Risky Business!

It’s never a dull day in the marketplace when one considers the impact of the global macro environment and how different factors contribute to the overall economic landscape.  As risk appetite has increased due to concern over the European debt crisis, it is very easy to see how any other negative event can cause a piling on effect.  Case in point:

North Korea seems to be up to its old tricks, initiating conflict by launching a missile strike at S. Korea.  This has been an on-going game of chicken as this is how N. Korea bargains its way to economic accommodation because no one wants an all-out war to erupt.  Call it high stakes blackmail.  The fact that they are trying to develop nuclear weapons though may put an end to this as the world is getting fed up with these tactics.  Keep an eye on this one heading into the Thanksgiving holiday.

So we can come up with a laundry list of why there is ample risk in the marketplace: Euro debt crisis and possible contagion, potential war between the Koreas, a Chinese economic slowdown, not to mention unspectacular economic data.  With all of this going on, it is no wonder that today is a day marked by risk aversion.

Stocks and commodities are lower, and the Dollar and Yen are higher.  Despite the obvious risk in the marketplace, there was some “decent” economic data from around the globe.  Canadian CPI data came in higher than expected, which is positive if you are a Loonie bull.  US GDP and personal consumption figures also came in better than expected, which may show signs of US recovery.  We will find out later today what the Fed honchos think when the Fed releases the minutes from its most recent FOMC meeting.

Today looks like it could be an ugly day as traders lighten the load before the Thanksgiving holiday.

In the forex market:

Aussie (AUD):  The Aussie is lower today as all of the risk in the market has tipped the scales toward capital preservation over yield-seeking.  Expect the Aussie to continue to trade on risk themes this week.

Kiwi (NZD):  The Kiwi is also lower for the same reasons as the Aussie.  While there has been recent strength coming from the Pac Rim, the risk focus today from the Koreas as well as news that China may be pulling back has put additional pressure on both the Kiwi and Aussie.

Loonie (CAD):   The Loonie is holding up surprisingly well despite the risk in the market as CPI figures came in hotter than expected, showing inflation gained 2.4% vs. the expectation of 2.2%.  Retail sales figures slipped slightly and despite the potential for inflation, the BOC is likely on hold with rate hikes as global risk trumps domestic policy for now.

Euro (EUR):  The Euro is taking it on the chin again today despite GDP figures that were in line with expectations.  The only negative number that stands out is a decrease in German exports and capital investment, and a slight decline in French business confidence.  The real driver of the Euro today is obviously the debt deal in Ireland and whether or not it spreads to other areas in Europe (see yesterday’s blog for that discussion).  In addition, the Irish bailout may not be a “done-deal” just yet, as the internal politics and backlash are starting to heat up.  (Click chart to enlarge)

Pound (GBP):   The Pound is also lower ahead of tomorrow’s GDP report.  British banks have close ties to the Irish banks so if the politics in Ireland prevent a deal was being completed, then we could see some Pound weakness.

Dollar (USD):   The Dollar is stronger this morning as the safe haven play is dominant ahead of the shortened trading week due to the holiday.  GDP figures came at 2.5% vs. an expectation of 2.4%, and personal consumption figures increased 2.8% vs. an expected 2.5% gain.  Stocks and commodities are lower and existing home sales are due out later this morning.  The minutes from the Fed meeting later today could be a game-changer.

Yen (JPY):  The Yen is stronger across the board as the un-wind of carry trades highlight the demand for safe havens and not speculative plays.  Should the instability in the Pac Rim pick up, then we could some further Yen strength.  (Click chart to enlarge)

The timing of the N. Korean missile strike is no accident as the N. Koreans were looking for the most “bang for their buck”.  With heightened risk due to the Euro debt crisis and with lower volume due to the holiday here in the US, the fuel has definitely been added to the fire.

The global economy is still a fragile place and any instability can send markets reeling, especially when they are already cautious due to other perceived risk.  One of the major “problems” is that event risk from something like the Korean situation is very hard to predict so it is tough to plan for.

With the US holiday fast approaching, I am inclined to keep my trading short-term, and I would advise that you do the same!

Who’s Up Next?

As was expected, Ireland requested a rescue of its banks to the tune of $130 billion, with various downgrades likely to follow.   The initial reaction was Euro-positive, but as I mentioned last week the result is likely to be negative, as the market turns its attention to both Portugal and Spain.While the exact details of the Irish deal are unclear at this time, there is going to be a re-structuring of the banking system at the very minimum.  The Euro should continue to be volatile as markets punish the bonds of Portugal and Spain.  The EU needs to come up with a viable solution to promote stability in the region or we could just see this story played over and over again until the EU emergency fund has been completely tapped.

Portuguese debt is among the highest in the world and Spain is the 4th largest economy in the Euro zone so further attacks on these countries’ bonds could exacerbate the problem much worse than what we saw from Ireland.  Expect more volatility in the market as further details of the Irish bailout are released.

There’s not a lot of economic data due out today in this shortened holiday week here in the US.  Markets are mixed this morning with stocks and commodities lower and specific weakness in both the Pound and the Euro.

In the forex market:

Aussie (AUD):   The Aussie is surprisingly higher as the market appears to be leaning toward risk aversion this morning.  This week is a light week for economic data from Australia, so perhaps they are benefiting from Euro and Pound money flows this morning.

Kiwi (NZD):   The Kiwi is lower across the board as S&P downgraded NZ’s credit-rating outlook to negative, citing a reduced outlook for global demand.  (Click chart to enlarge)

Loonie (CAD):  The Loonie is mixed as oil is slightly lower this morning but like the Aussie may be catching a bid as investors seek places to stash their dough.  Tomorrow is a busy day of data in Canada, as retail sales and CPI data are on the docket.

Euro (EUR):  The Euro is lower despite the news of the bailout for Ireland, as now the question of contagion becomes the bigger issue.  While there is some data due out for the region this week, the more pressing concern is structural in nature, as the Euro hopes to avoid the type of declines that we saw earlier this year.   (Click chart to enlarge)

Pound (GBP):   The Pound is also lower as the UK’s close ties to the Irish banking center and the threat of contagion is weighing on the currency and stocks alike.  Wednesday is the UK GDP report which will provide further insight into the health of the UK economy as austerity measures begin to take place.

Dollar (USD):   The Dollar is mostly higher as would be normal in a risk aversion scenario.  This is a holiday week her in the US with Thanksgiving on Thursday, so most of this week’s data will be released tomorrow and Wednesday.  Tomorrow is GDP and personal consumption data along with existing home sales, with Wednesday bring durable goods orders, initial jobless claims, and the U Michigan confidence survey.

Yen (JPY):   The Yen is mostly higher though in recent times it has not behaved like we would expect from a “safe-haven” currency.  Thursday is CPI data so we will get a better idea of how bad deflation is in Japan.

As the market begins to learn more about the details of the Irish bailout, the focus will now turn to both Portugal and Spain as they are the two most vulnerable countries in the Euro zone.  Unless the EU comes up with some type of plan to keep bond yields from rising (perhaps a short ban?), we are likely to see these two flirt with disaster.

While Portugal is in much worse shape than Spain, the latter is a much larger economy so market participants may feel emboldened to strike at the bigger prize.  The Spanish economy is still mired in a major housing bubble and has rampant unemployment.  If the ratings agencies decide to take aim at either country, it could get the ball rolling downhill.

With the Thanksgiving holiday here in the US likely to slow the markets down toward the end of the week, we could see some added volatility.  I seem to recall last year there was some news (can’t remember what) over the Thanksgiving holiday that induced risk aversion, so be cautious heading in toward the end of the weekend.

To learn more about how you can take advantage of world events through the currency market, be sure to check out ourcurrency trading courses!

It's Simple

What is Forex?
Forex stands for Foreign Exchange Market. Where you buy 1 currency over the other (exchange). Its a business, no matter what people say. It involve buying and selling like any other business only difference is the medium is currency. 

How to trade Forex?
The idea behind forex trading is to make profit from the difference in prices. Simply put, buy when the price is low and sell it when the price is high. Its just like the item you buy in stores, the store keeper is selling it at a higher price to make profit except in Forex you can sell first at high price and buy back later when the price is low. 

When to buy and when to sell?
Logically you will sell when the price is going down and you will buy when the price is going up. It is simple but in practice this is what killing most traders. Something so simple can be so complicated. 

How to know when the price is going down/up?
The price is going down when it no longer making new high. The price is going up when it no longer making new low. 

Final advice
Forex is a human activity. It involve buying and selling. Because it is a human activity, it is not predictable. You cannot predict when is the time you need to go to toilet or when you are going to cut your hair. It is all based on situation. Prediction is an over statement of intelligence in Forex. You dont need it. 

Fortunately not everything is unpredictable. By nature human tends to follow what other people are doing. In Forex there is something called the Trend. It happen when lots of people are doing the same thing at the same time (follow??). when more and more people are buying, you buy. When more and more people are selling you sell. 

Dont get greedy. Put a reasonable target for each trade and get out once you get your target. There will always be another trade tomorrow and you dont have to trade everyday to make profit. Btw, last week I only trade once. 

Good luck to all you traders. For the new blood, take your time. Give it 2 years before you can understand it and go for the kill.