In much of the discussion about the collapse of the U.S. housing market, commentators have assumed that the massive run-up in property prices that preceded the subprime-mortgage meltdown were simply the result of a speculative frenzy that became a full-fledged market bubble.
But that’s not the case at all.
You see, the bubble and subsequent crash were inevitable under the current system of housing finance. Fundamental changes must be made.
Standard and Poor’s recently projected the likely future loss rate on the $650 billion of subprime-mortgage-backed securities that are still out in the marketplace. From that we can estimate the losses S&P is projecting on the actual mortgages themselves.
According to S&P, senior AAA-rated bonds will pay out about 60% of principal, junior AAA-rated bonds about 35%, AA-rated bonds about 5% and lower-rated bonds nothing at all. Since about 75% of subprime mortgage-backed securities were AAA rated, we can calculate that S&P thinks subprime mortgages will eventually return about 40% on the original principal amount.
That’s a startling number.
Losses Still to Come
If you had a portfolio consisting entirely of 100% loan-to-value mortgages, on which the appraisals were accurate but a large percentage of the borrowers had poor credit, and house prices were destined to drop between 20% and 25% over the next few years, you’d expect to lose 25% - or perhaps 30% - of principal, but still manage to keep 70% to 75% of your money.
When you had a foreclosure, there would be costs involved that increased your loss. On the other hand, some of the borrowers would be able to make their mortgage payments, leaving you with no loss at all. Thus, if subprime mortgages are expected to return only 40%, almost half of them must have had some fraud involved, either by the borrower, the mortgage broker or the appraiser.
Let’s now turn to actual housing prices. The S&P/Case-Shiller Home Price Indices of home prices in the Top 20 urban markets dropped a bigger-than-anticipated 12.7% in the 12 months that ended in February - the worst showing since the index debuted in 1991. What’s even more alarming, however, is that the decline is accelerating. In February alone, prices dropped 2.7% - the equivalent of a 28% decline if this rate persisted for the entire year.
That should have alarmed both homeowners with large mortgages and mortgage market participants - if prices were to drop 30% to 40%, instead of the generally expected 15% to 20%, even prime home mortgages would get in trouble and the losses would be appalling - in the range of multiple trillions of dollars.
Since the first-quarter vacancy rate in U.S. housing - owner-occupied and rental - increased to 2.9%, the highest level in 50 years, we may indeed be approaching such a bearish scenario.
However, when you look at factors like the ratio of house prices to incomes, it becomes obvious that the problem is not the current drop, but the previous rise. Since World War II, the average house price was 3.2 times the average income. By 2006, however, the average house price had jumped to 4.5 times the average income. With house prices outrunning incomes in that way, mortgage financing was bound to become more and more risky, and a substantial drop was eventually inevitable - to take prices from 4.5 times income to 3.2 times would require housing prices to plunge 29%. And that doesn’t even consider the possibility that prices might overshoot on the downside.
The principal reason for the excessive rise in house prices and the high level of fraud was the housing finance system. In the modern system, the originator of a home mortgage loan is paid a fee on the origination, and never has to worry again about the credit risk on that loan, which is passed off to investors through a process known as “securitization.”
Because securitization separates the mortgage originator and the actual investor, the investors - often foreigners - have no idea of the actual underlying quality of the loans that they’re purchasing.
The mortgage broker’s incentive is to maximize loan volume - pretty much regardless of whether or not the borrower can afford the loan. Falsification of documents, suborning of appraisers, and other similarly reprehensible machinations becomes a normal course of action in such a situation, as does turbo-charging the housing market to valuation and sales levels it cannot sustain. A system in which prices are forced up to unsustainable levels and fraud is rampant is broken, and needs to be replaced with something better.
It (Once) Was a Wonderful Life
Years ago, the United States had a superior home-financing system; it was extolled in the 1946 Jimmy Stewart movie, “It’s a Wonderful Life.” Home-mortgage loans were made by local institutions to borrowers whom they knew personally. The system had some inefficiencies. For example, if the housing needs in a particular area expanded rapidly, there might be a shortage of funds, so that mortgages would be unavailable. However, banking is mostly national today, so local funds shortages would be less important, although there would probably be a corresponding decline in personal knowledge of the borrowers.
It’s not true that the Jimmy Stewart system of financing home mortgages was less efficient than today’s: That’s a myth put out by Wall Street, which has been one of the chief beneficiaries of the recent shenanigans. (Riddle me this: Do you think that “George Bailey” - Jimmy Stewart - ever got a million-dollar bonus?).
If you look at the U.S. Federal Reserve statistics on U.S. interest rates (which started recording home mortgage rates in 1972), you will discover that in 1972-78 - when the Jimmy Stewart home financing system was still mostly in place - 20-year Treasury bonds yielded an average of 7.41%, while 30-year fixed rate home mortgages yielded 8.49%, a differential of 1.08%. In 2000-06, an equivalent period that predates the recent worries about credit risk, 20-year Treasuries yielded an average of 5.28%, while home mortgages yielded 6.50% - a differential of 1.22%.
Thus, the “spread” of home mortgage interest costs over Treasury bond yields, the most appropriate measure of home mortgage costs, has widened by 0.14%. That may not sound like much until you realize that it’s an effective cost increase of 13%. Where did that increase go?
While some lawyers made money, too - what did you expect - it’s largely Wall Street that would rather you didn’t think about that question.
Two Key Changes
We can move back a long way toward the Jimmy Stewart system, but to do so two things must be changed:
First, we need to close down Fannie Mae (FNM: 30.08 +1.79 +6.33%) and Freddie Mac (FRE: 27.21 +1.69 +6.62%), the government-sponsored enterprises that guarantee most home mortgages. By putting a quasi-government guarantee on the mortgages - they’re not quite government-guaranteed, but close (another worry for the taxpayers of America) - you take away the local credit risk and make them easy to pass around the money pits of Wall Street. Most countries don’t have the government-guarantee home mortgages; it’s entirely unnecessary as good home mortgages are fine credit risks on their own.
Second, you need to enact some kind of small transfer tax on paper shuffling that makes securitization of mortgages expensive. The British have a 0.5% stamp duty on share dealing; even a 0.1% duty per transfer would probably be enough, here. It would make packaging the mortgages and turning them into mortgage bonds just a little less competitive, compared to the other alternative of having local banks or bank branches lend directly.
Once the financial incentives had been tilted against securitization, and the foolish government guarantees had been removed from the mortgage market, home-mortgage lending could revert to the Jimmy Stewart model. (You might want to leave a small loophole for low-income housing, on which mortgages - otherwise non-creditworthy - still could be guaranteed by Ginnie Mae, part of the U.S. Department of Housing and Urban Development; it seems voters want the government to subsidise housing for the poor and help them get mortgages).
Overall, under the new model, home mortgages would be a little cheaper, you would go to a proper bank - and not a salesman - to get them, and housing prices would remain reasonable.
Of course, thousands of rich Wall Streeters would be thrown out of work. There’s a pity.
segunda-feira, 19 de maio de 2008
Yahoo Shares Set To Plummet
Microsoft (MSFT: 29.489 +0.409 +1.41%) has decided to withdraw its bid for Yahoo (YHOO: 25.82 +1.45 +5.95%) as the price of $37 per share that Yang and the Yahoo board wanted was higher than the latest revised offer of $33 per share that Microsoft has made. This will probably lead to a blood bath in Yahoo shares on Monday as arbitragers who had bought the shares and expecting to sell them at $31+ will now have to exit their positions in a hurry. Since Yahoo is also traded on the Tokyo stock exchange, the first round of sales will happen there as the market opens on Monday. Even traders who opened positions in the US markets will be short selling on the Tokyo exchange to square their positions. After that, the next round of shorts will come in the pre-market session in the US, and finally when the US exchanges actually open, most of the action may already have taken place.
This could of course be just a negotiating tactic for Microsoft. Yahoo shareholders who see their shares plummet after Yahoo refused Microsoft’s offer will file lawsuits and put pressure on the Yahoo management. Furthermore, with share prices plummeting, Microsoft will be able to buy shares on the open market and possibly launch a hostile takeover at an even lower price. And then they’ll have many options if they still want Yahoo, use shareholder pressure/lawsuits to replace the board, or buy a big enough stake on the open market that allows them to replace the board themselves. In the meantime, the biggest winner will be Google (GOOG: 590.3912 -4.5089 -0.76%) who can take advantage of the distractions of these two companies to forge ahead with its own business.
This could of course be just a negotiating tactic for Microsoft. Yahoo shareholders who see their shares plummet after Yahoo refused Microsoft’s offer will file lawsuits and put pressure on the Yahoo management. Furthermore, with share prices plummeting, Microsoft will be able to buy shares on the open market and possibly launch a hostile takeover at an even lower price. And then they’ll have many options if they still want Yahoo, use shareholder pressure/lawsuits to replace the board, or buy a big enough stake on the open market that allows them to replace the board themselves. In the meantime, the biggest winner will be Google (GOOG: 590.3912 -4.5089 -0.76%) who can take advantage of the distractions of these two companies to forge ahead with its own business.
Daily Market Commentary - GCI Financial
EURO
The euro appreciated vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.5500 figure and was supported around the $1.5420 level. Technically, today’s intraday low was just above the 38.2% retracement of the move from $1.4430 to $1.6020. European Central Bank President Trichet reported “global growth remains significant despite the slowing down observed in a number of industrialized economies and clearly thanks to the remarkable resilience of a great number of emerging economies.” He added inflation risks remains “significant” on account of oil, commodities, and food price increases. Most traders believe the ECB will keep its benchmark main refinancing rate unchanged at 4.0% this week. Data released in the eurozone today saw Sentix May investor confidence lost 0.6 points to 3.5. In U.S. news, the April ISM non-manufacturing index improved to 52 from 49.6 in March. Data to be released in the U.S. this week include unit labour costs, non-farm productivity, and foreign trade. Remarks from Federal Reserve officials including Kansas City Fed President Hoenig, Fed Governor Kroszner, and former Federal Reserve Chairman Greenspan will be closely monitored. Euro bids are cited around the US$ 1.5345 level.
JPN/CNY
The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥105.10 level and was capped around the ¥105.45 level. Liquidity was reduced on account of the ongoing Japanese Golden Week holidays and is likely to be reduced in Tokyo for the duration of the week. Finance minister Nukaga talked about surging inflation in many parts of the world saying “As nations try to figure out what impact that higher input prices will have and how to deal with economic growth and inflation, it’s very important that we discuss and bring our collective know-how together on how to make policy in these very difficult times.” The Nikkei 225 stock index last closed at ¥14,049.26. Dollar bids are cited around the ¥103.65/ ¥101.35 levels. The euro depreciated vis-à-vis the yen as the single currency tested bids around the ¥162.35 level and was capped around the ¥163.10 level. The British pound came off vis-à-vis the yen as sterling tested bids around the ¥206.80 level while the Swiss franc appreciated vis-à-vis the yen and tested offers around the ¥208.30 level. The Chinese yuan weakened vis-à-vis the U.S. dollar as the greenback closed at CNY 7.0016 in the over-the-counter market, down from CNY 7.0002. Data released in China today saw the CFLP April manufacturing PMI survey improve to 59.2 from 58.4 in March. Goldman Sachs sees April inflation around 8.5% and Lehman Brothers sees 2008 GDP growth below 10.0%. People’s Bank of China Governor Zhou said “We’re always observing very carefully whether there is significant hot money flow into China. In the recent circumstances, (after) the U.S. lowered down the interest rates, a lot of short-term investors pay attention to investing in China. These circumstances may create some new situation.” Finance minister Yi reported China will boost the flexibility of the yuan’s exchange rate.
STERLING
The British pound came off vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.9660 level and was capped around the $1.9785 level. Technically, today’s intraday high was right around the 23.6% retracement of the move from US$ 2.0395 to $1.9595. U.K. financial markets were closed for a public holiday and liquidity will return to normal tomorrow. Some traders believe Bank of England’s Monetary Policy Committee will reduce its repo rate this week while others believe BoE will not reduce interest rates until June. Cable bids are cited around the US$ 1.9505 level. The euro moved higher vis-à-vis the British pound as the single currency tested offers around the ₤0.7865 level and was supported around the ₤0.7815 level.
SWISS
The Swiss franc appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.0515 level and was capped around the CHF 1.0565 level. Technically, today’s intraday low was right around the 61.8% retracement of the move from CHF 1.1105 to CHF 0.9645. U.S. dollar offers are cited around the CHF 1.0760 level. The euro moved higher vis-à-vis the Swiss franc as the single currency tested offers around the CHF 1.6340 level while the British pound weakened vis-à-vis the Swiss franc as sterling tested bids around the CHF 2.0705 level.
The euro appreciated vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.5500 figure and was supported around the $1.5420 level. Technically, today’s intraday low was just above the 38.2% retracement of the move from $1.4430 to $1.6020. European Central Bank President Trichet reported “global growth remains significant despite the slowing down observed in a number of industrialized economies and clearly thanks to the remarkable resilience of a great number of emerging economies.” He added inflation risks remains “significant” on account of oil, commodities, and food price increases. Most traders believe the ECB will keep its benchmark main refinancing rate unchanged at 4.0% this week. Data released in the eurozone today saw Sentix May investor confidence lost 0.6 points to 3.5. In U.S. news, the April ISM non-manufacturing index improved to 52 from 49.6 in March. Data to be released in the U.S. this week include unit labour costs, non-farm productivity, and foreign trade. Remarks from Federal Reserve officials including Kansas City Fed President Hoenig, Fed Governor Kroszner, and former Federal Reserve Chairman Greenspan will be closely monitored. Euro bids are cited around the US$ 1.5345 level.
JPN/CNY
The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥105.10 level and was capped around the ¥105.45 level. Liquidity was reduced on account of the ongoing Japanese Golden Week holidays and is likely to be reduced in Tokyo for the duration of the week. Finance minister Nukaga talked about surging inflation in many parts of the world saying “As nations try to figure out what impact that higher input prices will have and how to deal with economic growth and inflation, it’s very important that we discuss and bring our collective know-how together on how to make policy in these very difficult times.” The Nikkei 225 stock index last closed at ¥14,049.26. Dollar bids are cited around the ¥103.65/ ¥101.35 levels. The euro depreciated vis-à-vis the yen as the single currency tested bids around the ¥162.35 level and was capped around the ¥163.10 level. The British pound came off vis-à-vis the yen as sterling tested bids around the ¥206.80 level while the Swiss franc appreciated vis-à-vis the yen and tested offers around the ¥208.30 level. The Chinese yuan weakened vis-à-vis the U.S. dollar as the greenback closed at CNY 7.0016 in the over-the-counter market, down from CNY 7.0002. Data released in China today saw the CFLP April manufacturing PMI survey improve to 59.2 from 58.4 in March. Goldman Sachs sees April inflation around 8.5% and Lehman Brothers sees 2008 GDP growth below 10.0%. People’s Bank of China Governor Zhou said “We’re always observing very carefully whether there is significant hot money flow into China. In the recent circumstances, (after) the U.S. lowered down the interest rates, a lot of short-term investors pay attention to investing in China. These circumstances may create some new situation.” Finance minister Yi reported China will boost the flexibility of the yuan’s exchange rate.
STERLING
The British pound came off vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.9660 level and was capped around the $1.9785 level. Technically, today’s intraday high was right around the 23.6% retracement of the move from US$ 2.0395 to $1.9595. U.K. financial markets were closed for a public holiday and liquidity will return to normal tomorrow. Some traders believe Bank of England’s Monetary Policy Committee will reduce its repo rate this week while others believe BoE will not reduce interest rates until June. Cable bids are cited around the US$ 1.9505 level. The euro moved higher vis-à-vis the British pound as the single currency tested offers around the ₤0.7865 level and was supported around the ₤0.7815 level.
SWISS
The Swiss franc appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.0515 level and was capped around the CHF 1.0565 level. Technically, today’s intraday low was right around the 61.8% retracement of the move from CHF 1.1105 to CHF 0.9645. U.S. dollar offers are cited around the CHF 1.0760 level. The euro moved higher vis-à-vis the Swiss franc as the single currency tested offers around the CHF 1.6340 level while the British pound weakened vis-à-vis the Swiss franc as sterling tested bids around the CHF 2.0705 level.
Dollar Gets Smacked By Fannie Mae
Just last week dollar’s rebound looked promising, but yet as we enter the second trading day of the week, dollar’s upside momentum is slipping away. The main catalyst of dollar’s decline today has been the bigger-than-expected loss by Fannie Mae, US’s biggest mortgage lending company, reigniting fears that we haven’t seen the worst of the financial market turmoil. The company reported a first-quarter net loss of $2.19 billion, or $2.57 a share, compared with a loss of 64 cents a share, and said it expected its credit losses to be significantly higher next year than in 2008. Fannie Mae also said it will need to raise $6 billion in capital. This kind of negative news, coming hot on the heels of not-so-bad GDP and not-so-terrible payrolls, is a jolt to overall market sentiment and confidence, and a reminder that more pain could be in store for the economy, something which Warren Buffett had said over the weekend.
Alien Talk
And speaking of Buffett, he has been hogging headlines lately with his Berkshire’s annual general meeting and numerous interviews. During the AGM, he even made fun of the US dollar, a currency which he said he has been shorting since 2002, saying even aliens won’t want to keep US dollars. He said, “If I landed from Mars today with a billion Martian dollars, or whatever they call them, went to the local bank near where my UFO landed, and they asked what would I like, I don’t think I’d put my money in the US dollar.” His outer-space remarks come at a time when a sustained dollar recovery seems to be a possibility, though a vulnerable one. For traders, their perspective is more short-term and opportunistic, unlike Buffett’s long-term view, so his comments may not have much of an influence, short-term wise, in the fickle currency markets.
Fisher the Hawk
Dallas Fed President Fisher, one of the two dissenters to last week’s rate cut, said a dramatic slowdown would be needed to justify more rate cuts, and that the Fed policy has already discounted significant “anemia” in the US economy. He sees risks on both sides of the economy.
Forex Trading
Today’s data has been helpful to the Euro: Eurozone producer prices rose 5.7% from a year ago, the most since August 2006, after gaining 5.4% in February. EUR/USD rose to a high of 1.5600. If it breaks successfully above 1.5610, it may target 1.5640, then 1.5680-1.5700. USD/CHF could slide towards 104.00, then 103.50-60. For now, the sour taste of Fannie Mae’s woes stays with the US dollar.
Alien Talk
And speaking of Buffett, he has been hogging headlines lately with his Berkshire’s annual general meeting and numerous interviews. During the AGM, he even made fun of the US dollar, a currency which he said he has been shorting since 2002, saying even aliens won’t want to keep US dollars. He said, “If I landed from Mars today with a billion Martian dollars, or whatever they call them, went to the local bank near where my UFO landed, and they asked what would I like, I don’t think I’d put my money in the US dollar.” His outer-space remarks come at a time when a sustained dollar recovery seems to be a possibility, though a vulnerable one. For traders, their perspective is more short-term and opportunistic, unlike Buffett’s long-term view, so his comments may not have much of an influence, short-term wise, in the fickle currency markets.
Fisher the Hawk
Dallas Fed President Fisher, one of the two dissenters to last week’s rate cut, said a dramatic slowdown would be needed to justify more rate cuts, and that the Fed policy has already discounted significant “anemia” in the US economy. He sees risks on both sides of the economy.
Forex Trading
Today’s data has been helpful to the Euro: Eurozone producer prices rose 5.7% from a year ago, the most since August 2006, after gaining 5.4% in February. EUR/USD rose to a high of 1.5600. If it breaks successfully above 1.5610, it may target 1.5640, then 1.5680-1.5700. USD/CHF could slide towards 104.00, then 103.50-60. For now, the sour taste of Fannie Mae’s woes stays with the US dollar.
How You Can Make Money by Trading Forex
Your mission as a Forex trader (should you choose to accept it) is to earn as many pips as you possibly can. The more pips you earn in currency trading the larger your profits will be. So, what is a pip and why does earning them help you make money in Forex?
The basic goal of Forex trading is to swap one currency for another currency then cross your fingers and hope the currency you bought will increase in value relative to the one you sold. Then once it increases in value you sell it back in order to receive more of your original currency in exchange.
It’s your old favorite investment cliché of buy low and sell high. However, there are many ways to accomplish this with Forex trading. Let’s explore a few examples to help you better understand how to make money in Forex.
Pick a Pair
Before we dive into the ways a Forex trader makes money, it is important to understand how a currency pair works. You’ve probably heard of an exchange rate before – news anchors and travel agents often talk about favorable exchange rates.
Well, what is an exchange rate? It is purely the value of one currency in relationship to another. In other words it is the amount of Euros that a Dollar can buy or the amount of Dollars that a Euro can buy.
Since exchange rates pit one currency against another they are quoted in currency pairs. If you wanted to know how many Euros it would take to buy one Dollar then you would check the USD/EUR exchange rate.
The first currency listed is known as the base currency and the second is known as the counter or quote currency. The exchange rate will tell you how many units of the counter currency it will take to buy one unit of the base currency and vice versa.
Theory of Relativity
Remember when you were a kid and traded baseball cards with your friends? Let’s imagine that it’s 1998 and you are engaging in some hardnosed negotiations with Tommy, the local seventh grade card kingpin.
You trade Tommy one of your Mark McGwire cards for one of his Sammy Sosa cards. Sosa then hits homerun number 66 and you hurry over to Tommy’s house and trade him your Sosa back for two Mark McGwires (of course McGwire goes on to beat Sosa in the homerun race and if you’re smart you trade McGwire for as many Barry Bonds as possible…)
Forex trading is very similar to baseball cards – except that your broker doesn’t usually include bubblegum in a currency lot. Let’s evolve our baseball card example by substituting currency for cards and increasing the quantity:
Say you start with 1,000 U.S. Dollars (USD) and wish to purchase Japanese Yen (JPY) because you think the JPY will increase in value relative to the USD, just like why we originally traded the McGwire for the Sosa. So, if the JPY/USD exchange rate is 0.0075 (meaning that each yen will buy a very small percentage of each dollar) then you start off by purchasing approximately 133,333 JPY with your 1,000 USD.
You then hold onto your JPY for 2 weeks at which time your instincts prove correct because the U.S. president announces the U.S. is heading towards a recession and the value of the dollar plummets. With this news the JPY/USD exchange rate rises to 1.000 (1 JPY now equals 1 USD). You then buy 133,333 USD back with your 133,333 JPY, resulting in a profit of about 132,333 USD.
This example is a bit extreme and currency values do not usually change that drastically in a two week period, but hopefully you’re beginning to see how money can be made in Forex trading.
The Long and Short of It
There are several ways for you to make money on a Forex trade depending on whether you want to buy or sell the currency that is currently in your possession. In the example above we decided to buy JPY with the USD we had. In Forex speak we went long on the JPY/USD.
Suppose you had started off with JPY instead of USD and decided to sell your JPY for USD in anticipation that the JPY would decrease in value. Your strategy here would enable you to buy more JPY back once the price dropped. Executing your trades in this manner is considered going short on the JPY/USD.
Going short or long in Forex is just an insider’s way of saying whether you bought or sold a particular currency as part of your strategic move to make a profit. Just remember that long equates to buying and short equates to selling.
Buddy, Can You Spare a Pip?
In the introduction to this article we told you that your goal was to earn pips. So, what is a pip? Well, it’s not a character on South Park or the star of a Charles Dickens’ novel (just in case you were wondering).
Put simply, a pip is the smallest price change that a given exchange rate can make. Most major currency pairs are priced to four decimal points, so the smallest change for most exchange rates is equal to a 1/100th of one percent.
Your profits and losses can be calculated in terms of how many pips you gained or loss. A pip is derived by comparing the starting rate to the ending rate. The difference between the two is how many pips you gained or lost.
For example, if the exchange rate for the USD/CHF was initially 1.2155 and rose to 1.2159 then it has moved 4 pips – which could be good or bad depending on whether you own Francs or Dollars.
Putting It All Together
You should now have a better understanding of how you can actually make money as a successful Forex trader. Remember, Forex trading is NOT easy – anyone who tells you otherwise is lying.
Carefully prepare yourself and learn all you can before trying to execute any trades with real money. Once you feel comfortable then go out there and get all the pips you can!
The basic goal of Forex trading is to swap one currency for another currency then cross your fingers and hope the currency you bought will increase in value relative to the one you sold. Then once it increases in value you sell it back in order to receive more of your original currency in exchange.
It’s your old favorite investment cliché of buy low and sell high. However, there are many ways to accomplish this with Forex trading. Let’s explore a few examples to help you better understand how to make money in Forex.
Pick a Pair
Before we dive into the ways a Forex trader makes money, it is important to understand how a currency pair works. You’ve probably heard of an exchange rate before – news anchors and travel agents often talk about favorable exchange rates.
Well, what is an exchange rate? It is purely the value of one currency in relationship to another. In other words it is the amount of Euros that a Dollar can buy or the amount of Dollars that a Euro can buy.
Since exchange rates pit one currency against another they are quoted in currency pairs. If you wanted to know how many Euros it would take to buy one Dollar then you would check the USD/EUR exchange rate.
The first currency listed is known as the base currency and the second is known as the counter or quote currency. The exchange rate will tell you how many units of the counter currency it will take to buy one unit of the base currency and vice versa.
Theory of Relativity
Remember when you were a kid and traded baseball cards with your friends? Let’s imagine that it’s 1998 and you are engaging in some hardnosed negotiations with Tommy, the local seventh grade card kingpin.
You trade Tommy one of your Mark McGwire cards for one of his Sammy Sosa cards. Sosa then hits homerun number 66 and you hurry over to Tommy’s house and trade him your Sosa back for two Mark McGwires (of course McGwire goes on to beat Sosa in the homerun race and if you’re smart you trade McGwire for as many Barry Bonds as possible…)
Forex trading is very similar to baseball cards – except that your broker doesn’t usually include bubblegum in a currency lot. Let’s evolve our baseball card example by substituting currency for cards and increasing the quantity:
Say you start with 1,000 U.S. Dollars (USD) and wish to purchase Japanese Yen (JPY) because you think the JPY will increase in value relative to the USD, just like why we originally traded the McGwire for the Sosa. So, if the JPY/USD exchange rate is 0.0075 (meaning that each yen will buy a very small percentage of each dollar) then you start off by purchasing approximately 133,333 JPY with your 1,000 USD.
You then hold onto your JPY for 2 weeks at which time your instincts prove correct because the U.S. president announces the U.S. is heading towards a recession and the value of the dollar plummets. With this news the JPY/USD exchange rate rises to 1.000 (1 JPY now equals 1 USD). You then buy 133,333 USD back with your 133,333 JPY, resulting in a profit of about 132,333 USD.
This example is a bit extreme and currency values do not usually change that drastically in a two week period, but hopefully you’re beginning to see how money can be made in Forex trading.
The Long and Short of It
There are several ways for you to make money on a Forex trade depending on whether you want to buy or sell the currency that is currently in your possession. In the example above we decided to buy JPY with the USD we had. In Forex speak we went long on the JPY/USD.
Suppose you had started off with JPY instead of USD and decided to sell your JPY for USD in anticipation that the JPY would decrease in value. Your strategy here would enable you to buy more JPY back once the price dropped. Executing your trades in this manner is considered going short on the JPY/USD.
Going short or long in Forex is just an insider’s way of saying whether you bought or sold a particular currency as part of your strategic move to make a profit. Just remember that long equates to buying and short equates to selling.
Buddy, Can You Spare a Pip?
In the introduction to this article we told you that your goal was to earn pips. So, what is a pip? Well, it’s not a character on South Park or the star of a Charles Dickens’ novel (just in case you were wondering).
Put simply, a pip is the smallest price change that a given exchange rate can make. Most major currency pairs are priced to four decimal points, so the smallest change for most exchange rates is equal to a 1/100th of one percent.
Your profits and losses can be calculated in terms of how many pips you gained or loss. A pip is derived by comparing the starting rate to the ending rate. The difference between the two is how many pips you gained or lost.
For example, if the exchange rate for the USD/CHF was initially 1.2155 and rose to 1.2159 then it has moved 4 pips – which could be good or bad depending on whether you own Francs or Dollars.
Putting It All Together
You should now have a better understanding of how you can actually make money as a successful Forex trader. Remember, Forex trading is NOT easy – anyone who tells you otherwise is lying.
Carefully prepare yourself and learn all you can before trying to execute any trades with real money. Once you feel comfortable then go out there and get all the pips you can!
Surviving as a Beginner: Education, Responsibility, and Expectations
Many people expect to end up swimming through mountains of money in their own private vault like Scrooge McDuck when they start trading Forex. This is most likely not the case. It takes beginning investors years to develop the skills necessary to excel as a Forex trader.
As with any career, it takes dedication and hard work in order to succeed at trading currency. The old Japanese proverb, “fall down seven times, stand up eight” is very applicable as you start out in Forex trading.
The three main things to consider as you establish a career as a Forex trader are education, responsibility, and expectations. If you are able to manage these three areas effectively then you will eventually do well in currency trading.
Seek Ye Knowledge
In order to survive as a beginning Forex trader, you must learn all you can about foreign exchange markets. Simple, right? Not so fast. So, how do you go about tackling this daunting task?
The first thing to do is start learning about the fundamentals of currency trading – which we assume you’ve started since you are visiting this site. It would also be wise to familiarize yourself with the basic principles of macroeconomics and to understand the current foreign policies affecting currency markets.
It is important to educate yourself about key economic indicators such as interest rates, employment rates, gross domestic product (GDP), gross national product (GNP), etc. In a sense, you must learn the lingo so you start to know what to look for when you are trading.
Another area of expertise you should look to develop is a keen understanding of technical analysis. This will give you the ability to analyze charts, identify trends, and forecast results. Much of Forex trading involves crunching numbers and trying to make sense out of mounds of data. Technical analysis skills will give you a distinct advantage as a beginning trader.
Buckle Your Seat Belt and Check Your Rearview Mirror
The Forex market is a relatively new market involving many speculators – all hoping to strike it rich. Since it has only been within the last few decades that the general public has access to currency trading, it has created an atmosphere which is somewhat akin to the gold rush of the 1840s and the dotcom hysteria of the late 1990s.
It is your responsibility as a new Forex investor not to get caught up in the hype. We strongly recommend that you open a demo account and set aside a long period of time – at least 6 months – during which you promise only to trade fake money. This should give you time to go through a few waves of different world and economic events in which you can see how the currency market reacts.
You must also be responsible not to exceed your financial limitations when you start trading. Forex offers unprecedented margin or leverage for an investing vehicle, and while this can eventually help you rack up big profits, it will also cause you to rack up big losses when you are first starting off.
Set aside an amount of money that you know you can lose – some people recommend saving the money you would have invested during your demo period – and do not put yourself in a position to trade more than that. Consider it a less glamorous Las Vegas trip when you tell yourself that you’ll only spend $500, no matter how quickly you lose it at the craps table.
Great Expectations
Many people say that money doesn’t buy happiness, but from our experience we’ve learned that it makes a great down payment. Most investors don’t start trading Forex because they’re bored or enjoy crunching mountains of numbers just for the fun of it. Most Forex traders start investing for one reason – to make money, lots of money.
It is vital that as you begin trading currency you keep your expectations reasonable. Don’t turn in your two weeks’ notice the day you place your first trade, and don’t take out a second mortgage on your house to fund your investments.
Most beginning Forex traders LOSE money. This is one of the main reasons we recommend opening a demo account first. Expect to lose money on the majority of your trades as you begin; however, make sure you evaluate why you were wrong and identify what you can do differently. For example, did you buy too early or sell too late? Or did you misread the impact a certain economic indicator was going to have?
Reasonable expectations will help you not to get discouraged as you start trading currency. This will allow you to avoid getting frustrated and instead learn from your mistakes and keep improving. If you are able to do this, than you can expect to become a very successful Forex trader.
Get Started
It’s time to get your feet wet and prepare to dive in. The first step is to open a demo account with a credible broker and start practicing. The second step is to keep learning as much as you can while you are not using any of your own money and then start using advanced techniques such as technical analysis.
The world of a Forex trader is fast-paced and exciting, but just like most NBA players had to start playing high school and college ball before earning big bucks as a professional, you will also need to put in the hours first. Once you start, though, you will discover how profitable the Forex market is and will learn how to take advantage of it with a great deal of success.
As with any career, it takes dedication and hard work in order to succeed at trading currency. The old Japanese proverb, “fall down seven times, stand up eight” is very applicable as you start out in Forex trading.
The three main things to consider as you establish a career as a Forex trader are education, responsibility, and expectations. If you are able to manage these three areas effectively then you will eventually do well in currency trading.
Seek Ye Knowledge
In order to survive as a beginning Forex trader, you must learn all you can about foreign exchange markets. Simple, right? Not so fast. So, how do you go about tackling this daunting task?
The first thing to do is start learning about the fundamentals of currency trading – which we assume you’ve started since you are visiting this site. It would also be wise to familiarize yourself with the basic principles of macroeconomics and to understand the current foreign policies affecting currency markets.
It is important to educate yourself about key economic indicators such as interest rates, employment rates, gross domestic product (GDP), gross national product (GNP), etc. In a sense, you must learn the lingo so you start to know what to look for when you are trading.
Another area of expertise you should look to develop is a keen understanding of technical analysis. This will give you the ability to analyze charts, identify trends, and forecast results. Much of Forex trading involves crunching numbers and trying to make sense out of mounds of data. Technical analysis skills will give you a distinct advantage as a beginning trader.
Buckle Your Seat Belt and Check Your Rearview Mirror
The Forex market is a relatively new market involving many speculators – all hoping to strike it rich. Since it has only been within the last few decades that the general public has access to currency trading, it has created an atmosphere which is somewhat akin to the gold rush of the 1840s and the dotcom hysteria of the late 1990s.
It is your responsibility as a new Forex investor not to get caught up in the hype. We strongly recommend that you open a demo account and set aside a long period of time – at least 6 months – during which you promise only to trade fake money. This should give you time to go through a few waves of different world and economic events in which you can see how the currency market reacts.
You must also be responsible not to exceed your financial limitations when you start trading. Forex offers unprecedented margin or leverage for an investing vehicle, and while this can eventually help you rack up big profits, it will also cause you to rack up big losses when you are first starting off.
Set aside an amount of money that you know you can lose – some people recommend saving the money you would have invested during your demo period – and do not put yourself in a position to trade more than that. Consider it a less glamorous Las Vegas trip when you tell yourself that you’ll only spend $500, no matter how quickly you lose it at the craps table.
Great Expectations
Many people say that money doesn’t buy happiness, but from our experience we’ve learned that it makes a great down payment. Most investors don’t start trading Forex because they’re bored or enjoy crunching mountains of numbers just for the fun of it. Most Forex traders start investing for one reason – to make money, lots of money.
It is vital that as you begin trading currency you keep your expectations reasonable. Don’t turn in your two weeks’ notice the day you place your first trade, and don’t take out a second mortgage on your house to fund your investments.
Most beginning Forex traders LOSE money. This is one of the main reasons we recommend opening a demo account first. Expect to lose money on the majority of your trades as you begin; however, make sure you evaluate why you were wrong and identify what you can do differently. For example, did you buy too early or sell too late? Or did you misread the impact a certain economic indicator was going to have?
Reasonable expectations will help you not to get discouraged as you start trading currency. This will allow you to avoid getting frustrated and instead learn from your mistakes and keep improving. If you are able to do this, than you can expect to become a very successful Forex trader.
Get Started
It’s time to get your feet wet and prepare to dive in. The first step is to open a demo account with a credible broker and start practicing. The second step is to keep learning as much as you can while you are not using any of your own money and then start using advanced techniques such as technical analysis.
The world of a Forex trader is fast-paced and exciting, but just like most NBA players had to start playing high school and college ball before earning big bucks as a professional, you will also need to put in the hours first. Once you start, though, you will discover how profitable the Forex market is and will learn how to take advantage of it with a great deal of success.
400% Profits in 3 Days!!- How to Spot a Forex Scam
Start researching Forex and you’re likely to see several ads proclaiming ridiculous guarantees such as “2,000 pips a Day!” or “400% Profits in 3 Days!!” Before you quit your day job and start trading Forex fulltime because of these outlandish claims, let’s evaluate how to spot a Forex scam.
Unfortunately, many people associate Forex trading with scams, and perhaps for good reason. The number of unscrupulous companies has been increasing. The number of Forex-related scams has increased abruptly over the last few years, and it is important for you to be able to identify a hoax.
Currency trading is an exciting and potentially profitable investment option, but as with anything involving money, there are people out there who will rob you blind if you don’t know what you’re doing. Let’s take a closer look at Forex scams, so you are properly equipped to spot one.
Understand Genuine Forex Operations
So, where are Forex scams likely to occur? Advertisements for scams can often be spotted in online pop-ups, newspaper advertisements, and the classified sections of financial magazines. How do you weed out the good from the bad?
A first step is to learn how legitimate Forex trading is conducted. Generally, Forex traders can place orders through an exchange or board of trade, a bank, insurance company, registered securities broker/dealer, or other financial institution.
This means that you should search out these types of institutions in order to trade currency. It also means that many scammers will masquerade as one of these types of companies in order to trick you. So where can you turn for help? Is there anyone out there tracking down and punishing these evil-doers? Never fear, the CFTC is here to help you.
Meet A powerful Ally – The CFTC
Even though Jack Bauer doesn’t work there (that’s CTU), the CFTC or Commodity Futures Trading Commission is a great source of information for Forex scams. They have been working tirelessly to crack down on the number of scams, and while it has taken longer than 24 hours, their efforts have produced solid results which Forex traders can utilize.
In the United States, the CFTC has federally mandated authority and jurisdiction to investigate and take legal action when appropriate against corrupt Forex brokers. Additionally, they have the ability to prosecute any firm registered with the CFTC if the firm’s actions violate any CRTC-mandated rules.
The CFTC was empowered in December 2006 with the passing of the Commodity Futures Modernization Act. Their efforts have centered on educating potential Forex traders about currency trading’s best practices as well as keeping tabs on the people who offer Forex services.
CFTC Guidelines
The CFTC has issued several reports concerning the offering and trading of foreign currency futures and options contracts. Some of the main points of advice from the advisory are the following:
Stay Away From Opportunities That Sound Too Good to Be True
Avoid Any Company that Predicts or Guarantees Large Profits
Stay Away From Companies That Promise Little or No Financial Risk
Don’t Trade on Margin Unless You Understand What It Means
Question Firms That Claim To Trade in the “Interbank Market”
Be Wary of Sending or Transferring Cash on the Internet, By Mail or Otherwise
Currency Scams Often Target Members of Ethnic Minorities
Be Sure You Get the Company’s Performance Track Record
Don’t Deal With Anyone Who Won’t Give You Their Background
Additionally, the CFTC warns to be careful of unsolicited phone calls about “can’t miss” investments from offshore salespersons or companies that don’t sound familiar.
The following are some of the steps prescribed to identify a potential scam by the CFTC, and we encourage you to follow them:
Contact the CFTC.
Visit the CFTC’s forex fraud Web page.
Contact the National Futures Association to see whether the company is registered with the CFTC or is a member of the National Futures Association (NFA). You can do this easily by calling the NFA or by checking the NFA’s registration and membership information on its Web site. While registration may not be required, you might want to confirm the status and disciplinary record of a particular company or salesperson.
Get all information about the company and verify that data, if possible. If you can, check the company’s materials with someone whose financial advice you trust.
Learn all possible information about fees charged, and the basis for each of these charges.
If in doubt, don’t invest. If you can’t get solid information about the company, the salesperson, and the investment, you may not want to risk your money.
No Free Lunch
One of the basic principles of economics is the concept that there is no such thing as a free lunch. This concept is for the most part true (soup kitchens excluded) and particularly applies to any type of investing, especially Forex trading.
If a Forex claim seems too good to be true and a broker is seemingly giving money away, then don’t invest. This doesn’t mean you shouldn’t try to find low commissions or low bid/ask spreads, but remember there is no invincible Forex formula or brokerage which will enable you to instantly make huge amounts of money trading currency.
Never Stop Learning
The only foolproof method to avoiding currency scams and to become a successful Forex trader is to gain as good an education as possible. The more you learn about Forex trading in general, the easier it will be to spot currency trading scams.
For example, what would happen if on your way into your favorite electronics store, someone stopped you and said not to buy that Plasma which you’ve been saving all year for, because they could guarantee you a better television at half the price? They explain all you have to do is give them $1000 in cash and they’ll present you with the TV.
Would this get your attention? Of course. Would this be a good idea? Not unless you want to wave goodbye to one thousand hard-earned dollars. How do you know? You’re a well-informed and responsible consumer with years of purchasing experience. In order to identify Forex scams you must also become a well-informed and responsible Forex investor.
Unfortunately, many people associate Forex trading with scams, and perhaps for good reason. The number of unscrupulous companies has been increasing. The number of Forex-related scams has increased abruptly over the last few years, and it is important for you to be able to identify a hoax.
Currency trading is an exciting and potentially profitable investment option, but as with anything involving money, there are people out there who will rob you blind if you don’t know what you’re doing. Let’s take a closer look at Forex scams, so you are properly equipped to spot one.
Understand Genuine Forex Operations
So, where are Forex scams likely to occur? Advertisements for scams can often be spotted in online pop-ups, newspaper advertisements, and the classified sections of financial magazines. How do you weed out the good from the bad?
A first step is to learn how legitimate Forex trading is conducted. Generally, Forex traders can place orders through an exchange or board of trade, a bank, insurance company, registered securities broker/dealer, or other financial institution.
This means that you should search out these types of institutions in order to trade currency. It also means that many scammers will masquerade as one of these types of companies in order to trick you. So where can you turn for help? Is there anyone out there tracking down and punishing these evil-doers? Never fear, the CFTC is here to help you.
Meet A powerful Ally – The CFTC
Even though Jack Bauer doesn’t work there (that’s CTU), the CFTC or Commodity Futures Trading Commission is a great source of information for Forex scams. They have been working tirelessly to crack down on the number of scams, and while it has taken longer than 24 hours, their efforts have produced solid results which Forex traders can utilize.
In the United States, the CFTC has federally mandated authority and jurisdiction to investigate and take legal action when appropriate against corrupt Forex brokers. Additionally, they have the ability to prosecute any firm registered with the CFTC if the firm’s actions violate any CRTC-mandated rules.
The CFTC was empowered in December 2006 with the passing of the Commodity Futures Modernization Act. Their efforts have centered on educating potential Forex traders about currency trading’s best practices as well as keeping tabs on the people who offer Forex services.
CFTC Guidelines
The CFTC has issued several reports concerning the offering and trading of foreign currency futures and options contracts. Some of the main points of advice from the advisory are the following:
Stay Away From Opportunities That Sound Too Good to Be True
Avoid Any Company that Predicts or Guarantees Large Profits
Stay Away From Companies That Promise Little or No Financial Risk
Don’t Trade on Margin Unless You Understand What It Means
Question Firms That Claim To Trade in the “Interbank Market”
Be Wary of Sending or Transferring Cash on the Internet, By Mail or Otherwise
Currency Scams Often Target Members of Ethnic Minorities
Be Sure You Get the Company’s Performance Track Record
Don’t Deal With Anyone Who Won’t Give You Their Background
Additionally, the CFTC warns to be careful of unsolicited phone calls about “can’t miss” investments from offshore salespersons or companies that don’t sound familiar.
The following are some of the steps prescribed to identify a potential scam by the CFTC, and we encourage you to follow them:
Contact the CFTC.
Visit the CFTC’s forex fraud Web page.
Contact the National Futures Association to see whether the company is registered with the CFTC or is a member of the National Futures Association (NFA). You can do this easily by calling the NFA or by checking the NFA’s registration and membership information on its Web site. While registration may not be required, you might want to confirm the status and disciplinary record of a particular company or salesperson.
Get all information about the company and verify that data, if possible. If you can, check the company’s materials with someone whose financial advice you trust.
Learn all possible information about fees charged, and the basis for each of these charges.
If in doubt, don’t invest. If you can’t get solid information about the company, the salesperson, and the investment, you may not want to risk your money.
No Free Lunch
One of the basic principles of economics is the concept that there is no such thing as a free lunch. This concept is for the most part true (soup kitchens excluded) and particularly applies to any type of investing, especially Forex trading.
If a Forex claim seems too good to be true and a broker is seemingly giving money away, then don’t invest. This doesn’t mean you shouldn’t try to find low commissions or low bid/ask spreads, but remember there is no invincible Forex formula or brokerage which will enable you to instantly make huge amounts of money trading currency.
Never Stop Learning
The only foolproof method to avoiding currency scams and to become a successful Forex trader is to gain as good an education as possible. The more you learn about Forex trading in general, the easier it will be to spot currency trading scams.
For example, what would happen if on your way into your favorite electronics store, someone stopped you and said not to buy that Plasma which you’ve been saving all year for, because they could guarantee you a better television at half the price? They explain all you have to do is give them $1000 in cash and they’ll present you with the TV.
Would this get your attention? Of course. Would this be a good idea? Not unless you want to wave goodbye to one thousand hard-earned dollars. How do you know? You’re a well-informed and responsible consumer with years of purchasing experience. In order to identify Forex scams you must also become a well-informed and responsible Forex investor.
6 Ways Greenspan Caused the Current Economic Crisis
As the credit crisis teeters on the verge of full-blown catastrophe, the hunt for the culprit(s) begins. Quickly working his way to the top of the blame table is Alan Greenspan, former Chairman of the Board of Governors at the US Federal Reserve Bank. During his tenure and even into retirement, Dr. Greenspan received near-universal praise for presiding over the Fed during a record period of economic growth and price stability. In fact, he coined the term Goldilocks economy to describe the optimal economic situation in which growth is maximized and inflation is kept to a minimum.
Recently, public opinion has begun to turn on Dr. Greenspan for his perceived role in the current economic crisis. The extended period of easy money over which he presided, combined with his laissez-faire approach to regulation have been identified as two chief causes behind the inflation and subsequent collapse of the housing bubble. In the interest of truth (to preserve his legacy, say cynics), Dr. Greenspan has embarked on a media tour, defending his policies and his ideology. Ultimately, the onerous task of sorting out the causes of the credit crunch will be left to economic historians, but that doesn’t prevent us from scrutinizing the facts and coming to our own conclusions here in the present.
Low Interest Rates: Precipitated by the bursting of the technology bubble and exacerbated by the 9/11 terrorist attacks, the US economy slid into a recession that lasted for two years. The Fed, under the leadership of Dr. Greenspan, moved quickly to slash its bechmark Federal Funds Rate to 1%, the lowest level in nearly 50 years. At the time, Dr. Greenspan was acclaimed by economists for mitigating business cycle volatility and returning the economy back into a period of rapid growth. In hindsight, however, this period of easy money may have enabled the run-up in housing prices that caused the current housing crisis. According to a paper published by the European Central Bank, the Fed kept rates too low for too long. According to the paper, there exists a theoretical natural rate of interest, which “keeps output at its potential and inflation stable, once any shocks to the economy have played out.” Witness the connection to Dr. Greenspan’s pursuit of the Goldilocks economy! The ECB used a sequential monte carlo algorithm to simulate the post-9/11 deteriorating economic conditions and the Fed’s subsequent response. Ultimately, it determined that 1% was below the natural cost of capital, and households were able to borrow at rates which failed to properly account for their creditworthiness- or lack thereof. It is ironic that the Fed’s response to the 2001 recession (which, itself was caused by the collapse of an asset bubble) was to facilitate another asset bubble - this time in housing - which, in turn, may precipitate yet another recession.
Weak Dollar: The excessive easing of monetary policy from 2001 to 2003 yielded an unintended consequence: a weakening of the US Dollar. The Euro was already gaining acceptance, and a rising interest rate differential provided the necessary impetus for the Euro to surpass the Dollar, once and for all. As a result, oil prices, which are denominated in Dollars, have risen as the Dollar as fallen. A weaker Dollar has also made foreign imports more expensive for a nation that imports $800 Billion more than it exports. As a result, inflation is slowly creeping up; at 4%, it is certainly past the Fed’s comfort zone and is preventing the Fed from adequately responding to the current crisis. In the words of one analyst, “the Fed took a gamble on inflation to ward off what was perceived as a deflationary threat in 2001-02. The inflationary consequences of that gamble are now here, with the petrodollar monetary merry-go-round fueled by the weaker dollar.” Even Dr. Greenspan believes that it’s “absolutely conceivable that the euro will replace the dollar as reserve currency, or will be traded as an equally important reserve currency.”
Loose Regulation: Many critics charge that in addition to low interest rates, loose regulation represents one of the smoking guns behind (the Fed under) Dr. Greenspan’s culpability. The former Chairman is well known for his laissez-faire approach to government regulation, his commitment to which comes across as doctrinaire and ideological. He has insisted that a loose regulatory framework is essential to a dynamic and growing economy, and has argued that “counterparty surveillance” is much more effective than government regulation. With regard to the housing crisis, the Fed’s regulatory failings fall under two subheadings: predatory lending and inadequate collateral.
On the first point, the 1994 Home Ownership and Equity Protection Act “gave the Fed authority to monitor abuses and step in, if necessary, to restrict or stop lenders and their practices.” Unfortunately, the Fed largely failed to take advantage of its newfound power. Credit rating agencies, charged with certifying that the repackaged mortgages were indeed investment-grade, were shocked to discover that some of the mortgage applications lacked even basic contact information for borrowers. In other cases, the borrower’s income wasn’t confirmed, such that it would be impossible for the counterparties - the loan officers that Dr. Greenspan insisted were most capable of regulating the system - to evaluate whether a particular mortgage was appropriate for a given borrower. Thus, over $250 Billion of worthless mortgages have already been written down (declared worthless) since the start of the credit crunch. If lenders had been properly regulated from the start, then perhaps most of these mortgages never would have been extended.
The second point applies to the inability of the financial system to absorb the shock from the unexpectedly high default rate on subprime loans. This failure to anticipate can be traced back to 1998, if not earlier, when the Federal Reserve spearheaded a bailout of Long Term Capital Management (LTCM), a large hedge fund which lost nearly $5 Billion trading complex securities. Some would say that this created a moral hazard situation, whereby banks became comfortable taking larger risks because of the foreknowledge that they would be bailed out if their bets went sour. Sure enough, the current credit crunch was fueled by even riskier practices in the financial sector, whereby mortgages were repackaged into increasingly esoteric securities, held off-balance sheet for tax purposes. In sum, “there was nothing done to head off more such failures…The result a decade later has been the need for another, even more dramatic, bailout.” Thus, the Fed found itself orchestrating an 11th hour sale of Bear Stearns, a near-bankrupt investment bank, to JP Morgan. While this was the only debacle that required the Fed’s assistance, most large investment banks have accepted large cash infusions, due to the Fed’s low collateral requirements.
Dr. Greenspan’s response to these accusations has been uninspiring, arguing that the Fed probably could have done more, but not enough to avert the credit crunch. He has clung to the notion that the markets can police themselves more effectively then the government could ever hope to. According to Naked Capitalism, “the biggest problem with Dr. Greenspan’s posture is that he fails to accept the rationale for regulation. Banking is an industry that can create enormous externalities, namely, financial panics, asset bubbles (which suck investment out of more productive uses) and busts. Even a mere nasty credit contraction exacts a toll on the real economy.” It is no wonder that the government’s official response to the current crisis has been to cut out, rather than impose more, regulations.
Indifference to Asset Bubbles: During the height of the dot-com stock market bubble, Dr. Greenspan famously cautioned against “irrational exuberance.” For an encore, why then did he willingly enable another bubble to form? Under Dr. Greenspan, the Fed became famous for its asymmetric response to asset bubbles, whereby the bursting of a bubble was softened by rate cuts, but the bubbles’ inflation was not dealt with through countervailing rate hikes. In this way, investors were encouraged to take larger risks, knowing that if/when the bubble(s) did burst, the Fed would ease monetary policy to cushion the fall. Dr. Greenspan was unbending in his defense of this policy, arguing that the Fed’s job is to deal with economic growth and inflation, rather than to influence asset prices. It is not as though Dr. Greenspan was unaware that a bubble was forming. In testifying before the US Congress in 2005, he, himself, commented that “signs of froth in some local markets where home prices seem to have risen to unsustainable levels.” Even the IMF delicately offered that “some ‘leaning against the wind’ may also prove useful to limit the risk of a buildup of housing market and financial imbalances.” In Dr. Greenspan’s defense, it is not clear that a more “symmetric” response to the inflation of the housing bubble would have produced a different outcome. This is because short-term rates, which the Fed controls, have slowly become disentangled from long-term rates (which the Fed does not control), such that the Fed cannot effectively set the risk premium that is built into mortgage rates.
Greenspeak: Dr. Greenspan was famous for his abstruse way of communicating with investors, policymakers, and the news media, which has been nicknamed “Greenspeak.” For example, the testimony listed above also included the following nugget of wisdom: “to the extent that some households may be employing these instruments to purchase a home that would otherwise be unaffordable, their use is beginning to add to the pressures in the marketplace.” Dr. Greenspan claimed the ambiguity was deliberate, as it allowed him the flexibility necessary to zig and zag when conducting monetary policy for the world’s most dynamic economy. On one occasion, he poked fun at himself, suggesting to policymakers that “if I say something which you understand fully … I probably made a mistake.” In hindsight, however, perhaps a little more clarity would have behooved the Chairman in communicated the long-term risks inherent in the housing bubble.
ARM Recommendation: In a 2004 speech which has since reverberated around cyberspace, Dr. Greenspan offered the following piece of advice: “American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage.” He also intimated that borrowers would benefit by using adjustable rate mortgages instead of fixed rate mortgages, although in the same breath, warned that this benefit would not inure to homeowners in a rising interest rate environment. This comment speaks to one of the key trends underlying the housing bubble: the proliferation of esoteric mortgage products. Adjustable-rate mortgages became especially problematic as the Fed began tightening in 2005, and many investors were unable to adjust to rising interest payments. When housing prices reversed course and began to decline, many investors were shocked to discover that their mortgages had also reversed, such that their equity was now negative. Dr. Greenspan’s de facto endorsement of complex mortgages products, such as those of the “interest only” and “pick a payment” variety, paved the way for the the millions of defaults on subprime mortgages that ensued.
Dr. Greenspan’s ideology has been a recurrent theme throughout this article. Those familiar with the former Chairman’s background should recall that he was an early admirer of Ayn Rand, a prominent novelist, whose works read like expositions on free-market economics. In addition, Dr. Greenspan was appointed by a Republican president, Ronald Reagan. Some degree of bias is to be expected, even accepted, and the fact that Dr. Greenspan was a staunch defender of free-market principles need not have precluded him from managing an institution which is supposed to be apolitical. Unfortunately, the story painted above suggests that Dr. Greenspan allowed his ideology to infuse his job. Ironically, the man famous for ambiguous “Greenspeak” was often deliberately unambiguous when opining on taxes, regulation, and other issues of policy. Two years removed from his position, Dr. Greenspan has argued dogmatically that increased regulation and an earlier tightening of monetary policy would not have prevented the housing bubble. According to an interview with the Wall Street Journal, “Mr. Greenspan says he doesn’t regret a single decision. In his view, many critics are ignoring evidence in his favor and failing to assess the process by which he made decisions.” He insists that his comments on ARMs were taken out of context and that the people most qualified to police mortgage lenders are….mortgage lenders, themselves. Suffice it to say that if he is ultimately found guilty on the charge of inciting the current housing bubble, Dr. Greenspan will probably lodge an appeal.
Recently, public opinion has begun to turn on Dr. Greenspan for his perceived role in the current economic crisis. The extended period of easy money over which he presided, combined with his laissez-faire approach to regulation have been identified as two chief causes behind the inflation and subsequent collapse of the housing bubble. In the interest of truth (to preserve his legacy, say cynics), Dr. Greenspan has embarked on a media tour, defending his policies and his ideology. Ultimately, the onerous task of sorting out the causes of the credit crunch will be left to economic historians, but that doesn’t prevent us from scrutinizing the facts and coming to our own conclusions here in the present.
Low Interest Rates: Precipitated by the bursting of the technology bubble and exacerbated by the 9/11 terrorist attacks, the US economy slid into a recession that lasted for two years. The Fed, under the leadership of Dr. Greenspan, moved quickly to slash its bechmark Federal Funds Rate to 1%, the lowest level in nearly 50 years. At the time, Dr. Greenspan was acclaimed by economists for mitigating business cycle volatility and returning the economy back into a period of rapid growth. In hindsight, however, this period of easy money may have enabled the run-up in housing prices that caused the current housing crisis. According to a paper published by the European Central Bank, the Fed kept rates too low for too long. According to the paper, there exists a theoretical natural rate of interest, which “keeps output at its potential and inflation stable, once any shocks to the economy have played out.” Witness the connection to Dr. Greenspan’s pursuit of the Goldilocks economy! The ECB used a sequential monte carlo algorithm to simulate the post-9/11 deteriorating economic conditions and the Fed’s subsequent response. Ultimately, it determined that 1% was below the natural cost of capital, and households were able to borrow at rates which failed to properly account for their creditworthiness- or lack thereof. It is ironic that the Fed’s response to the 2001 recession (which, itself was caused by the collapse of an asset bubble) was to facilitate another asset bubble - this time in housing - which, in turn, may precipitate yet another recession.
Weak Dollar: The excessive easing of monetary policy from 2001 to 2003 yielded an unintended consequence: a weakening of the US Dollar. The Euro was already gaining acceptance, and a rising interest rate differential provided the necessary impetus for the Euro to surpass the Dollar, once and for all. As a result, oil prices, which are denominated in Dollars, have risen as the Dollar as fallen. A weaker Dollar has also made foreign imports more expensive for a nation that imports $800 Billion more than it exports. As a result, inflation is slowly creeping up; at 4%, it is certainly past the Fed’s comfort zone and is preventing the Fed from adequately responding to the current crisis. In the words of one analyst, “the Fed took a gamble on inflation to ward off what was perceived as a deflationary threat in 2001-02. The inflationary consequences of that gamble are now here, with the petrodollar monetary merry-go-round fueled by the weaker dollar.” Even Dr. Greenspan believes that it’s “absolutely conceivable that the euro will replace the dollar as reserve currency, or will be traded as an equally important reserve currency.”
Loose Regulation: Many critics charge that in addition to low interest rates, loose regulation represents one of the smoking guns behind (the Fed under) Dr. Greenspan’s culpability. The former Chairman is well known for his laissez-faire approach to government regulation, his commitment to which comes across as doctrinaire and ideological. He has insisted that a loose regulatory framework is essential to a dynamic and growing economy, and has argued that “counterparty surveillance” is much more effective than government regulation. With regard to the housing crisis, the Fed’s regulatory failings fall under two subheadings: predatory lending and inadequate collateral.
On the first point, the 1994 Home Ownership and Equity Protection Act “gave the Fed authority to monitor abuses and step in, if necessary, to restrict or stop lenders and their practices.” Unfortunately, the Fed largely failed to take advantage of its newfound power. Credit rating agencies, charged with certifying that the repackaged mortgages were indeed investment-grade, were shocked to discover that some of the mortgage applications lacked even basic contact information for borrowers. In other cases, the borrower’s income wasn’t confirmed, such that it would be impossible for the counterparties - the loan officers that Dr. Greenspan insisted were most capable of regulating the system - to evaluate whether a particular mortgage was appropriate for a given borrower. Thus, over $250 Billion of worthless mortgages have already been written down (declared worthless) since the start of the credit crunch. If lenders had been properly regulated from the start, then perhaps most of these mortgages never would have been extended.
The second point applies to the inability of the financial system to absorb the shock from the unexpectedly high default rate on subprime loans. This failure to anticipate can be traced back to 1998, if not earlier, when the Federal Reserve spearheaded a bailout of Long Term Capital Management (LTCM), a large hedge fund which lost nearly $5 Billion trading complex securities. Some would say that this created a moral hazard situation, whereby banks became comfortable taking larger risks because of the foreknowledge that they would be bailed out if their bets went sour. Sure enough, the current credit crunch was fueled by even riskier practices in the financial sector, whereby mortgages were repackaged into increasingly esoteric securities, held off-balance sheet for tax purposes. In sum, “there was nothing done to head off more such failures…The result a decade later has been the need for another, even more dramatic, bailout.” Thus, the Fed found itself orchestrating an 11th hour sale of Bear Stearns, a near-bankrupt investment bank, to JP Morgan. While this was the only debacle that required the Fed’s assistance, most large investment banks have accepted large cash infusions, due to the Fed’s low collateral requirements.
Dr. Greenspan’s response to these accusations has been uninspiring, arguing that the Fed probably could have done more, but not enough to avert the credit crunch. He has clung to the notion that the markets can police themselves more effectively then the government could ever hope to. According to Naked Capitalism, “the biggest problem with Dr. Greenspan’s posture is that he fails to accept the rationale for regulation. Banking is an industry that can create enormous externalities, namely, financial panics, asset bubbles (which suck investment out of more productive uses) and busts. Even a mere nasty credit contraction exacts a toll on the real economy.” It is no wonder that the government’s official response to the current crisis has been to cut out, rather than impose more, regulations.
Indifference to Asset Bubbles: During the height of the dot-com stock market bubble, Dr. Greenspan famously cautioned against “irrational exuberance.” For an encore, why then did he willingly enable another bubble to form? Under Dr. Greenspan, the Fed became famous for its asymmetric response to asset bubbles, whereby the bursting of a bubble was softened by rate cuts, but the bubbles’ inflation was not dealt with through countervailing rate hikes. In this way, investors were encouraged to take larger risks, knowing that if/when the bubble(s) did burst, the Fed would ease monetary policy to cushion the fall. Dr. Greenspan was unbending in his defense of this policy, arguing that the Fed’s job is to deal with economic growth and inflation, rather than to influence asset prices. It is not as though Dr. Greenspan was unaware that a bubble was forming. In testifying before the US Congress in 2005, he, himself, commented that “signs of froth in some local markets where home prices seem to have risen to unsustainable levels.” Even the IMF delicately offered that “some ‘leaning against the wind’ may also prove useful to limit the risk of a buildup of housing market and financial imbalances.” In Dr. Greenspan’s defense, it is not clear that a more “symmetric” response to the inflation of the housing bubble would have produced a different outcome. This is because short-term rates, which the Fed controls, have slowly become disentangled from long-term rates (which the Fed does not control), such that the Fed cannot effectively set the risk premium that is built into mortgage rates.
Greenspeak: Dr. Greenspan was famous for his abstruse way of communicating with investors, policymakers, and the news media, which has been nicknamed “Greenspeak.” For example, the testimony listed above also included the following nugget of wisdom: “to the extent that some households may be employing these instruments to purchase a home that would otherwise be unaffordable, their use is beginning to add to the pressures in the marketplace.” Dr. Greenspan claimed the ambiguity was deliberate, as it allowed him the flexibility necessary to zig and zag when conducting monetary policy for the world’s most dynamic economy. On one occasion, he poked fun at himself, suggesting to policymakers that “if I say something which you understand fully … I probably made a mistake.” In hindsight, however, perhaps a little more clarity would have behooved the Chairman in communicated the long-term risks inherent in the housing bubble.
ARM Recommendation: In a 2004 speech which has since reverberated around cyberspace, Dr. Greenspan offered the following piece of advice: “American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage.” He also intimated that borrowers would benefit by using adjustable rate mortgages instead of fixed rate mortgages, although in the same breath, warned that this benefit would not inure to homeowners in a rising interest rate environment. This comment speaks to one of the key trends underlying the housing bubble: the proliferation of esoteric mortgage products. Adjustable-rate mortgages became especially problematic as the Fed began tightening in 2005, and many investors were unable to adjust to rising interest payments. When housing prices reversed course and began to decline, many investors were shocked to discover that their mortgages had also reversed, such that their equity was now negative. Dr. Greenspan’s de facto endorsement of complex mortgages products, such as those of the “interest only” and “pick a payment” variety, paved the way for the the millions of defaults on subprime mortgages that ensued.
Dr. Greenspan’s ideology has been a recurrent theme throughout this article. Those familiar with the former Chairman’s background should recall that he was an early admirer of Ayn Rand, a prominent novelist, whose works read like expositions on free-market economics. In addition, Dr. Greenspan was appointed by a Republican president, Ronald Reagan. Some degree of bias is to be expected, even accepted, and the fact that Dr. Greenspan was a staunch defender of free-market principles need not have precluded him from managing an institution which is supposed to be apolitical. Unfortunately, the story painted above suggests that Dr. Greenspan allowed his ideology to infuse his job. Ironically, the man famous for ambiguous “Greenspeak” was often deliberately unambiguous when opining on taxes, regulation, and other issues of policy. Two years removed from his position, Dr. Greenspan has argued dogmatically that increased regulation and an earlier tightening of monetary policy would not have prevented the housing bubble. According to an interview with the Wall Street Journal, “Mr. Greenspan says he doesn’t regret a single decision. In his view, many critics are ignoring evidence in his favor and failing to assess the process by which he made decisions.” He insists that his comments on ARMs were taken out of context and that the people most qualified to police mortgage lenders are….mortgage lenders, themselves. Suffice it to say that if he is ultimately found guilty on the charge of inciting the current housing bubble, Dr. Greenspan will probably lodge an appeal.
Top 25 Most Influential People in Forex
When certain people talk, the world listens. No, we’re not talking about Donald Trump or Paris Hilton – we’re talking about people with real power. We’re talking about leaders whose very words have the power to cause stocks listed on the New York Stock Exchange to decrease in value or make buying a house more expensive -power that really affects the everyday lives of all of us. Who wields this type of power with regard to forex markets? Who has the ability to change how valuable the dollar will be tomorrow relative to the Euro? Who has the greatest influence on currency trading markets? We have decided to compile a list of the Top 25 Most Influential People in Forex in order to help you know when to turn your television up and which articles to pay attention to on the internet.
Central Bankers
The first main group of influential Forex figures includes the people who run the world’s most powerful financial institutions – the Central Banks. These leaders are usually appointed by their government to run and manage the monetary policy for their country (or league of countries, i.e. the European Union). As we all know, Central Banks determine many important factors that have a huge impact on currency trading. Arguably the most important duty of a central bank is to determine whether to raise or lower interest rates. The power these people have ranks them as perhaps the most influential on our list. Let’s introduce you to the world’s most influential central bankers:
1. Ben Bernanke, Chairman of the US Federal Reserve Bank
Ben Bernake was sworn in as Chairman of the US Federal Reserve System on February 1, 2006 and is widely regarded as the most powerful man in the financial world. He had previously served on the Federal Reserve Board from 2005 to 2006 and was serving as the Chairman of the President’s Council of Economic advisors when he was appointed to succeed Alan Greenspan as Chairman of the Fed. Every word the Chairman speaks concerning the U.S. economy is carefully scrutinized and has tremendous influence on the value of the dollar. A recent example is when Chairman Bernanke announced that the US housing market may have a negative impact on U.S. growth for “somewhat longer” than expected. The dollar immediately dropped with the news.
2. Jean-Claude Trichet, President of the European Central Bank (ECB)
Holder of what is widely regarded as the second most powerful financial position in the world, Jean-Claude Trichet serves as the President of the European Central Bank. President Trichet presided as the President of the Bank of France before being appointed to head the ECB. Often regarded as overly conservative in his monetary policy-making, President Trichet is notoriously deliberate and precise in his decisions. Critics complain that he is typically too slow to respond to changing European conditions; however, admirers praise the way he has handled the difficult economic issues facing the European Union.
3. Toshihiko Fukui, Governor of the Bank of Japan
Toshihiko Fukui is credited as being one of the most progressive leaders in the Bank of Japan’s history. Many people have attributed his successes to his unconventional thinking, most notably his efforts to combat the country’s six-year struggle with deflation by implementing monetary-easing programs. Last year he announced that the Bank of Japan would return to conventional interest-rate target policies. This has recently been tested as the Yen has reached an all-time low against the Euro and a 4 ½ year low against the dollar on the back of effectively negative real interest rates.
4. Mervyn King, Governor of the Bank of England
Mervyn King is Governor of the Bank of England and Chairman of the Monetary Policy Committee. He has been involved with the Bank of England for over 15 years, including his service as the Chief Economist and Director from 1991 – 1998 and Deputy Governor from 1998 – 2003. Mr. King has enjoyed a successful tenure as chief of the Bank of England and has earned the praise of his peers for his handling of the UK economy. He is characterized by a tendency towards formulating strong academic arguments and evenly presenting both sides of an issue before making a decision.
5. Jean-Pierre Roth, Chairman of the Swiss National Bank (SNB) Appointed Chairman of the Governing Board and head of Department I of the Swiss National Bank, Jean-Pierre Roth presides over the Swiss National Bank. He often plays the role of the traditional Swiss banker, but has also made efforts to respond to slowdowns in Switzerland by keeping interest rates low.
6. David Dodge, Governor of the Bank of Canada
Perhaps the most blunt central banker, David Dodge was selected to head the Bank of Canada in February 2001. Known for expressing his opinions on the health of the loonie (Canadian Dollar) in a frank manner, he has also shown his ability to raise interest rates when he feels inflation is on the horizon.
7. Glenn Stevens, Governor of the Reserve Bank of Australia
Glenn Stevens recently replaced Ian Macfarlane as head of the Reserve Bank of Australia. So far, Glenn appears committed to operating the Australian central bank in a manner similar to what was established under Ian Macfarlane. Namely, he has sought to preserve the independence of the Reserve, to target inflation of 2-3% over the course of an economic cycle, and to maintain the accountability of the Reserve when changing interest rates.
8. Allan Bollard, Governor of the Reserve Bank of New Zealand
Allan Bollard is another inflation hawk with a strong background in economics. He is a passionate supporter of free markets who has also at times implemented a restrictive monetary policy in order to keep inflation in check.
9. Philipp Hildebrand, Vice-Chairman of the Swiss National Bank
As one of the youngest members of our influential people list, Philipp Hildebrand is also unusual in his background among his fellow central bankers. Instead of rising from the ranks of bureaucracy or the ivory tower, Philipp spent most of his career in private industry before being invited to serve as member of the Swiss National Bank.
10. Alan Greenspan
Though he no longer holds his title of US Fed Chairman, Alan Greenspan is perhaps one of the most influential figures ever in financial markets, and the retired Fed Chairman still casts a long shadow- most recently when he made comments about a possible US recession and financial markets plummeted. His successful policies while head of the US Federal reserve system are often emulated by leaders of other Central banks.
11. Ottmar Issing, former Chief Economist of the European Central Bank (ECB)
Ottmar Issing is one the leading authorities on ECB economic issues and tends to favor conservative monetary policy. Like Greenspan, even though he no longer holds his former title, he is still well-respected and carries significant clout concerning issues on the European economy.
Government Officials
Our next collection of significant individuals includes other government officials who exert influence over aspects of the world economy but are not directly related to their countries’ respective central banks. Nonetheless, these individuals have a tremendous impact on the fiscal policy and overall financial health of their countries. You will notice we have excluded heads of states from our list and, while they are still very important to the strength of their country’s currency, we have decided to include figures that are more directly related to the currency markets.
12. Condoleezza Rice, US Secretary of State
The Forex market is truly a global market and is affected greatly by public policy decisions. No one has been at the center of more geo-political events over the last few years than Condoleezza Rice. She has been recognized by Forbes magazine as the most powerful woman in the world in 2004 and 2005 (second in 2006) along with being one of only three people to be ranked as one of Times Magazine most influential people four or more times (2004 – 2007). She definitely has the wherewithal to shape the world’s political climate, and hence currency markets.
13. Rodrigo Rato, Managing Director International Monetary Fund (IMF)
As head of the International Monetary Fund (IMF), Rodrigo Rato is intimately involved in the world’s economy. Article I of the IMF’s Articles of Agreement states that the IMF works at: promoting international monetary cooperation; facilitating the expansion and balanced growth of international trade; promoting exchange stability; assisting in the establishment of a multilateral system of payments; and making its resources available (under adequate safeguards) to members experiencing balance of payments difficulties. With such stated goals and the backing of almost every major country in the world, Rodrigo Rato has tremendous influence on the world’s currency markets.
14. Peer Steinbruck, Finance Minister of Germany
Peer Steinbruck was appointed as Finance Minister of Europe’s largest economy in 2005. He has focused on lowering Germany’s budget deficit, but has received mixed reviews while in office.
15. Henry Paulson, US Secretary of Treasury
After being hugely successful in the private sector, Henry Paulson was appointed US Secretary of Treasury in June of 2006. Henry Paulson served as CEO of Goldman Sachs before his appointment to run the Treasury and is well acquainted with private banking and finance. Many pundits suspect his appointment was based on his relationship with Chinese economic officials, and he has been quite vocal about Chinese currency and economic issues.
16. Gordon Brown, Chancellor of Exchequer UK
James Gordon Brown is currently Prime Minister of England and leader-designate of the Labour Party in the United Kingdom. Previously, he was the longest serving Chancellor of Exchequer and oversaw the longest period of sustained economic growth in UK history. While this claim has been challenged, his influence on the world economy remains significant.
17. Christine Lagarde, Minister of Finance France
Christine Lagarde is the first woman Minister of Finance for France. Even before her appointment as Finance Minister, Christine was ranked the 30th most powerful woman in the world by Forbes magazine.
18. Sadakazu Tanigaki, Finance Minister of Japan
Appointed Minister of Finance for Japan in 2004, Sadakazu Tanigaki has been quoted concerning Forex markets as saying, “Currency levels need to reflect fundamentals in a stable manner…Abrupt moves that don’t reflect that are undesirable.”
19. Hiroshi Watanabe, Vice Finance Minister for International Affairs of Japan
Hiroshi Watanabe is Japan’s Vice Finance Minister for International Affairs of Japan and is the most quoted Japanese official concerning foreign exchange markets. He has expressed concerns in the past when he felt the Yen was overvalued against the dollar.
Private Industry
This last section of Forex’s influential people examines the actual participants in the Forex market. While the previous two sections described the people who set policies and laws, which change how the currency market behaves, this part takes a look at the people active in the private sector. We have included three investors, two CEOs of large corporations, and one Forex analyst. All of these individuals have a profound effect on the industry of currency trading.
20. George Soros, co-founder Quantum Fund
George Soros owns the world-renowned Quantum hedge fund and often executes large, successful currency trades. He earned the reputation on Black Wednesday as “the man who broke the Bank of England” when he sold short more than $10 billion pounds (and earned $1.1 billion) due to England’s reluctance to either raise interest rates or float its currency.
21. Warren Buffet, CEO Berkshire Hathaway
The Oracle of Omaha is perhaps the world’s most famous investor. Warren Buffet’s influence is tremendous and investors of every kind seek his advice on various markets (last year someone paid $620,100 just to have lunch with him!) Two years ago, he bet over $20 billion against the USD and lost $1 billion as the Dollar rose over the course of the following year. (However, it is reported that his company was still up about $2 billion on the deal). He created a buzz earlier this year when he entered the Forex market after a 2 year hiatus and then announced he wouldn’t disclose which currencies he was buying until next year.
22. Joseph C. Lewis, Principal Investor Tavistock Group
Though private about his personal life, Joseph C. Lewis is one of the most powerful Forex traders. Joseph Lewis has amassed a personal fortune of several billion dollars through currency trading and subsequent investments. A leader in the move to take currency trading online, Joseph Lewis and his Tavistock Group developed Hotspot FX, Inc., which allows traders to have better access to placing trades on the internet. The Tavistock group recently sold the company for $77 million.
23. Charles Prince, CEO Citigroup
As CEO of the world’s largest bank, Charles Prince has significant influence on the way in which currency trading is conducted. Citigroup accounts for large volumes of the daily Forex market of which Mr. Prince ultimately manages.
24. Tom Lasorda, CEO Chrysler Group
Tom Lasorda took over the Chrysler Group in 2005 and has been an active voice in the Forex market. Throughout its history, Chrysler has at times made more money trading currency than selling cars. LaSorda has been an active critic of the Japanese Government’s involvement in trying to control the value of the Yen in order to help its industry and has pressured the US government to do the same.
25. John Hardy, Analyst for Saxo Bank
A regular featured guest on CNBC flagship programs including “Squawk Box,” “Worldwide Exchange,” “Power Lunch” and “Closing Bell,” John J. Hardy is recognizable to many European business television viewers as the face of Saxo Bank currency analysis. Formerly chief FX strategist for the Danish-based online investment bank and anchor of Saxo’s popular live-streamed Market Call, Hardy has tremendous influence due to his visibility and unique approach to technical analysis.
Listen and Learn
These leaders’ decisions and announcements should have a profound influence on your strategies as a Forex trader. The more you know about them and their opinions, the better you will be at evaluating the world’s financial markets. As these influential people shape the financial world you can learn to identify the affects that their policies and transactions have on the price of the currencies that you are trading. Who knows? Maybe one day you’ll make our list…
Central Bankers
The first main group of influential Forex figures includes the people who run the world’s most powerful financial institutions – the Central Banks. These leaders are usually appointed by their government to run and manage the monetary policy for their country (or league of countries, i.e. the European Union). As we all know, Central Banks determine many important factors that have a huge impact on currency trading. Arguably the most important duty of a central bank is to determine whether to raise or lower interest rates. The power these people have ranks them as perhaps the most influential on our list. Let’s introduce you to the world’s most influential central bankers:
1. Ben Bernanke, Chairman of the US Federal Reserve Bank
Ben Bernake was sworn in as Chairman of the US Federal Reserve System on February 1, 2006 and is widely regarded as the most powerful man in the financial world. He had previously served on the Federal Reserve Board from 2005 to 2006 and was serving as the Chairman of the President’s Council of Economic advisors when he was appointed to succeed Alan Greenspan as Chairman of the Fed. Every word the Chairman speaks concerning the U.S. economy is carefully scrutinized and has tremendous influence on the value of the dollar. A recent example is when Chairman Bernanke announced that the US housing market may have a negative impact on U.S. growth for “somewhat longer” than expected. The dollar immediately dropped with the news.
2. Jean-Claude Trichet, President of the European Central Bank (ECB)
Holder of what is widely regarded as the second most powerful financial position in the world, Jean-Claude Trichet serves as the President of the European Central Bank. President Trichet presided as the President of the Bank of France before being appointed to head the ECB. Often regarded as overly conservative in his monetary policy-making, President Trichet is notoriously deliberate and precise in his decisions. Critics complain that he is typically too slow to respond to changing European conditions; however, admirers praise the way he has handled the difficult economic issues facing the European Union.
3. Toshihiko Fukui, Governor of the Bank of Japan
Toshihiko Fukui is credited as being one of the most progressive leaders in the Bank of Japan’s history. Many people have attributed his successes to his unconventional thinking, most notably his efforts to combat the country’s six-year struggle with deflation by implementing monetary-easing programs. Last year he announced that the Bank of Japan would return to conventional interest-rate target policies. This has recently been tested as the Yen has reached an all-time low against the Euro and a 4 ½ year low against the dollar on the back of effectively negative real interest rates.
4. Mervyn King, Governor of the Bank of England
Mervyn King is Governor of the Bank of England and Chairman of the Monetary Policy Committee. He has been involved with the Bank of England for over 15 years, including his service as the Chief Economist and Director from 1991 – 1998 and Deputy Governor from 1998 – 2003. Mr. King has enjoyed a successful tenure as chief of the Bank of England and has earned the praise of his peers for his handling of the UK economy. He is characterized by a tendency towards formulating strong academic arguments and evenly presenting both sides of an issue before making a decision.
5. Jean-Pierre Roth, Chairman of the Swiss National Bank (SNB) Appointed Chairman of the Governing Board and head of Department I of the Swiss National Bank, Jean-Pierre Roth presides over the Swiss National Bank. He often plays the role of the traditional Swiss banker, but has also made efforts to respond to slowdowns in Switzerland by keeping interest rates low.
6. David Dodge, Governor of the Bank of Canada
Perhaps the most blunt central banker, David Dodge was selected to head the Bank of Canada in February 2001. Known for expressing his opinions on the health of the loonie (Canadian Dollar) in a frank manner, he has also shown his ability to raise interest rates when he feels inflation is on the horizon.
7. Glenn Stevens, Governor of the Reserve Bank of Australia
Glenn Stevens recently replaced Ian Macfarlane as head of the Reserve Bank of Australia. So far, Glenn appears committed to operating the Australian central bank in a manner similar to what was established under Ian Macfarlane. Namely, he has sought to preserve the independence of the Reserve, to target inflation of 2-3% over the course of an economic cycle, and to maintain the accountability of the Reserve when changing interest rates.
8. Allan Bollard, Governor of the Reserve Bank of New Zealand
Allan Bollard is another inflation hawk with a strong background in economics. He is a passionate supporter of free markets who has also at times implemented a restrictive monetary policy in order to keep inflation in check.
9. Philipp Hildebrand, Vice-Chairman of the Swiss National Bank
As one of the youngest members of our influential people list, Philipp Hildebrand is also unusual in his background among his fellow central bankers. Instead of rising from the ranks of bureaucracy or the ivory tower, Philipp spent most of his career in private industry before being invited to serve as member of the Swiss National Bank.
10. Alan Greenspan
Though he no longer holds his title of US Fed Chairman, Alan Greenspan is perhaps one of the most influential figures ever in financial markets, and the retired Fed Chairman still casts a long shadow- most recently when he made comments about a possible US recession and financial markets plummeted. His successful policies while head of the US Federal reserve system are often emulated by leaders of other Central banks.
11. Ottmar Issing, former Chief Economist of the European Central Bank (ECB)
Ottmar Issing is one the leading authorities on ECB economic issues and tends to favor conservative monetary policy. Like Greenspan, even though he no longer holds his former title, he is still well-respected and carries significant clout concerning issues on the European economy.
Government Officials
Our next collection of significant individuals includes other government officials who exert influence over aspects of the world economy but are not directly related to their countries’ respective central banks. Nonetheless, these individuals have a tremendous impact on the fiscal policy and overall financial health of their countries. You will notice we have excluded heads of states from our list and, while they are still very important to the strength of their country’s currency, we have decided to include figures that are more directly related to the currency markets.
12. Condoleezza Rice, US Secretary of State
The Forex market is truly a global market and is affected greatly by public policy decisions. No one has been at the center of more geo-political events over the last few years than Condoleezza Rice. She has been recognized by Forbes magazine as the most powerful woman in the world in 2004 and 2005 (second in 2006) along with being one of only three people to be ranked as one of Times Magazine most influential people four or more times (2004 – 2007). She definitely has the wherewithal to shape the world’s political climate, and hence currency markets.
13. Rodrigo Rato, Managing Director International Monetary Fund (IMF)
As head of the International Monetary Fund (IMF), Rodrigo Rato is intimately involved in the world’s economy. Article I of the IMF’s Articles of Agreement states that the IMF works at: promoting international monetary cooperation; facilitating the expansion and balanced growth of international trade; promoting exchange stability; assisting in the establishment of a multilateral system of payments; and making its resources available (under adequate safeguards) to members experiencing balance of payments difficulties. With such stated goals and the backing of almost every major country in the world, Rodrigo Rato has tremendous influence on the world’s currency markets.
14. Peer Steinbruck, Finance Minister of Germany
Peer Steinbruck was appointed as Finance Minister of Europe’s largest economy in 2005. He has focused on lowering Germany’s budget deficit, but has received mixed reviews while in office.
15. Henry Paulson, US Secretary of Treasury
After being hugely successful in the private sector, Henry Paulson was appointed US Secretary of Treasury in June of 2006. Henry Paulson served as CEO of Goldman Sachs before his appointment to run the Treasury and is well acquainted with private banking and finance. Many pundits suspect his appointment was based on his relationship with Chinese economic officials, and he has been quite vocal about Chinese currency and economic issues.
16. Gordon Brown, Chancellor of Exchequer UK
James Gordon Brown is currently Prime Minister of England and leader-designate of the Labour Party in the United Kingdom. Previously, he was the longest serving Chancellor of Exchequer and oversaw the longest period of sustained economic growth in UK history. While this claim has been challenged, his influence on the world economy remains significant.
17. Christine Lagarde, Minister of Finance France
Christine Lagarde is the first woman Minister of Finance for France. Even before her appointment as Finance Minister, Christine was ranked the 30th most powerful woman in the world by Forbes magazine.
18. Sadakazu Tanigaki, Finance Minister of Japan
Appointed Minister of Finance for Japan in 2004, Sadakazu Tanigaki has been quoted concerning Forex markets as saying, “Currency levels need to reflect fundamentals in a stable manner…Abrupt moves that don’t reflect that are undesirable.”
19. Hiroshi Watanabe, Vice Finance Minister for International Affairs of Japan
Hiroshi Watanabe is Japan’s Vice Finance Minister for International Affairs of Japan and is the most quoted Japanese official concerning foreign exchange markets. He has expressed concerns in the past when he felt the Yen was overvalued against the dollar.
Private Industry
This last section of Forex’s influential people examines the actual participants in the Forex market. While the previous two sections described the people who set policies and laws, which change how the currency market behaves, this part takes a look at the people active in the private sector. We have included three investors, two CEOs of large corporations, and one Forex analyst. All of these individuals have a profound effect on the industry of currency trading.
20. George Soros, co-founder Quantum Fund
George Soros owns the world-renowned Quantum hedge fund and often executes large, successful currency trades. He earned the reputation on Black Wednesday as “the man who broke the Bank of England” when he sold short more than $10 billion pounds (and earned $1.1 billion) due to England’s reluctance to either raise interest rates or float its currency.
21. Warren Buffet, CEO Berkshire Hathaway
The Oracle of Omaha is perhaps the world’s most famous investor. Warren Buffet’s influence is tremendous and investors of every kind seek his advice on various markets (last year someone paid $620,100 just to have lunch with him!) Two years ago, he bet over $20 billion against the USD and lost $1 billion as the Dollar rose over the course of the following year. (However, it is reported that his company was still up about $2 billion on the deal). He created a buzz earlier this year when he entered the Forex market after a 2 year hiatus and then announced he wouldn’t disclose which currencies he was buying until next year.
22. Joseph C. Lewis, Principal Investor Tavistock Group
Though private about his personal life, Joseph C. Lewis is one of the most powerful Forex traders. Joseph Lewis has amassed a personal fortune of several billion dollars through currency trading and subsequent investments. A leader in the move to take currency trading online, Joseph Lewis and his Tavistock Group developed Hotspot FX, Inc., which allows traders to have better access to placing trades on the internet. The Tavistock group recently sold the company for $77 million.
23. Charles Prince, CEO Citigroup
As CEO of the world’s largest bank, Charles Prince has significant influence on the way in which currency trading is conducted. Citigroup accounts for large volumes of the daily Forex market of which Mr. Prince ultimately manages.
24. Tom Lasorda, CEO Chrysler Group
Tom Lasorda took over the Chrysler Group in 2005 and has been an active voice in the Forex market. Throughout its history, Chrysler has at times made more money trading currency than selling cars. LaSorda has been an active critic of the Japanese Government’s involvement in trying to control the value of the Yen in order to help its industry and has pressured the US government to do the same.
25. John Hardy, Analyst for Saxo Bank
A regular featured guest on CNBC flagship programs including “Squawk Box,” “Worldwide Exchange,” “Power Lunch” and “Closing Bell,” John J. Hardy is recognizable to many European business television viewers as the face of Saxo Bank currency analysis. Formerly chief FX strategist for the Danish-based online investment bank and anchor of Saxo’s popular live-streamed Market Call, Hardy has tremendous influence due to his visibility and unique approach to technical analysis.
Listen and Learn
These leaders’ decisions and announcements should have a profound influence on your strategies as a Forex trader. The more you know about them and their opinions, the better you will be at evaluating the world’s financial markets. As these influential people shape the financial world you can learn to identify the affects that their policies and transactions have on the price of the currencies that you are trading. Who knows? Maybe one day you’ll make our list…
The Magical 50 Day Line
So, all of your stock picking schemes trying to trade stock have ended in shambles. You have no idea when to buy and when to sell. The stockmarket is up but your way down. We need to get down to the basics of the stockmarket and how to pick a good stock.
The best way to help you to buy a stock is to see patterns and this involves using charts. One of the most basic tools on a chart is its 10 week line or also known as the 50 day moving average. The line is calculated by taking the last 50 days of the stocks closing prices adding them up and dividing buy 50. Bingo you got your line.
Now we know what the line is when your looking at a stock the one thing you want to look at is the trend, is it up or down. Now the good companies that have strong fundamentals will generally show really strong up-trends in a bull market and will still be fairly strong in a bear market. The key is again the fundamentals. Once you have determined it is a good company lets look for out entrance into the stock using the 50 day moving average as a guide.
Monsanto an agriculture company has been on a dramatic climb since the end of 06’ it had strong fundamentals.
The best way to help you to buy a stock is to see patterns and this involves using charts. One of the most basic tools on a chart is its 10 week line or also known as the 50 day moving average. The line is calculated by taking the last 50 days of the stocks closing prices adding them up and dividing buy 50. Bingo you got your line.
Now we know what the line is when your looking at a stock the one thing you want to look at is the trend, is it up or down. Now the good companies that have strong fundamentals will generally show really strong up-trends in a bull market and will still be fairly strong in a bear market. The key is again the fundamentals. Once you have determined it is a good company lets look for out entrance into the stock using the 50 day moving average as a guide.
Monsanto an agriculture company has been on a dramatic climb since the end of 06’ it had strong fundamentals.
A Successful Currency Trader
Your success as a Forex trader is measured primarily by your commitment to studying the markets, learning trading signals, being patient, and waiting until good trades make themselves known. It is also important to manage your money by the amount of lots you trade and where you place the stop losses.
Avoid comparing yourself to other currency traders and measuring the outward results of your efforts against theirs. Remember that traders have different styles and will make money at different paces in different times. Your responsibility is to develop your trading skills so you can make correct trading decisions. As you are learning you will have losses. You should not, however, become discouraged; discouragement will weaken your trading ability and cloud your judgment. You want to keep your expectations high. If you lower your expectations, your effectiveness will decrease, your desire will weaken, and you will have greater difficulty making good trades.
You can know you have become a successful Forex trader when you:
Feel in tune with the market.
Love to trade and take the profits the market wants to give.
Obey trading rules with exactness.
Live so your body and mind are rested and healthy.
Trade effectively every day, do your best to seek knowledge, learn, and improve.
Help to build up other traders wherever you go.
Warn people of the consequences of poor trading and money management practices.
Teach and serve other traders.
Help other traders at every opportunity, whether or not you will be paid for helping.
Avoid comparing yourself to other currency traders and measuring the outward results of your efforts against theirs. Remember that traders have different styles and will make money at different paces in different times. Your responsibility is to develop your trading skills so you can make correct trading decisions. As you are learning you will have losses. You should not, however, become discouraged; discouragement will weaken your trading ability and cloud your judgment. You want to keep your expectations high. If you lower your expectations, your effectiveness will decrease, your desire will weaken, and you will have greater difficulty making good trades.
You can know you have become a successful Forex trader when you:
Feel in tune with the market.
Love to trade and take the profits the market wants to give.
Obey trading rules with exactness.
Live so your body and mind are rested and healthy.
Trade effectively every day, do your best to seek knowledge, learn, and improve.
Help to build up other traders wherever you go.
Warn people of the consequences of poor trading and money management practices.
Teach and serve other traders.
Help other traders at every opportunity, whether or not you will be paid for helping.
Sell EUR/USD
Traders seems to be increasingly hesitant buying the pair at current levels, especially with Euro-zone economic data likely to worsen. The main reason price remains near all-time highs is because the ECB continues to maintain a tough stance on interest rates in the short term to control inflationary pressure. But just how long will this last if economic data being released gets suckier and suckier?
If the ECB do stick to their guns with maintaining interest rates, then the dollar will continue to remain weak, since the Fed continues to lower interest rates. I'm not so sure how long the ECB can hold out though.
Either way, I think there's little value selling the dollar at these levels and look to get in early to catch a big price reversal.
Technically, price has been trading sideways for almost two weeks now. There is bearish divergence as the oscillator seems to be weakening.
If the ECB do stick to their guns with maintaining interest rates, then the dollar will continue to remain weak, since the Fed continues to lower interest rates. I'm not so sure how long the ECB can hold out though.
Either way, I think there's little value selling the dollar at these levels and look to get in early to catch a big price reversal.
Technically, price has been trading sideways for almost two weeks now. There is bearish divergence as the oscillator seems to be weakening.
It's Not the Size of the Fish But... Oh, Wait
During my very early days of currency trading my mind was running wild with the ideas and dreams of what I was going to do with my soon-to-arrive riches. Sound familiar? But I wasn't dreaming of a dollar here or a dollar there, but some serious cash money. I knew that I only needed a few monster winning trades to help me realize my then fantasies, and then the world was for my taking! Muuu-haha, muu-haha, muu-haha (imagine Dr.Evil/Austin Powers laughing).
Big trades weren't going to be easy or commonplace, I knew this. If they were, then everybody and their mothers would be here trading right along side me. And they weren't. So, I'd have to wait and be patient, and watch for the right signals and listen for that one hot tip. And then BAM! I'd get in low, wait for price to skyrocket, and then get out just before the masses new what hit them. SO EASY...
But did it happen that way? No.
And does it usually happen that way. Well, for a few, yes. But for the rest us (and the more common), of course not.
But who doesn't dream of being in the right place at the right time? Who doesn't dream of that rare elephant-sized gain? Again, it's normal and wishful, but not always realistic. Sure, yearning for that winning opportunity will motivate a trader to build his skill in hopes of becoming a trading master. But it's not going to be that rare trade that he waits forever for that transforms him into a profitable trader. For the most part, a trader's success will be defined by the many smaller, almost "boring", winning trades that are made and hopefully become regular. Although small profits, they are just as significant as the larger and more thrilling trades.
It's often times never realized that the many smaller trades provide just as much if not more to a new trader than a big win that hits only once every third full moon. Many novice traders make the small trades one after another with no real gains to show.
One pip here, six pips there... and so on.
They feel they've hit a level of experience that just can't be surpassed by making these small moves. But no matter how petite the trade, each trade provides another examination of the market and another test of the strategy and trader's skill. These trades all provide a new insight that ultimately aids in gaining more market experience and adding to that bag of knowledge.
Whether it's finally learning to identity a particular candlestick pattern and then better forecasting a price move to being risk-conscious by always placing a stop, the small experiences we have and learn along the way matter a great deal.
We all know that currency trading can be difficult, requiring various levels of commitment, whether financial, physical or mental. Many novice traders give up earlier after being smacked in face (figuratively), but there are those who make it. The surviving traders are still there because they have their systems in place; they're cool, calm and collect when dealing with the market and its uncertainties. They stay focused on their plan or strategy and they stay away from the risky and unrealistic trades and profit goals. They understand the risks involved with each position they take, and that losses are inevitable, but they look for the high profitability trades with minimized risk. It's always a calculated move, not driven my emotion. Now, it may not be World Cup type action, but the small profits are there. In the end, the many smalls add up to a very big.
Don't get disheartened if you feel you aren't progressing as you should be. Stay focused on making profits, no matter how small they are. You want to keep the capital on the positive side and continue to be able to make trades. That's the important part. You add more to your bag of knowledge when you're actually acting, and making a real trade. In the beginning, profits may not exist or may be small, but remember that a single pip gain is still a gain. And not a loss!
Big trades weren't going to be easy or commonplace, I knew this. If they were, then everybody and their mothers would be here trading right along side me. And they weren't. So, I'd have to wait and be patient, and watch for the right signals and listen for that one hot tip. And then BAM! I'd get in low, wait for price to skyrocket, and then get out just before the masses new what hit them. SO EASY...
But did it happen that way? No.
And does it usually happen that way. Well, for a few, yes. But for the rest us (and the more common), of course not.
But who doesn't dream of being in the right place at the right time? Who doesn't dream of that rare elephant-sized gain? Again, it's normal and wishful, but not always realistic. Sure, yearning for that winning opportunity will motivate a trader to build his skill in hopes of becoming a trading master. But it's not going to be that rare trade that he waits forever for that transforms him into a profitable trader. For the most part, a trader's success will be defined by the many smaller, almost "boring", winning trades that are made and hopefully become regular. Although small profits, they are just as significant as the larger and more thrilling trades.
It's often times never realized that the many smaller trades provide just as much if not more to a new trader than a big win that hits only once every third full moon. Many novice traders make the small trades one after another with no real gains to show.
One pip here, six pips there... and so on.
They feel they've hit a level of experience that just can't be surpassed by making these small moves. But no matter how petite the trade, each trade provides another examination of the market and another test of the strategy and trader's skill. These trades all provide a new insight that ultimately aids in gaining more market experience and adding to that bag of knowledge.
Whether it's finally learning to identity a particular candlestick pattern and then better forecasting a price move to being risk-conscious by always placing a stop, the small experiences we have and learn along the way matter a great deal.
We all know that currency trading can be difficult, requiring various levels of commitment, whether financial, physical or mental. Many novice traders give up earlier after being smacked in face (figuratively), but there are those who make it. The surviving traders are still there because they have their systems in place; they're cool, calm and collect when dealing with the market and its uncertainties. They stay focused on their plan or strategy and they stay away from the risky and unrealistic trades and profit goals. They understand the risks involved with each position they take, and that losses are inevitable, but they look for the high profitability trades with minimized risk. It's always a calculated move, not driven my emotion. Now, it may not be World Cup type action, but the small profits are there. In the end, the many smalls add up to a very big.
Don't get disheartened if you feel you aren't progressing as you should be. Stay focused on making profits, no matter how small they are. You want to keep the capital on the positive side and continue to be able to make trades. That's the important part. You add more to your bag of knowledge when you're actually acting, and making a real trade. In the beginning, profits may not exist or may be small, but remember that a single pip gain is still a gain. And not a loss!
Forex Leads Equities
In recent months, the credit crunch has ignited a global trend towards risk aversion. As a result, a correlation has developed between equities, which serve as a proxy for risk, and certain currencies. The Forex Blog previously covered the link between the S&P 500 and the Japanese Yen, whereby the Japanese Yen moved inversely with the S&P as a decline in risk appetite led carry traders to unwind their positions. Perhaps, this connection can be seen in other currencies. Since the forex markets are open 24 hours a day and are the most liquid financial markets in the world, macroeconomic events are often priced into currencies before they are priced into equities. In addition, carry trading strategies have expanded beyond the Japanese Yen. In fact, the USD is now a decent candidate as interest rates are negative,when adjusted for inflation. Thus, an increase in risk appetite could simultaneously boost the S&P and punish the Dollar!
Barclays Introduces Carry Trade ETN
Through its trademark iPATH line of funds, Barclays Bank recently introduced a new ETN designed to mimic the carry trade. In accordance with this strategy, this note is linked to the performance of the Barclays Intelligent Carry Index, which aims sell low-yielding currencies and use the proceeds to invest in those that offer higher yields. This index holds varying combinations of the so-called G10 currencies, which includes all of the majors as well as the Norwegian Krona and Swedish Krona. Traditionally, carry traders have sold one specific currency (i.e. Japanese Yen) in favor of another currency (i.e. the New Zealand Dollar). By instead purchasing this note, which will trade under the ticker ICI, investors can buy a share of an entire portfolio, optimized expressly for this strategy. Comtex reports:
The index is composed of ten cash-settled currency forward agreements, one for each index constituent currency, as well as a "Hedged USD Overnight Index" which is intended to reflect the performance of a risk-free U.S. dollar-denominated asset.
The index is composed of ten cash-settled currency forward agreements, one for each index constituent currency, as well as a "Hedged USD Overnight Index" which is intended to reflect the performance of a risk-free U.S. dollar-denominated asset.
Fundamentals Harm Emerging Market Currencies
Since the inception of the credit crunch, one of the themes in forex markets has been the surprising strength of the Dollar. Despite growing economic uncertainty, the US is still viewed as a relatively safe place to invest. On the other hand, emerging markets, especially those with current account deficits, have witnessed capital flight and subsequent currency depreciation. The currencies of South Africa and Iceland, for example, have both experienced declines 20% since the start of this year. Risk premiums had fallen to historic lows prior to the credit crunch, and neither country experienced great difficulty financing its respecive deficits. However, investors are growing increasingly nervous and are shifting capital to countries with stable current account balances. The Financial Times reports:
Goldman Sachs says: "We have long argued that in times of global turmoil suppliers of capital are poised to outperform countries in need of capital. However, it is only since January 2008 that we have seen the current account theme really gain momentum in the FX market."
Goldman Sachs says: "We have long argued that in times of global turmoil suppliers of capital are poised to outperform countries in need of capital. However, it is only since January 2008 that we have seen the current account theme really gain momentum in the FX market."
Dollar Decline: Not a Sure Thing
Since 2002, the Dollar has lost 70% of its value, relative to the Euro. Meanwhile, the same factors that signaled bearishness in 2002 persist in 2008, or even worsened in some aspects. The twin deficits are still growing, though the current account deficit may be leveling off. The US economy is headed towards recession. Inflation is set to rise due to soaring commodity prices and a loosening of monetary policy. As a result, many investors are betting that the Dollar's slide will continue well into the near future.
However, prudent investors would be wise to "handle with care." While not entirely applicable to forex markets, efficient markets theory dictates that inherent in a security's current valuation is all relevant, publicly available information. Thus, all of the bad news listed above has already been priced into the Dollar, to some degree at least. The rule of diversification is in full effect when betting on forex. Thus, rather then putting all of one's chips directly behind one currency, an investors could buy foreign securities (stocks and bonds) instead, which also capture any currency appreciation (and depreciation). Investors can also purchase Treasury Inflation Protected Securities (TIPS), whose yield is linked to inflation and, thus, acts as a hedge against a declining Dollar. The Wall Street Journal reports:
While some market watchers believe the six-year dollar bear market isn't over yet, investors should recognize that trends in the currency markets are typically marked by volatile ups and downs along the way.
However, prudent investors would be wise to "handle with care." While not entirely applicable to forex markets, efficient markets theory dictates that inherent in a security's current valuation is all relevant, publicly available information. Thus, all of the bad news listed above has already been priced into the Dollar, to some degree at least. The rule of diversification is in full effect when betting on forex. Thus, rather then putting all of one's chips directly behind one currency, an investors could buy foreign securities (stocks and bonds) instead, which also capture any currency appreciation (and depreciation). Investors can also purchase Treasury Inflation Protected Securities (TIPS), whose yield is linked to inflation and, thus, acts as a hedge against a declining Dollar. The Wall Street Journal reports:
While some market watchers believe the six-year dollar bear market isn't over yet, investors should recognize that trends in the currency markets are typically marked by volatile ups and downs along the way.
Forex Trading Education
Every potential forex trader should learn as much as possible before starting to trade. If you have any pretensions in making money from forex, you should invest in educational tools which can make you a better forex trader and reduce the risk of taking a big hit early in your trading days.
For starters, here are a couple of useful books you should read:
"Reminiscences of a Stock Operator" - by Edwin Lefevre. This is a classic trading text written in 1923 about trading legend Jesse Livermore and although not about forex, it's trading wisdom is timeless and this should be read by all traders.
"Bird Watching in Lion Country"- Retail Forex Trading Explained
This outside-the-box ebook explains various strategies including how to use "relational analysis" - using basic technical analysis coupled with fundamental analysis (rather than relying on just one or the other) which creates a more powerful synergistic strategy. Also helps you to create your own system using leverage, discusses the myths of "random" timing signals where many traders fall down, and using cost averaging trade entries.
This book is available here.
For starters, here are a couple of useful books you should read:
"Reminiscences of a Stock Operator" - by Edwin Lefevre. This is a classic trading text written in 1923 about trading legend Jesse Livermore and although not about forex, it's trading wisdom is timeless and this should be read by all traders.
"Bird Watching in Lion Country"- Retail Forex Trading Explained
This outside-the-box ebook explains various strategies including how to use "relational analysis" - using basic technical analysis coupled with fundamental analysis (rather than relying on just one or the other) which creates a more powerful synergistic strategy. Also helps you to create your own system using leverage, discusses the myths of "random" timing signals where many traders fall down, and using cost averaging trade entries.
This book is available here.
DailyForex Review
Visit www.dailyforex.com
Caught in a cross road about critical questions like Broker choice, Competent Signal Providers, Well informed Forex Course Providers, and a comparative Forex products reviews. DailyForex offers these answers. DailyForex multi-lingual features for language change into English, Arab and Spanish is well poised.
Dailyforex provides unique information about Forex Brokers, Top Signal Providers, Forex Market Products and Top Forex Course Providers. Dailyforex understands that the forex market is dynamic and changing; thus it provides monthly updated reviews on Top Forex Brokers, Top Signal Providers, and Top Forex Courses.
Dailyforex special feature for Brokers allows a particular broker singled out and reviewed. Reviewed Top Forex courses during each month categorize these courses under Online Forex Courses and Offline Forex Courses.
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Amidst the entire buzz in the world of currencies, you can always find solace where information is accurate and updated, and Jenifer’s blog has just been the right spot for market overviews
Caught in a cross road about critical questions like Broker choice, Competent Signal Providers, Well informed Forex Course Providers, and a comparative Forex products reviews. DailyForex offers these answers. DailyForex multi-lingual features for language change into English, Arab and Spanish is well poised.
Dailyforex provides unique information about Forex Brokers, Top Signal Providers, Forex Market Products and Top Forex Course Providers. Dailyforex understands that the forex market is dynamic and changing; thus it provides monthly updated reviews on Top Forex Brokers, Top Signal Providers, and Top Forex Courses.
Dailyforex special feature for Brokers allows a particular broker singled out and reviewed. Reviewed Top Forex courses during each month categorize these courses under Online Forex Courses and Offline Forex Courses.
Significantly, dailyforex updates latest forex news, currency rates, besides offering Daily Forex Newsletter on sign up via email. Newbie’s can gain knowledgeable insights as a section on the homepage give out tips to forex newcomers. An interface that allows you invite friends to join dailyforex is provided.
Amidst the entire buzz in the world of currencies, you can always find solace where information is accurate and updated, and Jenifer’s blog has just been the right spot for market overviews
Carry Trade Gains Favor
t's been rough sailing for the Yen carry trade of late; the technique had been sagging in popularity due to the credit crunch and the associated trend towards risk aversion. Over the last few weeks, however, the Yen has fallen, which is to say the Yen Carry Trade is making a comeback. First came the announcement that the world's leading Central Banks would be injecting hundreds of billions of dollars in the banking system, in order to ease growing liquidity concerns. Next, the Bank of Japan hinted that it would hold rates at .5%, the lowest in the industrialized world. Finally, a continued surge in commodity prices virtually ensures that countries rich in natural resources, such as Canada and Australia, remain viable "targets" for carry traders. Overall, the story remains focused around volatility. In fact, one investment bank discovered an inverse correlation between the S&P 500 and the Japanese Yen. In other words, the appetite for risk appears closely correlated with the strength of global capital markets and the popularity of the Yen carry trade. Bloomberg News reports:
Over the last fortnight, that odd correlation with equities has broken down...Instead the fundamental factors behind carry trades have come to the fore again. Investors are paying attention to Japan's economy.
Over the last fortnight, that odd correlation with equities has broken down...Instead the fundamental factors behind carry trades have come to the fore again. Investors are paying attention to Japan's economy.
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