Themes: Forex Trading, Currency Markets
Currency trading is like investing in stocks… only bigger, because effectively you’re investing in whole countries.
Perhaps the most famous “currency” trade was carried out by George Soros. In 1992 he literally made $1 billion overnight by shorting the pound! He understood the big picture of a reunified Germany challenging the Exchange Rate Mechanism (ERM) that overvalued the British currency.
His inspired trade earned him the nickname “the man who broke the Bank of England” and forced the Bank to abandon the ERM.
Or consider the collapse of the Mexican peso in 1994-1995. When foreign capital dried up, causing political chaos, the government tried unsuccessfully to peg the peso at 3.4 to the dollar. Ultimately, the peso went into free-fall, losing half its value. Betting against the peso could have made you a fortune.
What makes currencies move
Of course, it’s difficult to predict these huge currency moves. But there is plenty of scope to snatch quick-fire 100 and 200 point moves in the currency markets using online Forex brokers or spread betting accounts.
And there are several key things that affect currencies and make them move. You just need to know what to look at. Firstly, think about interest rates.
Central banks make a big deal of announcing interest rate changes and anyone who reads a newspaper can tell you which way they are going. When a central bank raises interest rates, its currency becomes more precious as borrowing costs rise and the money supply is pushed downwards.
Just read the paper and buy a currency every time they raise interest rates and sell every time they lower them. Or buy the high yield currency versus the low yield one. International investment capital is sure to seek out the bigger yield. Of course, it’s not quite as simple as that as often the increase is already predicted and the price will reflect that. But you get the idea.
Money supply is also important. Other things being equal, when the supply of money increases, its price does the opposite. That’s why a good long-term bet is that the dollar will fall. Barrack Obama’s government has created trillions of dollars to fund its economic stimulus. All that printing of money has to devalue the dollar in the long term.
As with any market, the idea is to sell currencies that are plentiful and buy those that are relatively scarce.
Other economic data often moves currency exchanges, too. GDP growth, changes in employment numbers, trade balances, and even big moves on the stock market can have an effect. That’s because confidence in a country’s economy can lead to confidence in the currency and vice versa. That’s why it’s important to keep the big picture in mind when thinking about making a Forex trade.
The best way to trade the Forex now
But according to my colleague Darryl Cox, who runs our FX WIRETAP ALERT, you can pay too much attention to these fundamentals. By all means be aware of major economic announcements and central bank policy on interest rates. But the secret to successful Forex trading boils down to one thing: momentum.
As you may know, the Forex markets can offer some great long-term price trends. However, what Darryl has discovered by looking at historical data is that the market only trends (up or down) about a third of the time. In other words, about two-thirds of the time there is no trend to follow.
But that doesn’t mean there are not opportunities. What Darryl has worked out is that, over time, there are areas where the price momentum of a currency simply diminishes. These areas, known as momentum resistance or support zones, are a very good indicator of current price limits. When the price rises above the momentum resistance or falls below the momentum support, it usually does so with a supernormal force.
Darryl’s looks to take advantage of these “momentum break-outs” with short-term trades of between a couple of days to a couple of weeks. And what he’s found is that the momentum break-outs themselves are independent of any trends, though when they do coincide we can have spectacular results!
Right now, the Forex markets, like the stock markets, are not trending. This is because traders and investors are uncertain about the global economy. The dollar should be falling, by rights, given the state of the US economy.
But instead, every time there is a major piece of negative news that causes stock markets to fall, the dollar rallies. That’s because it is still the world’s reserve currency. America is still seen as the safest economy and the dollar the safest currency. In time this will change and a major trend will emerge in the dollar. That trend will be down. But until then, the way to trade the Forex is to look for momentum breakouts that can deliver short, sharp gains.
Good investing,
Frank Hemsley
For The Right Side
MARKET NOTES
Investors’ appetite for gold still going strong
BY SHIVVY ARORA
Gold-backed exchange-traded funds (ETFs) saw record inflows last month. They also hit an all-time high in the first quarter of this year, with 456 tonnes of inflow coming in globally. That’s against 321 tonnes for the whole of 2008.
This demand shows no sign of ceasing. And this is good because the yellow metal’s supply is limited, which means prices get pushed up. The other key driver for gold prices is dollar action. A weaker greenback makes gold cheaper for other currency holders, causing its dollar price to rise.
Take a look at the chart below. It tracks the performance of the SPDR Gold Shares (ticker: GLD) for the past nine months. You can see that the fund is up by close to 30% since Nov last year. Since its launch in 2004, it’s become one of the most successful ETFs in history. In fact, it’s now the second-largest ETF in the world!
Investment inflows to gold gained ground as the economy worsened
If you would like to see a larger version of this graph please click here
Source: Yahoo Finance
Gold is a great inflation and crisis hedge. The economy isn’t making any real, sustainable headway and confidence in the markets is still low. We’re worried about credit, the financial system, money-printing… all of which adds to inflationary pressure.
And so, folks start moving away from equities and bonds. Indeed, this is already happening. Every portfolio needs an inflation hedge and gold is just that. Gold carries actual investment value, rather than just being ‘pretty’ to look at. It’s crucial to be invested in an asset class that offers a strong counter to inflation. Expect to see a steady surge in gold-backed ETFs this year as buyers flood the market.
The Daily Reckoning – After the bubble comes the clean-up
BY BILL BONNER Waterford, Ireland
Thursday, 16 July 2009
The monsoons came to an end yesterday afternoon... more below...
In the meantime, the Financial Times, on the final page of the first section, reports the big news:
“China... is back in bubble land.”
After the expansion comes the contraction. After the bubble comes the clean-up. After the storm comes the sun.
But what is going on in China? What comes after the biggest export-led bubble ever? Another bubble?
It doesn’t seem possible. China’s number one customer is broke. It has far too many factories for those that are left. It should be closing up shop... and waiting out the bad weather. And yet, China is growing. A combination of hot money... and hot financial policy... is falling on everyone’s favorite green shoot like Miracle Gro’.
Its trade surplus and foreign direct investment – the usual source of reserves of foreign currencies – are only half what they were last year. But the speculators are coming in... bringing cash. This has boosted Chinese reserves past the $2 trillion mark... . and provided the liquidity for another round of bubble-like conditions. Trading volumes in Chinese stocks, for example, are running three times last year’s.
The world’s investors and economists think they are looking at the Second Coming. Chinese growth will power the world out of its slump. Hallelujah... we’re saved! Things will be ‘back to normal’ soon. Stocks rose yesterday in anticipation – with the Dow up 256 points.
Daily Reckoning readers are warned: this too shall pop.
Back to normal is not where we want to go. ‘Normal’ in the bubble years was perverted... odd... queer... weird... and unhealthy. What really makes people wealthier is capital formation – the accumulation of machines, resources, and skills. But instead of forming capital, the bubble economy consumed it. As the longer the ‘normal’ bubble years went on, the poorer and more vulnerable people became.
But the big bubble has already popped. And these echo bubbles won’t bring it back. For behind the bouncy figures are the same limp facts we have been looking at all year. Americans aren’t buying. Mortimer Zucker in the Wall Street Journal:
"Households, overburdened with historic levels of debt will also be saving more. The savings rate has already jumped to almost 7% of after-tax income from 0% in 2007, and it is still going up. Every dollar of saving comes out of consumption. Since consumer spending is the economy's main driver, we are going to have a weak consumer sector and many businesses simply won't have the means or the need to hire employees.
“After the 1990-91 recessions, consumers went out and bought houses, cars and other expensive goods. This time, the combination of a weak job picture and a severe credit crunch means that people won't be able to get the financing for the big expenditures, and those who can borrow will be reluctant to do so. The paycheck has returned as the primary source of spending."
Americans aren’t buying. So China isn’t selling. Exports... the source of its real wealth... are down. And there’s no reason to think they’re coming back anytime soon.
Read on...
To read the Daily Reckoning in full, click here.
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