WORLD FOREX

Fox business TV to simulcast Don Imus radio show

2009-09-03T18:54:00.000-07:00

NEW YORK (Reuters) – The Fox business news channel of Rupert Murdoch’s News Corp has agreed to simulcast the radio show of Don Imus, the ratings-grabber who stirred a national controversy on race two years ago.

Fox Business Network (FBN) said on Thursday it had signed a multiyear deal to show the Imus program on weekdays from 6 a.m. to 9 a.m. starting on October 5.

“The program will incorporate additional business news into its format, which now offers a mix of current affairs, politics, entertainment and sports,” Fox said in a statement.

The Imus show will continue to be syndicated on the radio by Citadel Broadcasting Corp.

Fox Business Network launched in October 2007 to compete with CNBC, a unit of NBC Universal which is owned by General Electric and Vivendi.

Since its launch, Fox Business Network’s morning audience has regularly been dwarfed by CNBC, and television analysts have said it needs a jolt. Imus may provide that, but his show also raises questions about whether the network will continue to concentrate on business news or is ready to move in other directions to attract viewers.

Imus’ show of off-color humor and politics will air in the critical hours before markets open in New York.

The “Money for Breakfast” show from 7 a.m. to 9 a.m. will be canceled and the “Opening Bell” show will continue in the 9 a.m. to 10 a.m. slot.

Imus, among the highest-rated radio hosts in the United States, caused a scandal in 2007 when he referred to a mostly black women’s basketball team as “nappy headed hos.” The phrase combines a term for short, curly hair with slang for whore and was widely criticized as racially charged and offensive.

Imus apologized, but the comment led MSNBC cable television to cancel the simulcast of his radio show, which was also aired by CBS Radio. CBS then fired Imus when the controversy persisted.

(Reporting by Daniel Trotta; Editing by Tim Dobbyn)

Crude Oil Jumps Above $70 On Improved Demand Hopes

2009-08-03T20:05:00.000-07:00

(RTTNews) - Crude oil continued its upward surge on Monday, extending a seven-week high. Encouraging economic data improved the prospect of energy demand.

Light sweet crude for September delivery rallied to $71.58, up $2.13 on the session. Prices reached as high as $72.10 earlier in the day.

A weaker dollar boosted oil's value as a hedge investment. The greenback dropped to a its lowest levels of 2009 against both the euro and sterling as rising global stocks boosted risk appetite.

On the economic front, the Institute for Supply Management said its index of activity in the manufacturing sector rose to 48.9 in July from 44.8 in June, although a reading below 50 indicates a contraction. Economists had been expecting a reading of 46.5.

Meanwhile, the U.S. Commerce Department revealed that construction spending rose 0.3 percent in June. This followed a revised 0.8 percent slide in May.

Oil finished last week up $1.63 per barrel amid volatile movement. September oil fell $5.14 in the month of July, briefly touching below $60.

Energy Department data released last week showed U.S. commercial crude oil inventories increased by 5.1 million barrels during the week ended July 24.

by RTT Staff Writer

For comments and feedback: contact editorial@rttnews.com

Gold Rises To Seven-Week High On Weaker Dollar

2009-08-03T20:00:00.001-07:00

(RTTNews) - The price of gold extended a seven-week high on Monday, boosted by a weaker U.S. dollar. Soaring crude oil prices also boosted the metal.

Gold for immediate delivery rose to $956.60 per ounce, up $2.90 for the day. Prices touched as high as $964 earlier in the session.

The dollar continued to plunge against the euro, falling below 1.4400 to its lowest level since December. The greenback also hit its lowest level of the year versus the British pound. Gold usually moves opposite the dollar because of the precious metal's hedge value.

Crude oil for September delivery rallied to $71.58 per barrel, up $2.13 on the session. Prices touched a seven-week high of $72.10 earlier in the day.

In economic news, the Institute for Supply Management said its index of activity in the manufacturing sector rose to 48.9 in July from 44.8 in June, although a reading below 50 indicates a contraction. Economists had been expecting a more modest increase to a reading of 46.5.

Meanwhile, the U.S. Commerce Department revealed that construction spending rose 0.3 percent in June. This followed a revised 0.8 percent slide in May. Private construction slipped 0.1 percent, though residential construction spending was up 0.5 percent.

Personal income and spending is coming at 8:30 a.m. ET Tuesday. Personal income is expected to drop 1% in June after a 1.4% rise in the prior month. Personal spending is forecast to rise 0.3% after gaining 0.2% in May.

Pending home sales data is coming at 10 a.m. ET. Sales are expected to be up 0.3% in June after rising 0.1% in May.

Last week, gold gained $2.40 amid choppy trading after surging more than $18 on Friday. The metal rallied about 2.8% in the month of July.

by RTT Staff Writer

For comments and feedback: contact editorial@rttnews.com

Dollar Hits The Skids As Recovery Hopes Rise

2009-07-31T19:11:00.000-07:00

(RTTNews) - The dollar plummeted across the board versus major counterparts on Friday as traders expressed increased risk appetite after a report showed that the US economy contracted less than analysts were predicting.

The report fueled hopes that the world's biggest economy could lead the world out of the worst recession in decades, and sooner than once feared.

Traders had been hedging of late, refusing to go all-in on the prospect of a global recovery beginning by year's end. However, with stocks on the rise and a number of key indicators showing a faint pulse in the housing and labor markets, the dollar could be in for some big losses to higher-yielding counterparts.

Its already been a rough month for the dollar versus resource-linked currencies, and the euro and sterling joined the buck-bashing party on Friday.

The dollar tumbled to 1.4270 versus the euro, giving back all of its gains from earlier in the week. With the loss, the dollar moved within a penny of its 2009 lows.

The dollar plunged from a month-long trading range versus the sterling, slipping to a 4-week low of 1.6732 before finding support. Back in June, the dollar hit a 2009 low of 1.6744.

Even the yen battered the dollar on Friday. The buck slipped to 94.58 by mid-day after challenging a monthly high near 96 in the previous session.

Versus the loonie, the dollar dropped to C$1.0762, coming within a hair of Monday's 10-month low of C$1.0749.
The U.S. economy continued to shrink in the second quarter, according to new government statistics released Friday, although the pace of contraction slowed by more than economists had been expecting.

The U.S. Commerce Department revealed that Gross Domestic Product, a closely watched measure of broad economic performance, fell at a pace of 1 percent for the second quarter. Economists had expected GDP to fall at a 1.5 percent rate.

And while the Institute for Supply Management - Chicago released a report on Friday showing a continued contraction in manufacturing activity in the month of July, the pace of contraction slowed by a little more than economists had been expecting.

North of the border, Canadian real gross domestic product (GDP) decreased 0.5% in May, a faster rate of decline than in the previous three months, according to data released Friday by Statistics Canada.

Economist were looking for GDP to fall 0.3% in May.

by RTT Staff Writer

For comments and feedback: contact editorial@rttnews.com

Crude Oil Rallies As GDP Report Boosts Demand Expectations

2009-07-31T18:57:00.001-07:00

(RTTNews) - Crude oil turned sharply higher again on Friday and closed at a four-week high. A better-than-expected gross domestic product report boosted the outlook for energy demand.

Light sweet crude for September delivery surged to $66.31, up $2.53 on the session. Prices touched as high as $69.74 after earlier hitting as low as $64.96.

With the rebound, oil finished a choppy week up $1.63 per barrel. September oil fell $5.14 in the month of July, briefly touching below $60.

Earlier in the week, prices fell as Energy Department data showed U.S. commercial crude oil inventories increased by 5.1 million barrels during the week ended July 24.

In the big economic news, a U.S. Commerce Department report revealed gross domestic product fell 1% in the second quarter. Economists had expected GDP to fall at a 1.5 percent pace. This follows a 6.4-percent contraction in the first quarter.

The Chicago purchasing manager's index for July came in at 43.4. A reading of 42.0 was projected, compared to a 39.9 in June.

The dollar tumbled versus the euro and moved within a penny of its 2009 lows. The buck also fell to a four-week low against the pound.

Forex Trading Account Registration

2009-07-25T00:50:00.000-07:00

When you open a Forex trading account, you will be asked to give various personal details, including your credit card details, so you will be able to make real cash trades. Some sites offer Forex trading free training wherein you are not required to give out your credit details in order to open and use the demo account.In most cases Forex trading registration is done online, even though sometimes you are required to register by fax. This is uncommon though and only occurs for the smaller Forex trading sites.Forex

Forex Symbols

2009-07-21T19:21:00.000-07:00

Understanding the Forex symbol is essential to Forex trading. You need to remember that the first currency listed in the symbol is the base currency, and the quote is the base currency in terms of the second currency in the symbol.

Major currency pairs are EUR/USD, GBP/USD, USD/JPY, and USD/CHF.
For example:

1.) A price quote of EURUSD at 1.30851 means that one Euro is equal to 1.30851 U.S. Dollars. When that number increases, it means the Euro is appreciating while the U.S. Dollar is depreciating and vice versa.

2.) USDJPY is trading at 124.000. It means 1 U.S. Dollar is equal to 124 Japanese Yen. An increase in the number means that the U.S. Dollar is appreciating while the Japanese Yen is depreciating, and vice versa. Again, if a currency quote goes higher, that increases the value of the base currency. A lower quote means the base currency is weakening. Cross currency pairs are currency pairs that do not involve the U.S. dollar.

For example:
3.) With EURJPY at a price of 126.34, it means that 1 Euro is equal to 126.34 Japanese Yen.

Benefits of Trading Forex

2009-07-21T19:18:00.000-07:00

Lower Trading Costs
When trading Forex with TradeStation, you pay a small commission, and the bid-ask spread also adds to the cost of trading. However, there are no real-time data exchange fees, real-time Forex data is Free.

24 Hour Market Action
The Forex currency market is a seamless 24-hour market. From 5PM EST Sunday to 5PM EST Friday.

Leverage
Forex trading often allows borrowing leverage up to 100 times your account value.
Remember that while leverage can help build profits quickly, it can also produce large, catastrophic losses.

High Liquidity
The Forex market, with an average trading volume of over $1.3 trillion per day, is the most liquid market in the world. This means that a trader can usually enter or exit the market at will in almost any market condition usually without regard to trade size limitations.

What is forex?

2009-07-21T18:56:00.000-07:00

FOREX or Foreign Exchange market is the world largest financial market, where currency of one country is exchanged with another country through currency exchange rate system. Trader’s purpose is to get the profit as the result of foreign currencies purchase and sale. From latest assessment, Forex trading daily constitution is approximately average from 1.5 trillion to 2.5 trillion. . The free-floating of currencies being in the market turnover are determined by the supply and demand. The currency rate is actually run through telecommunication all over the network of banks 24 hours a day from 00:00 GMT on Monday to 10:00 pm GMT on Friday. Importance of human society event in the sphere of economy strongly influences the currency market. Traders gain the profit from the fluctuations in accordance with an agreed principle “buy cheaper- sell higher” or “sell higher-buy cheaper”. Forex is a continuously changing number financial system which exclusively create high trade turnover to all individual and corporative traders with an ensured liquidity of traded currencies. Due to the high potential profitability, therefore the higher risk should be essentially considered. Traders can only be the successful forex investors by going through proper training including an understanding of forex structure and types, the common techniques of analysis, the factors influencing currencies and potential risks, high confident prediction of the market movements with the trading tools and data. There are lots of simulation trading software on web, you can simply choose anyone of them for self training. This will help you to be in a better scenario. Most of the trading providers have the toll free phone number, so just call them up! Ask them question! Learn from them! Some of them may take initiative to consult you, so do write down the question from time to time.

There are many countries in world; so results different currency pairs. Among all of them, these are the popular in currency trading:

EUR/USD, USD/JPY, GBP/USD, USD/CHF, EUR/CHF, AUD/USD, USD/CAD, NZD/USD, EUR/GBP, EUR/JPY, GBP/JPY, CHF/JPY, GBP/CHF, EUR/AUD, EUR/CAD, AUD/CAD, AUD/JPY, CAD/JPY, NZD/JPY, GBP/AUD, AUD/NZD

Five Major Currencies are:

U.S dollar - The United States dollar is the world's main currency – an universal measure to evaluate any other currency traded on Forex.

Euro- Euro was designed to become the premier currency in trading by simply being quoted in American terms. Like the U.S. dollar, the euro has a strong international presence stemming from members of the European Monetary Union.

Japanese Yen- The Japanese yen is the third most traded currency in the world; it has a much smaller international presence than the U.S. dollar or the euro. The yen is very liquid around the world, practically around the clock.

British Pound - Until the end of World War II, the pound was the currency of reference. The currency is heavily traded against the euro and the U.S. dollar, but has a spotty presence against other currencies.After the introduction of the euro, Bank of England is attempting to bring the high U.K. rates closer to the lower rates in the euro zone.

Swiss Franc - Swiss franc is the only currency of a major European country that belongs neither to the European Monetary Union nor to the G-7 countries. Although the Swiss economy is relatively small, the Swiss franc is one of the four major currencies, closely resembling the strength and quality of the Swiss economy and finance.

To have a well focusing, you have to concentrate on less than 5 currency pairs( preferred the U.S. cross-currency pairs.)

Some traders see forex as a business, and some see it as a fortune. And even some traders think forex is an art. But anyway, its highly recommended to use pivot system in your trading plan or else you are trading blind.

Forex Tutorial: Introduction to Currency Trading

2009-07-21T18:55:00.000-07:00

The foreign exchange market (forex or FX for short) is one of the most exciting, fast-paced markets around. Until recently, forex trading in the currency market had been the domain of large financial institutions, corporations, central banks, hedge funds and extremely wealthy individuals. The emergence of the internet has changed all of this, and now it is possible for average investors to buy and sell currencies easily with the click of a mouse through online brokerage accounts.

Daily currency fluctuations are usually very small. Most currency pairs move less than one cent per day, representing a less than 1% change in the value of the currency. This makes foreign exchange one of the least volatile financial markets around. Therefore, many currency speculators rely on the availability of enormous leverage to increase the value of potential movements. In the retail forex market, leverage can be as much as 250:1. Higher leverage can be extremely risky, but because of round-the-clock trading and deep liquidity, foreign exchange brokers have been able to make high leverage an industry standard in order to make the movements meaningful for currency traders.

Extreme liquidity and the availability of high leverage have helped to spur the market's rapid growth and made it the ideal place for many traders. Positions can be opened and closed within minutes or can be held for months. Currency prices are based on objective considerations of supply and demand and cannot be manipulated easily because the size of the market does not allow even the largest players, such as central banks, to move prices at will.

The forex market provides plenty of opportunity for investors. However, in order to be successful, a currency trader has to understand the basics behind currency movements.

The goal of this forex tutorial is to provide a foundation for investors or traders who are new to the foreign currency markets. We'll cover the basics of exchange rates, the market's history and the key concepts you need to understand in order to be able to participate in this market. We'll also venture into how to start trading foreign currencies and the different types of strategies that can be employed.

Robot Performing Well

2009-07-13T19:01:00.001-07:00

It was a slow week for trading the Pound Yen and the beast kept in a fairly tight range. Our robot has held steady taking some losses and finding some winners. Remember this is a continuation from where we left off over 219%. in three months. We are up 21% since the inception of this robot, so all in all we are in great shape.

We do have some more good news. Coming soon, you will be able to have one of your own take off robots. The requirements to receive this robot are fairly simple, so stay tuned. You may also contact us on our contact page if you would like your own Forex Robot.

Forex News Trader

2009-07-13T18:44:00.000-07:00

How do the majority of profitable Forex traders truly profit in the FX market? One way… they trade the news!

Forex News Trader was developed to give traders the edge they need to learn how to trade based on economic news events from around the world. The same edge the institutions use to make hundreds of millions and even billions of dollars in profit each year.

Forex News Trading will provide you with the information you need to give you a true insider’s understanding of the Forex markets. You will feel confident in your trading, and never doubt your trades again.

Does this mean you will win every trade? No, of course not, but armed with the knowledge Forex News Trader will provide you, you will never be afraid to take that next trade - as the odds will now be tipped in your favor.

Each and every month there are a tremendous number of news releases for the Off Exchange Retail Foreign Currency Market (FOREX). Many of these events and announcements move the markets considerably. But how do you properly capitalize on these moves? Get it wrong and you could be wiped out. Get it right and you can be in a small group of trading elite, consistently pulling pips out of the market each and every week.

Our Forex Trading goal is to provide our visitors with the best trading strategies available. We work exclusively with Forex brokers who specialize in news trading, and also include extensive reviews on the best in the business. Any relevant and helpful information related to Forex news trading can be found on this site.

There are many trading methods that exist to help you succeed as a trader, but there also many factors you need to consider before you execute your trades. Each news event moves differently. What we do is provide you with techniques and systems on how to trade these major news events. How can you maximize your gains and limit your loses? Not easily done, unless you truly know what you are doing.

Forex News Trader will teach you the moves you need to make. In volatile or fast moving markets, such as news trading events, it is imperative to be completely focused and on top of your game. You need to constantly learn new styles and techniques if you want to stay ahead.

Whether you profit, or end up like the other 95% of traders, depends on your ability, knowledge, patience, and how the market moves that day. With such a large world market there are numerous opportunities to pull profits on a consistent basis.

If you’ve spent thousands of dollars to learn strategies that do not work - you are not alone. In fact, in a recent poll of over 5,000 active traders, the majority have spent over $3,500 on education. Some people drop more money into Forex courses then into their own trading account. We offer insider strategies that will give you a huge edge to succeed in the Forex market. You can also learn our Forex Trading Systems and expand your wealth even further. Here is a look at one of our Forex trading videos on YouTube.
Forex Signals

Whether you are a beginner or a seasoned trader, we have a service to fit your needs. Do you have a hard time understanding when to get in the market, or is your exit points that need help? There are hundreds of forex signals services on the market, but most are not worth a dime. We only work with the best. We screen them with the strictest parameters - ensuring their performance is real.

These signal providers may send signals by e-mail, voice, cell phone, or a live trading room. We will provide you with a list of the best Forex services available to best suit your trading needs.

Some traders prefer an auto trade type of system which does the trading for you, like FX-System Center, an excellent way to go. We work with a number of providers of auto-trade services which include state of the art software that will execute trades in the Forex market for you. You can learn to trade many different styles throughout the trading day. You can join live chat sessions with live calls in voice chat rooms with professional traders and learn how to trade the Forex market yourself. The options are all available, and now you know where to look.
Forex Brokers

Finding the right Forex Broker may be the difference in coming out ahead in the long run. FX brokers are your sole connection in this huge market and you have to put a lot of faith in them. We provide you with the top forex brokers and broker reviews to help you decide during this selection process.
Forex Rebates

What are Forex Rebates? FX Rebates are a payout for the volume of trading you run through your Forex Broker. These rebates can add up to a significant amount capital if you are trading in the Forex Market. If you are going to trade, you might as well get paid to trade. You are going to pay a spread or commission either way you look at it, so it only makes sense to earn Forex Rebates as you continue your trading.
Weekly Forex News

Using the videos created by FXDD, we will try to provide you with weekly videos of future events as well as provide you with the daily events when necessary. This will give you, the trader more information to help you. Each video will represent a week or day depending on which is available. At least this way you can come back to one spot for all your Forex video needs. Continue to Weekly Forex News.

Daily Technical Analysis 28.05.2009

2009-07-08T19:12:00.000-07:00

U.S. dollar continued to man in the Asian session, as we expect to maintain and test the downward movement of price in the area of support at 1.3722, which now appears stable enough to reduce a significant growth of green money. In support of the estimates appear to fall down values of stochastic indicator and MACD. In the opposite option, enhancing the confidence of traders in the green money will direct cost to resisting 1.3860 and 1.4050.

USD/JPY

U.S. dollar rise in price by almost one cent against the Japanese currency during the Asian session, as the expectation is directed to test resistance at 96.70, in the case of addressing, the path to the next key level to 97.80 will be opened. In the opposite option, move in the direction favorable to the yen will give support to the daily movement in 95.50.

GBP/USD

U.S. dollar appreciation against the register pound in Asian session, after the end of U.S. session yesterday, the currency pair recorded its highest value since November. New growth of sterling will aim at overcoming the top 1.6080 and the test area at levels around 1.6490. In the opposite option, a new appreciation of the U.S. dollar will direct the daily movement in support to 1.5775.

USD/CHF

The currency pair is trading near support at 1.0920, which in the case of endurance will allow for new growth of green money and will activate the double bottom formation with targets resistance at 1.0928 and 1.1057. In the opposite option, passing the price back below 1.0920 will direct the daily traffic to support 1.0805.

Fundamental review of the week from 01.06. year to 05.06.2009

2009-07-08T19:07:00.001-07:00

The week begins with retail sales in Australia in April. The sector enjoyed solid sales in recent months as the combination of fiscal and monetary incentives "otduha 'consumer portfolios. Over the past months, signs of improving the overall consumer confidence also support retail. By continuing incentives (in the form of fiscal variations) during April, and total disappearance of the speculator market during this period we expect a new sound-percent increase in sales for the month. Later PMI index of European countries and the euro will show whether improvements in the Old Continent and may lead to new "bichi movement in favor of the euro. The main index of U.S. consumer spending for April will also be removed - the capacity and extend the recession reduced price to a point of deterioration and inflation pressure down during the next 12 months. But it is proven that this will show a little more slowly in the data, based on inflation, which has stabilized recently. Manufacturing index recovered from 28-year bottomed in 32.9 in 40.1 Dkemvri it for April, which was the lowest for the past 18 years, if the last 6 months were never happen.

On Tuesday the Swiss GDP may help to "rally" in the franc and the pair dollar / Frank down to below 1.0400, if any improvement in the Swiss economy. Mortgage loans approved in the UK 11:30 will give us a clearer picture of England and if there is resurgence in the credit sector. Pounds are expected to be extremely volatile on its main krosove. Unemployment rate of the euro is expected to increase compared to the previous period, which may slow down upward movement of the euro against the dollar, but we assume that this will be only short-term correction in favor of the state currency. Unsold U.S. homes go 17:00 on Tuesday and will reveal whether there is a chance the U.S. construction sector to show any effect.

On Wednesday morning PMI index released by the European countries and we suggest that management's confidence in the sector has improved, and if so, to support the euro in the news. Then the UK also exports its PMI index, and decrease it may weaken pounds short. U.S. ISM index afternoon - the decline in services is no longer so sharp, even refund is quite sharp. Shows continued improvement for profits, but we see that the ISM is less important for obrashtaemostta inventory and probably more frustrating than production data.

Thursday, we expect highly volatile session for the main doubles as removal of the decisions of the Central Bank interest rates in the euro area, UK and Canada then. ECB will not surprise us, and levels are expected to remain unchanged to 1.00 percent, but there is little chance for reduction of 25 basis points to 0.75 percent and if this happens will quickly lead over euro 1.5000 against the dollar. Predvaritelniet studies show that the interest of England will also remain unchanged since the British economy shows signs of improvement and the government prefers to maintain a 0.5%. Canada to suggest that because the strong Canadian dollar against major opponents.

On Friday will be removed from the CPI and the Swiss can support Frank during the morning session. Later that day Zaetostta in non-agricultural sector for the month of May and the unemployment rate (9.2 percent expected) are expected to be exported. Like most recent statistics, wages seem to be prepared to show improvement. Weekly initial jobless claims to step back slightly from recent peaks and indicators of labor market improve. But levels continue to grow and the level of unemployment nearing 10 percent. We believe that these figures reflect more on the demand in the economy and will be too slow to improve it will continue to be key challenges for households and politicians.

Forex order types

2009-07-07T21:25:00.001-07:00

Market Order
All order types listed underneath are accepted by ACM and may be placed either online or by phone.

A market order is an order to buy or sell at the current market price. Customers using ACM's online currency trading platform click on the buy or sell button after having specified their deal size. The execution of the order is instantaneous. Placing a market order by phone is quite similar but usually takes a few seconds more time.

The exact process goes like this:

1. A customer specifies the currency pair and the deal size to the dealer.
2. The dealer gives a two-way price (BID and ASK price).
3. The customer takes one of the two prices (he may ask for a re-quote).
4. The dealer confirms the trade. Under normal market conditions, ACM dealers usually respond to market orders in about 5 to 10 seconds at most. Assuming the customer deals immediately on the offered prices a phone deal can be made in 10 to 15 seconds on average.

Whether you choose to deal with ACM or another firm, you should be aware that it is a correct market practice for such institutions to quote two-way prices to a customer who wishes to trade. A firm that does not do so is almost certainly taking advantage of their customers' ignorance as far trading procedures are concerned.
Limit Orders

A limit order is an order placed to buy or sell at a certain price. The order essentially contains two variables, price and duration. The trader specifies the price at which he wishes to buy/sell a certain currency pair and also specifies the duration that the order should remain active.

GTC (Good till cancelled): A GTC order remains active in the market until the trader decides to cancel it. The dealer will not cancel the order at any time therefore it is the customer's responsibility to remember that he possesses the order.

GFD (Good for the day): A GFD order remains active in the market until the end of the trading day. Since foreign exchange is an ongoing market the end of day must be a set hour.
For ACM the end of the trading day occurs at exactly 23:00 CET.
Stop orders

A stop order is also an order placed to buy or sell at a certain price. The order contains the same two variables, price and duration. The main difference between a limit order and a stop order is that stop orders are usually used to limit loss potential on a transaction whilst limit orders are used to enter the market, add to a pre-existing position and profit taking. The same variations are used to specify duration as in limit orders (GTC and GFD). Let's take the following example:

Example: Trader x Buys EUR/USD 100'000 @ 0.9340, he's expecting a 60 to 70 pip move in the market but he wants to protect himself in case he has overestimated the potential strength of the Euro. He knows that 0.9310 is a b support level so he places a stop loss order to sell at that level. Trader x has limited his risk on this particular trade to 30 pips or USD 300.

Another usage of a stop order is when a trader is expecting a price breakout to occur and wishes to grasp the opportunity to 'ride' the breakout. In this case a trade will place an order to buy or sell 'on stop'. To illustrate the logic behind this let's review the following scenario:

Example: Trader x sees EUR/USD breaking through the 0.9390 resistance level. He believes that if this happens, the price of EUR/USD could be headed to 0.9450 or over. At this point the market is at 0.9350 so trader x places an order to initiate a buying position of 500'000 at 0.9392 'on stop'.
OCO

An OCO (order cancels other) order is a mixture of 2 limit and/or stop orders. 2 orders with price and duration variables are placed above and below the current price. When one of the orders is executed the other order is cancelled. To illustrate how an OCO order works let's take the following example:

Example: The price of EUR/USD is 0.9340. Trader x wants to either buy 500'000 at 0.9395 over the resistance level in anticipation of a breakout or initiate a selling position if the price falls to 0.9300. The understanding is that if 0.9395 is reached, he will buy 500'000 and the 0.9300 order will be automatically cancelled.

the source from forex

How to trade Forex?

2009-07-07T21:23:00.000-07:00

The forex market is the most liquid market on earth.

Placing an order is as simple as that: choose the currency pair, the amount of the base currency you want to trade, and if you want to buy or sell, when trading with an online platform, just click and there you are.

But though it sounds very easy, the forex market has its own rules, uses and usual practices.

In order to trade properly the following pages will provide you with important guidelines and tips.

What types of order you will have to place in specific market conditions.

Examples of a typical trading day (very simplified) in order to give you an idea of how it works.

But moreover, when taking a position on the market, your exposure has to be consistent with your feeling of the market sentiment, the trading time frame you defined and your financial capacities, that’s what we call trading forex with a strategy.

The source from forex

Forex history

2009-07-07T21:21:00.000-07:00

Foreign exchange history, origins of the forex
In order to gain a complete understanding of what forex is, it is useful to examine the reasons that lead to its existence in the first place. Exhaustively detailing the historical events that shaped the foreign exchange market into what it is today is of no great importance to the Fx trader and therefore we will happily omit explanations of historical events such as the Bretton Woods accord in favor of a more specific insight into the reasoning behind foreign exchange as a medium of exchange of goods and services.

Originally our ancestors conducted trading of goods against other goods this system of bartering was of course quite inefficient and required lengthy negotiation and searching to be able to strike a deal. Eventually forms of metal like bronze, silver and gold came to be used in standardized sizes and later grades (purity) to facilitate the exchange of merchandise. The basis for these mediums of exchange was acceptance by the general public and practical variables like durability and storage. Eventually during the late middle ages, a variety of paper IOU started gaining popularity as an exchange medium.

The obvious advantage of carrying around 'precious' paper versus carrying around bags of precious metal was slowly recognized through the ages. Eventually stable governments adopted paper currency and backed the value of the paper with gold reserves. This came to be known as the gold standard. The Bretton Woods accord in July 1944 fixed the dollar to 35 USD per ounce and other currencies to the dollar. In 1971, president Nixon suspended the convertibility to gold and let the US dollar 'float' against other currencies.

Since then the foreign exchange market has developed into the largest market in the world with a total daily turnover of about 3.2 trillion USD. Traditionally an institutional (inter-bank) market, the popularity of online currency trading offered to the private individual is democratising forex and widening the retail market.

The Forex Market

2009-07-07T21:20:00.000-07:00

Contrary to popular belief, the unification of many European currencies into one single currency (the Euro) has only strengthened and rendered more popular the usage of foreign exchange as an investment, a hedging instrument and as a tool for speculation. The most marked development has been the democratisation of foreign exchange in the retail forex market, the tightening of spreads and drastic improvement of trading conditions for the small trader.

In practically all investments there is a Foreign Exchange (Forex) transaction to be made. Whether in international trade, import-export, or practically any type of business, resorting to some form of forex foreign exchange operation is practically unavoidable. It is not surprising then that the forex market is by far the largest in the world, in fact it is approximately 32.5 times larger than all equities markets put together.

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Small firms avoid currency hedging

2009-07-06T22:43:00.000-07:00

As financial markets grow increasingly sophisticated, individuals and businesses are now able to insure themselves against most conceivable risks. Specifically, as forex markets have grown more volatile in the last decade, many businesses have begun to hedge against the risk of rapid currency appreciation/depreciation. An array of financial products can be used towards this end, including options, forwards, futures, and swaps. The principal tool used in currency hedging continues to be currency futures, in which one party agrees to buy/sell a fixed amount of a given currency at a fixed exchange rate, on a fixed date in the future. While most large corporations now have entire departments devoted solely to hedging and risk management, small firms lack the resources necessary to engage in currency hedging. Anecdotal evidence suggests that small firms that import/export simply hope that relative changes in currency values balance out in the long run. This is a risky strategy, as the Times Online reports:

If the currency strengthens the price of the goods increases, making it difficult for companies to plan accurate revenue forecasts and ultimately putting stress on cashflow. Exporters selling into foreign markets face the risk of the currency weakening.

Interview with Zachary Storella: “Be quick and agile.”

2009-07-06T22:12:00.000-07:00

Today, we bring you an interview with Zachary Storella of Counting Pips. He is a self-professed “independent forex trader and blogger.”

Forex Blog: CountingPips purports to offer investors “Forex Trading and Currency Information,” so I would would like to begin by asking you to outline what you perceive to be the most important themes at this stage of the economic downturn, especially as they bear on forex markets?

The major theme at play at present in the currency markets is the risk aversion versus risk appetite scenario. The risk appetite currencies have been doing quite well since early March compared to the safe havens although I think that the rally in the risk currencies may have come too far, too fast and we could be ripe for a possible correction on that front.

Forex Blog: Based on your blog, you seem to have your finger on the pulse of the global economy. What do you perceive to be the “direction” at this point? Do you think that all of the ‘green shoots’ talk is still premature, or is there evidence to support the underpinnings of recovery?

Well, I would tend to agree with the view out there that the global economy has probably bottomed on the evidence that the pace of decline has cooled off in many of the important economic indicators. That being said, the global economy as a whole and the economy here in the U.S., is still very weak and has a ways to go to get back on track. I am absolutely keeping an open mind in terms of the direction the global economy might take because we just witnessed a (hopefully) once-in-a-lifetime event in the financial crisis and there are many global inequalities and inefficiencies that need to be worked out and that will take time. So going forward, it looks promising but we are still in the midst of a deep recession and there are bound to be surprises.

Forex Blog: The credit crisis exposed the myth of “decoupling,” which held that the US economy no longer pulls the rest of the world along. Do you think that as a result of the credit crisis, decoupling is more realistic, such that a global recovery might not be led by the US? In such a scenario, do you think that this would spur a decline in the importance of the US Dollar?

Well, it is being said that the global recovery may be a China led recovery. I think it’s too early to tell if that will be the case. I think that there is a good chance that decoupling can be more realistic in the future as emerging economies develop. Of course, many thought that before only to be proven dramatically wrong in the last year. So really it is hard to tell until it happens…It seems to make sense in theory but the reality is a different story.

Forex Blog: You blogged recently about how the upward revision of US GDP (i.e. the actual contraction was smaller than originally reported) had a mixed effect on the Dollar. Do you think this suggests that economic fundamentals have become less important (even irrelevant) to traders than general appetite for risk?

Yes, I think right now the fundamentals have taken a backseat to the general risk theme but the further away from the financial crisis we get I think we will see the fundamentals become stronger catalysts. I think it makes sense, right now on the heels of the financial crisis, an unprecedented event in recent times, that we need to work through this period before the normal rules apply again.

Forex Blog: The stock market rally is correlated closely with a rally in both high-yielding currencies and emerging market currencies, of which there is certainly overlap. Do you think that this de facto revival of the carry trade is flimsy, or is it an accurate reflection of improved market fundamentals, and hence robust?

I think it is an accurate reflection of market developments. The high-yielders have been doing very well as of late, with some of the more exotic carry trade currencies like the Brazilian Real and South African Rand making some real moves.

Forex Blog: You can see from the chart below that the US unemployment rate is on the verge of surpassing that of the EU. Do you think that this kind of comparison is useful in the context of forex markets? Can traders use employment data - or other economic indicators - to trade the Euro/Dollar currency pair?

At the present time, the comparison in the numbers, I don’t see it as having a huge relevance as it pertains directly to forex trading. The Nonfarm Payrolls data release is obviously big and definitely moves the markets. I see that data as helping to drive the risk mood one way or the other and traders can use it in that context. So the number comparison doesn’t mean much to me but of course, another more insightful trader could see something in it and I could be wrong.

Forex Blog: Judging from its meeting this week, do you anticipate the Fed will raise rates in the near-term? How do you think such rate hikes (or lack thereof) will weigh on forex markets?

I don’t feel that we will see the Fed raise rates in the near term as inflation is not a problem as of yet and our economy is just too fragile at the moment. It doesn’t seem warranted. I think when rates do move higher it will bear weight on the forex market as the US economy will be in a different place, probably starting to see more inflationary pressures and/or the economy will be growing. On an overall basis, I am very interested to watch and see which economies pull out of the recession first, start raising rates and how the global economy develops from here, who leads where and what the implications are then for the currency markets.

Forex Blog: Finally, what advice do you have for investors that want to beat the market during the credit crisis?

Is Risk Aversion Back?

2009-07-06T22:08:00.000-07:00

At the end of last week, I posed a question: what will be the next theme to dominate forex markets? Perhaps the answer can be found in Monday’s massive market selloff (”Triple-M Monday” anyone?), the worst day for stocks in over two months. Commodities and currencies- both of which have taken their cues from stocks of late- also trended downwards.

While I would be the first to caution against reading too much into one day (especially since the early indications are that some of these losses will be erased today), it’s possible that yesterday marked the breakout that many technical analysts have called for over the last few weeks. Asked one such analyst last week, “Taking a step back to look at the daily price action of the EUR/USD, we can clearly see that the currency pair is consolidating and a sharp breakout is imminent. The big question is, will it be an upside or downside breakout?”
What was the catalyst for Monday’s selloff? Perhaps it was my blog post on uncertainty: “The World Bank said Monday that prospects for the global economy remain ‘unusually uncertain,’ and it cut its 2009 growth forecasts for most economies” from 1.7% to 2.9%. But really, the World Bank was only echoing what every investor already knew- that the stock market rally rested on a house of cards, and that in fact the arguments in support of an economic recovery are still quite tenuous. In other words, “Some of the buying since early March was been based on a conclusion by many investors that government intervention had forestalled the threat of a doomsday scenario, such as another Great Depression…expectations were so low that stocks rose merely on news that indicators such as manufacturing activity or the service economy were shrinking less than had been feared. Investors didn’t require signs of actual growth.”
From trough to peak, stocks rallied 34%, pushing P/E levels back to normal levels. Now that all of the temporary pricing inefficiencies have been “corrected,” investors are taking a step back and looking to see whether the data supports further buying. Until there is solid proof that the “green shoots” are real, it’s my prediction that markets will trend either sideways or downwards.
What does this mean for forex markets? Investors will probably shun riskier currencies in favor of the Dollar and the Yen, which are still perceived as relative safe-havens. “Risk aversion has resurfaced as market participants take profits on riskier exposures. There are “renewed concerns about the extent of the ongoing global recession and the sustainability of the ‘green shoots’ of recovery,” said one analyst.
Of course, some would argue that that the emerging markets forex rally was built on a more solid foundation than US stocks. If this is the case, then perhaps the correlation between stocks and currencies will break down in the coming weeks. For now, at least, risk-averse investors will probably start to unwind carry trades and pile back into the mainstays of forex. Those with the highest interest rates will suffer the most. Until the day comes that bad economic news in the US doesn’t paradoxically buoy the Dollar, we can be certain that the current narrative is once again one of risk aversion.

Investors Bullish on Canadian Loonie Despite Record Interest Rate Cut

2009-07-06T22:06:00.001-07:00

Today, the Bank of Canada followed up on an earlier promise by formally clarifying its position on quantitative easing. Suffice to say that the markets breathed a huge sigh of relief when it was revealed that the BOC was not committing itself to such a program. ” ‘The market has always had great trepidation about the idea of printing money…As the Bank of Canada has pushed back at that notion, the Canadian dollar is having a little party of its own,’ ” quipped one analyst.

In other words, the BOC would like to avoid following in the footsteps of its counterparts in the US, UK, Japan, and perhaps the EU, by pumping newly-minted money directly into credit and government bind markets. At the same time, the Bank admitted that a rapid deterioration in the Canadian economy would certainly prompt it to reconsider. Governor Mark Carney et al have approached the subject of quantitative easing coyly. On the one hand, today’s report (as well as the BOC website) contain detailed explanations of what quantitative easing would hypothetically entail. On the other hand, they insist that such a scenario does not fit with their economic projections, and hence remains unlikely. “The need to do extraordinary easing is a ‘big if,’ ” in the words of Governor Carney.

This is largely consistent with analysts’ expectations, one of whom had predicted that “it’s also quite possible the bank could simply lay out a framework on Thursday and not take any action at all.” Even ignoring the inflationary implications of quantitative easing, it’s not clear whether such a policy could even be effective. “The corporate bond market is reviving, with spreads narrowing and issuance levels improving, raising the question of whether central bank involvement is necessary or appropriate in a market that seems to be healing itself.” Granted, most investors are now wearing their rose-tinted glasses, but the data speaks for itself.

The BOC’s estimation that it can avoid quantitative easing is somewhat dubious, since it is predicated on overly optimistic economic forecasts, as well as because it has already exhausted the primary tool in its monetary arsenal. Earlier this week, it lowered interested rates to a record low of .25%, capping a 16-month period of easing, during which it slashed rates by 4.25%. By the Bank’s own reckoning, interest rates will remain low until mid-2010, as inflation is now comfortably within the target range of 1-3%.

Given the abysmal economic situation, it is no surprise that inflation has moderated. Commodity prices are well below the record highs of 2008. Aggregate demand, and GDP by extension, are retreating in kind. According to one economist, ” ‘When you do that math, no matter how optimistic you are, you are talking about a time frame of years before things like the unemployment rate (are) back down to historically normal levels.’ ”

Still, traders remain bullish on the Loonie. “Since March 9, the loonie has climbed 6.2 percent…The loonie will appreciate to C$1.19 by the end of March next year, according to the median forecast of 38 economists and analysts in a Bloomberg survey.” As the Forex Blog reported in yesterday’s post, the carry trade has returned, which is good news for commodity currencies, low interest rates are not. Meanwhile, low interest rates could stimulate corporate borrowing and home buying. Given the Central Bank’s reluctance to print money, the economic recovery would even unfold without the drag of inflation. Maybe the excitement is justified…

BOC Nervous about Loonie Appreciation, but Not Enough to Take Action

2009-07-06T22:04:00.001-07:00

Canada right now seems to typify the contradiction between political posturing and economic reality. GDP dropped by a whopping 5.3% in the first quarter- less than what the Central Bank had predicted but greater than thr 3.7% drop in the previous quarter. “The economy will shrink by 3 percent this year, the central bank predicts. That would be the biggest drop since 1933, according to Statistics Canada. The unemployment rate has also been at a seven-year high of 8 percent the last two months.” The most grim statistic is that “Canadian exports fell an annualized 30.4 percent in the first quarter, led by the automotive industry.” This is particularly problematic for Canada, whose economy is 30% depending on such exports.

Meanwhile, Canada’s Prime Minister, Steven Harper, is bandying the term “green shoots” around, and has declared “The worst is behind us now.” I guess it just depends on which statistics you choose to cite. After all, “April data…showed new jobs were created for the first time in six months and sales of existing homes rose the most in more than five years. Credit markets are also improving, with the Bank of Canada’s composite index of financial market conditions rising to its strongest level last month since September.” Still, a majority of surveyed economists forecast economic contraction for at least another quarter.

At least the Bank of Canada seems to have two feet planted firmly on the ground. It has warned investors not to expect a rate hike (from the current record low of .25%) for about a year, although it admits that could change depending on inflation. The BOC has thus far abstained from unveiling a massive “quantitative easing” plan to match that of the UK and US, which were subtly gibed for not having viable “exit strategies.” In addition, while Canada’s outstanding public debt has surged past $500 Billion, the country’s debt/GDP ratio is still the lowest in the G8 and projected to remain stable (despite projections of deficit for the next five years). In short, inflation inflation is probably not a realistic concern.

What is worrying to the Bank of Canada is the rise in the Loonie, which has surged 14% since March and shows no signs of stopping. In its decision last week to maintain rates at current levels, the BOC referred to “the unprecedentedly rapid rise in the Canadian dollar (which reflects a combination of higher commodity prices and generalized weakness in the U.S. currency).” Given that it can’t cut rates any further and is reluctant to devalue the currency through printing money, the only real option is for the Central Bank to intervene directly in currency markets, last done in 1998. Analysts, though, reckon that this is extremely unlikely.

What would it take for the Loonie to return to a more sustainable level? A decrease in risk appetite, for one thing. If investors got spooked and returned to the Dollar, this would probably crunch the Canadian Dollar. More likely, at least in the short-term, seems to be a retreat in commodity prices. The Loonie has pretty closely tracked the recovery in commodity prices [see chart below], any any pullback in oil and metals would likely be reflected in decreased demand for the currency. A recent report in the NY Times suggested that the surge in Chinese buying activity - which was clearly correlated with rising prices - may soon come to an end. The inevitable fall in commodities prices that would follow will certainly help officials at the BOC to sleep better.

Forex Reserve Diversification Builds Slowly

2009-07-06T22:00:00.000-07:00

With this week slow for news and other economic developments, some forex traders are taking a step back to look at the long-term picture. The US Dollar, in particular has come into focus, because of the uncertain consequences of its current economic policy and the related talk of central bank diversification away from the Dollar. “The United States’ expansionist fiscal and monetary policies, which are raising fears of inflation down the road that could erode the value of the dollar, is surely driving diversification out of dollar-denominated asset…The dollar has weakened whenever talk about an alternative reserve currency makes the headlines.”

This week brought a couple small developments on this front. First, China released its annual report on the economy, in which it renewed calls for a “supra-national” currency, to be administered by the IMF: “To avoid the inherent deficiencies of using sovereign currencies for reserves, there’s a need to create an international reserve currency that’s de-linked from sovereign nations.” Analysts caution however that the move is politically motivated, and it could be a while before it’s squared with economic reality: “There may be signs here of tensions mounting between the PBOC’s economic concerns over China’s holdings of dollars and the Chinese government’s diplomatic reasons for doing so.”

Still, China is walking the walk. Having already entered into swap agreements with Argentina and several other developing countries, it is moving to conduct as much of its trade in Chinese Yuan as possible. This week, it inked a deal with Brazil, “for the gradual elimination of the US dollar in bilateral trade operations which in 2009 are estimated to reach US$ 40 billion.” Previously, such trade had been settled primarily in Dollars, a bane for Brazilian companies, which collectively “have lost hundreds of millions over the last two years due to dollar weakness.”

There is also activity closer to home. “The government said on April 8 that it will allow Shanghai and four cities in the southern Guangdong province, including Shenzhen and Guangzhou, to settle international trade in yuan.” An agreement with Hong Kong, meanwhile, aims to settle at least half of bilateral trade in Yuan. “Hong Kong Financial Secretary John Tsang said the city will be a ‘testing ground’ for use of the yuan outside mainland China.” If successful, this program could quickly expand to encompass the rest of East Asia ex-Japan.

In the short-term, these baby steps won’t have much of an impact on the Dollar. Besides, most Central Banks remain committed to the Dollar, if only for lack of a viable alternative. “The Fed’s holdings of Treasuries on behalf of central banks and institutions from China to Norway rose by $257.2 billion this year, or 15 percent, according to data compiled by Bloomberg. That compares with an increase of $127.3 billion, or 10 percent, in the first half of 2008.”

Even China has stated that its reserve policy will not feature any sudden changes. In sum, “It seems safe to say that the Chinese are pursuing a rather logical path. They will continue to accumulate dollar reserves, as doing so fits their three-adjective criteria [liquidity, safety and returns], while also pushing for international acceptance of an alternative to the dollar in a new global currency.”

Will the Euro Survive the Credit Crisis?

2009-07-06T21:55:00.000-07:00

The Euro has always had a marginal group of naysayers; there were always those who insisted that a common currency didn’t make sense for a region as diverse as the EU. As a result of the credit crisis, a bevy of critics have come out of the woodwork and declared that the Euro will not survive its first official crisis. Are they right?

According to a Special Report on the Euro Area published in the Economist (which inspired this post), the Euro has been a modest success by most measures. “The ECB has fulfilled its remit to maintain the purchasing power of the euro. Since the currency’s creation the average inflation rate in the euro area has been just over 2%. Fears that the euro would be a “soft” currency have proved unfounded. It is unquestioningly accepted at home and widely used beyond the euro area’s borders.” While the Euro hasn’t facilitated meaningful gains in productivity or GDP, it has unquestionably engendered greater stability.

Ironically, the countries that are now complaining the loudest about the Euro are mainly those that benefited the most from its membership. The economy of Spain, for example, “grew at an average annual rate of 3.9% between 1999 and 2007, almost twice the euro-zone average and much faster than in any of the currency area’s other big countries…Unemployment fell from close to 20% in the mid-1990s to just 7.9% in 2007.”

Unfortunately, the economic boom also corresponded with a rise in prices and unit wage costs, both of which are now proving to be particularly painful in the context of recession. Aided by a strong currency, its current account deficit has risen to 10% of GDP. Meanwhile, the same problems are affecting Portugal, Ireland, Italy, and Greece. As the report explains, “The main hazard for investors in high-inflation countries—that a steady loss of domestic purchasing power will drag the currency down—is eliminated in a fixed-exchange-rate zone.”

A country with an independent monetary authority would normally deal with these problems by raising interest rates and/or devaluing the currency. Actually, given how extreme the imbalances are in some of these countries, the markets probably would have accomplished this for them. In this case, however, their membership in the EU and their deference of monetary power to the European Central Bank precludes such possibilities. As a result, the main solutions will have to be originate in the political arena. Wages will have to become more flexible, and labor market controls will have to be loosened, in order to increase productivity.

The alternative - leaving the Euro zone- is unthinkable. “The costs of backing out of the euro are hard to calculate but would certainly be heavy. The mere whiff of devaluation would cause a bank run: people would scramble to deposit their euros with foreign banks to avoid forced conversion to the new, weaker currency. Bondholders would shun the debt of the departing country, and funding of budget deficits and maturing debt would be suspended.” As a result, borrowing costs would increase drastically, which could induce a wage-price spiral. Inflation and currency stability would be tenuous, at best. As a result, it’s not surprising that in most Euro member states, polled citizens remain strongly in favor of the Euro.

In addition, those on the cusp of joining remain firmly committed to doing so. For such economies, the economic crisis has actually strengthened the case for Euro membership. “As emerging economies they are prone to sudden shifts in foreign-investor sentiment, which makes for volatile currencies, so exchange-rate stability holds considerable appeal for them.” Romania and several baltic states have already had to go hat-in-hands to the EU and IMF to ask for assistance in order to stave off a complete loss of investor confidence. Poland is also vulnerable to currency decline, since many of its loans are denominated in foreign currency; it is currently aiming for Euro membership in 2012.

Concludes the Economist, “For all its shortcomings, the euro zone is far more likely to expand than shrink over the next decade. Most EU countries that remain outside, bar Britain and Sweden, are eager to join.” This is certainly a bit glib, and ignores the imbalances that the currency is at least partially responsible for. Still, the tentative consensus is accepting of the Euro. It’s like the old joke about capitalism - “it’s the worst system– except for all of the others…”

Forex Reserve Growth Could Slow

2009-07-06T21:47:00.000-07:00

Forex Reserve Growth Could Slow

Most of the recent discussion surrounding foreign exchange reserves has focused on the allocation of those reserves; specifically, whether or not these reserves will be invested in Dollar-denominated assets to the same extent as before. But what if this discussion fails to see the forest through the trees? In other words, this issue is built on the implicit premise that Central Banks will continue to build their forex reserves, and hence they need a place to invest them. With this post, I will examine whether this is indeed the case.

Since the start of the credit crisis, forex reserve growth has slowed as Central Banks (mainly in emerging markets) began to deploy some of their cash: “In the first quarter of 2009, foreign reserves were at 80% of their June 2008 levels in Korea and India, around 75% in Poland and 65% in Russia.” Most of the spending was used for direct intervention in currency markets and to finance capital outflows, as risk-averse investors moved funds out of emerging markets. Russia, alone, spent nearly $200 Billion trying to prevent a complete collapse in confidence in the Ruble.

Thanks to their prudence following the 1997 Southeast Asian economic crisis, however, reserves are still more than adequate based on most measures: “A well known rule of thumb (the so-called Guidotti-Greenspan rule) is that foreign reserves should cover 100% of external debt coming due within one year. In 2008, almost all EMEs far exceeded this threshold – coverage was more than 400% in Asia and Russia and around 300% in Latin America. Another rule of thumb, that foreign reserves should cover three to six months of imports (ie 25–50% of annual imports) was also typically exceeded at the end of 2008.” Even despite the recent declines, coverage remains strong enough to meet financing requirements for the immediate future. China, whose cache of forex is by far the world’s largest, boasts a coverage ratio of nearly 2,000%!

foreign-reserve-adequacyGiven such robustness, it’s clear that the impetus to continue accumulating reserves has eroded slightly. Central Banks have also come to realize how vulnerable they are to credit and currency risk, vis-a-vis the allocation of their reserves, which means that the best alternative going forward is probably to start investing in commodities and/or domestic economic initiatives. China has already begun to move in this direction.

There are several alternatives that are less risky/expensive than directly holding foreign exchange reserves. “First, in October 2008 four EME central banks each entered into a $30 billion reciprocal currency arrangement with the US Federal Reserve. Second, a $120 billion multilateral facility, drawing on international reserves, was recently established in East Asia…Third, recent G20 initiatives have called for large increases in resources for international financial institutions…[such as the] IMF’s recently created Flexible Credit Line.” Such programs provide countries in crisis with the cash to draw from without forcing them to build up reserves in advance.

To be fair, not all Central Banks are prepared to break from the current system. “In spite of significant interventions in the fourth quarter of 2008, many EMEs still had larger foreign reserves at the end of 2008 than they did in 2007.” Reports are coming in that Indian and Korean reserves, for example, have reached their highest levels since the collapse of Lehman Brothers last fall. This is sounding alarm bells for economic officials: “There is a hope the lesson taken away from the current experience is not that these countries need even larger foreign exchange reserves. These things are not terribly efficient. Our concern is that these things are going to be built up even further as a consequence.”