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80. Who Really Controls the Forex Market?
As we discussed in our last lesson the forex market is an over the counter market meaning that there is no centralized exchange where all trades are made. Because of this, the price that someone receives when trading forex has traditionally differed depending on the size of the transaction and the sophistication of the person or entity that is making that transaction.
At the center or first level of the market is something known as the Interbank market. While technically any bank is part of the Interbank market, when an FX Trader speaks of the interbank market he or she is really talking about the 10 or so largest banks that make markets in FX. These institutions make up over 75% of the over $3 Trillion dollars in FX Traded on any given day.
There are two primary factors which separate institutions with direct interbank access from everyone else which are:
1. Access to the tightest prices. We will learn more about transaction costs in later lessons however for now simply understand that for every 1 Million in currency traded those who have direct access to the Interbank market save approximately $100 per trade or more over the next level of participants.
2. Access to the best liquidity. As with any other market there is a certain amount of liquidity or amount that can be traded at any one price. If more than what is available at the current price is traded, then the price adjusts until additional liquidity enters the market. As the forex market is over the counter, liquidity is spread out among different providers, with the banks comprising the interbank market having access to the greatest amount of liquidity and then declining levels of liquidity available at different levels moving away from the Interbank market.
In contrast to individuals who make a deposit into their account to trade, institutions trading in the interbank market trade via credit lines. In order to get a credit line from a top bank to trade foreign exchange you must be a very large and very financially stable institution, as bankruptcy would mean the firm that gave you the credit line gets stuck with your trades.
The next level of participants are the hedge funds, brokerage firms, and smaller banks who are not quite large enough to have direct access to the Interbank market. As we just discussed the difference here is that the transaction costs for the trade are a bit higher and the liquidity available is a bit lower than at the Interbank level.
The next level of participants has traditionally been corporations and smaller financial institutions who do make foreign exchange trades, but not enough to warrant the better pricing
As you can see here, traditionally as the market participant got smaller and less sophisticated the transaction costs they paid to trade became larger and the liquidity that was available to them got smaller and smaller. In a lot of cases this is still true today, as anyone who has ever exchanged currencies at the airport when traveling knows.
To give you an idea of just how large a difference there is between participants in the Interbank market and an individual trading currencies for travel, Interbank market participants pay approximately $.0001 to exchange Euros for Dollars where Individuals in the airport can pay $.05 or more. This may not seem like much of a difference but think about it this way: On $10,000 that is $1 that the Interbank participant pays and $500 that the individual pays.
The landscape for the individual trader has changed drastically since the internet has gone mainstream however, in many ways leveling the playing field and putting the individual trader along side large financial institutions in terms of access to pricing and liquidity. This will be the topic of our next lesson.
http://youtu.be/IcL6-WEvUAA
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81. The Role of the Retail Forex Broker
Before the internet, very few individuals traded foreign exchange as they could not get access to a level of pricing that would allow them a reasonable chance to profit after transaction costs. Shortly after the internet became mainstream however several firms built online trading platforms which gave the individual trader a much higher level access to the market. The internet introduced two main features into the equation which were not present before:
1. Streaming Quotes: The Internet allowed these firms to stream quotes directly to traders and then have them execute on those quotes from their computer instead of having to deal over the phone. This automated trade processing, and therefore made it easier for firms to offer the ability to trade fx to the individuals and still be profitable.
2. Automatic Margin Calls: What is not so obvious but what was perhaps even more key is that the internet allowed an automated margin call feature to be built into the platform. This allowed firms to accept cash deposits from clients instead of having to put them through the process of signing up to trade via a credit line. As we discussed in our last lesson it is very difficult to get a credit line to trade FX and for those who do it is a lot of paperwork and hoops to jump through before they can begin trading. This would have made it impossible to offer FX trading to smaller individual traders as the cost involved in getting them set up to trade would not be worth it.
As the electronic platform allowed clients to deposit funds and then automatically cut them out of positions if they got to low on funds, this negated the need for credit lines and made the work to get an individual account open well worth it to the forex broker from a profit standpoint.
If you don't understand all the ins and outs of margin at this point don't worry as this is something that we are going to go into much more detail on in a later lesson.
For now it is simply important to understand that what these firms did was take all the traders who were not big enough by themselves to get access to good pricing and routed their order flow through one entity that was. This allowed these firms access to much tighter pricing than would otherwise have been possible which was then passed along plus a little for the brokers to the end client.
So now you can see why although the forex market has been around for a relatively long period of time, individuals have only started to trade the market over the last few years.
Anther key thing that it is important to understand here is that the larger a firm gets in terms of trading volume, the greater access that firm has to tighter prices and liquidity and the more likely that firm is to be able to pass on better pricing and execution to their clients.
http://youtu.be/szs8cBa1LzA
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82. How Central Banks Move the Forex Market
A lesson on how the central banks of the world participate in the foreign exchange market and move the forex market up and down for their economic benefit.
http://youtu.be/g82etHhTOnY
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83. How Banks, Hedge Funds, and Corporations Move Currencies
Behind central banks in terms of size and ability to move the foreign exchange market are the banks which we learned about in our previous lessons which make up the Interbank market. It is important to understand here that in addition to executing trades on behalf of their clients, the bank's traders often times try to earn additional profits by taking speculative positions in the market as well.
While most of the other players we are going to discuss in this lesson do not have the size and clout to move the market in their favor, many of these bank traders are an exception to this rule and can leverage their huge buying power and inside knowledge of client order flow to move the market in their favor. This is why you hear about quick market jumps in the foreign exchange market being attributed to the clearing out the stops in the market or protecting an option level, things which we will learn more about in later lessons.
The next level of participants is the large hedge funds who trade in the foreign exchange market for speculative purposes to try and generate alpha, or a return for their investors that is over and above the average market return. Most forex hedge funds are trend following, meaning they tend to build into longer term positions over time to try and profit from a longer term uptrend or downtrend in the market. These funds are one of the reasons that currencies often times develop nice longer term trends, something that can be of benefit to the individual position trader.
Although not the typical way that Hedge funds profit from the market, probably the most famous example of a hedge fund trading foreign exchange is the example of George Soros' Quantum fund who made a very large amount of money betting against the Bank of England.
In short, the Bank of England had tried to fix the exchange rate of the British Pound at a particular level buy buying British Pounds, even though market forces were trying to push the value of the Pound Down. Soros felt that this was a losing battle and essentially bet the entire value of his $1 Billion hedge fund that the value of the pound would decrease. The market forces which were already at play, combined with Soro's huge position against the Bank of England, caused so much selling pressure on the pound that the Bank of England had to give up trying to prop up the currency and it preceded to fall over 5% in one day. This is a gigantic move for a major currency, and a move which netted Soros' Quantum Fund over $1 Billion in profits in one day.
Next in line are multinational corporations who are forced to be participants in the forex market because of their overseas earnings which are often converted back into US Dollars or other currencies depending on where the company is headquartered. As the value of the currency in which the overseas revenue was earned can rise or fall before that conversion, the company is exposed to potential losses and/or gains in revenue which have nothing to do with their business. To remove this exchange rate uncertainty many multinational corporations will hedge this risk by taking positions in the forex market which negate any exchange rate fluctuation on their overseas revenues.
Secondly these corporations also buy other corporations overseas, something which is known as cross boarder mergers and acquisitions. As the transaction for the company being bought or sold is done in that company's home country and currency, this can drive the value of a currency up as demand is created for the currency to buy the company or down as supply is created when the company is sold.
Lastly are individuals such as you and I who participate in the forex market in three main areas.
1. As Investors Seeking Yield: Although not very popular in the United States, overseas and particularly in Japan where interest rates have been close to zero for many years, individuals will buy the currencies or other assets of a country with a higher interest rate in order to earn a higher rate of return on their money. This is also referred to as a carry trade, something that we will learn more about in later lessons.
2. As Travelers: Obviously when traveling to a country which has a different currency individual travelers must exchange their home currency for the currency of the country where they are traveling.
3. Individual speculators who actively trade currencies trying to profit from the fluctuation of one currency against another. This is as we discussed in our last lesson a relatively new phenomenon but most likely the reason why you are watching this video and therefore a growing one.
http://youtu.be/jcavZW5kxs0
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84. A Breakdown of the Forex Trading Day
Unlike the futures and equities markets, the forex market trades actively 24 hours a day with active trading hours following the sun around the globe to each of the major money centers.
As the foreign exchange market is an over the counter market where two counterparties can trade with each other whenever they want, technically the market never closes. Most electronic trading platforms however open for trading at around 5 PM Eastern Time on Sunday, which corresponds to the start of Monday's business hours in Australia and New Zealand. While there are certainly banks in these countries which actively make markets in foreign exchange, there is very little trading done in these countries when compared to other major money centers of the world.
The first major money center to open and there fore the start of the first major session in the forex market is the Asian Trading session which corresponds with the start of business hours in Tokyo at 7pm Eastern Time on Sunday.
While still considered 1 of the three major money centers, only 7.6% of forex transactions flow through Tokyo trading desks, so the Asian trading session is the least active of the three. While there is active trading in Yen based currency pairs during Asian hours the market for currencies outside of Yen based pairs is relatively thin, making Asian trading hours a time when the larger banks and hedge funds in the market will sometimes try and push the market in their favor.
Next in line is the European trading session which begins with the start of London business hours at 2 AM Eastern Standard Time. While New York is considered by most to be the largest financial center in the world, London is still king of the forex market with over 32% of all forex transactions taking place in the city. Before the Euro there were more than a dozen additional currencies in Europe making foreign exchange part of every day life for both individuals and businesses operating in the region. In addition to this, London is situated perfectly from a time zone standpoint with business hours for both the large eastern and western economies taking place during London trading hours.
As London is the most active session in the forex market it is also the session with the most volatility for all the currency pairs which we will be studying in this course.
Last but not least is the US session which begins with the start of New York business hours at 8 AM Eastern Standard Time. New York is a distant second to London in terms of forex trading volumes with approximately 19% of all forex transactions flowing through New York Dealing Rooms.
The most active part of the US Trading session, and the most active time for the forex market in general, is from about 8am to 12pm when both London and New York trading desks are open for business. You can see very large volatility during this time as in addition to both New York and London trading desks being open, most of the major US economic announcements are released during these hours as well.
The trading day winds down after 12pm New York time with most electronic platforms closing for business at around 4 PM Eastern Standard Time on Friday.
http://youtu.be/kzyUhD60JgQ
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85. Forex Trading - Characteristics of the Main Currencies
Over 80% of all currency transactions involve the US Dollar. As you can probably imagine after hearing this, currency traders pay heavy attention to what is happening with the US Economy, as this has a very direct affect not only on the US Dollar but on every other currency in the world as well. Japan, which is the second largest individual economy in the world, has the third most actively traded currency, the Japanese Yen. After experiencing impressive growth in the 60's, 70's and early 80's Japan's economy began to stagnate in the late 1980's and has yet to fully recover. To try and stimulate economic growth, the central bank of Japan has kept interest rates close to zero making the Japanese Yen the funding currency for many carry trades, something which we will learn more about in later lessons. It is also important to understand at this stage that Japan is a country with few natural energy resources and an export oriented economy, so it relies heavily on energy imports and international trade. This makes the economy and currency especially susceptible to moves in the price of oil, and rising or slowing growth in the major economies in which it trades with. While the United Kingdom is a member of the European Union it was one of the three countries that opted out of joining the European Monetary Union which is made up of the 12 countries that did adopt the Euro. The UK's currency is known as the Pound Sterling and is a well respected currency of the world because of the Central Bank's reputation for sound monetary policy. Next in line is Switzerland's currency the Swiss franc. While Switzerland is not one of the major economies of the world, the country is known for its sound banking system and Swiss bank accounts, which are basically famous for banking confidentiality. This, combined with the country's history of remaining neutral in times of war, makes the Swiss Franc a safe haven currency, or one which attracts capital flows during times of uncertainty. When traded against the US Dollar, the Euro, Yen, Pound, and Swiss Franc make up known as the "major currency pairs" which we will learn more about in coming lessons. For the purposes of this course we will focus on currencies that trade actively 24 hours a day allowing the trader to move in and out of positions during the trading week at anytime as he or she pleases. Although not considered part of the major currencies there are three other currencies in addition to the ones just listed which trade actively 24 hours a day and which we will be covering in this course. Known as the commodity currencies because of the fact that they are natural resource rich countries, the Australian Dollar, New Zealand Dollar and the Canadian Dollar are the three final currency pairs we will be covering. Also known as "The Aussie" the Australian Dollar is heavily dependant upon the price of gold as the Australian economy is the world's 3rd largest producer of gold. As of this lesson interest rates in Australia are also among the highest in the Industrialized world creating significant demand for Australian Dollars from speculators looking to profit from the high yield the currency and other Australian Dollar denominated assets offer. Like the Australian Dollar the New Zealand Dollar which is also known as "The Kiwi" is heavily dependant on commodity prices, with commodities representing over 40% of the countries total exports. The economy is also heavily dependant on Australia who is its largest trading partner. Like Australia, as of this lesson New Zealand also has one of the highest interest rates in the industrialized world, creating significant demand from speculators in this case as well. Last but not least is the Canadian Dollar or otherwise affectionately known as "The Loony". Like its commodity currency brothers, the Canadian Economy, and therefore the currency, is also heavily linked to what happens with commodity prices. Canada is the 5th largest producer of gold and while only the 14th largest producer of oil, unbeknownst to most; it is also the largest foreign supplier of oil to the United States.
http://youtu.be/AeU-d-ojsp0
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86. Forex Trading - Setting Up Your Trading Software
A lesson on getting set up with a forex trading demo account for active currency and foreign exchange traders.
http://youtu.be/tP_URK0wOgA
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87. Forex Trading - How to Read a Currency Quote
A lesson on how to read a currency quote for active traders and investors in the forex market.
http://youtu.be/PmHNTmUd9YY
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88. Forex Trading - Understanding Currency Rate Movements
A lesson on understanding what increases and decreases in the rate of a currency pair mean for the values of the currencies which make up that pair
http://youtu.be/punOTf9UnyA
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89. Forex Trading - Understanding the Bid/Ask Spread
A lesson on the two way quote in forex trading referred to as the bid ask spread and what this means to us as traders of the forex market.
http://youtu.be/hUMorIhXu8M
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90. How to Place Your First Forex Trade
A lesson on how to place your first forex trade for traders who are new to the forex market.
http://youtu.be/oNkt0vEapD8
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91. How to Determine Your Position Size in the Forex Market
A lesson on the different contract sizes available to active traders and investors in the forex market.
http://youtu.be/r_nrgJ4f9xM
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92. Forex Trading - Pips and Fractional Pip Pricing
A lesson on what a pip is in the forex market as well as what fractional pip pricing is for active traders and investors in the foreign exchange market.
http://youtu.be/6OtGTV3OG7s
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93. How to Calculate Forex Trading Profits and Losses
A lesson on how to calculate profits and losses in the forex market for active traders and investors in foreign exchange and currrencies.
http://youtu.be/suUhmn6pH8Y
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94. An Introduction to Leverage in Trading
A lesson on what leverage is and how it is used to amplify gains and losses in the forex market. This lesson also applies to any financial market including stocks and futures so a good lesson for both traders and investors.
http://youtu.be/mhbyOk_NGkY
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95. How Trading on Margin Works
A lesson on what trading on margin is and how this applies when trading the forex market. For active traders and investors seeking to learn how to trade the currency market.
http://youtu.be/aPPnj8NR3vQ
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96. How to Calculate Leverage in the Forex Market
A lesson on how to calculate how much leverage you are using when the base currency pair in the pair you are trading is not the US Dollar. For active traders and Investors in the forex market.
http://youtu.be/-s1mU-8127E
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97. How to Calculate Leverage in the Forex Market Part 2
A lesson on how to calculate how much leverage you are using when the base currency pair in the pair you are trading is not the US Dollar. For active traders and Investors in the forex market.
http://youtu.be/WzHgikKabzU
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98. How to Place a Market Order in the Forex Market
A lesson on how to place a market order in the forex market. For active traders and Investors in the forex market.
http://youtu.be/0YYRQPteuCc
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99. How to Place a Stop Loss and Take Profit Order in Forex
A lesson on how to place a stop loss and take profit order in the forex market. For active traders and Investors in the forex market.
http://youtu.be/YGpY6YHzeO0
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100. How to Place A Pending Entry Order in the Forex Market
A lesson on how to place a Pending Entry order in the forex market. For active forex traders.
http://youtu.be/s2qsuPyNRxc
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101. How Rollover Works in Forex Trading
A lesson on what rollover is and how it works for traders of the forex market who hold trading positions overnight.
http://youtu.be/MHSnaAd0SZY
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How Rollover Works in Forex Trading Part 2
The second lesson of two on what rollover is and how it works for traders of the forex market who hold trading positions overnight.
http://youtu.be/b7WF22-8uks
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103. What Moves the Forex Market? - Trade Flows
A lesson on how the trade flows between different countries affect the value of their currencies for active traders and investors in the forex market.
http://youtu.be/k1jpjREQbzo
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104. How Capital Flows Move the Forex Market
Capital flows encompass all of the money moving between countries as a result of investment flows into and out of countries around the world. Here instead of money flowing between countries to buy each others goods and services, we are talking about money flowing into and out of the stock and bond markets of countries around the world, as well as things such as real estate and cross boarder mergers and acquisitions.
Just as the importing or exporting of goods shifts the supply demand balance for a particular country, so do the flows of money coming into and out of the country as a result of capital flows. As the barriers to investing in foreign countries have come down as a result of the internet and other factors, it is much easier for fund managers and other investors to take advantage of opportunities not only in their domestic markets, but anywhere in the world. As this is the case, when a market in a particular country is showing above average returns, foreign investors will often flood the market with capital, buying up the assets of that country looking to earn above average returns as well. When this happens it not only affects the markets of that country, but also the value of its currency, as foreign capital must be converted into local currency in order to participate in the markets there.
While most people are more familiar with the equities markets, an important thing to note here is that the bond markets in most countries are much larger than the equities markets, and therefore can have a greater affect on the currency. When the interest rates being paid for the bonds in a particular country are high, this tends to attract capital to that country from foreign investors seeking to take advantage of that higher yield, creating a demand for the local currency here as well.
Lastly, cross boarder mergers and acquisitions are also part of the capital flows category and when they happen on large levels can move the market as well. As an example, if Deutsche bank (a large German bank) were to buy Washington Mutual here in the United States, this would create a large demand for dollars and increase the supply of Euros on the market as Deutsche Bank sold Euros for dollars in order to complete the transaction.
As you can probably imagine there are a myriad of factors that can affect both trade and capital flows for a particular country, and therefore its currency. As currency traders it is our responsibility to know what to expect in terms of a reaction in the FX market when different things happen, so always think of things in terms of how something effects the supply demand relationship. Once you understand this it is next important to understand whether that effect fits into the trade flow or capital flow category since, as we will learn in later lessons, some countries are affected more by trade flows than capital flows and vice versa.
http://youtu.be/binul5xH0ZY
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105. The Current Account: How Forex Traders Can Use it to Identify Opportunities
While the concept that we are going to be covering here is fairly involved, I am covering this not because I feel we need to know all the details, but because having a general understanding of how the flows of money in and out of a country are measured, is important to help understand how the value of currency is affected by those flows. Now that we have an understanding of both trade and capital flows we are going to learn how each is measured starting with the current account.
The basic formula for calculating the current account for a country, is exports - imports of goods and services (also referred to as the balance of trade) + Net Factor Income from Abroad (basically interest and dividends) + net transfer payments (like aid given to foreign countries).
In general for the countries whose currencies we are focused on, the balance of trade portion of the formula is the main component we are concerned with and very little if anything will ever be heard about the other two components.
When thinking about a countries imports and exports (balance of trade), you will often hear a country described as having either a current account surplus or a current account deficit. A current account surplus basically means that a country is exporting more than they are importing which, as we learned in our lesson on trade flows, should strengthen the value of the currency all else being equal. A current account deficit basically means that a country is importing more than it is exporting which should weaken the value of its currency all else being equal.
If you remember from our lesson on trade flows I gave the example there of a US company needing to import 1 Million Dollars worth of steel from a Canadian steel producer. Just to give a simple example lets say for a second that this was the only transaction that both the United States and Canada did with foreign countries. If this were the case then the United states would have a current account deficit of 1 Million Dollars and Canada would have a current account surplus of 1 Million dollars.
Now obviously there are millions of transactions just like this one which go on between countries all over the world. The current account measures these transactions so we as traders can have an idea of whether the value of a countries currency should be increasing or decreasing based on the trade flows of that country, all else being equal.
As of this lesson China has the largest current account surplus at $363 Billion and the United States had the largest current account deficit at $747 Billion. It is because of this that many argue China's currency is too weak and the US Dollar is too strong, two imbalances which have started to right themselves over the last year.
Here is a graph of the current accounts of some of the major countries whose currencies we are focused on, so you can have an idea of whether those countries are more import or export oriented. As we will learn this is something which is going to be important when analyzing economic data relating to those currencies.
Japan: A Surplus of $201 Billion
Germany: A Surplus of $185 Billion
Switzerland: A Surplus of $67 Billion
Canada: A Surplus of $28 Billion
New Zealand: A deficit of $10 Billion
France: A deficit of $35 Billion
Australia: A Deficit of $50 Billion
Italy: A Deficit of $58 Billion
United Kingdom: A Deficit of $111 Billion
http://youtu.be/Fx80EzPAPYQ
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106. Interpreting the Capital Account and Measuring Capital Flows
The basic formula for calculating the capital account is: Increase in Foreign Ownership of Domestic Assets (things such as real estate, cross boarder M&A, and Investments by Foreign Companies in local operations) - Increase in Domestic Ownership of Foreign Assets + Portfolio Investment (things such as stocks and bonds) + Other Investment (things such as loans and bank accounts).
As with the current account it is for our purposes not important to understand all the intricate details of the capital account, but simply that where the current account measures money flowing in and out of a country as a result of trade flows, the capital account measures money flowing in and out of the country as a result of capital flows.
As we discussed in our lesson on capital flows, when a market in a country is outperforming the markets in other areas of the world, money will flow into the country from foreigners seeking to participate in those out sized returns. These capital flows are reflected in the country's capital account. This is the case whether we are talking about a country's stock market, bond market, real estate market etc.
As a quick example lets say that a mutual fund located in the United States invests $1 Million Dollars in the Canadian Stock Market, and a Canadian real estate firm buys the equivalent amount of real estate in the United states. Just for simplicities sake, if these were the only transactions that took place between these two countries and any other country, the Capital Account for both the United States and Canada would show a balance of zero, as the two transactions would have exactly offset themselves.
As with the current account when a country sees strong inflows or outflows of capital, this has a direct affect on its currency. When there are significant inflows this creates demand for the currency, pushing the value of the currency up, all else being equal. Conversely, when there are significant outflows, this creates a market supply of the currency, pushing its value down all else being equal.
As you may be able to tell by now, it is the interaction of both the current account and the capital account that fundamental traders focus on, as it is the imbalances here that theoretically cause the value of a currency to rise and fall over the long term. This will be the topic of our next lesson so we hope to see you then.
http://youtu.be/QE6819vVrCA
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1 Attachment(s)
107. Fundamentals that Move Currencies - Balance of Payments
As we discussed briefly in our last lesson it is the interaction of flows of money relating to international trade and investment that ultimately determines the value of a currency over the long term. When demand strengthens for the exports of a particular country and/or investments by foreigners into that country increase, then, all else being equal a currency should strengthen. Conversely, when demand weakens for the exports of a particular country and/or investment by foreigners in that country falls, then, all else being equal a currency should weaken.
It is the interaction of the current account and the capital account that measures this, and when combined these make up a country's balance of payments. The balance of payments is very simply the total transactions by a country with all other countries in the world, or in other words the combination of both trade flows and capital flows into one report. By following a country's balance of payments and its related indicators, an FX trader can gain great insight into the potential future direction of a country's currency.
To help understand this better lets look at the example of the US Dollar. As we've discussed in previous lessons, the United States has run a very large current account deficit for quite some time, meaning that the country has imported many more goods and services than it has exported. As this chart of the US Dollar Index shows however, for a number of years the US Dollar continued to strengthen, despite this large current account deficit.
Attachment 2691
As you can see here going up into 2000 although the US ran a persistent current account deficit, the currency overall continued to strengthen before starting to sell off from late 2000 forward. Now I am making some pretty significant generalizations here for simplicities sake, but there are two major reasons that fundamental traders will point to as reasons for this:
1. Although this is starting to change somewhat, there has for many years been a strong demand for US Dollars because the US Dollar is the currency of choice for many major central banks to hold as their reserve currency, with Japan and China being the countries you will hear most about in this regard. This creates a demand for dollars on the capital flows side of the equation that helped to offset the persistent current account deficit going into 2000.
2. As most of you will remember the NASDAQ top which happened in March of 2000 was preceded by a major bull market in the United States, one in which foreign investors were active participants. As we learned about in our lesson on capital flows this also created a large demand for dollars, further helping to offset the large current account deficit.
After the sell off of the NASDAQ however, foreign investors fled the US Stock market along with a lot of other traders and investors. As there was no longer as much foreign capital flowing in to offset the large current account deficit, the US Dollar began to weaken. As the dollar began to weaken this created a chain reaction with the central banks who began to diversify into the EURO and other currencies, further exacerbating the dollar's sell off.
This created a situation where the current account deficit in the United States remained large (creating a market surplus of US Dollars from an international trade standpoint) and the inflows of capital into the US stock and bond markets began to fall, lowering the demand for dollars which was offsetting the current account deficit.
While it is not important to understand all the intricate details at this point, what you do need to understand is that in order to have a feel for the long term fundamentals of a currency, it is important to have a general understanding of what is happening from both a trade flows and a capital flows standpoint, and how these two things interact with one another. As we will learn in coming lessons all fundamentals with currencies can be related back to these two basic concepts, so for your homework assignment for this lesson I encourage you to consider the following question:
As the value of the US Dollar falls what effect if any should this have on the large current account deficit in the United States and why?
http://youtu.be/D6zvPTIKYQs
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108. How Interest Rates Move the Forex Market Part 1
Like current and future earnings prospects are the most important factors to consider when trying to forecast the long term direction of a stock, current and future interest rate prospects are the most important factors to consider when trying to forecast the long term direction of a currency. Because of this fact, currencies are highly sensitive to any economic news that can affect the country's interest rates, an important factor for traders of all time frames to understand.
When the central bank of a country raises interest rates this not only affects the short term rate that they target, but the interest rates for all types of debt instruments. If the central bank of a country raises interest rates then debt instruments of all types are going to become more attractive to investors, all else being equal. This not only means that foreign investors are more likely to invest in the debt of that country, but also that domestic investors are less likely to look outside the country for higher yield, creating more demand for the debt of that country and driving the value of the currency up, all else being equal.
Conversely, when a central bank lowers interest rates, then interest rates on all types of debt instruments for that country are going to be less attractive to investors, all else being equal. This not only means that both foreign and domestic investors are less likely to invest in the debt of that country, but that they are also more likely to pull money out to seek higher returns in other countries, creating less demand for, and a greater market supply of that currency, and driving its value down, all else being equal.
Once this is understood, it is next important to understand that foreign investors are exposed to not only the potential profit or loss from interest rate changes on the debt instrument they are investing in, but also to profits and losses which result from fluctuations in the value of that country's currency. This is an important concept to understand, as it generally will work to increase the profits for investors when interest rates increase, as the increase in the value of the currency is realized when they sell the investment and convert back into their home country's currency. This gives the foreign investor that much extra return on their investment, and that much extra incentive to invest when interest rates rise, driving the value of the currency up further all else being equal.
Conversely when interest rates decrease, there will be less demand for the debt instruments of a country not only because of the lower yield to investors, but also because of the decrease in the value of the currency that normally comes with a decrease in interest rates. The additional whammy of a loss to the foreign investor from the currency conversion that results as part of the investment, further incitivizes them to put their money elsewhere, decreasing the value of the currency further, all else being equal.
http://youtu.be/5k7bQWWVQhw
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109. How Interest Rates Move the Forex Market Part 2
In our last lesson we continued our free forex trading course with a look at interest rates and how the capital flows associated with movements in the interest rates of a country affect the value of its currency. Now that we have a basic understanding of how interest rates move the forex market, lets help drive this point home with a specific example from today's market environment.
For our example we are going to say that I am a savvy investor located in the United States who is seeking a good place to park some savings where I can earn a decent return on my money. For this particular slice of my portfolio I am looking for an interest paying instrument that will pay me a steady stream of cash on my money.
As many of you already know a government or corporate bond will do just this paying me whatever the interest rate is as set by the country's central bank that I am investing in, plus an additional interest rate depending on the length of the bond that I am investing in (for example a 1 year bond is generally going to pay me a lower rate of interest than a 10 year bond) and for the extra risk that I take on for different type of bonds (for example a government bond is normally going to pay me less than a corporate bond because there is less chance that the government is going to default on the loan).
So, knowing this, I decide that I would like to invest in a bond that pays me a good rate of interest, and I am not looking to get too speculative about this investment, so I prefer a government bond over a corporate bond. For our example we are going to say for simplicity's sake, that the bonds of the countries that we have available to invest in pay an interest rate equal to the interest rate in the country as set by the central bank.
Now with this in mind the next thing that I do is list out all the different interest rates for the major countries of the world and I come up with:
United States: 2.00%
Euro Zone: 4.00%
Japan: .50%
United Kingdom: 5.00%
Australia: 7.25%
Canada: 3.00%
New Zealand: 8.25%
Switzerland: 2.75%
After reviewing my options its seems pretty clear that if I am just going on interest rates, then New Zealand is the place to put my money as this will earn me an extra 6.25% in interest each year over investing that same money in the United States. Now I am not going to drag the lesson out by including all the history of the interest rates in New Zealand here, but I will tell you they have been in a high interest rate environment relative to the United States for quite some time. With this in mind if I would have have followed this logic in the past then it would have played out very well for me not only from an interest rate standpoint but also from a currency appreciation standpoint.
Now obviously hindsight is 20/20 and I have simplified things here for our understanding, but this is not too far off from how international investors including large market moving hedge funds and other players think. It is also a great example of the forces we have spoken about in our lessons on capital flows and in our last lesson on interest rates at play in today's market.
http://youtu.be/1NYPwx1h1GE
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110. How To Trade the Carry Trade Strategy Part 1
As we learned about in our lessons on how rollover works in module two of this course, when holding a position past 5pm NY time traders earn interest when they are long the currency with the higher interest rate. Conversely, when traders are long the currency with the lower interest rate they pay interest when holding a position past 5pm NY time. Like the US investor in the example from our last lesson who took his US Dollars and invested them in New Zealand Bonds to earn a higher return, currency traders can also take advantage of countries which offer higher interest rates. Luckily for us however taking advantage of interest rate differences between countries is generally much easier for currency traders who can do so with a simple click of the mouse.
To help demonstrate this lets look at the interest rates as set by the central banks for the main currencies which we are interested in. As you can see here and as we went over in our last lesson, rates as set by the Federal Reserve in the United States are currently at 2%, and rates as set by the Bank of New Zealand are currently at 8.25%.
Now lets bring up a screen shot of the simple dealing rates window and locate the New Zealand Dollar/US Dollar Currency pair. If we buy this currency pair, then we are long the New Zealand Dollar which is the higher yielding currency, and short the US Dollar which is the lower yielding currency. With this in mind we earn $10 per contract held past 5pm NY time as shown in the Roll B column of the simple dealing rates window. Conversely, if we sell this currency pair then we are short the higher yielding New Zealand Dollar and Long the lower yielding US Dollar, so we pay $15 dollars per contract held past 5pm NY Time, as shown in the roll s column of the window. As you can see here, we can take advantage of the higher interest rates in New Zealand by buying New Zealand Dollars and Selling US Dollars with the click of the mouse, and without having to go through the trouble of figuring out how to buy New Zealand bonds as we would have had to in our last lesson. Because of the simplicity of this strategy and the fact that in addition to the interest that one earns by being long the currency with the higher interest rate there is the opportunity for capital appreciation should the higher yielding currency move in one's favor, this is a hugely popular strategy. This is important to us as traders not only because it is a strategy that we may want to consider trading at some point, but also because a huge amount of capital flows in and out of currencies based on this strategy, making it a major market mover in both the long and short term time frames. Lastly, it is important to us as traders to understand that when a trader is long the carry, meaning that he or she is long the currency pair with the higher interest rate, then that trader is normally trading with the wind at their back as they are getting paid every day they hold their position, regardless of what happens to the exchange rate. Conversely when a trader is short the carry, meaning that they are long the currency pair with the lower interest rate, then they are generally trading with the wind in their face as they are paying money every day, regardless of what happens with the exchange rate.
http://youtu.be/kUSiahpanKo
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111. How To Trade the Carry Trade Strategy Part 2
As we saw in previous lesson, if a trader buys the NZD/USD currency pair, then as of this lesson, they will earn $15 per contract held past 5pm NY time on Monday, Tuesday, Thursday, and Friday. As we learned in our lesson on rollover in module two of this course, they will earn 3 days worth of rolls or $45 on Wednesday to take into account Saturday and Sunday when the market is closed. This brings the total interest paid for the 7 days in the week to 7 * 15 = $105. As there are 52 weeks in a year if a trader held this position for an entire year and the rollover rate did not change, they would earn (105 * 52) = $5460 in interest from the rollover portion of the trade.
At the current market rate for NZD/USD as of this lesson of .7687 this is an annual return from just the rollover portion of the trade of $5460/$76,870 = 7.1%. This of course makes the large assumptions for simplicity's sake that the exchange rate and rollover rate will remain the same as they are today for the 1 year period that the trader is in the trade.
Now you may be thinking to yourself at this point, "well Dave I was kind of excited about this whole carry trade thing and was seeing how it was so popular until I see a 7.1% return plus all the caveats. To be honest with you this does not get me too excited and I don't really see why this is all that popular."
As some of you may have already realized however, if we were to utilize some of the leverage that is available to us in the forex market as we learned about in module two of this course, then we might be able to take that 7.1% return and juice it up into something a little more interesting. So with this in mind, lets say I leveraged this position 2 to 1, which most traders I think would agree is still pretty conservative. This would double the return from the rollover portion of the trade to 14.2%, a return that if generated consistently would out perform the long term average return of the US Stock market. Taking this a bit further, if I increased the leverage to a more aggressive 3 to 1, that would put my return from rollover at 21.3%, and if I upped the leverage to an even more aggressive 4 to 1 that would put me at 28.4%, a return that if I consistently generated year after year, would put me among the top traders in the world.
When people first see this many times their initial reaction is one of excitement, which makes them want to jump right into a trade. As with most things however, if making money was this easy then everyone would be a millionaire, so while this is an enticing return, and while there has been a lot of money made by people employing carry trade strategies, there are other things to consider:
1. Exchange Rate Fluctuations which can cause additional profits or wipe out all profits and cause losses on the trade.
2. Changes in Interest Rates which can increase the positive rollover, decrease it, or cause a trader to end up paying for holding the position instead of earning.
3. The Use of Leverage amplifies any gains made on the strategy but also amplifies any loss should the trade begin to work against the trader.
It is how traders deal with these unknowns that separates traders who consistently make money with carry trade strategies from those who do not, a topic which we will discuss in our next lesson.
http://youtu.be/3UE5vbEHj64
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112. How To Trade the Carry Trade Strategy Part 3
As we have learned in our first two lessons on the carry trade, it is the size of the difference between interest rates in the countries whose currencies we are trading that ultimately determines how much we either pay or receive for holding a position past 5pm New York Time. With this in mind it is only logical that if the difference in interest rates between two countries changes, then so will the rollover amount that is either paid or collected when trading those country's currencies.
As a quick example lets take another look at the NZD/USD. As of this lesson if we were to buy the NZD/USD currency pair then we would earn $10 for each contract we held past 5pm NY time. As we have learned in our first two lessons the reason why we would earn $10 is because we are long the NZD where currently interest rates are at 8.25% and short the USD where interest rates are currently 2% as of this lesson. So with this in mind we are long the positive interest rate differential of 8.25%-2% which equals 6.25%.
Now lets say in our example that interest rates in the United States went up by 1% to 3%, while interest rates in New Zealand stayed the same. If this were to happen then our positive interest rate differential of 6.25% would drop to 5.25%. Very simply here, as the positive interest rate differential has decreased the amount of money that we earn for holding the position has decreased as well.
Conversely, if rates were to rise in New Zealand and stay the same in the United States then the interest rate differential would grow in our favor, and the amount we earn for holding a position past 5pm should grow as well. So you can see here that one of the first things that must be considered when thinking about a carry trade is what the current interest rates are, and what they are expected to be for the life of the trade.
A second thing which must be considered when thinking about a carry trade is the exchange rate fluctuation that may occur while a trader is in the position. Traders may consider a number of things here, the most popular of which are one of or a combination of:
1. Capital Flows: Most importantly here is interest rate expectations which as we discussed in our lesson on how interest rates move the forex market, when interest rates rise in a country, interest bearing assets generally become more attractive to investors, which will many times drive the value of a currency up all else being equal, and vice versa when interest rates fall.
Notice here that I say interest rate "expectations". As we have talked about extensively in module 8 of our free basics of trading course, markets anticipate fundamentals so in general once an interest rate increase or cut is announced, it has already been priced into the market.
2. Trade Flows: Most importantly here is affects on the current account.
We will be discussing how traders go about forcasting changes in capital and trade flows in the coming lessons. The third thing which traders focus on and which we have already covered in our basics of trading course is:
3. Technical Analysis: As carry trades are generally longer term trades many traders will look at the overall trend in the market and use technical analysis to try and determine when they think the trend is going to be in their favor if they open a carry trade.
http://youtu.be/SM0R7Nmv6j8
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114. Fundamental Analysis Vs. Technical Analysis in Forex
Traders analyze any financial market including the forex market in one of 3 ways:
1. Through Fundamental Analysis
2. Through Technical Analysis
3. Through a Combination of fundamental and technical analysis
While which method a trader chooses is ultimately up to them and their trading personality, it is my opinion that a trader who at least has an understanding of both technical and fundamental analysis is in a better overall position to trade profitably, than someone who focuses on only one school of thought.
To help understand this lets say that I am a trader who studies technical analysis and believes that at least in the short term, which is the time frame that I trade on, that technicals are all that matter. Next lets say that I am looking at a chart of the EUR/USD at 8:20 AM on the first Friday of the month, and my technicals are telling me that the trade is a good buy.
If I focused purely on technical analysis then I would probably enter that position not knowing that at 8:30 AM I may be in for a surprise that I was not expecting. As those of you who have been through module 8 of my basics of trading course know, at 8:30 AM on the first Friday of the month Non Farm Payrolls (NFP's) are released, which historically has been one of the most market moving fundamental releases in the forex market.
While I am not saying that a trader who trades on technicals should not take a trade that looks good to them from a technical standpoint because of weak fundamentals, what I think this shows is that technical traders who at least have an understanding of fundamentals have the ability to decide whether or not they should factor in a specific piece of fundamental information or no. In my opinion this gives them a big leg up on technical traders who dismiss fundamentals altogether.
Now lets say that I am a trader who trades a carry trade strategy which trades based off of a model I built to forecast interest rates based on fundamental news releases. Next lets say that my model generates a buy signal at 1.4700 which I have included on the chart on your screen. Would my trading not be better served if I at least knew that there was a major head and shoulders top in place, so technically the market is very weak here?
As with our technical analysis example what I am not saying is that a trader who trades on fundamentals should not take a trade that they feel is good from a fundamental standpoint when the market is weak from a technical standpoint. What I am saying however is that fundamental traders who at least have a basic understanding of technical analysis have the ability to decide this for themselves. In my opinion this gives them a big leg up on fundamental traders who dismiss technicals altogether.
As you have probably realized if you have been following my courses, they are designed to give traders a knowledge of both fundamental and technical analysis because I believe a knowledge of both puts traders in the best position to learn to trade profitably. I also believe that you can't really make a decision if you are going to trade based mainly off of technicals, fundamentals, or a combination of the two unless you have a sound understanding of the basics of both fundamental and technical analysis.
http://youtu.be/UGWYGDB_Zjk
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115. Forex Trading Fundamentals Quiz - Test Your Knowledge
As we now have a basic understanding of how trade flows and capital flows move the forex market, the next step is to look at each of the individual currencies we will be focusing on so we can gain an understanding of their backgrounds, and the makeup of their economies. Once we have an understanding of this it will become clear what fundamental factors are the most important drivers of individual currencies, and therefore what we as traders should watch for.
Before we get into this however it is very important that everyone has a sound understanding of how trade flows and capital flows move the forex market (which is covered in module 3 of this course) as well as the following concepts, all of which are covered in module 8 of our free basics of trading course:
- We all need to understand what the business cycle is.
- The difference between monetary and fiscal policy.
- What a central bank is and how they go about changing interest rates. In module 8 of the basics of trading course we cover the Federal Reserve which is the central bank in the United States. While the central banks that we are going to be covering going forward may differ in how aggressive they are with monetary policy in relation to the Federal Reserve, the methods they use to conduct monetary policy, and the reactions of the forex market that monetary policy generates, is basically the same no matter what central bank you are looking at.
- The first currency we will be covering will be the US Dollar, so you should have a good understanding of the basic components of the US Economy.
I am going to give everyone 10 questions here that you should now have the knowledge to answer if you have been through module 8 of my free basics of trading course, and module 3 of this course. To help make it interesting for everyone, I will offer a free copy of Kathy Lien's excellent book Day Trading the Currency Market, to the first person that posts the correct answers to all 10 questions in the comments section of this lesson on InformedTrades.com. If you are watching this video on Youtube you can find a link to this lesson on InformedTrades to the right of the video. Ok so here we go:
1. If inflation is low and a Central Bank is concerned about recession, what would the expected monetary policy response be?
2. If inflation and growth are both high what would the expected monetary policy response be?
3. If a central bank raises interest rates, what affect if any is this expected to have on the currency of that country, all else being equal?
4. If a central bank lowers interest rates, what affect if any is this expected to have on the currency of that country, all else being equal?
5. If a country's imports grow and all other trade and capital flows remain equal, what affect would this have on the current account and what would be the expected affect on the currency if any?
6. If a country's exports grow and all other trade and capital flows remain equal, what affect would this have on the current account and what would be the expected affect on the currency if any?
7. If a country is a major exporter of gold and the price of gold moves up by 50% over the course of a year, what would be the expected affect if any on that country's currency all else being equal?
8. Japan is a major importer of oil and Canada is a major exporter of oil. If the price of oil goes up by 50% over the course of a year, then what affect if any should this have on the CAD/JPY currency pair all else being equal?
9. Traders who follow US Dollar fundamentals pay particular attention to any numbers which reflect the overall health of the consumer. Why?
10. The US Economy in the past was referred to as an Industrial Economy, now it is referred to more as a ________________ Economy.
http://youtu.be/1q1ANaqjHiE
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116. Why the US Dollar is Still King
In our last lesson we continued our free forex trading course with a look at why the US Dollar is still king of the currency world. As expected, this lesson generated a lot of debate, so in today's lesson we are going to look at whether or not the US Dollar will remain the king of the currency world.
As we discussed in our last lesson the US Dollar is involved in approximately 89% of all forex transactions, so the fate of the US Dollar has huge implications not only on the US Dollar, but on the forex market as a whole. While currently the US Dollar is still king of the currency world, many argue that the tides are changing, and that the US Dollar is in danger of losing this status. Whether or not this happens, to what extent it happens, and if it does happen how quickly or slowly it happens, is of huge importance to currency traders.
The most important reason why the US Dollar is king of the currency world is the fact that, as we learned about in our last lesson, it is the world's reserve currency. According to Wikipedia.com, as of 2007 there is approximately $7.5 trillion worth of currencies held as reserves by central banks around the world. Of that $7.5 trillion 63% or 4.7 trillion is held in US Dollars. This is an enormous amount of dollars being held by central banks outside of the United States, so forex traders watch closely anything that could show a decrease in the appetite of central banks for US Dollars.
Like with individuals and companies, other countries willingness to lend money to the United States (by holding US Dollar Denominated Debt as reserves) is based on the financial soundness of the United States as a whole. As we learned about in module 3 of this course, the US has run a large current account deficit for years. In addition to this, the country's government has also run large budget deficits. Like an individual who runs up large amounts of debt, this makes the debt of the United States less attractive, and has the potential to decrease other countries willingness to fund these activities, by holding US Dollar Denominated debt as reserves.
Secondly, many consider the monetary policy of the United States to be flawed, citing the Federal Reserve's increase of the money supply to hold interest rates low, as a major factor in the dollar's decline. As we learned about in our lessons in module 3 of this course, the lowering of interest rates tends to weaken the value of a currency all else being equal. As the value of the currency falls, countries around the world who hold that currency, see wealth evaporate due to the falling value of their reserves. This obviously has the potential to make the US Dollar less attractive for them to hold as their reserve currency, which means a decrease in demand, and a decrease in the value of the currency all else being equal.
As of this lesson the US Dollar has fallen over 35% in the last several years, as measured by the US Dollar Index. As we just discussed, this decreases the wealth of the countries who hold the US Dollar as their reserve currency, and has the potential to reduce their appetite for US Dollars, regardless of the reason for the decline in value. This potentially means a decrease in demand from the central banks to hold US Dollars as their reserve currency, and a decrease in the value of the currency, all else being equal.
http://youtu.be/nUV6QWc5T0s
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117. Determining the Fate of the US Dollar
As some of you who are a little more experienced in the markets probably know, some problems can arise with the above scenario, and there have been many examples in history of countries who were not able to hold their currency pegs. Probably the most famous example of this is referred to as Black Wednesday, when the famous speculator George Soros was credited with forcing the Bank of England to abandon their currency peg, causing the British pound to fall over 25% relative to the US Dollar in a matter of weeks.
So what does all this have to do with the US Dollar's Status as the world's reserve currency? Well, one of the main reasons that countries have in the past chosen to peg their currencies to the US Dollar, is because of the relative stability of the US Dollar in relation to other currencies. It is important to understand that not only do the currencies of countries who peg to the US dollar fluctuate in value along with the US Dollar, but their own monetary policy is basically tied to the monetary policy in the United States.
This is all fine and dandy so long as the monetary policy of the United States is considered sound, and so long as the currency does not fluctuate in a manner that adversely affects the economy of the country pegging to the dollar. Problems arise however when the dollar fluctuates in a way that adversely affects the economy of the country with the peg, and/or the monetary policy of the United States is set in a way that is not beneficial to those same countries.
There is a perfect example of this going on as of this lesson, with oil producing countries in the Middle East. As the price of oil has been high for so long, the economies of countries such as Saudi Arabia are booming, and money is flowing into those countries at a rate never seen before, creating all sorts of demand for the Riyal (Saudi Arabia's Currency). At the same time, the United States, the currency of which Saudi Arabia pegs their currency to, is going through an economic slowdown.
So what you have here is a situation where, if anything, monetary policy should be tightening in Saudi Arabia, and their currency should be strengthening. As their currency is pegged to the US Dollar however, they are affected by the loose monetary policy of the United States, throwing fuel on an already hot economy, and weakening their currency when it really should be strengthening. As we learned in our lessons on monetary policy in module 8 of our basics of trading course, this is a recipe for massive inflation, which it seems they are starting to see signs of now.
Scenarios such as this can cause countries to abandon their currency pegs or switch the currencies that they peg to something which is of major importance to the status of the US Dollar as the World's reserve currency.
There are many different scenarios such as the one above which can arise from countries who peg their currency to another. It is important for us to have a fundamental understanding of how to spot these scenarios, as whether or not countries continue to peg their currencies to the US Dollar, or move to a basket of currencies or another currency all together, will have huge affects on the value of the US Dollar going forward.
http://youtu.be/HJB91O9sDE0
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118. Determining the Fate of the US Dollar Part II
A look at currency pegs, what they are, and how they affect the value of the US dollar.
http://youtu.be/lkNyI5VL2OQ
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119. Determining the Fate of the US Dollar, Part III
A look at the US dollar and the primary factors that traders need to consider when evaluating its long term value. The final video in our three part series on this subject.
http://youtu.be/gYmY2sJO5lk
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120. Economic Releases that Move the US Dollar
As you can probably imagine, we could spend many lessons and multiple hours going over each of the economic indicators that affect the price of the US Dollar. It is for this reason, that before getting into any of the actual indicators, I wanted to give everyone an overview of the broad things that move the market. As we have discussed in previous lessons the two broad categories that pretty much everything that moves the forex market fits into, are trade flows and capital flows, as covered in module 3 of this course.
Once you have an understanding of this, all that is necessary to understand how economic numbers move the dollar, is to understand which numbers are important to the market at the time, whether those numbers fit into the trade flows or capital flows category, and how they should affect the dollar as a result.
As we learned in module 8 of our basics of trading course, how the market reacts to economic releases is generally determined by two factors:
1. How important the market considers a particular release to be.
2. How close to market estimates the number comes in at. Remember that markets anticipate news, so generally if an economic release comes out as expected, there is very little if any market reaction to that release.
How important the market considers a particular economic release to be, is something that changes over time depending on what is happening from a US Dollar fundamentals standpoint. If there are worries that the economy is going into recession, then the market is going to be extra sensitive to any numbers, such as non farm payrolls and consumer spending, which may provide early warning signs that this is the case. Conversely, if the economy is heating up and the markets are worried that inflation may become a problem, then the most market moving numbers may be price data releases, such as the CPI and the PPI. For your reference, according to Dailyfx.com the most market moving indicators for 2007, in order of importance were:
1. Non Farm Payrolls
2. FOMC Releases
3. Retail Sales
4. ISM Manufacturing
5. Inflation
6. Producer Price Index
7. The Trade Balance
8. Existing Home Sales
9. Foreign Purchases of US Treasuries (TIC Data)
We have discussed most of these indicators already, and for those which we have not, a quick google search, and review of the indicator in the context of whether it fits into trade flows or capital flows, should answer the question of why they move the market.
Although I am probably a little biased since I used to work with the people who run the site, I am a very big fan of Dailyfx.com as the place where I go to find out what economic data is due for release, and for commentary on the number after the release. They have a great global calendar which you can find at the top of the site as well as tons of both technical and fundamental commentary on everything that affects the US Dollar and forex market in general.
For this lesson specifically, if you click the calendar button at the top of the site you will see they have all of the economic data releases from the major countries of the world with the time of the release, the previous number, the forecasted number and the actual number which is updated after the release. You will also notice here they have links for the more important numbers giving a definition of the release, the relative importance of the release, and the latest news release relating to that release.
If you click back to the homepage of the site you will see lots of fx related reports which the Dailyfx staff puts out throughout the day. Two of my favorite reports are the Daily Fundamental report by Kathy lien, and the US Open Market Points by Boris Schlossberg which you can find in the middle of the page.
As we discussed in module 8 of our basics of trading course, the best way to get a feel for how economic numbers affect the market, and which numbers are in focus, is to start following the market on a daily basis and seeing how it reacts to various news events. As this is the case, I highly recommend following the commentary on Dailyfx.com as well as the forex commentary on InformedTrades.com, and start putting your analysis to practice on your real time demo accounts. If you have not registered for a free realtime demo account I have included a link above this video where you can do so.
http://youtu.be/Ri8Bf6jYswY