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The relationship between the dollar and the equity markets is further underscored by the Dow Jones Industrial Index reaching historic highs. This occurred as the USDX entered into an extended downtrend see Figure 5. Why has the relationship been in- verse between the equity market and the value of the dollar? A deeper look reveals the answer.
As the dollar value declines versus other currencies, the companies that export to the rest of the world benefit from increased sales, as exports become more attractive to foreign buyers.
Additionally, multinational corporations having assets abroad experi- ence an increase in the dollar value of those assets. the Dow. Are any of these commodities in a channel pattern? These reports are results of extensive profes- sionally designed surveys that are conducted on a regular basis in many countries. When these survey results are released, they provide important information on expecta- tions regarding the economy of a country.
This information is seriously assessed by cen- tral banks in determining their next moves in controlling inflation. Growth in business or consumer confidence has inflationary potential, while a decline in business or consumer confidence portends economic slowdown. When these releases come out, they move the market, especially if the results are surprising. Beyond having an impact upon their release, confidence indicators can also provide a leading indicator for the forex trader.
If business confidence is at its highest in years, the market will interpret it as positive for the currency because greater confidence in- dicates expansion and growth of an economy. Where there is expectation of expansion and growth, there is the concomitant expectation of interest rates not going lower and possibly going higher. These confidence surveys are not perfect predictors of resulting currency moves.
They are one of the most important ingredients in the mix of fundamen- tal forex factors. Some of the important confidence indicators are listed on page 42 and should be fol- lowed.
Their release times are tracked in the numerous economic calendars available, and strategies for trading these economic data releases should be learned by traders.
It is interesting to note that every major country has its version of investor and busi- ness confidence indicators. These form in effect a leading indicator about currency directions. de r IFO Business Climate Survey www. de r Institute of Supply Managers www. aspx U. Sentiment Indicators r Consumer Confidence www. htm r Fed Beige Book released two weeks prior to Federal Open Market Committee meet- ings, eight times a year r ISM Nonmanufacturing www.
cfm r Empire State Manufacturing Survey monthly report, www. html r Chicago PMI ISM Nonmanufacturing released on the third business day of the month, can be found at www. cfm r Philadelphia Business Outlook Survey monthly, www. com and Find the Next Business or Consumer Conﬁdence Report Release Time Watch what happens upon the release to the currency pairs. This chapter focuses on how a trader can gain an understanding about the strength and weakness of a currency.
The concept of a trade- weighted currency basket is introduced as well as how to obtain the latest trade-weighted information and data that can be directly used in trading.
TRACKING CURRENCY STRENGTH: HOW STRONG IS A CURRENCY? We can be convinced that currencies reflect world opinion about how well an economy is doing or expected to do. The next step in fundamental analysis is to be able to make a judgment about a particular currency itself.
Ultimately, the question arises for the trade: How strong is the currency? In spot forex trading, the trade itself is always a paired event of one currency against another. But when a trader makes a judgment about the strength or weakness of a currency by only comparing one currency against another usually the U. dollar , the conclusion can be misleading as to the global strength or weakness of the currency. When trading majors where the U. dollar is part of the pair, the comparative question becomes: How strong is the U.
dollar against that currency? question of how strong a particular currency is on its own terms without reference to another pair, the trade-weighted index TWI is used by economists and should also be used by currency traders. The TWI represents how well the currency of a country is doing against a basket of other currencies.
The currencies included in the TWI are those that reflect the major trading relationships with the index currency. Each currency receives a weight in the index that reflects its importance. For example, in Table 7. We can also see that Canada and many other nations have a very small percentage compo- nent of the TWI.
Each year the central bank and economists adjust the weights to reflect changing realities of international trade. As China increases its trading relationships around the world, it will receive more weight in TWIs. The point is that the TWI represents a way TABLE 7. dollar pound sterling 5. By knowing the TWIs of each currency, the forex trader can detect a strengthening and weakening of a currency and also get a sense of how a currency can be impacted by events in countries of their trading partners.
Many traders often ask the question: What do you think of the U. dollar or yen, pound, or euro? One important way of answering is from the perspective of the TWI. Each currency gains a trading personality, and knowing the TWI for each currency is very useful, because it will reflect the big picture much more accurately.
Most recently, the International Index Company issued a new product line called iBoxxFX® , which are indices that are, in fact, trade weighted. They allow an average forex trader to take a snapshot of the strength of a currency without the noise of the forex market. Table 7. Notice how each currency index reflects the varying importance of its different trading partners.
We will see shortly that these trade weights are a clue to defining the fundamental personality of a currency. Before that time, it was pegged to the dollar, and before that it was pegged to the British pound.
By floating its currency, the market sets the value of the currency and the cen- tral bank can avoid the necessity of intervening by buying and selling dollars to keep the currency value. But a floating currency also permits capital to float out of a country. The fear of floating is great among totalitarian regimes and emerging countries that want to maintain control of their economy.
By looking at the aussie TWI see Table 7. The role of Australia as a global trading country makes it an attractive currency to trade. The recent years of economic expansion have created strength in this currency. The currency in had a strong upward trend, which, from a world trade perspective, re- mains intact. The Australian dollar is almost as equally sensitive to the Japanese economy as it is to the euro or the U.
Important also to consider are commodity-related events such as movements in cop- per and gold. Australia is a major producer of both of these commodities and is affected by price patterns. Figure 7. TABLE 7. We can see how the movements are in sync, visualizing a strong correlation between commodity moves and the aussie-dollar pair. It shows that in , these commodities began to diverge down while the aussie FIGURE 7.
iBoxx® is a registered trademark of International Index Company Limited. FIGURE 7. continued strengthening. When a trader sees divergence from the traditional relation- ship, questions arise. Why would the aussie continue to be strong if copper is weak? The answer was that there was great strength in other sectors of the Australian economy, making copper less important. The fundamental personality of the aussie is that of a commodity- and trade- dependent currency.
The aussie will be affected by global economic growth and, in particular, Chinese growth. China is now the second largest buyer of Australian exports, making the aussie more sensitive then ever before to the direction of the Chinese economy. A special feature of the aussie is that it has a multiple fundamental personality.
It can be considered an Asian currency, reflecting Asian growth, and it can be consid- ered a currency that also is impacted by the United States and Europe. This means that the forex trader should seriously look to trade the aussie pairs such as the Australian dollar—Japanese yen AUDJPY and Australian dollar—euro AUDEUR , as well as the traditional Australian dollar—U.
dollar AUDUSD pair. Growth will, however, be held back in by the effect of a drought on the agricultural sector. The cycle of growth that the aussie is in will be certainly tested. Events in China and the commodity markets will be important factors to watch. Source: Guy Debelle, head of the International Department, Australian Foreign Exchange Market, November significant over the coming year are events in Japan.
If Japan raises its interest rates, the aussie will suffer because the conditions for the carry trade will decline. The Japanese rate of 0. If this spread changes, so will the condi- tions encouraging a stronger aussie. In recent years, it has been very rare for the aussie to depreciate against the yen. This made the risks of an unhedged carry trade very low. But the risk of carry trades providing a big decline remains very real. Domestically, the Australian economy entered with year lows in unemploy- ment at 4.
The Reserve Bank of Australia increased rates to 6. At the end of , inflation rates were at 3. The combination of domestic growth and global growth makes trading the aussie in the coming years a lot of action.
dollar receives a weight of 86 percent in the trade- weighted basket. Refer to Table 7. Therefore, when the U. economy slows, the Canadian economy also suffers. When oil prices increase, the Canadian currency benefits. From a fundamental point of view, trading the Canadian dollar against the U.
pair is the most effective way to play this currency. A useful web site for tracking the Canadian economy is www. New Zealand is almost a classic example of how fundamentals can drive currency movements. The New Zealand economy is small. Since its consumer economy is small, the fundamental char- acteristic that affects its economy is whether its exports can grow.
Therefore, interest rates and the resulting currency valuation are key to its future economic vitality. Data show only 4 percent of the New Zealand firms do any exporting. But this level was recognized as having risks of slowing the New Zealand economy. In fact, the New Zealand Central bank intervened for the first time since and sold the New Zealand dollar on June If it tries to raise rates further to slow down inflation, it can choke off exports and cause a major contraction.
The fundamentals point to a mixed situation that can go either way. As a result of this uncertainty, the kiwi offers potentially very many trading strategies, as the currency will be extremely sensitive to central bank actions as well as surprises in economic data.
The forex trader looking to trade the kiwi can explore trading the dollar pair U. dollar—New Zealand dollar USDNZD , as well as the kiwi against the aussie NZDAUD , the yen NZDJPY , or the euro NZDEUR. MEXICAN PESO The peso is a currency that offers potential for trading more than ever. The OECD projects a GDP growth in Mexico of 3.
Importantly, inflation is projected to be just above 3 percent www. Additionally, the peso is strengthened by its ability to attract capital flows. It is useful to note that those traders who sell the U. dollar and buy the Mexican new peso MXN in the USDMXN pair, receive interest rate payments. So the peso can be used as a carry trade currency pair.
The second major factor is the U. Mexican exports are at a level of over 80 percent to the United States, and there is a high inflow of capital coming from Mexicans living in the United States. Oil also needs to be considered. Like Canada, Mexico is a net exporter of oil and attracts petrodollars.
A major negative factor is business confidence. The Mexican busi- ness climate is often marred by inefficiencies, and the political economy generates a great deal of negative sentiment.
Another factor emerging is Asian competitiveness. If Mexican interest rates fall, the peso could weaken substantially; if the U. economy slows, Mexican growth will suffer. Based on this fundamental picture, trading the Mexican peso should be considered mainly against the dollar, and trading this pair using longer-duration charts is more advisable see Figure 7. JAPANESE YEN Japan is the second largest developed economy in the world. To understand Japan today, one has to have a sense of where the Japanese economy has come from.
In , the Nikkei Index, which is a price-weighted index of the top stocks on the Tokyo exchange, peaked around 39, In , the Nikkei Index fell by 39 per- cent, and in March , it was at the 17, mark, still quite a way from the highs of the previous era. auction prices, and surges in sales of luxury brand bags and jewelry. The Nikkei had tripled in price in the 45 months prior to its peak. Also, metropolitan land prices tripled between and Compare this to the same period growth rate of other nations, shown in Table 7.
The Japanese stagnation had many causes, but a major contributor was the Japanese consumer. Studies e. Household disposable income declined, household wealth declined, and, coupled with uncertainty about the future, the result was low confidence in prospects of strong growth. Once the forex trader appreciates what the era of stagnation was like in Japan, he or she will have a greater understanding of why Japan today is still not on firm footing of renewed growth.
For example, household disposable income had a growth rate of only 0. Household wealth declined by an average 0. Interestingly enough, there is data showing that the proportion of people saving for old age rose from The data from Japan underscores the importance of consumer confidence.
This makes it diffi- cult to stimulate growth through traditional monetary measures such as lowering inter- est rates. Another important characteristic was that prices were actually in deflationary mode, and when prices keep falling there is little incentive for consumers to purchase since they expect cheaper prices.
It was before the emergence of the retail forex market. But the era of stagnation also holds clues as to whether Japan will experience robust, uncertain growth or retreat again into stagnation. Much will depend on the interest rate decisions of the Bank of Japan and business and consumer confidence surveys because the core cause of stagnation was lack of consumer confidence and spending. Therefore, the core of recovery will be a recovery in consumer spending.
But it is not easy to stimulate the Japanese consumer. This means that the forex trader should carefully watch consumer confidence and inflation data coming out of Japan for clues as to whether Japan is overcoming deflationary fears. One such clue oc- curred in March when, for the first time in 16 years, Japanese land prices showed an increase.
Other clues will be necessary before the Japanese inflation rate moves beyond its current 0. Also important is export data on Japan. Stimulating exports becomes a critical factor in determining the ability of the Japanese economy to grow. However, any extreme level of weakening of the yen would help exports. But remember that too weak a yen against, for example, the euro may help Japanese exports but would undermine European exports.
The forex trader should note that where there are beneficiaries to a currency direction, there are also losers. The Japanese finally increased interest rates to 0.
But the interest rate differential between Japan and other nations is still quite steep. Even if the Bank of Japan increases rates to 0. This uncertainty in the Japanese economy creates a great deal of increased rang- ing behavior in the currency. Traders of the yen should almost always expect the unex- pected because economic news from Japan has a built-in greater potential to surprise us. Also important to consider is the growing impact of China on the Japanese prospects for growth.
A weak yen, in contrast, stimulates Japanese export growth. Export growth data therefore becomes very important in affecting sentiment toward the yen. With regard to Japan, perhaps the best word to describe current conditions is un- certain.
The uncertainty whether the Japanese consumer economy is strong enough to grow, combined with the uncertainty of whether Japanese interest rates will rise, dom- inates trading of the yen. The complexities facing the Japanese economy also involve aging workforce and potential shortages in labor. All these factors make trading the yen more challenging than the other currency pairs. CARRY TRADE The Japanese big picture implications are profound. With interest rates at 0. This is where Japanese investors can borrow at extremely low rates and place the capital in bonds of other nations and receive a net gain in interest rates.
New Zealand and Australia have been major beneficia- ries of the carry trade. For example, New Zealand interest rates are almost the highest in the world, at 8. It therefore is a major attraction for the low-interest-rate costs of borrowing yen. A popular way to do this is called the Uridashi bond. The total flow of such bonds is in billions more. These bonds are of short duration, most being two to three years. If the market perceived that Japanese rates will increase, the huge amount of carry trade money outflow could suddenly decline.
On February 27, , this is ex- actly what happened, with a sudden sell-off of the dollar against the yen. This caused simultaneously a sell-off of the Dow Jones Industrial Index as big funds got out of equity positions to cover losses in their previous selling of yen. Even gold sold off during this crisis. Refer back to Figure 1. The big picture on Japan is one that focuses on uncertain growth and relatively low interest rates.
Preliminary edition, November During , the yen had a wide range between its index lows and highs and ended near its lows see Figure 7. Its value largely depends on what happens in the economies and the currencies of the United States and Europe. Refer back to Table 7.
The first is the bet that the interest rate differences between Japan and the rest of the world will continue. An additional strategy is simply to be selling yen until the key fundamentals change and the trade-weighted index reverses toward the mean of The fact that the trader may observe that the yen is weakening, even in the face of good economic news, should not be a surprise. Instead, the trader looking to buy yen would wait for the period of technical strengthening to run its path and then look to go long the yen.
Any surprise news that is positive for the yen can just mean to be prepared for a reversal toward strengthening. The USDJPY pair and the EURJPY pairs are the best trading instruments for the yen. A third strategy is to buy into the longer view that the Japanese economic recovery will continue and that interest rate increases are inevitable.
The trading strategy is to buy the yen sell USDJPY —of course, at the right technical locations, which we discuss in Part II. EURO The euro as a currency is the most complex in the world. The creation of the euro was a tectonic event in world economic news. Other currencies reflect one unified economy, whereas the euro reflects 13 economies comprising the Eurozone: r Belgium r Germany r Greece r Spain r France r Ireland r Italy r Luxembourg r The Netherlands r Austria r Portugal r Slovenia r Finland When combined, the Eurozone economy presents a powerful part of world trade.
Managing to control the multiple economies of the Eurozone makes the mission of the European Central Bank ECB one of the most challenging of all central banks. To succeed, the policies of the ECB need to succeed in all of the member countries.
Keep in mind that this is not easy. Each country has its own domestic policies, and its own TABLE 7. Events in any country can undermine, achieving the average inflation rate that the ECB sets. The forex trader has to expect the unexpected in regard to the euro. We can observe these trading relationships in the Trade- Weighted Index for the euro refer to Table 7.
dollar has the greatest weight, with the British pound and then the yen following. There is more than one trade-weighted index that the trader should be aware of. For example, we also have a fairly new trade- weighted index for the euro called the Dow Jones Euro Currency 5 Index Table 7. The DJEC5 places a greater weight on Japan and less weight on the United Kingdom.
It also includes Australia, which is ignored by the TWI. dollar to euro In any case, trading the euro in the absence of knowledge about which countries the euro trades with will undoubtedly lead to misjudgments about the performance of that currency. The importance of the euro as a currency reflects the fact that its trading partners are global, and as a result the euro as a currency may become less dependent on U.
economic prospects. Traders have many choices of pairs to shape the trade. The EURUSD pair is the most popular, followed by the EURJPY pair and the EURGBP pair. The fundamental picture of euro performance at this point in time is that of sustained strength.
It has been probing trade-weighted highs, which reflects strong economic per- formance in its member countries. The economic growth of the Eurozone has led to interest rate increases by the European Central Bank to contain inflation near a 2 per- cent level. This increase in rates has served to further strengthen the demand for the currency. The ECB raised its benchmark interest rate seven consecutive times, from 2 percent in December to 4. However, the Eurozone also faces a relatively high unemployment rate of nearly 8 percent.
If the currency continues to have strength against a weakening yen, the Eurozone may face a slowdown on exports, of which Japan is an important trading partner Figure 7. The trader should carefully watch the EURJPY pair Figure 7. Fundamental forces will kick in and provide the impetus for a sell-off. BRITISH POUND CABLE Great Britain remains a vigorous part of the global economy.
Consider the fact that over half of the profits coming from the Financial Times and London Stock Exchange FTSE are profits from overseas activity. The British economy is intimately linked to global trading patterns. The TWI of the pound as tracked by iBoxx® see Table 7. This immediately suggests that in trading the pound, the EURGBP and the USDGBP pairs would be the main pairs to trade. We can see in Figure 7. In , it broke the index number of We can also see that the pound is getting close to topping out in global strength, and traders need to watch for a possible probing or trend break in its TWI, as we can see in Figure 7.
The Bank of England BOE , in response to the hot British economy, raised rates in a surprise move in August , and raised rates again to 5. These actions of the BOE show that its policy on raising rates is very sensitive to data and that the central bank is not ideological about it. The key factor for traders to watch will be what the BOE does on interest rates. As indicated in the section on fundamentals, housing continues to be a major com- ponent of decisions of central banks.
But any data that shows a slowing of inflation would translate into a selling of the pound. Beyond the critical components of interest rates and GDP, Great Britain has unique economic challenges due to an increase in migration levels.
The surge in migration can affect inflation and employment levels in a variety of ways, and those who watch and trade the pound must not ignore these aspects of fundamentals and Great Britain.
Sources: Reproduced with kind permission of Land Registry. The house prices data being used is Crown copyright and is reproduced with the permission of Land Registry under delegated authority from the Controller of HMSO. SWISS FRANC The Swiss franc represents an interesting niche among the global floating currencies. Over the years, it has been used as a safe-haven currency because it had a link of convertibility. This link was abandoned in , but the Swiss National Bank SNB , the central bank, still holds 30 percent of its assets, about tons in gold.
Even though it is more than 70 years after the global collapse of the gold standard in , there is still an association of gold and the Swiss franc. In a speech commemorating this anniversary, John Pierre Roth, chairman of the gov- erning board of the SNB, said the following: As I said at the outset, the role of gold has faded over the years. But gold had an afterlife long after it ceased to be relevant in any form for the conduct of mone- tary policy.
The constitutional changes that severed this link took effect in , followed, within the same year, by the correspond- ing changes in the relevant law. The new law no longer includes an obligation on the part of the SNB to redeem banknotes for gold—an obligation which—in practice—had been suspended for decades.
Moreover, it has abolished the mini- mum gold coverage of the banknotes in circulation and the gold parity of the Swiss franc. With these changes, gold finally became a normal and marketable asset for the SNB.
In May , the SNB began to sell part of its gold stock. About 50 percent of the gold once owned by the SNB has now been sold. It reflects the fact that it is embedded in the European economy. From a trade-weighted point of view the most important currency impacting the franc is the euro followed by the U.
dollar see Table 7. Trading this currency offers several alternative strategies. It can be used as a hedge against the EURUSD trade; it can also be used as a method for buying dollars. In fact, in trading the news, the hedge effect of the USDCHF against the EURUSD is employed to implement a trading the news strategy.
The Swiss franc also can be used as an alternative to the yen for those traders looking to construct a carry trade. They would be selling the Swiss franc, which has an associated low interest rate of 2. Finally, by understanding the state of the Swiss econ- omy and evaluating the trade-weighted index charts Figure 7.
com and register. You will then be able to generate the latest TWI charts in a few simple steps. Dollar aining a fundamental understanding of the U. economy is a critical part of being G prepared fundamentally for forex trading. economy is still the largest developed economy in the world, and therefore the U. dollar reflects this im- portance. It is true that we are in a period when the world economy is growing, particularly with the growth of Asia.
This growth may mean that in the coming years, the preeminence of the U. economy will diminish. However, as the U. economy re- mains the critical pivot point of the world economy, forex trading will continue to pay close attention to U.
In particular, the forex trader, in trading a currency pair involving the dollar, is actually making a judgment or a bet about the direction of the U. dollar with regard to the other pair.
This can be a five-minute bet or one that goes substantially longer in duration. But the fundamental question the trader has to answer is whether to be bullish or bearish on the dollar for his next trade. A first approach to getting a picture of the global position of the U. dollar and gauging whether it is strong or weak is by looking at the Trade-Weighted Index TWI. In Figure 8. dollar has declined significantly. It is probing the lows of this index, and if it breaks below 80, the world, through global trading forces, will demonstrate an unprecedented decline in dollar values.
This year chart certainly provides a perspective missing from day-to-day trading, but a forex trader can zoom in on the U. dollar performance by generating a nearer- term chart. For example, in Figure 8. Dollar Index—TWI recent patterns.
The trader can use this chart and generate strategies to prepare for future moves if they occur. FIGURE 8. Source: Board of Governors of the Federal Reserve System. Dollar 71 based on a review of Figure 8. dollar is in a compressed triangle and that it is testing historic support near 80 on the TWI.
Gaining insight into the strength of the U. This index is traded at the NYBOT and is a weighted index. But the USDX is traded by major funds and is considered an important barometer of sentiment regarding the dollar. It can easily be tracked at www.
STRUCTURE OF THE USDX The USDX has its own basket of currencies, just like the TWIs. The question arises of which is better? The answer really depends on how you use it. The USDX is more popular and provides a trader an accepted way to track dollar sen- timent, though it is less accurate from an economic point of view.
When the USDX is showing a dollar decline, it may be exaggerating the real decline from a global trading point of view. The USDX chart provides a good way of checking dollar sentiment. It should be clear that there are many ways to evaluate the dollar. In fact, new mea- sures are always being introduced. Citigroup recently introduced its own dollar index called the Citigroup Flow-Weighted Index.
This index scrutinizes international capital flows, which have become an important influence on forex. Dollar Index Currency Weight European euro 0. Morgan Dollar Index, which looks at the dollar in terms of a basket of 18 curren- cies. The bottom line is that the forex trader has now an improved ability to answer the question of how well the dollar is doing in terms of its fundamentals by looking at the different TWIs of the dollar. FOREIGN DEBT AND WHO BUYS U. ASSETS One of the fundamental variables that affect sentiment regarding the U.
dollar is the fact that as a nation the United States has huge foreign debt. For example, economist David Levy said recently: The current account deficit measures the difference between what U. residents spend abroad and what they earn abroad in a year.
It now stands at almost six percent of GDP; total net foreign liabilities are approaching a quarter of GDP. Sudden unwillingness by investors abroad to continue adding to their already large dollar assets, in this scenario, would set off a panic, causing the dollar to tank, interest rates to skyrocket, and the U. economy to descend into crisis, dragging the rest of the world down with it www.
Another way to look at the current account deficit is that it reflects the excess of im- ports over exports. The question is: Why is there a current account deficit in the United States, and why do nations such as China have a current account surplus?
The answer is that the fundamental personality of the U. The fear is that if foreign investors of U. Treasury notes suddenly became unwilling to buy these notes, the U. economy would suffer. Here is what happened in Foreign ownership of U. Treasury securities has often been the subject of con- siderable public debate. Discussion of this issue arises particularly at times of uncertainty about either the outlook for the exchange value of the dollar or the need for cash in countries holding large stocks of Treasury assets.
In June of , for example, there was a flurry of activity in the U. financial markets when the Prime Minister of Japan, Ryutaro Hashimoto, suggested that Japan might find it necessary to sell some of its large Treasury holdings. On the day following Mr. Dollar 73 falloff on October 19, financial markets to sudden decisions by foreign holders of U. debt to undertake large-scale sales of their dollar assets.
Laurence H. pdf The U. Trea- sury Securities www. The fear that someday foreign own- ership of U. Treasury securities will stop and cause interest rates to increase and destabilize the U. The trader will find that this fear continues to resurface in newspaper headlines and will likely become part of the U. national political dialogue. When the U. Treasury report comes out, it can move the forex market.
securities see Table 8. From a fundamental view, this is supportive of the dollar. We can see that the Organization of Petroleum Exporting Countries OPEC accumulates dollar surpluses from its petrodollars.
It also purchased more U. Monitoring the levels of foreign owners of U. securities is an important part of sensing the true dollar sentiment in the world. Forex dollar bulls can point to the fact that essentially a consistent stream of buyers of U. treasuries has provided a floor against a steep and quick fall of the U. Major Foreign Holders of Treasury TABLE 8. Economists are in agreement that the effect of foreign purchasers of U.
Treasury securities is to lower interest rates. Without such purchases, U. rates might be nearly 1 percent more. Here is how analysts at the U. Treasury Department portrayed risks to the United States related to foreign ownership of U. r The trade balance has been weaker.
r Econometric evidence suggests that recent heavy central bank buying has helped keep interest rates low. investors would increase exposure to foreign securities. r A decline in the role of the dollar, were it to occur, would likely be gradual.
r Central banks are very conservative by nature. r The institutional structure of global trade payment system would change gradu- ally. and thus does not present a risk of a sharp or destabilizing financial market event www. In the long run, evidence exists that there is a trend toward diversification of foreign holders away from dollar assets.
As other economies grow, the incentives to reallocate reserves away from U. dollar assets to more local assets will rise. Even rumors of such diversification lead to selling U. dollars in the market by traders who do not want to risk holding dollars. This has an effect of weakening support for the dollar. Treasury Securities Go towww. txt and answer these questions: r Has there been a change in the trend of foreign holders of U.
Treasury securities? r When is the next Treasury International Capital System report coming out? The Internet provides unprecedented access T to information and data—perhaps too much information. A good technique to use that provides an efficient way to pull information out of the World Wide Web is to use the search engines and input the right terms.
For example, as the trader prepares to evaluate a currency to trade, he or she should also scan the latest news. Here is how to do it: 1. Go to Google, click on the News link and then click on Sort by Date. Input search terms U. dollar, Australian economy, etc. For example, if you input the term Australian interest rates, the results will quickly point to the latest article on it.
Using Google or any other search engine effectively will depend on which terms are entered. The trader should enter a variety of terms to maximize the items retrieved. Here are some useful terms to start with: U.
dollar U. economy U. interest rates Bloomberg on U. German interest rates Bernanke Trichet Zhou Xiaochuan Bank of China Fukui Australian interest rates Australian economy Canadian economy Canadian interest rates Governor Dodge Bank of Japan The idea is to search for the latest analysis while you are scanning the charts, which will help you gain an understanding of what forces are moving the charts while you trading.
When you first begin trading, the focus tends to be on technique and tactics because learning how to put on the trades and how to read the charts is the most important task at hand. But as a forex trader develops an understanding of the fundamentals, he or she will eventually ask the following two questions: 1. What currency pairs should I be trading?
What direction is my next trade? It is helpful to be able to group currencies by their fundamental personalities. We can see that some currencies are stronger than others and that some currencies are fun- damentally at extremes; those groups become more interesting to trade.
A fundamental view leads to the understanding that the major causes of change in the relative value of currencies are real or perceived changes in interest rates, inflation, or economic growth between their economies.
The relationship between fundamentals and forex prices is not a direct relationship; rather, it is more akin to fuzzy logic or a chemistry of forex. By forming a fundamental view of currencies, the trader is able to get in line with the powerful economic forces that currencies ultimately reflect. To guide traders in conducting their own fundamental analysis, they need to have their own fundamental forex checklist and action plan.
The purpose of the fundamental forex checklist is to make sure you have the information to make some trade strategy decisions. Fundamental Forex Checklist and Action Plan 1. Scan and list current global data on gross domestic product GDP , interest rates, and inflation levels. Scan price patterns in commodities such as oil, gold, copper. Review the Trade-Weighted Index TWI of each currency to determine if any are probing key support or resistance.
Check the U. Dollar Index USDX at www. com and compare it to the TWI of the U. Scan global interest rates and try to group currencies by: a. Countries expected to raise rates b. Countries expected to keep rates the same c. Countries expected to lower rates 6. Choose which currency pairs to trade. Choose the preferred direction of your next trade.
If you do not have a preferred direction, that means you are choosing to trade in either direction. Watch the calendar for economic releases. Send it to learn4x earthlink.
net will be reviewed, and you will receive advice on how to improve it. The central bank has indicated 1 a bias toward increasing interest rates; 2 a neutral stance on interest rates; 3 concern on slowdown of the economy. The Trade-Weighted Index has shown a trend up or down. The biggest risk factor for this currency pair is: 1. Unexpected rise in inﬂation 2. Further slowdown in housing 3. Direction of oil prices, etc. Technical analysis supplies the tools for answering that question, but there is no single answer.
There is no single technical indicator that can be exclusively relied on to produce winning outcomes, because the markets are too complex.
No one, to date, has produced a consistently reliable technical trading system for any market, let alone forex. This is because technical indicators can never capture all of the vari- ables that influence price movements. Yet none can replace the seasoned experienced trader.
The reason should be obvious—technical analysis provides a snapshot of market moves that have already occurred. The resulting snapshot is a picture that is always lagging and limited in reso- lution. In contrast, the smart trader has evolved a successful mixture of analytical tools that sense repeatable patterns in the market. Whatever analysis techniques are used, the single most important question that the forex trader has to ask and answer is: Where is my next trade?
By asking this question, the trader prioritizes information and analysis and separates what is useful from what is not. For example, the forex industry is filled with a great deal of information flow. We might even call it information overload. Traders have numerous chat rooms to visit; there are a number of news feeds pushing the latest headlines to the trader.
Blogs have added to the noise as well. The challenge is to pull the information that helps shape your next trade. How to shape your next trade is the goal of Part II of this book. Beginners to forex do not even know what they need to know.
Trades are put on without a plan, and beginning trades are really trial-and-error experiments. At this early stage, the exposure to quick and large losses usually wipes out the trader within the first month of trading. The second stage of the evolution of a forex trader is the discovery of indicators and technical analysis.
At this stage, the trader tends to use too many indicators. The trading results are not much better, but this stage is characterized by hunting trades. The trader overtrades due to a desire to put on trades as often as possible.
The final stage in the evolution of a forex trader occurs when the trader has sharp- ened his tools and has acquired an ability to let the market come to him. This is achieved when knowledge and experience combine. While the biblical adage that there is no wis- dom without pain still rings true, much of the pain that new traders experience in unnec- essary losses can be avoided. The best traders in the world lose perhaps 40 percent of the time but are still able to become profitable.
How does one evolve to his or her level of maximum forex competence? While ev- eryone cannot become a master trader, everyone has the capability of raising their level of competence. Competence is the ability to apply forex knowledge with consistently profitable results.
Therefore, the purpose of technical analysis is to help the trader shape a trade that offers a high probable profit within acceptable levels of risk. The process of becoming competent in forex trading started with understanding what forces move forex prices. It continues with understanding how to map the market. These steps involve finding support and resistance, trend lines, and assessing where the price is in relationship to these geometric points.
This question is quite basic but it involves many levels of analysis. Understanding the location of the currency pair is a foundational beginning of technical analysis and will reveal a great deal of information that a trader can use in formulating trading strategy. But how do we know where to look? The basic technical measurement of horizontal support and resistance provides the ground floor of technical analysis.
Whenever you look at a currency pair, you have to ask where support is and where resistance is. The answers provide the first mapping of the market.
Support is where the price stops falling, and resistance is where it stops rising. The process for locating support and resistance is fairly straightforward.
Figure Those lines that form floors and ceilings are outer support and resistance containing the price action within a range.
Those lines that are inside these larger lines are inner support and resistance. What is most significant about horizontal support and resistance lines is that they are not lagging. When price establishes support or resistance, the market recognizes that location as a zone or hurdle that has to be overcome.
The immediate future price movements need to probe and penetrate a support or resistance line. One of the first principles of trading forex is to locate a trade near support or resistance. Once we know where horizontal support and resistance are, we need to also deter- mine the strength of that support and resistance. In Figure dollar EURUSD held above it. In contrast, the resistance levels show only one test of the previous high. The trader can conclude that there is greater strength on the support side at 1.
If the price moved toward the previ- ous high 1. such as monthly and weekly resistance and support are more robust. After all, a great deal of money has had the chance to go through those levels but did not.
In constructing support and resistance lines, the trader needs to realize that there is a degree of judgment. Some of the candlewicks are penetrating the lines. These days, this price chart is without a doubt one the most popular amongst traders all over the world.
Much like the OHLC bar chart see below , candlestick charts provide low, high, open and close values for a predetermined time frame. Live forex traders love this chart due to its visual appearance and the range of price action patterns utilised. This allows you to gain a better understanding of how live trading works before you take any big financial risks in the market. As the title suggests, this one is a bar chart, and each time frame a trader is looking at will be displayed as a bar.
In other words, if you are viewing a daily chart you will see that every bar equates to a full trading day. With this price chart, traders are able to establish who is controlling the market, whether it be sellers or buyers.
OHLC analysis was the starting block for the creation of the ever-popular candlestick charts please further down. It is a great tool for looking at the bigger picture when it comes to trends. The line chart arranges the close prices at the end of that time frame; so in this case, at the end of the day, the line will connect the closing price of that day. In this section of our forex trading PDF, we are going to talk about the different ways in which you can sell and buy a forex position as well as things to look out for.
When it comes to forex trading you can trade both short and long, but always make sure you have a good understanding of forex trading before embarking on trades.
After all, forex trading can be a bit complex to begin with, especially when mixing long and short trades. In a nutshell, going long is usually a term used for buying. So, when traders expect the price of an asset to rise, they will go long. When forex traders expect the price of an asset to fall, they will go short.
This means benefiting from buying at a lesser value. To achieve this, you simply need to place a sell order. The current exchange rate of a forex pair is always based on market forces. This will change on a second-by-second basis. As we noted earlier, you also need to take the spread into account, so there will always be a slight variation in pricing.
For instance, if you exchange 1 USD for 17 ZAR, the sale and purchase price offered by your forex broker will be either side of that figure. The currency pairs with the most notable supply and demand attached to them will be considered the most liquid in the forex market. The supply and demand aspect is thanks to the investment of importers, exporters, banks and traders — to name a few.
The most liquid currency pairs are therefore the ones in high demand. When you feel you are ready to take the plunge and begin live trading, you need to select a forex trading system.
There is a vast amount of trading strategies for you to pick from. This is because investors, speculators, corporations and banks have been trading for decades. In this part of the forex trading PDF, we are going to explain a few of the strategies available to you. If you want to buy and sell currency pairs from the comfort of your home or even via your mobile device , you will need to use a trading platform.
Otherwise referred to as a forex broker, there are literally hundreds of trading platforms active in the online space. This makes it extremely difficult to know which broker to sign up with. In the below sections of our forex trading PDF, we explain some of the considerations that you need to make.
You should also look out for analysis tools available to you. In some cases, this might be embedded, while some offer tools such as technical analysis and fundamental analysis. This is because it will save you a lot of leg work having to move between different sites and sources of information.
Some of the fastest and easiest trading platforms are MetaTrader 5 MT5 and MetaTrader 4 MT4. Crucially, both MT4 and MT5 are fast and receptive trading platforms, both providing live market data and access to sophisticated charts. It is essential before you begin trading seriously that you fully trust the trading platform you intend on using. This is especially the case if you intend on using a scalping strategy, for example.
However, if you like to trade, it is vital for your peace of mind and your finances that you are fully confident with the fast execution of data transfer.
This is also the case with the precision of quoted prices, and the speed of order processing. All of these things are going to help you to have a successful forex trading experience. To enable you to make the most of new opportunities, the ideal forex broker will be available to you 24 hours a day and 7 days a week, in line with the forex market opening hours. To save you from having to request that your broker takes action for you, your forex broker should enable you to manage your account and your trades separately.
By doing this, you will be in a much better position to quickly react to any shifts in the market, and hopefully, make the most of potential opportunities. This will enable you to gain better control over any open positions as and when they arise. It is important to ensure that your forex broker of choice is a reputable company, who will ensure that your personal information and trading funds are fully protected and backed up.
Segregation is frequently used amongst forex brokers as a way to separate your funds from the funds of the company i. their daily costs, debts and running costs. So, no matter what happens to the forex broker, your money is safe and segregated.
If you find that a forex broker is unable to do this, we would suggest you find a better broker as it is standard practice these days. All of the brokers listed towards the end of this forex trading PDF are regulated by at least one reputable licensing body. In terms of getting set up as an online forex trader, the steps remain constant regardless of which broker you decide to join. Below we list some of the steps that you will need to take. In order to open an account, you will need to enter some personal information.
Standard details requested by the broker will be things like your name, residential address, and contact details. Some brokers will also require your tax status and will ask you to provide more financial details such as employment status, net worth and any regular income.
In this instance, you will usually need to answer some multiple-choice questions based on your experience. This is usually a fairly simple process.
Known as KYC in the industry Know Your Customer , this simply means that the forex broker is going to need you to prove who you are. Some brokers will verify this using scanned copies of documentation. Now you need to select your payment method of choice usually from a drop-down list. Bear in mind that how long this takes to go into your trading account will largely depend on the payment method — so always check this before parting with your cash.
Some brokers even support e-wallets like PayPal and Skrill. After reading our forex trading PDF you should now be feeling confident enough to begin trading. However, we do recommend that you always try out a free forex trading demo first. This will allow you to test out your newly formed trading strategies before risking your own capital.
In the next section of our forex trading PDF, we explore some of the more important technical indicators and market insights used by seasoned traders.
First invented by Richard Donchian, the donchian channels can be adapted as you like, in terms of parameters. Should you choose to view a day breakdown, for example, the indicator will be created by taking the lowest low, and the highest high of that period so in this example 30 periods.
When observing the moving average on a donchian channel you can look at averages stretching from 25 days to the last days. The direction which is permitted is determined by the direction of the short-term moving average. With this in mind, you should think about opening one of the following two positions:. You will need to sell your pair in order to exit your trade if you open a long position and visa-versa.
This is another commonly used forex indicator. The simple moving average aka SMA operates at a slower rate than the present market price known as a lagging indicator. Furthermore, it uses a lot of historical price data. In fact, more so than most other strategies. A good indication that the latest price is higher than the older price is when the long-term moving average is below the short-term moving average.
This could be considered a buy signal due to an upward trend in the market. In the opposite scenario when the long-term moving average is higher than the short-term moving average, this of course points towards a sell signal due to a downward trend. Moving averages are usually used as evidence of an overall trend, rather than purely forex trading signals. Of course, this is a great way to make your breakout signals much more productive.
If you are alerted to a sell signal, this indicates that the short-term moving average is below that of the long-term moving average, so you might want to place a sell order. However, if you are given a signal to buy, this usually means that the short-term moving average is higher than that of the long-term moving average. Using breaks as trading signals, the breakout is considered a long-term strategy. The breakout itself occurs when the market goes further than these consolidation limits — whether that be lower or higher.
As such, a breakout must take place whenever a new trend occurs. By looking at breaks, you will have a good indication of whether or not a new trend has begun.
In this case, you might want to use a stop-loss order to give you a better chance of avoiding a substantial loss. As glamorous as a career in forex trading might sound, there are a number of risks that you need to take into account.
In the below sections of our forex trading PDF, we explore these possible risks in more detail. The transaction risk is in relation to the exchange rate and any time zone differences. This means there is a chance that at some point between the beginning and end of a contract that the exchange rates could be subject to change.
The risk of this happening elevates with the more time that passes between entering a contract and settling the same contract. This generally leads to investors withdrawing investments, and as a result, your return will be lower. The good news is that when a currency rate is on the rise, chances are that the respective currency will be stronger. When this does happen, your returns could be higher. This is because seasoned investors like to gain exposure to stronger currencies.
The higher your leverage is, the higher your losses or benefits will be. Of course, this means leverage can affect your trading in a positive or negative way — depending on which way it goes. The final part of our forex trading PDF is to explore which brokers are popular with both newbie and seasoned traders.
Each of the forex trading platforms listed below has been pre-vetted, meaning that you can be confident they tick most boxed. This means that each platform is regulated, offers heaps of forex pairs, has low commissions and fees, and supports several payment methods. AvaTrade is an established broker that offers thousands of financial instruments. On top of stocks, indices, commodities, and cryptocurrencies all via CFDs , you can also trade heaps of forex pairs.
There are no trading commissions to pay, and spreads are very competitive. You can either trade via the AvaTrade web-platform, or via popular third-party provider MT4. The platform is heavily regulated, with several licenses under its belt. com is an FCA, CySEC, ASIC, and NBRB-regulated online broker that offers heaps of financial instruments.
You should consider whether you can afford to take the high risk of losing your money. Want to become a Forex Trading expert? Well, this might be your lucky day!!? We have finally decided to put all of our experience and knowledge into this Forex Pdf. This Forex Trading PDF is written in such a way that even complete beginners can understand it and learn from it.
In other words, we have read tons of Forex books, opened and closed thousands of trades; have filtered out? all the needed basics for beginner traders, and simplified them. So all you have to do is to take this FREE knowledge and start your online currency trading journey! TOP 3 Forex strategies that actually work? TOP 6 market movers, that create the most significant opportunities for profits? The best times for trading Currencies online? Learn how to read charts? Tips and warnings when using leverage?
Learn whats the difference between Fundamental and Technical Analysis? Information is gold and we believe the more you have, the more you should share. That is why the only thing we ask you to do if you like what you have read is to share this PDF book with your friends and family. If it helped you, it can help them as well. Download this FREE Forex Trading pdf. Read right away or while drinking your morning coffee. PS This Forex PDF is dynamically evolving, what does it mean for You?
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Web18/8/ · Forex Trading for Beginners PDF South Africa. Forex brokers have to be registered and licensed by Financial Sector Conduct Authority (FSCA) in order to operate Web13/8/ · Forex trading pdf is an online guide that provides foreign exchange (forex) traders with the necessary tools to trade successfully in the forex market. Forex trading WebForex is a decentralized international market of currencies that operates worldwide. It is also the conversion of these currencies. It is one of the most active markets that exist Web28/10/ · Forex Trading PDF for Beginners. Forex trading is one of the most exciting and lucrative investment opportunities available today. With so many benefits to ... read more
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