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In The Currency Jungle

This is a discussion on In The Currency Jungle within the General Discussion forums, part of the Trading Forum category; A Three Dimensional Approach To Forex Trading by Anna Coulling US Dollar Still a safe haven, and likely to remain ...

          
   
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    In The Currency Jungle

    A Three Dimensional Approach To Forex Trading
    by Anna Coulling




    US Dollar
    Still a safe haven, and likely to remain so, although other currencies are starting to nibble away at this
    once traditional role. As forex traders understanding market sentiment towards the US dollar should
    be paramount. Therefore, the dollar index is always the first port of call, and I like to use the FXCM
    version as it gives me a much clearer picture, particularly for intra day trading. All the technical
    analysis techniques covered in this book can be applied to this chart.
    If and until the Fed stop their QE program, the currency is likely to remain weak. In addition the
    currency has now joined the yen as a mainline funding currency for the carry trade. When this starts to
    unwind, then watch out!
    Euro
    Political with a capital P. The problem with the euro is trading it without an opinion. Almost
    impossible, since the currency has been written off so many times, by so many people, that it is very
    difficult to ignore the chatter. The euro, in its present format will go - eventually, but with the Chinese
    reducing their dollars in favour of euros, not just yet! Because it is such a political currency it is
    fiendish to trade with any certainty, and price action is often illogical.
    In many ways the markets are now so inured to bad news in Europe, that as each subsequent crisis
    unfolds, the reactions become less and less volatile. Indeed, a minor crisis is often welcomed as
    ‘good news’! In stark contrast to the US dollar the euro is increasingly seen as a high risk currency.
    When risk is on, them the euro will generally rise.
    Yen
    Safe haven and politics all rolled up in one neat package. The darling of the carry trade and another
    funding currency to match the US dollar. Protected and loved by the Bank of Japan, the yen will
    always come first when any decision has to be made. As interest rates start to rise, watch the yen
    weaken further, and faster, as the carry trade comes into play once again.
    British Pound
    Remember the English breakfast of sausage and egg. The chicken is involved, but the pig is
    committed! The pound is the chicken of Europe, involved but not committed, and long may it continue.
    Mr Reliable could best describe sterling, and despite the recent downgrade from the ratings agency
    (but then who cares about them anyway) a solid currency in every respect. Indeed, respectable sums it
    up, with the financial centre of the world and the Bank of England underpinning this currency. No real
    drivers or major influencing factors, although increasingly seen as a safe haven and an alternative to
    the euro.
    Australian Dollar[/B]
    Another solid and well managed currency, but which catches a cold each time China sneezes.
    Commodities hold the key, and in the last few years, the currency is increasingly seen as a safe haven,
    but with a ‘risk’ label due to the high interest rates and carry trade drivers. Expect to see the currency
    strengthen as interest rates rise globally, with hot money flowing in, provided the Chinese economy
    continues on track.
    Canadian Dollar
    Just as the Australian dollar is linked to its largest trading partner, China, so the Canadian dollar is
    heavily influenced by its next door neighbor, the US. Strength or weakness in the US economy will
    always impact Canada directly and quickly, which can make the USD/CAD a tricky pair to trade. In
    addition, commodities play their part with oil in particular, and if we throw the yen into the mix,
    trying to establish what is driving the currency can be difficult. Nevertheless, another solid currency
    representing a well managed economy. Remember that the weekly oil stats release on a Wednesday,
    will impact the Canadian dollar more than the US dollar, even though the data is released in the US.
    New Zealand Dollar
    In the majors, the preferred currency of the carry trade, with subsequent flows of hot money, although
    in recent years this has become less of an issue, with the interest rate falling below that of the
    Australian dollar. However, once rates start to climb again, watch for buying of the currency,
    particularly against the yen. A great ‘trending’ currency as a result, but when the trend reverses, watch
    out - they can move equally fast in the opposite direction as money flows out again. The Australian
    economy also plays a part, as one of New Zealand’s largest trading partners, and of course
    commodities are in the mix, although soft commodities are more significant. In fact, China has
    recently become New Zealand’s largest export market for dairy based products, such as milk powder,
    butter and cheese. Indeed the NZD came under pressure recently following a problem with milk
    powder exports to China.
    Norwegian Krone
    A very tricky currency to ‘put in a box’ in any well defined way. Norway is certainly stable, and
    extremely wealthy, and in many ways similar to Switzerland in this respect, particularly given its
    huge oil fund. Yet the currency struggles to be accepted as a ‘safe haven’ by investors which is rather
    odd, given its huge current account surplus. Oil, of course, is one of the determining factors for the
    currency, but in a currency whose volumes can be light during the trading day, volatility can be an
    issue. One opportunity on the horizon with the Krone is the prospect of rising interest rates due to the
    housing market which has been booming recently. This may force the Norwegian central bank (Norges
    Bank) to step in and raise interest rates, much against global trends. With rates in Europe falling and a
    possible increase for the Krone, this could see the development of a longer term trend, particularly if
    coupled with any move higher for oil.
    Swiss Franc
    Two words sum up the Swiss franc - ‘safety’ and ‘security’. Over the last few years Switzerland has
    increasingly been seen as another ‘safe haven’ country, under pinned by gold. Unlike Norway,
    overseas investors have been flooding in, and buying the Swiss franc, particularly from Europe. The
    SNB has attempted to weaken the currency several times, but with little effect so far. Swiss interest
    rates reflect those in the rest of the world, so this is not hot money, but simply panic driven flows.
    Gold underpins everything, but watch out if the bank wins the referendum to sell some of its gold
    reserves. This will not be good news for the currency, which could see these same investors use the
    door marked ‘exit’, and move elsewhere.
    South African Rand
    Moving to some of the more exotic currencies which can offer excellent trading returns, but equally
    can be extremely volatile and fast moving. The South African Rand is a case in point and a currency
    influenced by a variety of factors. The first is, of course, commodities and gold, then comes demand
    from China, and finally we have the interest rate differentials. At the current rate of 5% this is
    attractive, but for how much longer? After all, as major currencies start to move back to this level,
    with Australia leading the way, the decision is then between a ‘risk safe haven’ high yield currency vs
    a ‘high risk’ high yield currency.
    The recent weakness in gold has also been a factor, and as with many other countries dependent on
    China, any slowdown in the economy will be reflected directly in the rand. As an exotic currency it is
    extremely volatile with wide spreads. Japanese investors have been increasingly dominant in this
    currency moving into higher yields, underpinned by gold, but with the resurgence in risk, these
    investors are now selling the currency and moving back into ‘risk assets’ in particular Japanese and
    US equities, with the rand being sold as a consequence. As an ‘exotic’ currency, this may not be
    available on regular trading platforms, but can be traded as a future through the CME.
    Mexican Peso
    The Mexican peso is one to watch, as it is poised to become a key currency for forex traders over the
    next few years. If this is not on your list - ADD IT now! The Mexican economy is increasingly seen as
    stable, with a central bank that has managed the financial crisis well, and with the transition almost
    complete from a commodity driven export market to one built on technology, the peso is the one to
    watch. Overseas investors are flooding into the country for all the right reasons, and whilst the
    interest rates are attractive for the ‘hot money’ speculators at 4%, the flows here are manageable, and
    not purely speculative. As a result, the peso has been strengthening against most of the major
    currencies, and once again for investors and longer term speculators, a choice between a volatile
    currency offering slightly higher yields, against a stable currency with marginally lower yields, it is
    really no contest. Expect to see further strength in the peso against the major currencies.
    As with the rand, if this is not available on your trading platform, the CME offer futures and options
    under emerging markets.
    Korean Won
    The VIX of the currency world, which unlike the Japanese yen tends to weaken when the economy is
    weak, and strengthen when demand begins to pick up. Therefore, expect a return to strength once
    global markets begin to emerge from the carnage of the recent crisis. The currency is extremely
    volatile and indeed it is rare to see a candlestick with no wick. Generally they have wicks to both top
    and bottom. Very much a currency for longer term trading based on an analysis of the fundamentals
    and economic cycles initially.
    The Major Currency Pairs
    Having looked at some of the principle currencies, along with some of the more exotic currencies,
    which may become, ‘majors’ of the future, let’s now look at the major currency pairs, followed by
    some of the cross currency pairs, and how these characteristics are reflected.
    EUR/USD
    This may be the most widely traded currency pair in the forex market, but it is one of the most
    difficult. On one side we have a political currency now considered high risk, and on the other we
    have the US dollar, safe haven, yet increasingly manipulated by the FED policies. This pair is always
    promoted by brokers as the one to trade, primarily because of highly competitive spreads. This may
    have been the case a few years ago, but in my view this is no longer a valid argument. It may be very
    liquid, and is generally the pair that has the tightest spreads in the market, but these are about the only
    benefits. This is a pair I rarely consider, and rarely trade. It is a wolf in sheep’s clothing. Billions of
    dollars have been lost by speculators shorting this pair. Each time there is a new crisis in Europe, the
    latest being in Cyprus, the COT report shows the same patterns, with a massive build in short
    positions. The ECB then step in with supporting rhetoric, the storm passes and the euro duly recovers.
    Furthermore, the EUR/USD is a classic example of just how dramatically the forex market has
    changed over the last five years. As I said in the introduction to this book, the rule book has been torn
    up, and this is one of the casualties. Any book on trading forex, written before 2008, would have
    suggested that the FX markets trend strongly, are driven by interest rate differentials, and that the
    EUR/USD was the place to start given the depth of liquidity and strength of the two currencies. None
    of this is true at present. It may change in the future, but not in the short term. So my advice, is to look
    elsewhere, and NOT start here. There are many others pairs to choose from, and the cross currency
    pairs in particular offer increasingly good trading opportunities.
    USD/JPY
    This is another currency pair where we can tear up the rule book. Once upon a time, this pair was
    considered almost impossible to trade, and certainly not a ‘novice’ pair with two ‘safe haven’
    currencies battling for supremacy. Then along came QE, which both central banks have embraced
    with enthusiasm. In the case of the Japanese, rather too enthusiastically as the BOJ prepares to release
    its 9th and most aggressive version yet. The BOJ are desperate to weaken the yen further, and to date
    they have succeeded in grand style, making this one of the ‘no decision’ trades of the year. But
    remember, when global interest rates start moving higher once again, then the yen will be sold even
    more strongly, with any counterbalance effect from the US dollar, only having a muted effect.
    After all, if the carry trade explodes back in the market, which it will, then the yen will be the prime
    candidate once again, with strong trends in this and other yen based pairs. Furthermore, with the yen,
    when risk on appetite is in the ascendancy, then the Japanese will be selling the yen and moving into
    equities, and giving the BOJ a further helping hand. All good news for the Bank of Japan, moving
    forward. In contrast the Federal Reserve’s attempts at QE seem restrained and almost amateurish.
    The message is clear. Ignore the older forex trading books - the ‘old rules’ no longer apply. It is time
    to move away from a single currency pair. Start trading the USD/JPY, but if you prefer to trade the
    euro, then simply move to the EUR/JPY as this correlates extremely closely with the USD/JPY,
    particularly on the hourly, daily and weekly timeframes. This is a positive correlation as you would
    expect.
    GBP/USD
    Cable is in complete contrast to the EUR/USD. Solid steady and reliable, it ticks along like Big Ben,
    rarely volatile and generally predictable, and whilst it does have periods of excitement, the reasons
    are generally clear and self evident. There are no politics with the pound, and it is increasingly seen
    as a safe haven and an alternative to the euro. Before the financial crisis, the GBP/USD and the
    EUR/USD would generally have moved in lockstep together, with both moving higher or lower on US
    dollar strength and weakness. This relationship has long since broken down, and now the two react
    and move independently, with the primary driver for the EUR/USD being politics in Europe, whilst
    for Cable it is the UK economy. The good old British pound keeps plodding along, and despite the
    recent downgrade, confidence in the currency was only temporarily dented, before strength returned.
    This is not an exciting pair to trade, but then trading success is not about excitement, it’s about making
    money. The trading range typically is between 70 and 100 pips per day, and this is the currency which
    tends to set the tone for the London session following the open in Europe and from the overnight in
    Asia.
    If you are a novice or inexperienced trader, I would urge you to consider starting with the GBP/USD.
    AUD/USD
    The Aussie dollar is one of those currency pairs which gets a ‘double boost’ whenever the US dollar
    weakens or strengthens, given its association with commodities, and as result tends to develops
    strong trends. One only has to look back over the last few years and see how the extended bull run in
    commodities has been reflected in the pair. More recently, the pair has been in an extended phase of
    consolidation, with the bullish trend having run out of steam as the commodity super cycle begins to
    slow. China is the biggest influence on this pair. Next the interest rate differential is also playing its
    part, and with an economy that is stable and well managed, providing China does not implode, then
    we can expect to see interest rates rising in Australia thereby increasing the differential between the
    two currencies. Hot money flows should see the pair continue higher in due course. Fundamental
    news has a major influence on the pair with Chinese data leading the way, NOT US data.
    As you might expect the pair correlate positively with the NZD/USD but only on the longer term
    timeframes of weekly and above.
    USD/CAD
    The biggest influence on the USD/CAD is the US, with the pair almost a mirror image of the
    AUD/USD on the longer term charts, and following the longer term cycle in commodities. Oil is the
    predominant commodity so once again a double whammy for the pair, with movements in the US
    dollar reflected in the oil price, as well as the Canadian dollar. As mentioned earlier, the weekly oil
    stats can have a significant impact mid-week, with any draw or build reflected in strength or
    weakness for the currency.
    NZD/USD
    A very similar picture to the AUD/USD pair. A well managed economy which has survived the worst
    of the financial crisis, but once again it is China which influences the pair strongly. Another
    commodity currency and in its relationship with the US dollar, any effect is magnified as commodity
    prices rise and fall with strength or weakness in the US dollar. In addition, with China now taking
    over the number one spot as New Zealand’s primary export market, any bad fundamental news here,
    will instantly impact the currency, along with the Australian dollar. As you would expect correlation
    between the two pairs is relatively strong, particularly over the longer term time frames.
    USD/CHF
    Again, as with the USD/JPY, this is ‘safe haven’ meets ‘safe haven’, but in the case of the Swiss
    franc, underpinned by gold. This is one correlation that still holds good, with the USD/CHF moving
    inversely to the EUR/USD and maintaining this relationship across all the time frames, despite
    repeated interventions by the SNB (Swiss National Bank), which only goes to prove the greater
    power of the market.
    As an aside, some traders believe they have stumbled on a magic hedge, when this relationship is first
    discovered, and that trading long ( or short ) in both provides the ideal ‘safe bet’. I’m afraid this is
    completely wrong. This is simply constructing the EUR/CHF in another way, and using two pairs to
    do it, so an expensive way to trade a cross currency pair!
    Over the longer term charts, the USD/CHF has reflected the strength in commodities, with strong
    buying on safe haven demand also moving the pair lower. However, as economies start to recover,
    and better returns become available elsewhere, then expect to see the Swiss franc being sold, as
    money is moved out of safe haven and into higher yielding assets. Does this mean the euro will
    weaken against the US dollar - to which the answer is yes, provided the correlation continues to hold.
    Further weakness in gold could speed this process along, and indeed if the SNB gets its way and is
    able to sell off some of the gold reserves, this may be the trigger for investors to move elsewhere and
    into higher yielding assets. Moreover, as the current recession comes to an end, with inflationary
    pressure still some way off, demand for gold may fall.
    One other tip with the USD/CHF and EUR/USD correlation. If you are trading the EUR/USD, then
    using volume price analysis is a great way to validate the price action using an ‘associated’ market.
    After all, if the volume and price is confirming the trend higher for one currency pair, then you
    SHOULD be seeing the exact opposite in the other!
    USD/NOK
    Another commodity currency pair with oil again the defining commodity. Again the pair react to the
    twin forces of US dollar price movements, coupled with the associated movements in oil, so a double
    whammy effect. The problem with this pair is that, unlike the others in this list, it is relatively thinly
    traded and therefore can be very volatile. Furthermore, there is little liquidity in the Norwegian bond
    markets. Norway is certainly a safe haven, but to date the krone has failed to attract the inflows of
    currency to establish it in the markets with this tag.
    The key here will be any interest rate changes which are likely to be triggered by the housing bubble.
    The housing bubble has been developing for some time, and this could provide the catalyst with oil
    and the US dollar adding a further boost.
    The Cross Currency Pairs
    As I mentioned at the start of this chapter, the old rules in forex trading have gone, and as result we
    have to adapt and change as well. No longer are the major currency pairs the ‘de facto’ standard for
    us as forex traders. The world has changed and so has the world order of currencies and currency
    pairs. It is indeed ironic that I have suggested that you avoid trading the EUR/USD for the foreseeable
    future. This would have been unthinkable a few years ago.
    Therefore, let me highlight some of the cross currency pairs which I hope you will investigate for
    yourself. I accept the spreads will be wider, and yes you may have to take a slightly longer term view
    in order to make the maths work in your favour, but nevertheless, you can find some great trading
    opportunities in these pairs. As a fellow trader once said: ‘let the cross be your boss’. You just have
    to lift up your eyes, your time horizon and your perspective a little - not a lot, just a little!
    In addition there is a further, perhaps self evident reason, which is this - you will no longer be at the
    mercy of the US dollar. Naturally, the market will always be dollar centric, but its effect on these
    pairs will simply be indirect. Here are my suggestions.
    EUR/GBP
    Move the euro to a different pair and its behavior changes almost completely. It’s as though the
    influence of the slow and measured UK pound brings the political upstart into line. The pair moves in
    a controlled way, is rarely volatile, and driven more by genuine market sentiment and fundamental
    news, than by the eternal politics that dominates the price action in the major. Here is a pair of the old
    school, the way forex markets ‘used to be’. Price action swings along at an even pace, supported by
    the economic releases and the technical picture. In many ways this is a great currency pair for
    ‘learner traders’.
    It will never set the world on fire, but neither will it frighten you to death. It is a currency pair that
    many traders ignore, but is an excellent one, in my humble opinion, for gauging the TRUE market
    sentiment for the euro, devoid of politics, and also disassociated from the US dollar. So a clear view
    of the euro in every sense of the word. It is not a pair that will make you a fortune quickly, but it is a
    reliable and solid currency pair that behaves in the way currency pairs used to behave. You will make
    money with it, as it is predictable and follows the ‘rules’, and I say hurrah for that!
    The EUR/GBP has a very strong correlation with the GBP/CHF pair across all time frames, with an
    inverse relationship.
    AUD/JPY
    I’ve chosen the AUD/JPY pair here, but to be honest we could have chosen any of the yen currency
    pairs, as they all correlate very closely, driven by the Japanese yen which dominates the pairs.
    Therefore, get the direction for the yen correct, and you are then spoilt for choice. Furthermore, with
    the FXCM yen index, you have the perfect chart to reveal yen strength and weakness against the four
    major currencies, so use it!
    The reason I selected the AUD/JPY is simple - it is a proxy pair for risk, and is the currency pair
    which should be checked each day for an assessment of market mood and sentiment. The same could
    be said for the EUR/JPY which used to have a very strong positive correlation with the S&P500, but I
    prefer the AUD/JPY. Here we have a commodity currency with a high yield, balanced by the counter
    currency of safe haven and the funding currency for the carry trade. As with all yen pairs, the index to
    watch is the Nikkei 225. If the index is rising then money will be flowing into high risk and out of low
    risk. The yen will therefore weaken as Japanese ( and other investors ) sell the yen and move into
    risk.
    CAD/JPY
    Another of the yen pairs, and if you remember this is one that has a relatively close correlation to the
    price of oil. Canada as a major exporter, and the Japanese as a major importer. If oil prices are
    rising, at the same time as the yen is being weakened by ‘risk on’ or politics, then the pair will move
    quickly. The weekly oil stats release on the economic calendar will also play their part here, with any
    build in reserves, bad for the price of oil and any draw, generally good. So there are several
    influences here, but as always with the yen crosses, get the direction right and you make money very
    quickly.
    AUD/NZD
    I have included this pair as it is an interesting combination of ‘commodity currency’ vs ‘commodity
    currency’. Near neighbour vs near neighbour. Australia and New Zealand are very similar in terms of
    exports and stability with similar risk profiles for their currencies. Surprisingly this pair trend
    extremely well, but only in the longer term timeframes, once you move beyond the hourly chart.
    Therefore, this is definitely a pair to consider for longer term swing or trend trading. And as I
    mentioned earlier, given the spreads on many of these pairs will be wider than the more usual one or
    two pips of the majors, a longer term approach is required.
    In this pair the question is which commodities are dominating and why, and as I outlined earlier, the
    Australian dollar is closely connected to hard commodities whilst the New Zealand is more aligned
    to the ‘softs’. In addition, both now have China as their largest export market, and both have
    comparable interest rates. Therefore, what are the likely drivers of this currency pair, and again the
    answer is very much China. So, even if the Chinese economy does slow down, the Chinese people
    still have to eat, this is likely to have a greater impact on the AUD rather than the NZD. This would
    then be reflected in the pair in a move lower.
    EUR/CHF
    There are, of course, many cross currency pairs and impossible to cover them all here, so to round off
    this section, I just wanted to end with one I would suggest you DO NOT trade, unless you actively
    enjoy watching paint dry. And that is the EUR/CHF. If you are prepared to wait months, and I do mean
    months, for a trend to develop, then this pair may offer some trading opportunities. However, it
    remains rangebound for extremely long periods, and more likely to bore you out of a position before
    it moves!
    Last edited by GLOSBE; 10-20-2016 at 03:23 PM.
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    Methods of Forex Trading

    Methods of Forex Trading

    In The Currency Jungle-eurusd-h1-alpari-international-limited.png


    There are many different methods of Forex trading or foreign exchange market trading. All of them employ leveraging -- basically, the use of borrowed capital -- to make money. This has both an upside and a downside. Leveraging makes it easier to make a lot of money with a limited amount of your own capital. It also makes it easier to lose everything you've invested. Below is a list of some popular methods of Forex trading, with the benefits and pitfalls of each briefly described.

    1. The Forex Day Trading Method

    2. Scalping

    3. Big Picture Forex Trading

    4. Automated Forex Trading

    In The Currency Jungle-eurusd-w1-alpari-international-limited.png


    Some Practical Advice
    No matter how you plan to trade, you need to keep your emotions in check, watch your risk, and be honest with yourself when you are having trouble. Even professional traders don't like to admit when they are having a losing streak, or what is causing it, but it only hurts your bottom line when you don't face problems. That's a bit of a general business principle, but it strongly applies to trading.


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    Senior Member ForeCastle's Avatar
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    Introduction to the Euro

    The Euro is now the official currency of 15 of the 27 member states in the European Union (EU), which makes it the currency used by over 320 Million people. Like Europe itself, the Euro has an interesting history, which we as traders must understand to have a full understanding of the fundamentals of the currency. There are two major factors which lead to the eventual formation of the European Union, and therefore the Euro, which are important for traders to understand.

    1. The major powers in Europe had been battling each other for hundreds of years prior to World War II. Nothing like the decimation that the World Wars brought to Europe had ever been seen before however, so after World War II, there was a realization that a drastic reordering of the political landscape was needed, in order to put nationalistic rivalries to bed once and for all. 2. Also as a result of World War II, the world's power structure had shifted, and the major European countries who were once the superpowers of the world, were replaced by two new superpowers. The United States and The Soviet Union were now the unrivaled superpowers of the world, and as a result there was a keen awareness among the former world powers of Europe, that banding together was the only way for Europe to have comparable clout on the world stage. It was primarily as a result of these two factors that the European Coal and Steel Community (which eventually became the European Economic Community, the predecessor to the European Union) was founded in the 1950's with the general goals of:

    1. Lowering trade barriers and facilitating economic cooperation for the benefit of the member nations.

    2. Increasing Europe's clout on the world stage

    3. Integrating the economies of the major countries in Europe to the point where they were too reliant on one another to go to war again. During the next several decades many things happened from a diplomatic and trade standpoint that are very interesting, and which can be read about by doing a search on google for the history of the European Union. The next important event for us as traders however, came with the ratification of something which is known as the Maastricht Treaty in the 1990's. [COLOR=#000000]Up to this point, the idea of a tie up between nations in Europe was primarily focused on removing trade barriers and promoting economic cooperation. With the Maastricht treaty, member countries moved from a simple economic cooperation, to the much grander ambition of political integration between member nations.

    This is important to us as traders as it was here that plans for a single currency to be used among member nations was introduced, and therefore here that the basic fundamentals of the Euro were laid out. There were three steps outlined in the Maastricht treaty that had to be completed before the currency could be released which were:

    1. Free circulation of capital among member countries.

    2. The second, and most important step for us as traders to understand, was the coordination of economic policies. Once the Euro was introduced, each of the member countries would be bound by the monetary policy as set by the European Central Bank. With this in mind, you could not have countries with extremely different levels of inflation and interest rates, replace their currency with the Euro, without undermining the credibility and fundamentals of the currency. To make the currency credible, and to make its introduction as smooth as possible, member countries were required to keep inflation, interest rates, and debt below certain levels. Lastly, they were also required to maintain an exchange rate that was basically a banded peg, allowing their currency to fluctuate only within a narrow band.

    3. In 1999 the European Central Bank was established and the eleven countries listed here began to use the Euro in electronic format only.

    Spain, Portugal, Italy, Belgium, the Netherlands, Luxembourg, France, Germany, Austria, Ireland and Finland.

    These countries formed what is known as the European Monetary Union, which is comprised of countries who are members of the European Union, and use the Euro as their currency.

    Greece, the United Kingdom, Sweden, and Denmark (the other members of the European Union at the time) remained outside the European monetary Union for different reasons.

    While this may seem a bit like a history lesson rather than a lesson in trading, it is very important for traders of the Euro to have an understanding of the history we have just gone over. As we will learn in coming lessons, it is because of this history that the Euro is where it is today, and many of the concepts we have just outlined still affect the value of the currency in today's market.

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    Senior Member ForeCastle's Avatar
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    Introduction to the Euro, Part II

    As we discussed in our last lesson, the Euro was launched as an electronic currency on January 1st 1999. As you can see from this chart, the markets initial confidence in the Euro, and really the European Union as a whole, was initially not very high. Over the next year the currency sold off from just above 1.1600 dollars to 1 Euro at its inception, to a low point of around .8200 cents to 1 Euro towards the end of 2000. While the tables have turned now in the Euro's favor, it actually took the European Central Bank intervening in the markets and buying Euros, to keep the currency from sliding further in 2000.

    The launch of the Euro was the largest monetary changeover ever, and as you can see, was not guaranteed success. As we touched on in our last lesson, getting a dozen countries, which varied widely in their economic and political clout, to give up control over their own monetary policy and switch to a more centralized monetary system, was no easy task.

    As we learned about in module 8 of our basics of trading course, one of the most powerful tools that countries have to try and manage their business cycle is monetary policy, a tool which those adopting the Euro were essentially giving up. Although we have not seen a real test of this yet, you can imagine a situation where the economy of one of the major countries in the EMU such as Germany, goes into recession, but overall growth in the rest of the EMU is steady. If Germany were not part of the EMU, they could cut interest rates to try and bring their economy out of recession. Since they are however, their hands would be tied in this situation from a monetary policy standpoint, which may drive their economy deeper into recession than would otherwise be the case.

    As we also learned about in module 8 of our free basics of trading course, countries have a second tool to manage the business cycle, which is Fiscal policy. As the EMU nations are still primarily independent from a fiscal policy standpoint, they do still have this in their toolbox. The issue here however, is that one of the ongoing requirements established in the Massstricht treaty for countries which join the EMU, is that member country's budget deficits must be less than 3% of GDP. So here again member nations are someone limited in what they can do to help their own economies, should it falter.

    Of all the things to understand about the Euro from a fundamentals standpoint, it is this that is the most important, as it is here that a true test of the Euro, will eventually come.

    So far I think most would agree that the Euro has been a resounding success, and since the original 12 countries replaced their currencies with the Euro as their paper currency in January of 2002, 3 more EU member nations have joined the EMU, and 5 other countries outside the EU have adopted the Euro as their official currency.

    As a result of its success and the large combined economies that the currency represent, many feel that the Euro will one day replace the US Dollar as the premiere currency of the world. If you have thoughts on this I would love for you to share them in the comments section below.

    Thats our lesson for today. In our next lesson we will look at the major economies of Europe which traders watch closely for fundamental direction in the currency so we hope to see you in that lesson.

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  5. #5
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    Introduction to the Euro, Part III

    In our last lesson we continued our discussion of the Euro with a look at its introduction, and the major factors which will determine the long term fundamental direction of the currency. In today's lesson we are going to continue our free forex trading course, with a look at the major economies in the Eurozone and how each affects the value of the Euro.

    As you can see from this graph, member countries Germany, France, Italy, and Spain make up over 75% of the Eurozone's GDP. As a result of this economic data out of these countries has the tendency to move the Euro the most, so traders naturally pay them more attention.

    There are literally thousands of economic numbers released in the Eurozone however, like we covered in module 3 of this course, those that affect the current account (trade flows) or interest rates (capital flows) are going to have the greatest potential to move the currency. All of the indicators which we cover in module 8 of our basics of trading course, have a counterpart in the EU. Most of the time they are also named the same, and as they show the same things, traders can expect the market to react accordingly. The only thing to keep in mind here is that the economic climate in the United States vs. the Eurozone will differ at times, so traders and therefore the market may react differently to the same number out of the EU than they do out of the US.
    The second thing that it is important to understand about EU economic releases, is the different mandate of the European Central Bank, versus the Federal Reserve. Where the Federal Reserve has a dual mandate of maximizing employment and maintaining price stability, the ECB's mandate is solely to maintain price stability. With this in mind, the ECB is normally seen as more hawkish than the federal reserve, meaning they are more likely to hold steady or raise interest rates when economic data show price increases, and less likely to cut interest rates as quickly as the fed when growth in the Eurozone slows.

    I could spend many lessons covering each of the economic indicators and their relative importance to the market but in the interest of maximizing our learning I am going to instead defer to two free sites which do an excellent job here.

    Fxwords.com and specifically their page on Euro-Zone Economic Indicators which I have included a link to below this video. As you can see here they categorize the major economic reports and then list them out with stars representing the relative importance of the indicator to the market. If you click on the link for each indicator it will take you to a page giving a definition as well as commentary on how traders should expect the release to affect the market.

    Once you have an understanding of the economic indicators then you can get the date, time, and forecast for the release from the global calendar which you can find by click the calendar button at the top of Dailyfx.com. As you can see here the importance of the indicator to the market is also indicated with stars on the calendar, and the important indicators have links where you can go for more information.

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  6. #6
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    Forex has become a credible virtual trading platform today. But to ensure success in the forex market, each foreign currency exchange trader will necessitate right trading decisions always. A trader will always want to earn good profit from the price movements of various currencies in true sense. Thereby appropriate currency pair decision can help a forex trader to work with those pairs which are exotic, stable yet profitable in nature.

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