World Currency Watch: FOREX Market, FOREX Trading BLOG

Why trade currencies?

Let's take a look at why one would want to buy currencies over stocks.

For starters you can earn DAILY interest by buying these currency pairs rather than earning QUARTERLY dividends in the stocks. This is a huge advantage.

 You’ll also enjoy better fills on your orders (even market orders) since the currency market has more volume than all stock markets of the world combined.

 You’ll also enjoy the benefit of the extra leverage. Generally in stocks you can leverage 2 to 1 or 4 to 1. In currencies you can leverage up to 400 to 1 with 100 to 1 being much more common.

 Now this doesn’t mean you should use all of this leverage. You know a Corvette may go 190 miles per hour but it doesn’t mean you should drive that fast. You should obey the speed limits instead.

 Well currencies are the same way. They can be highly leveraged. However, when you increase the leverage to just 10 to 1, you’re greatly increasing the DAILY interest that you receive on your position. Plus, if you’re right in your assessment of where the market is going, you’ll gain far more than you would in the actual stock index that it tracks.

 But remember that leverage is a double edged sword. So if you could gain more, you could lose more too. So make sure you remain reasonable about how much leverage you choose to use.

 Now back to the benefits of trading currencies….

 Remember that you can get into a currency pair (or get out of a currency pair) 24 hours a day Sunday evening through Friday evening. So if you hear of some bad news and the stock market is closed, you can still exit your currency position while the stock traders can only bite their nails and wait for the opening. There are minimally several times a year where this facet could be of great help to you.

 Even though you can buy and sell short in stocks, most of the big money is “long only”. That means that they’re really only making money as stocks go up. But they’re losing their shirts when stocks decline.

 However, in currency pairs one is always going up and the other side of the pair is going down (and vice versa). So it’s no big deal to “go short” in currencies like it is in the stock market.

 Keep all of these “perks” in mind as you consider trading currencies. I think you’ll find that it’s a superior market in many ways. I know I did.

The dollar plummets and "everything and its mama" goes up against it!

Wow! Gold just hit $1,000 an ounce...oil is at $111 a  barrel now. Gasoline futures just rose to an all time high (even though the "summer driving season" hasn't hit yet). Wait until that happens...we'll all be paying more for gas than ever before this summer.

The euro hit an all time high (once again) against the buck at 1.5624.

The yen is at parity with the dollar (USD/JPY = 100)...It may not be long before the USD/CHF pair reaches parity also...the Canadian dollar is still "better than parity" with the greenback.

The U.S. dollar index hit fresh lows at 71.80....

The Singapore dollar just hit fresh highs against the buck...and the list goes on.

Not to mention that food costs are still soaring....foreclosures on homes are still rising...in fact, bank repossessions just doubled last month over the previous month.

So what am I trying to say...it's ugly out there. It's going to get even more ugly in the near term. Economies can't turn around on a dime no matter what "rabbit" the Fed pulls out of its hat.

Unemployment will rise, more firings will take place. So you'd better tighten your seat belt and get ready for the ride.

If you live in the U.S., then you'd better save back some cash and trim the fat financially. You'll be glad you did.

As the U.S. dollar continues to sink in the near term, most anything priced in dollars will become much more expensive: gas, oil, electricity, gold, silver, food, etc.

So watch your spending...because you're going to see many around you in tough times.

The Good news....I've had you positioned into many currencies and pairings that have done great in all of this and will continue to do so.

The carry trades are still in the tank...so the short sells that I've talked about have done rather well (EUR/JPY, GBP/JPY, EUR/CHF, etc.).

The Australian and New Zealand dollars have soared. So you're a part of a knowledgeable crowd that gets to take a lot of the sting out of your downside because you've experienced so much upside that offset the falling buck and higher energy costs.

Sean Hyman
Editor/Trader
www.money-trader.com

The New Zealand dollar is poised to break higher as the "risk appetite" returns to the market!

The New Zealand dollar gets ready to head higher based off of two concepts:

1. The risk appetite has returned to the markets after the U.S. Fed announcement yesterday. The market sees that the U.S. Fed, along with central banks all over the world, are trying "collectively" to crush the credit crunch problem and jump start the financial markets again. The New Zealand dollar is "king of the carry" because it earns such a high interest rate in its country.

2. The U.S. Fed is most likely going to lower rates some 50 to 75 basis points this next week. This will widen the interest rate differential between the two countries in the favor of New Zealand. So this means that NZD/USD traders will soon be earning more daily interest than they have in a long time. That's a huge thing and will put some support under the NZD/USD.

Here's an extra "bonus" thought for you technicians out there. The Hourly chart has a "bullish flag" formation that just formed. So when this pair breaks above the black lines in the chart below, it should head to the higher target minimally (horizontal black line).

New Zealand gets ready to enjoy the stock market
bounce and lower U.S. interest rates.

Sean Hyman
Editor/Trader
www.money-trader.com

EUR/USD reverses quick and hard.....200 pips of gains evaporate within just a few hours!

Wow, what a morning!

The Fed announces a $200 billion dollar deal to help out the financial markets and the Dow bottoms (at least for now) and heads higher...the EUR/USD comes down from almost 1.55 to 1.5280 within just a few hours.

This goes to show you that traders are getting scared while trading this "ultra-high" euro. The reversal was hard and fast this morning. This is much like the reversal we had on Non-Farm Payroll Friday when the U.S. lost 63,000 jobs. The EUR/USD reversed hard then too.

This tells me that we're nearing (if we're not at) a top on the EUR/USD exchange rate for now. If I'm right...then we'll probably get a pull back in the EUR/USD over the upcoming weeks to months which equates to a dollar rally.

At this point, the world "needs" the dollar to be supported at these levels. So far, the U.S. is still the "world's customer". So while I think that the long term dollar problems haven't been solved....in the near term (next 6 months or so) I think we'll finally see that dollar rally that I've been calling for.

It will prpbably be temporal just like the dollar rally in 2005. It will probably be like a "bear market bounce" but I still think we'll have to get one simply because the euro exchange rate is unsustainable for their exporters in Euroland.

Check out the 15 minute chart below and you'll see the swift reversal that I referred to this morning. Click on the chart to enlarge it.

The Euro gets crushed upon the news that the Fed is trying to put a halt to the liquidity issues in the markets.

Sean Hyman
Editor/Trader
www.money-trader.com

The sell off in the markets today is only encouraging those carry trades downward just as I'd said.

Man...the Dow hitting 11.750...oil hitting the $108 area. Wow!

This is all a recipe that is a disaster for the carry trades. EUR/JPY and GBP/JPY has headed lower and is poised to break a very crucial support. When this happens, "look out below" once again.

Check out the EUR/JPY 4 hour chart below. Click on the chart below to enlarge it.

GBP/JPY doesn't look any better. It's ready to head south real fast too. Click on the chart below to enlarge it.

So with Trichet giving "warning signals" with the high euro exchange rate...that's going to encourage the EUR/JPY rate downward.

The shakiness in the financial markets right now is boosting the yen and Swiss franc. This will end up bringing most carry trades down to their knees in the upcoming weeks/months.

So "look out below"! It's going to get ugly and the euro and pound will suffer at the feet of the yen and the Swiss franc.

One quick thing to note.....

I don't want you to get confused between yesterday's post of the AUD/CAD carry trade idea and my thoughts in general on carry trades.

Let me clarify...

Most carry trades are doomed this year because of increased volatility in all financial markets...loads of uncertainty at every turn...new "bombs" are unloaded on the market each day recently....this one has to write off "X" billions of dollars....spreads are widening in the auction market...banks are tightening lending...etc.

This is not the type of market for carry trades in general to do well in. HOWEVER, right now..Australia just stepped into a recent "class of its own" as it hiked rates when the rest of the world is on hold or cutting rates.

Canada will be cutting rates quite a bit more and their dollar has to fall more or their exports are going to get killed.

Therefore, that makes this possibly the only carry trade left standing.

So consider that..the one exception to the rule when I speak of carry trades.

Sean Hyman
Editor/Trader
www.money-trader.com

Things look grim around the world...not good for the carry trades!

The Nikkei busted through the 13,000 level and plummeted over 430 points. The Dow has plunged over 100 points so far and can't seem to hold the 12,000 level.

More jobs were lost as we found out in this morning's Non-Farm Payroll report. There was a loss of over 60,000 jobs this month and last month's loss was revised even worse also (-22,000).

You can see from the chart below that if the Dow doens't close above the 12,000 level...that it's not going to be good. Look out below!!!

The Dow threatens to break (Dow)n!

This is going to push the EUR/JPY carry trade down towards the 153.00 minimally. Check out it's long term yearly chart support line below.

EUR/JPY heads lower towards its yearly support level.

Hold onto your hat. It's not going to be pretty in stocks...but it can be a great thing for the short sellers of these carry trades such as EUR/JPY.

Unfortunately, things will probably worsen for the U.S. economy in the near term which will just encourage stocks and carry trades lower.

Hiring and firing trends don't usually turn around on a dime. Now sometimes they'll have improved months in the midst of a longer downturn...just like a stock chart can have.  But don't be fooled just because we get a favorable payrolls report here or there over the next few months. Even downtrends have "rallies upward". Yet they're still downtrends. Trends in employment are very much the same.

Sean Hyman
Editor/Trader
www.money-trader.com

The Dawn of the latest Carry Trade....

While most of the world's major economies are either lowering interest rates (or about to do so), Australia remains the ONLY country still in "rate hike" mode.

They also have one of the highest interest rates of any industrialized nation 7.25%.

Then I got to thinking....okay, who (on the other hand) is lowering interest rates. Because if we "paired these guys up" it would be the only remaining carry trade left standing.

The Bank of England has been cutting rates. But as of today, they went "on hold". Plus their rates are still far too high to make a good "funding currency".

Then I thought of the U.S....After all, they'll be cutting rates more...but the only problem is that the exchange rate is already at 30 year lows. So if you believe that the USD could fall a lot further, then of course AUD/USD could be your current "carry trade candidate"...and there may be some more room left in that one of course.

However, the Bank of Canada is cutting rates like that of the U.S. ..The only difference is that it is coming off of some of the highest levels we've seen in a number of years. So anyone could see where the CAD could fall quite a bit more as they continue to cut interest rates. Plus their currency has an interest rate of 3.50 currently and they'll probably "chop" that by another 50 basis points in the coming months.

If it's true that the global economy is slowing (and I think it is)....then oil won't remain above $100 a barrel. I'm with Boone Pickens on this one. A global slow down will "cool" the demand that's being placed upon oil right now. As that happens, this oil exporter...Canada..will have their currency fall downward.

We also know that the U.S. will continue to slow down a bit further also in the near term. This will only help bring Canada down (as we're their biggest trading partner). When their "buyer" suffers, they suffer as a "seller" to the U.S.

The ultra high exchange rate of the CAD to the USD is hurting their exports and aiding in their economic slowdown.

So there's a lot of reasons why Canada should "cool off" especially when you're comparing it directly to the economy of Australia.

This makes AUD/CAD the "perfect carry trade" for the moment when ALL others are failing.

Now this trade would need to be bought on pull backs in AUD/CAD. You can see that it started a new upward move...but it's also forming a triangular consolidation on a larger scale.

So buy this pair on pull backs and earn the daily interest. Remember that you'll probably have to only buy 1 mini lot per 10 to 20,000 dollars in your account. Carry trades are long term positions that last for months to years. Therefore they take quite wide swings along the way. Your account balance will have to be able to handle these along the way. So the biggest mistake would be to over-leverage or to have too close of a stop.

A stop would literally have to be below the black triangle pattern forming. So you need a "strong stomach" to handle the wide swings....but the daily interest starts to add up over the coming months and actually helps to make your entry price much lower when you take this into account.

However, the key is to buy it on a good dip and not today.

Click on the weekly, 10 year chart below to enlarge it.

AUD/CAD: The New Carry Trade with the right ingredients to succeed where others (are and will continue to) fail.

Sean Hyman
Editor/Trader
www.money-trader.com

Interest rate decisions are making this a volatile week in Currencyland!

This week Australia has been the one major economy to raise interest rates...this puts them in a class of their own right now.

The Bank of Canada surprisingly cut by 50 basis points when 25 basis points were expecgt. Boy, that new central banker there doesn't mess around. This was his first interest rate decision to make. Wow! What a way to start...

Tonight, New Zealand just kept rates on hold. However, they are the "highest rates in the land" when it comes to the major economies. So their rates are still at an "eye popping" 8.25% which is what was expected.

Then bright and early tomorrow morning we'll get the rate decisions from the U.K. and the Euro Zone. These will come out at 7am EST and 7:45am EST respectively. No changes are expected from either one...but be forewarned...the Bank of England doesn't mind surprising the market and they've had a history of it.

My guess is that they'll keep rates on hold this time...but honestly, with them...only they truly know.

Then on the 18th we'll get the interest rate decision from the U.S. Fed. Many are expecting as much as 75 basis points lopped off. Wow!

If so....when Bernanke takes it down....he takes it down. Of course, he doesn't have much of a choice. He's having to face a very difficult situation. Stagnating growth along with rising inflation (especially food and energy/commodity inflation).

One pair that I'm in right now is dodging all of those land mines...it's AUD/CAD. We already know that the Aussie has raised rates and will again sometime in the future IF inflation continues on its fast pace higher. The Bank of Canada cut more than expected and has already said they may have to cut rates further. (I like this new guy so far. So far he speaks plain English and not in "code" and tells you what he's thinking).

So therefore, over time, the rate differential will work in Australia's favor and away from Canada. It also doesn't hurt that gold is outpacing oil on its way up. Since Australia exports tons of gold and Canada exports "tons" of oil...this works in Aussie's edge over Canada as well....

But it doesn't stop there. Australia has a tighter labor market...more demand placed on it from China..wages are high...so things are good in "the land down under".

Sean Hyman
Editor/Trader
www.money-trader.com

European officials "voice" their concern over the "over-priced" euro.

This post will be a bit "raw" because I want you focus on some European officials commenting on the price of the euro over the last couple of days. Hear what they have said below:

Luxembourg Finance Minister Jean-Claude Juncker gave comments during a radio interview during which he said that the U.S. dollar was not reflecting fundamentals and was undervalued, along with the yen and the yuan.

Furthermore, Juncker added that the euro was overvalued in relation to other currencies.

 
European finance ministers said they are ``increasingly concerned'' the euro's advance to a record against the dollar risks deepening the economic slowdown in the region.

European officials need to be ``vigilant, concerned,'' on the euro exchange rate, Luxembourg Finance Minister Jean-Claude Juncker told reporters as he arrived for a meeting of his European counterparts in Brussels today. ``We're afraid to see the evolution of the exchange rate,'' Belgian Finance Minister Didier Reynders said.

ECB President Jean-Claude Trichet, who initially declined to comment yesterday, turned back to reporters to say that the

U.S.

government's ``strong dollar'' policy is ``very important.''

``Trichet was clearly responding to the currency overshooting,'' said Jacques Cailloux, chief euro-area economist at RBS.

``In the present circumstances we are concerned about excessive exchange-rate moves,'' Juncker told reporters late yesterday. ``I'm starting to be increasingly concerned and vigilant on the euro,'' he said, noting that finance ministers ``have never previously said that we were concerned on the basis of current circumstances.''

French Prime Minister Francois Fillon told

Europe

1 radio today that ``there is a problem of connection between the dollar and the euro.''

``We are going to continue monitoring closely evolutions of exchange rates,'' Juncker said.

Investors expect the ECB to cut rates at least once this year. The implied rate on the Euribor interest-rate futures maturing in December was at 3.51 percent today, down from 4.10 percent at the beginning of the year.

Also, companies like BMW are starting to "feel the heat" from the rising euro as they've remained "unhedged". They'll explain more on their March 18th conference call. But it seems as though they didn't expect such a strong rise since it should be valued around 1.20 according to them. See the comments below.

BMW's current policy is based on the euro's purchasing power parity of about $1.20, meaning the company has run up big losses on currencies by not hedging as the euro <EUR=> has continued to appreciate.

Expect more of this type of talk to continue as the level of pain starts to reach their threshold. This is the "prep work" that will lay the grounds for the ECB to cut rates later on this year.

Once Trichet finally talks about cutting rates, then you'll likely see "short sellers" start to ease into their positions against the euro. Until this "talk" steps up and gets more frequent, you'll likely see the euro remain at elevated levels against the buck.

Sean Hyman
Editor/Trader
www.money-trader.com