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Forex Volatility to Remain High

Jul. 24th 2010

With the onset of the Eurozone sovereign debt crisis this year, volatility levels in forex (as well as in other financial markets), surged to levels not seen since the height of the credit crisis. While volatility has subsided slightly over the last few months, it still remains above its average for the year, and significantly above levels of the last five years.

The spike in volatility was easy enough to understand. Basically, the possibility of a default by a member of the EU or even worse, a breakup of the Euro created massive uncertainty in the markets, spurring the flow of capital from regions and assets perceived as risky to those perceived as safe havens. As you can see from the chart below, this trend has begun to reverse itself, but still remains prone to sudden spikes.

5 Year Forex Currency Volatility Chart
While the crisis in the EU seems to have (temporarily) settled, investors are attuned to the possibility that it could flare up again at any moment. A failed bond issue, a higher-than-forecast budget deficit, political stalemate, labor strikes – all signal a failure to resolve the crisis, and would surely trigger a renewed upswing in volatility and sell-off in risky assets.

The same goes for (unforeseen) crises in other regions, affecting other currencies. Muses one analyst: “Next week? Who knows. One strong candidate is for flight out of the yen as investors start to fear there won’t be enough domestic demand for mountains of Japanese debt and foreign buyers will insist on much higher yields. Another might be that Swiss banking exposure to insolvent east European households causes another banking crisis.” Don’t forget about the UK and US, both of which have hardly put the recession behind them, and whose Trillions in debt represent powder kegs waiting to explode.

It will be months or years before these latent crises even begin to manifest themselves, let alone achieve some kind of resolution. As a result, many analysts predict that volatility will remain high for the foreseeable future: “Big and sudden currency market moves shouldn’t come as a surprise, whatever the direction…Higher market volatility should follow on from greater macroeconomic volatility. Increased economic fluctuations increase uncertainty. And there’s no question macroeconomic volatility has risen.”

In addition, there is no way for governments for Central Banks to alleviate these crises due to the “Trillema of International Finance.” Greg Mankiw, Harvard Economics Professors, explains that in prioritizing an independent monetary policy and open capital markets have forced many countries to forgo exchange rate stability: “Any American can easily invest abroad…and foreigners are free to buy stocks and bonds on domestic exchanges. Moreover, the Federal Reserve sets monetary policy to try to maintain full employment and price stability. But a result of this decision is volatility in the value of the dollar in foreign exchange markets.” While the Euro has eliminated exchange rate fluctuations between members of the Eurozone, meanwhile, there is nothing that the ECB can (or desires to) do to minimize volatility between the Euro and outside currencies.

From the standpoint of forex strategy, there are a couple of lessons that can be learned. First of all, the carry trade will remain underground until volatility returns to more attractive levels. Until then, the potential gains from earning a positive yield spread will be offset by the possibility of sudden, irascible currency depreciation. Second, growth currencies – despite boasting strong fundamentals – will remain vulnerable to sudden declines. That doesn’t mean that they should be avoided; rather, you should simply be aware that small corrections could easily turn into multi-month weakness.

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Commodity Currencies Remain in the Spotlight

Feb. 3rd 2010

In 2009, so-called commodity currencies – both individually and as a group – registered record-breaking gains. The Brazilian Real and the South African Rand finished up more than 30%, while the Australian and New Zealand Dollars finished up about 25% each, and the Canadian Dollar not far behind. While the outlook for 2010 is slightly less rosy (if only because of the law of averages), investors would still be wise to keep such currencies on their radar screen.

With the appreciations of 2009 canceling out the depreciations of 2008, currency markets are close to “equilibrium.” Going forward, then, investors will to find a rationale other than sheer momentum for making bets. Strong commodity prices represent one such rationale. This is not only the case because currency prices are rising and are underpinning the recoveries in the respective countries that are rich in their production, but also because economic recovery – and “normal” growth as well, for that matter – in many other economies is built precariously on debt and the expansion of sovereign money supplies.

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Commodity currencies – and commodities in general – have always held allure as investment vehicles because of their tangibility and necessity. Simply, modern economies depend on commodities for their functioning. Thus, countries rich in natural resources would seem to represent safe bets, since they can be assured of demand both during periods of expansion and during economic downturns.  The strong performance of commodity currencies in 2009 underscores this point, since despite the fact that prices for many commodities are well below the record highs of 2008, these currencies are very close to their 2008 highs.

More specifically, the Canadian Dollar often tracks the price of oil; this correlation will probably only strengthen when the oil sands of western Canada are developed. While rich in many natural resources, it is gold that both Australia and South Africa are famous for, and to which their currencies are often tethered. Brazil and New Zealand deal in a more diverse array of commodities, and the Kiwi and Real often move in tandem with broad-based commodities indexes. There is also the Mexican Peso (oil), the Russian Ruble (natural gas), the Norwegian Krona (oil), and Chilean Peso (copper), but the correlations between these currencies and the respective commodities for which they are famous tend to be looser.

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Of course, there are many other economies that are rich in natural resources, but for various reasons (lack of liquidity, fixed exchange rates), their currencies aren’t (as) appropriate for investing. Even the currencies I listed above don’t always reflect commodities prices. For example, Canada’s fiscal problems and South Africa’s monetary easing will arguably weigh down the Loonie and Rand, respectively, in 2010.

For commodity pure-plays, your best bet, then, would be to invest in the commodities themselves. Of course, commodities don’t pay interest and their costs associated with holding them (whether directly or indirectly) and they tend to fluctuate with greater volatility than currencies. Another option is the just-announced WisdomTree Commodity Currency Fund, an ETF composed of a basket of commodity currencies, many of which I listed above.

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Dollar Down, Gold Up

Sep. 26th 2009

As an unintentional extension to an earlier post (Dollar Down, Everything Else Up), I want to use this post to highlight the appreciation of gold in particular, against the Dollar. After a brief decline following the credit crisis, Gold has resumed its upward path. It has appreciated 15% year-over-year, and recently cracked $1,000/oz for the only the fourth time in history.

The general factors behind the price of gold are too broad and numerous to be captured in this post. In addition, many of these factors have little to do with currencies (including the Dollar), and thus don’t warrant much space on a blog devoted to forex. At the same time, conspiracy theorists, doomsday predictors, and even some mainstream economists have long argued in support of gold as a hedge against inflation (otherwise understood as currency devaluation). In fact, I am only posting about gold now is because that notion has become much more popular over the last few years, to the point where pundits have come to see the current appreciation almost solely in terms of the decline in the Dollar.

That’s because many of the more conventional factors – the same ones that affect prices for other commodities – suggest that gold prices should be declining. Non-speculative demand (i.e. jewelry, industry) remains subdued as a result of the economic recession. Speaking of which; while there is now some evidence of recovery, it is nowhere near robust enough to support a return to bubble prices. In addition, the International Monetary Fund (IMF) just approved a massive sale of its gold reserves, equivalent to 15% of the world’s annual gold production.

Yet the price of gold remains not only stable, but positively buoyant. According to analysts, this is because of an increasing sense of anxiety about the viability of the Dollar as the world’s reserve currency. Euro Pacific Capital’s Peter Schiff, an effusive source of commentary on the markets, believes the price of gold will skyrocket to $5,000 per ounce. “Schiff’s forecast is based on his view the U.S. dollar is going to collapse under the weight of our massive deficit and reckless policies of the Obama administration, which he compares to the massive spending programs of the 1960s, which paved the way for gold’s ascent in the 1970s.”

Other analysts take Schiff’s view one step further by arguing that a shortage of viable alternative reserve currencies (Euro, Yen, Pound, Yuan, etc are plagued by similar fundamental flaws as the Dollar) makes gold the best candidate to replace the Dollar. Some people even hold the extreme view that the entire fiat monetary system will collapse, with the result being a barter system centered around gold. In any event, people are nervous: “That means a growing number of investors, traders — and, most troublingly, foreign governments — don’t believe in the strength of the U.S. dollar, analysts warn. People buy gold when there’s fear.”

On the other hand, it seems reasonable that gold is appreciating for the same reason that everything else is. In this sense, rising gold prices are hardly remarkable. Silver and platinum, for instance, have risen nearly 50% year-after-year, despite similarly weak fundamentals. There is a danger in connecting the Dollar’s decline too closely with the rise in gold, since the former is largely a function of short-term factors such as low interest rates and increasing risk appetite. “With the Fed confirming that interest rates could be steady for a long time, the dollar may continue to be dumped in favor of higher yielding currencies, which may favor the yellow metal.”

While there’s reason to be alarmed or even angry about deficit spending, quantitative easing, money printing, and unsustainable debt, there’s very little to support the notion that inflation is taking hold.  In fact, based on both Treasury bonds and inflation securities, inflation is the last thing on the minds of investors. In addition, while gold represents a conceptual reserve commodity, it’s not very practical. It has very little utility (especially compared to other commodities), and its supply can be easily manipulated by producers and central banks. One analyst explains, “Even a rather wobbly reserve currency is better than gold. Gold is far less liquid than U.S. Treasury securities, costly to store and insure, and above all more volatile in price.”

Still, perception is reality in financial markets. If investors want to see a connection between a weak Dollar and strong gold, they will simply contrive one. But if the Fed raises interest rates and/or the Dollar stabilizes, you can expect gold prices to follow suit. If this happens, it won’t imply that confidence in the Dollar has been restored. Instead, it will only imply that investors can earn a higher return investing in Dollar-denominated assets and no longer need to speculate in gold.

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Posted by Adam Kritzer | in Features, News, US Dollar | 8 Comments »

Top 25 Forex Sites (By the Numbers)

Sep. 4th 2007

At Forex Blog, we like to keep up on the latest forex news by keeping tabs on other forex Web sites. Recently, our desire to stay on top of the latest forex news begged the question: which forex sites have the biggest reach? With nowhere to turn to answer this question definitively, we thought it would be an interesting exercise to rank all Web sites in the forex niche.

In ranking the top forex sites, our goal was to show — using objective data from reliable sources — which sites that are solely about forex are the most popular. To this end, we used data for these four metrics to calculate the rankings:

Top 25 (see complete methodology below)

Rank Site Google Alexa Technorati Compete Score
1 FX Street 6 10 10 10 36
2 Daily FX 6 10 10 10 36
3 Global Forex Trading 6 10 10 10 36
4 Forex Factory 4 10 10 9 33
5 Babypips 5 9 9 9 32
6 Action Forex 4 9 10 9 32
7 Forex News 6 9 9 8 32
8 CMS Forex 5 9 8 10 32
9 FX Solutions 4 10 7 10 31
10 Forex TV 5 6 10 10 31
11 Forex Markets 4 8 8 8 28
12 Global View 5 7 7 9 28
13 Finotec 4 9 8 6 27
14 Forex Directory 4 8 8 7 27
15 FX Words 6 6 6 9 27
16 Grace Cheng: Power Forex Trading 5 8 7 6 26
17 The Forex Project 4 6 9 7 26
18 Forex Blog 5 6 9 6 26
19 Forex Bastards 3 8 5 8 24
20 Secret Forex Society 4 8 5 7 24
21 Peter Bain: Forex Trading Commentary 3 7 6 8 24
22 MTI Forex Tips 4 7 7 6 24
23 Pip Trader 4 5 6 6 21
24 Forex Realm 4 5 4 7 20
25 Free Forex Charts 6 4 3 7 20

Methodology

To begin, we referred to an earlier post of ours, Top 100 Forex Resources, to gather an initial list of sites to rank.

For each metric, a score was assigned on a 0–10 scale. For Google PageRank, raw PageRank data was scored. For Alexa Rank, Technorati Authority, and Bloglines Subscribers, the Web sites were broken up into deciles. If a Web site was in the 0>10% decile, a 1 was scored; for the 10>20% decile, a 2 was scored; and so on, up to a 10 being scored for the 90–100% decile. If no data was available, a 0 was scored.

The overall score for each Web site is the sum of the scores of the four metrics. In the event of a tie in overall score, the tie is broken according to the Alexa Rank raw data.

Raw Data for Entire Set

Rank Site Google Alexa Technorati Bloglines
1 FX Street 6 7,252 15,114 31,817
2 Daily FX 6 12,991 3,350 50,605
3 Global Forex Trading 6 22,638 1,479 45,665
4 Forex Factory 4 5,385 1,085 8,726
5 Babypips 5 29,534 951 6,078
6 Action Forex 4 47,022 7,853 7,191
7 Forex News 6 54,775 745 3,939
8 CMS Forex 5 59,052 310 15,723
9 FX Solutions 4 28,263 207 160,374
10 Forex TV 5 195,082 1,247 15,380
11 Forex Markets 4 101,022 309 2,849
12 Global View 5 173,139 228 9,070
13 Finotec 4 37,691 346 1,016
14 Forex Directory 4 96,132 435 2,405
15 FX Words 6 213,487 183 5,082
16 Grace Cheng: Power Forex Trading 5 99,604 291 1,121
17 The Forex Project 4 210,968 466 1,392
18 Forex Blog 5 218,080 1,042 1,047
19 Forex Bastards 3 60,769 113 4,343
20 Secret Forex Society 4 102,413 110 1,871
21 Peter Bain: Forex Trading Commentary 3 112,319 126 3,341
22 MTI Forex Tips 4 119,283 261 1,045
23 Pip Trader 4 318,320 115 1,312
24 Forex Realm 4 442,474 72 2,153
25 Free Forex Charts 6 735,587 23 1,987
26 FX Power Trading Course 5 762,178 14 2,725
27 Earn Forex 3 285,271 891 0
28 Open Forex 5 522,180 433 0
29 Piptopia 4 283,227 95 0
30 Currency Secrets 4 319,276 74 0
31 Forex Reader 4 925,415 251 0
32 E-Forex 4 725,463 45 0
33 Forex Training 4 792,896 83 0
34 Forex Central 3 882,795 123 0
35 Ace Trader 3 183,248 4 0
36 Top 100 Forex Sites 0 353,883 158 0
37 Forex Predictions 3 1,019,283 33 0
38 Forex Trading USA 3 1,239,717 70 0
39 Scotia FX 5 2,771,289 14 0
40 FX HomeTrader 4 3,349,877 48 0
41 Learn4X 3 1,295,120 30 0
42 Forex Fibonacci 3 1,873,925 11 0
43 Forex Business 4 3,136,818 5 0
44 Info Forex 4 3,234,432 14 0
45 A Forex Loser 3 3,844,810 19 0
46 Forex Glossary 4 4,104,774 13 0
47 IFXTAG 4 29 0
48 Forex Planet 0 7,461,379 18 0
49 Forex Economic Calendar 0 2,340,539 3 0
50 My Forex Trading Tools 2 No Data 1 0
51 FX Quote 0 No Data 1 0
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Posted by Adam Kritzer | in Features | 1 Comment »

The Day Trader’s Toolkit: 100 Free Online Apps for Professionals

Aug. 13th 2007

Nothing beats direct access to a trading desk for day trading success, as instantaneous trade executions can be important for day traders who seek arbitrage opportunities that last second. Large amounts of capital and leverage and expensive analytical software are also important for the individual or institutional traders who seek easy profits that can be made from arbitrage opportunities and news events. While we can’t provide you with the ability to bypass a broker or pass on wads of cash for trading opportunities, we can supply you with a list of free apps that can help you gain a day trading edge.

The "free" part of this list is a bonus for day traders who seek to eliminate any dents in profits. You can gather free news, analytical tools, screeners, charts, and professional advice from this list. Plus, we’ve saved you time (and time is money!), as this list provides you with a handy alphabetical directory with direct access to the means for your future success.

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Posted by Adam Kritzer | in Features | No Comments »

13 Socially Responsible Careers in Finance

Jul. 11th 2007

If you’re interested in a financial career, you might be curious about how your interests can lead to reconciliation between your job and your belief system. Social finance might open the door to several solutions for your dilemma. While social financing might seem new, it’s been around since the first individual took a stand against profit at any cost. A Quaker would no more finance slavery before the Civil War than a conscientious objector would finance war machines today.

Before you have an epiphany about your career goals, you might want to learn more about the various facets within social financing, the career opportunities that are open to you, and the education you may need to pursue your dreams.

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How Does Terrorism Affect Your Trading?

Jun. 21st 2007

Most American traders know that a majority of stock market investments have become global over the past quarter century. Even homegrown companies have expanded with overseas offices or, at the minimum, overseas clients have come on board through the Internet. Currency traders aren’t immune to global trading, as the Forex market has opened to any interested trader with money to invest. While investors can look forward to portfolio growth with market expansions, they can also begin to measure how terrorism has affected their trades since 9/11.

The events on 11 September 2001 seem to provide the baseline for many analysts on how terrorism can affect trading. The day before the Twin Towers fell, the Dow Jones Industrial Average (DJIA) closed at $9,605.51. One week later, when the markets reopened on September 17, 2001, the DIJA hit an intraday low of $8,755.46 and the market didn’t recover for about another month. But, terrorist attacks – even the threat of an attack – can affect any market beyond Wall Street. Forex is especially susceptible to terrorism, since many targets focus on financial institutions or on major industries that represent wealthier countries.

According to one study [PDF] conducted by Ohio State University, exchanges, banks, and oil companies aren’t the only facilities that terrorists target. This study reveals that 75 terrorist-related attacks between 1995 and 2002 were focused on publicly traded firms and that the average loss per firm per attack was $401 million in market capitalization.

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Top 100 Forex Resources

Apr. 2nd 2007

The average daily forex trading volume currently exceeds $1.9 trillion. With so much on the line, we’ve put together a list of our favorite 100 forex resources to help you become a knowledgeable forex trader. The following resources were chosen for the quality of information and training tools offered. Although some of these tools are located on commercial sites, you’ll find value in materials produced by professionals. Other sites were chosen for the resources that they offered for a price (like books), but they’re all geared specifically toward the forex trader. The chosen sites are written in the English language, but some individuals, businesses, and organizations are located in areas other than the United States. All sites are listed in alphabetical order within the following categories:

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Posted by Adam Kritzer | in Features | 9 Comments »

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