they have been for nearly a decade. The Euro has fallen nearly 5 percent in the last year. With no end in sight to the European Union’s sovereign debt dilemma, Forex options traders have increasingly purchased puts on the EU currency. In purchasing puts in Forex trading the Euro traders purchase the right to sell Euros at the contract or strike price. This can be done in any currency pair containing the Euro. The trader picks a currency which he believes will remain stable or go up in value as the Euro falls. If the trader is correct in his assessment the Euro will continue to fall versus other currency. He then has two choices. He can execute the contract for options on the falling Euro. He sells Euros for US dollars – USD, British Pounds – GBP, Yen – YEN, Canadian dollars – CAD, Australian dollars – AUD, or Swiss francs – CHF, whichever major currency he chose to trade against the Euro. His second choice is to simply exit the options trade by executing the opposite trade on the same currency pair with the same expiration date. This later choice allows him to profit from trading options on the falling Euro without ever purchasing Euros or any other currency.

      Trading options on the falling Euro has two advantages over simply buying or selling Euros or other foreign currency. Options in Forex exchange trading help traders limit investment risk and allow traders to leverage their investment capital as well. When a trader buys put or call options on the falling Euro, for example, his only risk is the price he pays for the options contract. If currency rates to not perform as expected the trader limits his losses. If a currency trader buys out of the money puts or calls on one currency with the other he can often enter a trade at a very low cost. He does not invest the price of the currency involved, only the premium for his options contract. Should the currency pair perform as expected traders can earn multiples of their Forex options investment.

      As put options on the falling Euro outnumber calls interest rates on government bonds in both Greece and Italy are rising. These two nations are part of the PIIGS group, Portugal, Italy, Ireland, Greece, and Spain, whose national debt issues have plagued the Euro for well over a year. The underlying concern is that Greece and then Italy will default on their national debt and that the stronger members of the EU as well as the EU central bank will not intervene sufficiently to stop a wave of sovereign debt defaults reaching beyond the EU. Trading volatility is high as traders seek to profit from this unfolding drama. Buying options on the falling Euro can be considered a safer bet in a volatile market than selling options. The risk in selling puts, for example, can be essentially bottomless if the downward direction of the Euro, or any currency, accelerates.

      More Resources

        FX Investing, FX Trading, Foreign Exchange Trading, Forex, Forex Trading

        Internationalization of the Yuan

        Posted by TFNG Admin On September - 9 - 2011

        How does China’s plan for internationalization of the Yuan affect Forex traders? China would like the Yuan to be used as an international currency. However, foreign buyers typically pay with their own currencies while foreign suppliers typically are happy to receive Yuan. The Chinese currency has steadily risen against the dollar. The problem for China is that it is increasing its foreign currency reserves at a time when the dollar and Euro are going down in value versus the Yuan. China is losing money on their foreign currency reserves! To a degree the Chinese are at fault for causing this problem. They, like the Japanese and Taiwanese before them, have manipulated their currency, by purchasing dollars, in order to keep their currency weak and the dollar strong. This strategy profits an export driven economy. By keeping the Yuan exchange rate artificially low China has risen to be a global exporter and accumulated massive foreign currency reserves.

        Nigeria, a major oil producer and supplier of petroleum to China has just announced that it will begin to add the Yuan to its currency reserves targeting a five percent to ten percent level. This will certainly benefit Nigeria if the Yuan continues to rise in value versus the dollar or Euro. The decision may also be more complicated as China seeks the internationalization of the Yuan. If nations are holding ten percent of their reserves as Yuan and ninety percent as dollars likely not affect the dollar. However, if China discontinues its policy of supporting the dollar at the expense of the Yuan its export situation could suffer. The issue for the trader is how to trade Forex in the event of successful internationalization of the Yuan. Right now the Yuan is really not a market driven currency.

        China came out of its self-imposed cocoon years ago and came upon the global economic stage. Its huge, cheap, labor pool was attractive to those who set up factories in China to import back to the world. The huge potential customer base in China was an even bigger attraction to many who were willing to invest and wait for decades for their chance to sell products to an increasingly prosperous Chinese customer base. Now, thirty-nine years after President Nixon’s surprise visit to China opened relations between the two nations, China is looking at internationalization of the Yuan as a step toward a larger role on the world stage. Foreign currency trading of the Yuan versus the dollar may become totally market driven if China gives up its currency controls. Traders will have to follow both fundamental and technical aspects the market at that point in order to profit from trading in a post internationalization of the Yuan era. In the meantime traders are better advised to watch pronouncements of Chinese monetary officials to better anticipate target exchange rates set by the Chinese. As always we are not suggesting that traders trade the Yuan or ignore it. Rather we offer this discussion as an example the thinking traders may go through in approaching a foreign currency.

        More Resources

          Foreign Exchange Trading, Forex, Forex News, Forex Trading

          Greek Bank Merger

          Posted by TFNG Admin On September - 2 - 2011

          Will a Greek bank merger help stabilize the sovereign debt dilemma that has threatened the Euro for more than a year? Eurobank EFG and Alpha, the second and third largest banks in Greece have merged. The result in Greece was that bank shares across the board went up by about a third. What the Greek bank merger might mean for the European Union is a breather from the PIIGS sovereign debt crisis that has plagued the Euro. The two banks have issued new stock and sold assets to raise nearly €4 billion. The Qatari royal family, already shareholders of Alpha Bank, have promised to purchase half a billion Euros of debt with the promise that their investment can be converted into stock in three years. For those Forex trading the Euro a stabilization of Greek debt helped by the Greek bank merger may well be welcome news. On the other hand those who have profited by intermittently shorting the Euro against other currencies may need to look elsewhere for profits.

          Good Forex advice in trading the Euro or other currencies is probably to watch the situation to see if the Euro does, indeed, stabilize and start to rise. There are factors besides the debt crisis that have driven the price of the Euro. Economic growth in the Euro failed to meet expectations lately and that has exerted downward pressure on the EU currency. Both sound fundamental analysis and up to date technical analysis are necessary to follow and successfully trade foreign currencies. While the Greek bank merger has made the international news it remains to be see if it will lead to less pressure on Italy, Spain, Portugal, and Ireland, the rest of the PIIGS risky debt group.

          The key for the Euro in this situation is that a more stable banking situation in Greece will help keep promises of a sovereign debt bailout from fading away. Commentators remark that it is important that the merger go through and that the currently planned bailout, with its debt reduction agreement stay in place for the sake of Europe’s economic stability. Forex traders will watch this with interest as a solution to the debt crisis could lead to a rally of the Euro. If the deals fall apart the Euro could plummet as we would see an unraveling of sovereign debt across the weaker members of the EU. In the still-volatile PIIGS and Forex situation traders may prefer options trading directly trading the Euro versus other currencies. A simple strategy such as a long straddle will guarantee the trader profits whether the Euro goes up with a debt dilemma resolution or down if the Greek bank merger unravels. If the Euro stays the same the trader will not profit using a long straddle but his losses will be limited to the price of the options premiums paid. As always we are not suggesting that anyone trade the Euro or that anyone ignore the Forex opportunities present in the current situation. We present this discussion as an example of planning in order to set up profits in Forex trading.

          More Resources

            Foreign Exchange Trading, Forex, Forex Trading
            <a href="http://www.linkedtube.com/-vPVnCunDKsfe913f6c922420fb26f42a6311edad6d.htm">LinkedTube</a>

            POPULAR

            ARCHIVES

            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.

            © 2009 The Forex Nitty Gritty