Archive for the ‘FOREX’ Category

The strong dollar

Friday, 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 demise of the US dollar

Thursday, 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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Dollar weakness persists

Monday, June 1st, 2009

As mentioned in my previous post about the dollar, the current financial theme in the Forex market is dollar weakness.

As most bad economic news have already been priced into financial markets, and as these markets were created to anticipate, or speculate depending on whom you ask, the bullish market is continuing full steam at the start of June. The Dow Jones is up 211.11 points today.

The idea is that with so much Government intervention and liquidity creation by Central Banks globally, low interest rates and asset prices at much more affordable levels than they used to be, all is set for the next bull market.

This is not exactly a new bull market, but rather a current bull market as it started nearly three months ago. Only time will tell how powerful this rally is, but for now the bulls are dictating the direction of financial markets, with many new 6 months highs or lows reached today.

Rallying stock and bond markets, lower rates and liquidity injections make the dollar less attractive as an asset and this is the reason why a corollary of the current financial paradigm is dollar weakness.

Today’s rally was fueled by numbers showing that the US manufacturing sector was contracting at the lowest pace in recent history in addition to indications that commodity demand was strong in Asia.

The euro broke 1.42 in European time, to settle later around 141.60. The dollar was weak across the board and reached new 6 months intraday lows against most other currencies.

Based on the momentum theory, I forecast further dollar weakness in the near term.

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Euro at a 2009 High on Dollar

Saturday, May 23rd, 2009

Since the end of 2008, the Euro has traded in a range 1.25-1.40, moving back and forth.

In the pas few weeks, the Euro has rallied steadily and crossed 1.40 for the first time in 2009. What is also apparent is the correlation with the rally of the U.S. stock market.

The U.S. market has been rallying smoothly (with lower volatility) as of late, and for now momentum players are ruling the Euro. This is a standard type of trade with a mini trend started from a strong low (as the recent low is stronger than previous lows), plus the possibility to test a 6-month and a 9-month ranges, and to go all the way to the next magnet price of 1.50.

With respect to fundamental news, one reason for the rally is the recent decision by Standard & Poor’s to take a negative outlook on the triple-A rating of the U.K. This led to the belief that the triple-A rating of the U.S.A. could or should also be put on the same watch list.

Between you and me, this is ludicrous, as there is no better credit in the World than the U.S. Government. This is why it is called risk-free rate in Economics and Finance classes. Downgrading such rating is totally meaningless, as it just means all other credits should be shifted down as well. So this sounds more like an excuse to justify the rally than anything else, and confirms the momentum play theory.

In the other main currency pair, the Yen has also being very strong lately, confirming the scenario of overall medium-term U.S. dollar weakness, even though it corrected by late Friday. The dollar has also been weak versus the British Pound and the Swiss franc.

How is this dollar weakness playing in the bigger picture? For many months, part of the financial and forex business community has been concerned with the massive influx of liquidity created by World Central Banks, especially the Federal Reserve.

Printing money in times of crisis is not a new medicine, but the Obama’s administration is using it like there is no tomorrow. Creating money has always led to inflation since the first King of Antiquity started it. Only the future will tell us if this time is a different time. Or if this time there are strong enough counter forces such as a globalization induced deflationary wave to eradicate this mounting inflation.

For now, most economic indicators show inflation insouciance, such as the spread between the yield on the 10-year inflation-protected Treasury and the regular 10-year Treasury, which suggests inflation at 1.78%. But a number of smart money and well informed investors have been piling into Gold this year, betting that inflation will pop its ugly head at some point.

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What is the most stable currency vs. US dollar?

Wednesday, April 22nd, 2009

Do you know what the most stable currency versus the USD is, in the past one year, five year or twenty years?

Of course if you are a currency trader or if you are from that country, it is easy for you to answer. It is a currency which has almost always stayed within a 1% band versus the greenback in the past 20 years.

It is the Hong Kong dollar.

Before I start, note that the Hong Kong Dollar (HKD) dollar is the currency of Hong Kong which is part of China, whilst the Chinese Yuan or Renminbi (RMB) is the currency of mainland China. They do not have the same value (but they are close) and do not follow the same fluctuations.

The HKD’s target rate set by the Hong Kong Monetary Authority has been 7.8 HKD/USD since 1983. And since then, this “pegged rate” has almost never moved away by more than a percent; very rarely was the rate below 7.72. At the time of writing, it is at 7.75. It is always less than 7.8, usually around 7.77.

So who cares?

I care and I hope you too if you are still reading. The point is that if you are here you must be interested in currencies. And what is so special about all pegs is that they are made to be broken. An unbroken peg for 26 years is certainly almost a miracle.

Hong Kong is a relatively small country. It is “bigger” now, indeed it is part of China, but in 1983 it was small and it was not on such friendly terms with its big brother in the North as it is now. No other country, small or big, has been able to maintain a USD peg that long. The Singapore dollar also had a loose peg, but it has been shaken by wild financial crises more than once.

Hong Kong also faced financial crises, and not just the recent one. Do you remember the so-called Asian financial crisis in 1997? Then all the currencies from the “Asian Dragons” collapsed: Singapore, Taiwan and Korea, but not the 4th Dragon, Hong Kong. Other lesser dragons such as Thailand, Indonesia saw their currencies lose as much as 75% of their value against the US dollar.

Malaysia, like Hong Kong, had pegged its currency. But the consequence of the financial meltdown was truly dramatic as the convertibility of the Malaysian Ringgit was suspended, the Prime Minister took drastic measures and sent his successor to jail under accusations of sodomy.

I take off my hat to the courage and determination of the HKMA during all these years. 1998 was particularly tough, as Soros and other hedge funds took positions against HKD, but it never broke. Certainly Hong Kong has and continues to have large currency reserves and abundant wealth, but without its political firmness, it could not have sustained all these emergencies.

If you are interested in making money using forex trading systems, please cross the HKD/USD pair from your list, as the chart is a near perfect flat line. Thank God, there are many other currencies to play with.

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Hello world!

Friday, April 17th, 2009

Hello to the World Wide Web.

Trading Systems 4 FOREX is born today.

The name of this website makes it very clear what the topic of the content is. Two words. Trading systems and FOREX. FOREX is a well know word which stands for foreign exchange; it means currency exchange or currency trading. This activity is not the oldest profession on earth, usually it is another doctor or something like that…

Seriously as soon as two tribes with different currencies have met, thay had to find a  way to trade and to value their respective currencies with respect to the other. This was the first FOREX trade.  I will write a post about this memorable event later, but my guess is that this occurred in the Middle East about 5000 BC.

Anyway FOREX is a long story. The other word in the domain name is trading systems, two words in fact but they are together to mean one concept used in finance. The definition of a trading system is a quantified systematic method to trade.  A trading system relies on a mathematical equation or equations which dictate how each trade must be executed. Systematically, i.e. the rules are to be followed exactly. Otherwise if human intervention is allowed to make decisions, this is called discretionary trading.

So the primary focus of “tradingsystems4forex” is trading systems applied to forex. But there may be posts purely about FOREX or purely about trading systems.

I have been involved in finance since 1988. And I have intensely focused on trading systems since 1999. I guess I know the FOREX market since at least 1985 when I visited the USA from Europe. I was a student by then and the dollar was very expensive but my friend and me had decided to visit the USA and currency fluctuations were not part of our decision making process. So we had to each live with a total daily budget of $10 for a month. But this is another post as well.

I hope you will enjoy this blog. This will be about one of my main passions, forex trading systems.

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