Wednesday, September 29, 2010

Bullish on the euro?

Life would be a little easier if you stick the EUR/USD that importantly pair of Forex and bellwether which could currency market, simply choose a direction and with it. It appeared during the financial crisis only during the recovery phase apparent increase, fell during the sovereign debt crisis and rose during the shift, then fell as risk appetite disappeared, only to again increase in September, en route to a 5-month high.

Euro Dollar 5 Year Chart 2006-2010
There are a handful of factors of euro strength currently based are all generally can explain the risk by the fact is "on" at the moment and the markets are moving way so-called safe haven currencies and back towards growth investments. Of course, that could change tomorrow (or even 5 minutes from now!), but at the moment the risk-taking is high and Euro symbolizes danger.It doesn't matter how ironic projected growth in the EU for the year at 1.8%, while the rest of the world (ROW) GDP probably top wird.Alles what counts is 5% when compared the dollar and Yen, pounds, Swiss francs to a lesser extent) euro as currency perceived risk.

Of the euro cause is helped by the ongoing "currency wars," heated last week with Japan's entry into the game. Basically on central banks around the world now in competition with each other, to their currencies depreciate.On the other hand has the European Central Bank (ECB) decided to continue on the sidelines (in favor of fiscal austerity) that force up to the euro, is (or rather all other currencies down) .Zu questions worse, "the Federal Reserve indicates this summer that it... often can facilitate monetary policy further as printing money to pump up the economy." As a result set, "the euro looks on in a trend to keep climbing that looks increasingly entrenched."

There are certainly those who claim that reflects recent rise of the euro to renewed confidence in the euro-zone economy and prospects for the solution to the debt crisis of the EU. Finally, most euro members to reduce their budget deficits, in 2010 and auctions new bonds are once again over-subscribed. On the other hand, the interest rates on the pigs (Portugal, Italy, Greece and Spain) have risen multi-year highs as investors finally try serious efforts at pricing the possibility to make standard.

Eurozone sovereign debt interest rates graph 2007-2010
Moreover, the credit markets in the EU hardly work and large institutions remain the ECB credit facilities for financing depends on. Finally should be forgotten it, the only reason crisis due to the massive support (€ 140 billion), which was extended to Greece. When this program expires in less than three years, the tax problems of Greece (and the other PIGS) exposed again and a new (temporary solution) have suggested solution.

Each analyst has pointed out, are not the EU resolved worden.EU members have sent certainly proved fiscal problems to solve in the acute crises and keep the ECB certainly deserved recognition for the credit markets are functioning but none has proposed a viable solution for the repair of the Member States tax and economic health.Devaluation of the currency is impossible.Sovereign default is prevented.That leaves pay cuts and higher productivity than only two paths to balance.The former could be achieved, inflation, but the ECB seems reluctant to allow.

Eurozone Budget Deficits, GDP

For better or worse seems that these problems on the road have urged the EU and if everything according to plan, you must be for 2-3 years checks be. for now the euro is probably safe, and can even gedeihen.Short positions in the euro furious speed carried out and data show that it is still plenty of room for more entladen.Inflation dampened economic growth is stable, and so far have not any opposition to the euro expressed the ECB rise. while I promote this optimism with the caveat that "traders willingness euro lower from time to time on the slightest news or rumor downgrade to the eurozone sovereign or Bank ratings smack showed", the general trend of the euro is now indisputable.

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Tuesday, September 28, 2010

RMB appreciation, but speeds up dollar peg remains in place

The Chinese Yuan has a new record and USD/CNY touches. Especially the Yuan only increased approximately 2%, as the chip is officially in June - to put the most this esteem, has been eased, in the last couple of weeks is more intense pressure on China to do more.

Last week intervention by the Bank of Japan redirect an enormous amount of attention to the Yuan. In fact, many analysts have argued that it only because of the Yuan-dollar peg (even as the Chinese purchases of Yen assets that it generates is) that Japan was forced to act: "countries see entering the currency manipulation is a way, getting a advantage '...'"China to give affected their actions Japan and Japan hits us. '"The yen intervention could also force that the G20, his attention to the Yuan realignment and at least some discussion to dedicate it to the next Summit.

CNY USD 1 Year Chart 2010

It should be noted that the two soundbites on both from US Congressman, is what's important emerged, because currently, action on the Yuan currency peg ist.Politiker breed the U.S. Government are getting tired by the Treasury Department's repeated error China call a "currency manipulator," requiring the diplomatic discussions and even trade sanctions would. Have the Ministry of finance option in your next report about Forex, given from 15 October, redeem, but it is expected that the report will either be delayed or released without sufficient addressing of the undervalued Yuan.

In fact, Treasury Secretary Geithner said before Congress last week, and at least admitted that something had to be done: "the pace of appreciation was too slow, and the extent of appreciation too limited." "We need to figure out ways to change behavior."However, this was only in response to the harsh criticism-(Senator Schumer told him, "I come increasingly to the view that the only person in this room who believes it is not manipulated China its currency.") - and it ultimately failed a timetable/blueprint for action to sketch. Despite the consensus among politicians (and President Obama) that the currency peg hurts the US economy Geithner also made clear, that the Ministry of finance unilateral action towards dealing with problem without Congressional intervention to promote. For now, politicians are then probably banned on saber rattling and insults.

China's response to this farce was predictable. Trade representatives indicated that China would not bow to pressure from outside, and everyone at the "punishment attempt" would comply with countervailing duty actions. China questioned the economics between arguments that contributes to the trade imbalance, calling such claims the dollar peg "groundless".This position is actually from the idea that actually widened during the Yuan by 20% compared to the dollar from 2005-2008 USA estimated supported / China trade deficit.

In practice, China is expected to its policy of gradual appreciation of the Yuan, or a few reasons to keep.First of all, while Chinese policy makers know that you don't need to completely placate U.S. politicians, they must claim at least that you hear.It is true that the United States Chinese products and its purchases of Treasury depending on ist.jedoch, it is probably only so dependent on the United States its exports to buy bonds will promote the employment and social stability, and it is keen to avoid a trade war if possible.

Secondly, a long-term appreciation of the RMB is actually in China's interest.If it spur domestic consumption and promote more value added manufacturing will have a more valuable Währung.Ausgehende M & A, especially with natural resources companies, be cheaper when the Yuan more value ist.Auch if China has serious ambitions to transform the Yuan in a global reserve currency, it must create capital markets, are deep and liquid, which is currently unmotivated to do it, so it spur demand for Yuan of foreign institutional investors.

Should finally China would like to appreciate the Yuan as financially I mentioned it labor to do ist.Wie has its trade surplus with the USA wachsen.Preise of imports and the prices for raw materials expanded in recent years, as the prices for its exports along with amount and abgelehnt.deshalb have now paid other natural resources in Yuan conditions I think China probably continue to keep your current policy and enable the RMB still slowly inch.

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Monday, September 27, 2010

The Trend is Your Friend

Raise your hand if you’ve ever heard that expression before? Well, now there’s proof that this well-worn phrase is more than just a pointless platitude: “Royal Bank of Scotland Group indexes that track the performance of four of the most popular currency strategies show that the so-called trend style was the best-performing method, returning 7.3 percent this year through August.”

“Trend-Style” trading is also known as trend-following, and is just as it sounds. Traders identify one-way patterns in specific currency pair(s), and attempt to ride them for as long as possible. Given all of the big movements in currency markets this year, it’s no wonder that trend-following is the most popular. If you look at the 52 week trading ranges for the six most popular USD currency pairs, you can see that highs and lows are often as far as 20% apart. The EUR/USD pair, for example, fell 20% over a mere 7 months. Anyone who sold in December 2009 and bought to cover in June 2010 would have earned an annualized return of 35% without leverage! Even if you had captured only a couple months of depreciation would have yielded impressive returns. In addition, you could have traded the Euro back up from June until August and reaped a 60% annualized return. Best of all, both of these trends (down, then up) unfolded very smoothly, with only minor corrections along the way.

The Trend is Your Friend- USD/EURI’m sure serious technical analysts are rolling their eyes at the chart above, but the point stands that trend-following has never been easier and rarely more profitable than it is now. One fund manager summarized, “Trend-following investors are capturing the momentum in several big currency moves. You have so much uncertainty in the world now with regard to inflation or deflation, which typically makes currency markets and interest rates move. That is good for trend followers as it causes volatility, which typically creates good profits.” In other words, there is a tremendous amount happening in forex markets at the moment, and this is reflected in protracted, deep moves in currency pairs, which can change direction without notice and yet continue moving the opposite way for just as long. If you think this sounds obvious, look at historical data (5-10 years) for the majority of currency pairs: while trends have always been abundant, it was only recently that they began to last longer and became more pronounced.

The other three strategies surveyed by the Royal Scotland Group (”RSG”) were the Carry Trade, Value Trade, and Volatility Trade. Unfortunately, data was only offered for the carry trade strategy (confusingly referred to by RSG as the volatility strategy), which is down 5.9% in the year-to-date. The carry trade strategy involves selling a currency with a low yield and favor of one with a high yield, and profiting from the interest rate spread. In order for this strategy to be profitable, however, the long currency must either appreciate or remain constant. Thus, when volatility is high – as it has been over the last 2-3 years – this is a losing strategy.

We can only guess that a true volatility strategy probably would have been the second most profitable strategy. This strategy can be implemented through the use of long and short spot positions, as well as through trading in options and other derivatives. As I said, there is no shortage of volatility at the moment: “Since the collapse of Lehman Brothers in 2008, the dollar has seen record volatility against the euro…including six moves of at least 10%.” For traders that profit from volatility, the current uncertainty has created a windfall situation.

Volatility 2006-2010

However, it has made value trading – based on fundamentals and the notion of Purchasing Power Parity (PPP) – risky and unpopular: “The volatility also has made what would appear to be a straightforward bet against the dollar fraught with risk. Three factors tend to move currencies: the pace of growth, debt levels and interest rates. By those standards, the dollar should be falling against the currencies of emerging-market and commodity-producing nations.” Not only is this not the case (a decline in risk appetite has turned the Dollar into a safe-haven), but even betting on a protracted Dollar decline is itself risky because of surging volatility. One way around this is to trade a Dollar Index (by way of an ETF, for example) which is inherently less volatile (half as volatile, to be exact) than individual currency pairs.

That’s not to say that value trading isn’t profitable over the long-term. “Empirical evidence suggests that currencies…show a tendency to revert back toward PPP in the longer run.” Given current volatility/uncertainty, however, this strategy is unlikely to be profitable in the short run. Fortunately, uncertainty doesn’t negate opportunity, and traders should plot strategy accordingly.

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