There are many ways to trade the forex markets and one of the new popular tools is binary options. Some of the benefits of these financial products are that they are simple to use and you know exactly how much it costs and how much you can win. Also binary options let you to benefit from forecasting short-term fluctuations.

More money for Greece

March 16th, 2012


When will the Greek crisis be over? Who knows? The IMF just agreed to lend 28 billion euros to Greece, approving yesterday a loan of 28 billion euros to Greece. This is a longer credit refundable to longer term, better adapted to the Greek situation.

The Board of Directors of the International Monetary Fund (IMF) agreed yesterday to a proposal from the Executive Director, Christine Lagarde, to consent to a loan of about 28 billion euros, 1.65 billion paid immediately. Of these 28 billion euros, 10 billion are from a first aid program to Athens in May 2010 which was not used and the other 18 billion are new money.

As a result, the IMF contribution to the second program for Greece (EUR 130 billion) is significantly reduced compared to the foreground of 110 billion euros. At the time, the Washington institution’s committed to provide about one-third of the agreed amount. Approximately 20 billion euros that the IMF has already lent must be repaid by Athens between 2013 and 2015. The decline in the Fund’s contribution under the new aid plan is explained perhaps by the reluctance of emerging countries to further support the rich countries of the Old Continent.

Emerging countries, particularly China, have seen a larger role and an increased weight in the decisions of the IMF since the appointment of Christine Lagarde. The new capital will be filled under the Extended Fund Facility (EFF) which agrees to funding plans for a maximum period of four years. Greece will therefore receive funding from the IMF until 2015, while loans from Europe are planned until 2014.

The repayment period of the IMF loans has also been extended to suit the Greek case, and is between four and a half and ten years. “We realized that this country needed time to complete its reforms,” recently ??confided a senior IMF official. The European Commission, meanwhile, announced yesterday in Brussels that it would soon present a growth strategy for Greece.

Horst Reichenbach, who heads the task force appointed by the Commission last July, presented in Athens the significant progress being made to help Greece modernize its public administration. Nine areas have been defined with the use of experts from all Member States. The changes are fast. Horst Reichenbach welcomed the harvest of 946 million euros in back taxes, double the expected amount and a 15% drop in the number of outstanding tax disputes in courts over the last four months.

Let’s hope that the worse is now behind us and that such a small stops to have such an extraordinarily large negative effect of global financial markets.

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The more it changes, the more it is the same

November 5th, 2011

The euro exchange rate is probably the most important FX number to follow. The Yen is not as prominent as it used to be given the relative decline of the Japanese economy. The Reminbi will certainly become the leading currency but we are not there yet. The British Pound, Swiss Franc or Australian dollar are indeed interesting pieces of the FX puzzle but with a more local flavor. By default this leaves the EUR has the main currency to monitor (unless you think Gold is a currency).

euro
And it is amazing how stable the euro has been in the past few years. If you have a look at the chart of the past five years of data, it is clear that we have a range [1.20-1.60] with an attraction value of 1.40. You can run all statistical tests you wish, but here the eye ball analysis tells a clear story of a mean reverting asset, with a mean around 1.40. The market tested 1.60 in a double top formation, but failed and collapsed steeply from there. A few years later it was time to attempt 1.20 and here again the V-shaped reversal was swift.

The chart shows an oscillation around 1.40 and it seems that for once the PPA is working. PPA in other words parity of purchasing power is a fundamental theory for valuing currencies. It simply says that physical assets, and in particular consumption goods, should have about the same value in various currencies otherwise arbitrage opportunities will arise that will bring back the forex level to a more realistic level. Of course this theory is just a framework for thoughts as currencies have a tendency to derail from it. To take 2 examples from the currencies previously mentioned, the Yuan has beem undervalued for a few decades (based on PPA), while Swiss products and cost of living remain consistently pricey.

The PPA is better illustrated by following ‘The Economist’s Mac Donald Index’ which compiles the value of a Big Mac all over the world. Back to the euro, Western Europe and the USA have many similarities, both are large, stable and developed economies with a lot of commerce and exchange between the two. So when the euro reached 1.60, it seemed like Europeans became undeservingly rich compared to Americans and anyone could fly to New York and have the time of their life. Conversely at 1.20 it was Americans who found themselves with a bargain.

These economies are similar with respect to their modest growth and to their large middle class and retired population. Europeans like to buy retirement homes in Spain or Marocco, but it the euro got too strong their may opt for a nice beach property in Florida. Likewise Americans would love to have a house in Europe if they can afford it. This type of supply demand equilibrium is part of what keeps the euro in check.

The above description was somehow the rosy scenario. Of course this assumes that the euro can survive its internal tensions, after all it is not a real currency issued by a sovereign state, so there is always the risk that it collapses. So far the Greeks have not yet killed the euro, but the battle is not over.

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How to Rate the Top Spread Betting Firms

June 19th, 2011

If you’re at all interested in financial trading (also known as spread betting or spread trading), then there are a number of options you have in terms of finding and opening an account trading on financial markets.

In terms of its position in the investment community, spread betting is still technically classified as gambling because the odds (or the “spread”) is set in the house ‘s favour. However, spread betting is extremely similar to other forms of financial derivative trading such as CFDs and Forex which use spreads to charge commission. Thus, the “gambling” definition of spread betting really is a loose one and people should actively be referring to it as “spread trading” rather than betting which is giving it less respect than it deserves among professional traders in the UK.

Factors for Choosing a Spread Betting Site Tailored to You

With such a large choice of spread betting sites – some with a UK focus and others with a more global touch, you can take certain liberties when choosing a broker which meets you needs.

The most important factor of all is the reputation and history of the site of course. Don’t bother signing up to a broker that isn’t regulated by the FSA (Financial Services Authority). All of the top firms such as Capital Spreads, Tradefair, ProSpreads and CMC Markets will of course be fully regulated. They may even be arms of banks or financial organisations that are also listed on the LSE or AIM (such as the London Capital Group which owns Tradefair Spreads and Capital Spreads).

Other companies, such as IG Index and City Index, have been around for more than 35 years and have offered excellent customer support and garnered recognition in the industry. CityIndex.co.uk for example has constantly added new technology and features to its platform, and even won the “Best Mobile Trading Platform” award at MoneyAM in 2010.

Spreads, Margin Requirements and Range of Markets

The second most important thing will probably be the size of the spreads and the range/competitiveness of markets offered. An experienced trader should want a large selection of financial instrument to trade on. In that case I would recommend CityIndex.co.uk which offers more than 7,000 markets to traders compared to Tradefair which only offers around 2,000.

The size of the spread differs between different markets and platforms, however all that’s important to you is that the tighter the spread the more profitable it is. For example, if you’re trading a commodity such as Gold bullion, then a 4 point spread at IG Index will be much more profitable and give you higher return on your income than a 5 point spread at Capital Spreads.

WorldSpreads actually offers a special “Zero Spreads” promotion to active traders with a Platinum Account. This means that if you deposit more than £5,000 (minimum amount required to open a Platinum Account) then you can open zero point spreads on markets such as the UK 100, DAX, USD/EUR, GPB/JPY and a few others.

Low Margin Requirements (IMR) will also benefit both experience and beginner traders by allowing you to open positions with lower deposits, e.g. having only 10% of your position in your balance.

Education Tools and Technical Charts for Trading and Beginners

The final most important element of choosing a spread betting site is its range of online tools, technical charts and guides for new traders. Each spread betting platform has its own range of online seminars, news alerts, training guides and risk management tools. Your job is to compare what exactly you’ll require in your trading platform and spread betting future and make a choice based on this.

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Euro hesitates against dollar

April 4th, 2011

On Monday the euro hesitated against the dollar in an undecided market, after momentarily climbing to its highest level in five months, as investors anticipate an increase in rates by the European Central Bank (ECB) this week. The euro currency was worth 1.4219 dollars. It climbed in Asian trade to 1.4268, its highest level since November 4, before declining and then rising again. The euro steadied against the Japanese currency to 119.41 yen.

The ECB has hinted that it would use its next meeting on Thursday to raise its key rate to fight against the acceleration of inflation in the euro area. President Jean-Claude Trichet has indicated several times since early March a possible increase in April of the key rate which has been maintained at the very low level of 1% since May 2009, allowing the euro to advance significantly in recent weeks. It seems that market participants are already anticipating a 25 basis point rate by the ECB (an increase in rates makes a currency more attractive as more profitable).

The ECB press conference on Thursday is expected to generate considerable interest from investors, who scrutinize any sign that may indicate that the expected rate increase will mark the beginning of a cycle of tighter monetary policy in the euro area, with a second rate hike by summer. This perspective could instead reinforce concerns over the most indebted countries in the euro area, like Greece, Ireland and Portugal, while the latter is already groaning under very onerous debt markets and suffer from negative growth.

For its part the U.S. currency remained under pressure, despite the encouraging figures of the monthly report on employment in the United States on Friday. The president of the New York branch of the U.S. Federal Reserve said on Friday that the economic recovery in the U.S. remained fragile, with too high an unemployment rate, removing the likely prospect of a rate hike by the Fed. Investors will also monitor the decisions of monetary policy by the Bank of Australia and Bank of England, Tuesday and Thursday respectively, traders expecting a status quo from both institutions. The Australian dollar rose to 1.0417 U.S. dollar on Monday, its highest level since it has been decided to float the currency in 1983.

The British pound rose against the European single currency at 88.15 pence per euro, and against the greenback at 1.6131 dollar. The Swiss currency gained ground against the euro at 1.3116 Swiss francs to one euro, as against the greenback at 0.9225 Swiss francs to the dollar. One ounce of gold finished at 1435.50 dollars at tonight’s auction, also near its highest level. The Chinese currency has in turn yuan finished at 6.5450 per dollar.

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Another $600 billion injected into the system

November 11th, 2010

The dollar continued its rebound in Asia on Wednesday morning on the eve of the opening of the G20 in Seoul. The greenback continues to benefit from the unwinding of some short positions before the summit, which brings a high risk of volatitility. The dollar now trades at 1.3755 / euro between banks.

The G20 meeting comes in the wake of the announcement last week of an additional $600 billion dollars injected in the U.S. financial system by the Federal Reserve. This leads some to say that the U.S. policy of competitive devaluation threatens more than ever the global monetary equilibrium, starting with the German Finance Minister Wolfgang Schäuble, who accused the Fed and its chairman Ben Bernanke of undermining the credibility of U.S. financial policy.

On the eve of the G20 summit on Thursday and Friday in South Korea German Chancellor Angela Merkel said in an interview that the euro should not bear alone the weight of monetary policies designed to maintain some currencies at artificially low levels. “A stable currency like the euro should not bear alone the burden of such adjustments,” she told the German daily Die Welt. This statement appears as a thinly veiled criticism against China and the United States in particular.

The Federal Reserve has raised outraged reactions from Europe especially in Germany by deciding once again to flood the market with liquidity, which could weigh on the dollar and thus harm European exports. “A policy that is based on a currency kept artificially low and the resulting benefits for exports, is shortsighted and undermines all,” said Merkel.

A Chinese official has also recently stepped into the breach to denounce “a shock to the global financial markets”. This is the Chinese Vice Minister of Finance Zhu, who said there will be frank discussions about it at the G20: “The United States must assume its role and responsibilities in the global economy” added the official from China has the merit of clarity.

As for Ben Bernanke, the Fed chief has tried to justify himself by saying that it was vital to global stability that the economy of the United States found some strength. A position criticized even internally as the chairman of the Federal Reserve Bank of Dallas said that he was opposed to this last decision of the U.S. central bank, arguing that the strategy is bad for savers, it will push up commodity prices, add to financial speculation and could prove very costly if interest rates rose suddenly.

One thing certain is that the financial crisis is not over and this G20 summit might be the place of intense debate among the political leaders of the major economies.

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The rise of China and the Yuan

September 13th, 2010

Our strong belief is that China will take over the United States as the dominant power sometime this Century. This is becoming more apparent every day.

Note that in the image of the top of this blog, there is a Chinese woman holding some Renminbis. And you can also see on the left side of the same picture the exchange rate which was 7.31 when the photo was taken. China does not think like America, never did and probably never will. And a perfect example of that is their currencies.

Below is the exchange rate of the Chinese Yuan versus the US dollar for the past twenty years.


chinese-yuan

What is not always obvious when you read some recent newspapers articles talking about the Yuan moving in this or that direction is that for the most part the Yuan is not moving anymore with any significant degree. As they say one image reveals more than one thousand words. So let’s look at this graph.

First the chart makes it obvious that the Yuan has never been a freely floating currency, and it still is not. Whatever the official statements, the exchange rate is very much controlled by Beijing, with an iron hand in a velvet glove.

Long time ago, during the beginning of China’s modernization, the rate was at 5.50 (1992). The rate was even lower earlier (not on the plot). The Yuan was traditionally pegged at 2.46 fifty years ago, but it appreciated to a maximum rate of 1.50 in 1980.

As China opened up, they orchestrated a series of devaluations. The last one appears on the chart in 1994, when the Chinese made the last massive devaluation from 5.50 to 8.50. The rate then almost did not change for over ten years. Going from 1.50 to 8.50 gave a formidable competitive advantage for Chinese exports compared to other Asian or non-Asian nations, an advantage still felt today.

It is only at a much later time when the Han nation had achieved years after years of ten percent growth that they agreed to let the Yuan rise a bit, and it came back to about 6.7 in 2008. But from that point on, it has once more remained inside a tight range. As the picture clearly shows.

The red arrow leads to a zoom of the past 6 months range. So if you only see the range from that scale, it may seem that the exchange rate is moving. But indeed the recent movements are negligible.

The lessons to be learned. China differs from the USA for many reasons, two noteworthy are democracy and floating rates. So as China is rapidly dominating the world due to its economic success, it could very well be the case that the old democratic values from Europe may become vulnerable to a more controlled type of Government.

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The stronger dollar

May 21st, 2010

My last post was titled “the strong dollar”, and there is no better title than “the stronger dollar” for this post. As the dollar has kept on getting stronger in the past few weeks.

After many years watching markets, the only fundamental truth that summarizes how markets move goes as follows: currencies are mean reverting and the extraneous shocks necessary to bring values closer to parity will occur. In other words when a currency is too pricey like the euro used to be, something will happen to make it cheaper like the current Hellenistic crisis.

And what is the best way to assess if a currency is too pricey beyond all sophisticated models created by erudite Doctors in Economics. Simply ask tourists who visit Europe from the USA or vice versa, and they will tell you when the God of Currencies has lost its mind, like when he had the euro at or over 1.50 to the dollar for a long period of time. This was so absurd that Paris was determined to be the most expensive city in the world for the cost of living according to a prominent European magazine.

Yes Paris was ahead of New York, Tokyo or Hong Kong. And given the relative wealth available in the 4 cities in question, this was simply a ludicrous bogus statistic stemming from an exaggerated value of the euro. Now back to a 1.25 FX rate, I bet you Paris is not number one anymore.

So often the highly complex econometric models from Ivy League educated Professors of Economics will equate with what all the talkative taxi drivers of the big cities in the world know from talking to travelers. Assuming such models are correct.

If there is a positive consequence from the Greek debacle, it is to bring the value of European assets back to more a reasonable level, starting with its currency the euro. The purchasing-power parity is what rules currencies at the end of the day and this is getting truer if economic players are given the opportunity to arbitrage geographical locations.

One such PPA model by the OECD said 6 months ago that the euro was 21% overvalued. Nice evaluation and it is now approximately correctly valued versus the green back. Another similar model by the IMF says that the Chinese Yuan is 75% undervalued and we all know this one. This is the reason why China is getting so strong with its cheap exports. And the Greek crisis is given them a new reason not to let their currency appreciate at this point.

USA: 0; Europe: -1; China: +1.

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The strong dollar

February 26th, 2010

It is interesting to see how the FOREX market moves in waves and trends.

Not that long ago everyone was talking and blogging about the weak dollar, the end of America’s economic hegemony and its unsolvable deficit, deflation and the search for a replacement to the greenback.

Just a few months later the dollar has appreciated by 10% and the same bloggers are starting to worry if this dollar strength will have dire consequences. Here this discussion is focused on the USD versus Euro rate, a good summary of dollar strength or weakness.

This is all a matter of perspective. In my mind the EUR fluctuates in a big range [1.20-155] and this is where it belongs. Parity of purchasing power is a concept that traders and short-term investors tend to forget, but this is truly what defines the exchange rate. There are arbitrages from real good markets that guarantee that the dollar cannot stay too strong against the euro for  a prolonged period of time, and vice versa.

This fundamental truth is getting truer and truer and this is what guarantees that PPA theory will have its moment of glory. This is truer because the world is more integrated and arbitrages in real goods are easier and more predominant.

For example retired people in Europe may decide to buy their second home in Spain or in Florida. In the upper middle class this is common and the level of the exchange rate will be a significant determinant in their choice. As flying is easy and cheap, it does not make much difference to fly from Budapest to Barcelona or Miami.

The Internet facilitates the buying of all kinds of products that will be manufactured on the continent with the more favorable exchange rate. If one of the currencies were to diverge too much, natural commerce adjustments will occur that will modify supply demand to reverse the imbalance and the trend.

America and Europe are getting more alike, culturally and commercially, hence their currencies will stay in line for the most part. So expect the EUR to stay within [1.20-1.55] in the foreseeable future. But of course play the small trends and swings for short-term trading profits.

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The strong Yen

November 30th, 2009
Japanese Yen

Japanese Yen

The Japanese recently made a new high, reaching levels unseen since 1995.

As a country depending a lot on finished good exports (Japan has no natural resources to export) since after World War II, the strength or weakness of its currency is a matter of national concern. When the Americans ruled and reorganized Japan in 1945, they created today’s Japanese Yen with a conversion rate of 360 Yen for one dollar.

Last Friday the Nippon currency reached 86.58, a fourteen years low and a long way from the initial rate set by the American. And this is getting closer to making an all time high.

This is bad news for the country which has suffered from deflation for the past decade. This is likely to continue with a stronger Yen making all imports cheaper. This is also bad news for local investors. On one hand the Japanese stock market never likes a strong Yen; on the other hand all financial derivatives based on getting cheap Yen financing including carry trades will suffer from a stronger Yen.

This situation illustrates the eternal debate about the merit and benefit of using a floating currency for a trading country. Japan let its currency floating completely during financial deregulation in the 80′s under pressure from the American. But the Big Brother in the North, China, has not fallen to similar pressure. And their exports are booming but their currency is not that strong.

A large part of China’s recent economic success and rise to the top of commercial leagues can be attributed to the weakness of the Renminbi. The Chinese engineered a massive devaluation of their currency in the 80′s and even though the Yuan is nowadays pegged at 6,83 after its recent appreciation, it is still a long way from its value of 1,50 in 1980.

The bottom line is that the currency policies employed by Japan and China in the past twenty years have been opposite in many respects, helping the gap shrink between these two countries. This simple notion can explain tremendous wealth creation in the Middle Kingdom with simultaneous wealth erosion in the Land of the Rising Sun.

As the Japanese officials are starting to show signs of concern after the latest Yen appreciation, it is going to be interesting to watch this next episode in the saga of Asian currencies.

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The demise of the US dollar

October 29th, 2009

The theme of the weakening dollar is heralded in all news media.

This is nothing new to be honest and this was said years ago, even decades ago, until the dollar strengthened and then weakened ago.

Abandoning the dollar as the main international currency is a topic probably older than most currency traders nowadays. But years after years the dollar remains the main currency for forex trading, real goods trading, commodity trading in particular crude oil, currency reserves, etc. And if you travel and believe me I have traveled, and if you can only carry one currency with you, which one do you think it is going to be? Ok, ok sometimes the euro is more accepted such as in old French colonies in Africa, but this is by far the minority.

So why do people keep on writing thousands of pages and blogs about the demise of the dollar? The short answer I guess is people do not learn. Anyway the slightly longer answer is you need a currency to replace the dollar. It is not going to be the euro, because the euro is still a new currency (ten years old!) and even a large portion of Europeans do not like the euro, and it would be hard to convince the rest of the World to make it the reference currency. Yes one reason they do not like it is that it has induced concealed inflation.

You see, you need one currency to replace the dollar, and that currency has to be strong. The dollar will not be replaced by a smaller currency. Using a basket of currency to replace the dollar will never happen either. Why? Because a basket is not a currency in itself, it is an artificial creation with no relation to a real physical reality. The dollar is the dollar because it is backed by the power of the United States economy and population and army. Three not small backers. Baskets never have and never will be trusted and be able to compete with a true currency. Historically they have never worked. Just take the example of the predecessor of the euro, the ECU. It failed like all baskets, because the weaker elements in the basket make the basket fail.

So the point is only a currency can replace the dollar and it has to be strong. I just explained that the euro is not ready, far from it. What are the other strong currencies. The British Pound and Swiss French are way too small and local currencies to be even considered. The real serious contender is the Japanese Yen, and here again it cannot and will never replace the US dollar. First Japan is less than half the size of the US economy. Japan has no military. The Japanese Yen is not use as a currency for trading, unless one Japanese counterpart is involved in the transaction as buyer or seller.

So here we are, keep on printing pages after pages saying that crude oil will soon be traded in another currency like you have been saying for over ten years, and I am still waiting.

Wait, wait. So that is it? The truth is yes that is it. I hear someone say the Yuan. Please do I need to answer that? It is not even a freely traded currency please.

Summary: the dollar will remain the dominant world currency as long as there is no candidate for its replacement.

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