Simplicity Is The Main Thing To Attain Currency Trading Success

The basis for why several of the traders lose and do not attain currency trading success is regularly attributed to a lack of discipline, though this is not the main cause, it’s just a small part of the trouble.

The main cause is a short of “strong concentration”, this indeed should be looked in to as the majority of traders are ignorant of it.

If you desire to attain currency trading success you require “strong concentration” and this denotes concentrating on how and why forex markets actually function and what you have to do to eventually succeed. The majority of traders just will not follow this and they will lose.

Do your work smartly; don’t make things harder for yourself:

In several industries to attain success the more you place in the more you get out in terms of returns; this is not right in currency trading.

What you require to study is that to attain real good success in currency trading you will have to be working real smart, you must not be playing tough rather you must be applying an easy system that should have you spend less time and better profit.

You can make a better currency trading process in just an hour a day and create triple digit annual gains! Simplicity is the main thing to attain currency trading success.

Trade with likelihood:

These days, there is a massive industry that informs us of analytical theories and functions and you can choose market bottoms and tops with technical correctness.

The other huge fairy tale is day trading.

You can attempt to trade pretty harder as you desire, but the odds are not in your goodwill in day trading, as you will not have sufficient profits to wrap your predictable losses.

You require to trade better in the longer run and this is where the likelihood of success is more and this is one of the single method with which you will land up with success in currency trading.

Reserve Bank of Australia Could be the First to Hike Rates

Based on the chart below, which plots the Australian Dollar against the New Zealand Dollar over the last two years, one might be tempted to conclude that the two currencies are identical for all intents and purposes. Rather than suffer the inconvenience of separately analyzing the Australian Dollar.

But this chart belies the fact that while the two currencies, have risen and fallen (in near lockstep) in sync with the ebb and flow of risk aversion, this could soon change. While the near-term prospects for the New Zealand economy are dubious, sentiment towards the Australian economy is more consistently optimistic. “Central bank Governor Glenn Stevens said the nation’s economic downturn may not be ‘one of the more serious’ of the post-World War II era.” In addition, “Stevens said the nation’s economy may rebound faster than the central bank had predicted six months ago on improving confidence among consumers and businesses alike.” The latest projections are for a fall in .5% contraction in GDP in 2009 followed by a 1% rise in 2010.

Meanwhile, government spending is surging: “The Australian government forecast its largest budget deficit on record of A$57.6 billion for fiscal year 2009-10, or 4.9% of GDP.” Combined with the steady recovery in commodity prices and the resumption of residential construction, this could soon trickle down through the Australian economy in the form of inflation. It’s no wonder, then, that the Reserve Bank of Australia (RBA) could begin tightening interest rates as early as December, in order to mitigate against the possibility of inflation in 2011 and 2012.

In fact, Governor Glen Stevens has been raising eyebrows with his unequivocal comments about raising rates. “I’ve never seen written down … I’ve never heard in discussion in the institution, some rule of thumb that says we wait until unemployment’s peaked before we lift the cash rate…I think it depends what else is happening, and also depends how low you went. We eased very aggressively,” he said recently. As a result, traders are betting that rates will be 1.13% higher one year from now than they are today.

This development should be of especial interest to forex traders. Australian interest rates are already the highest in the industrialized world. When you consider “the market’s expectations that the RBA is likely to be the G-10 central bank which is likely to hike first,” it goes a long way towards explaining the 18% rise in the Aussie that has taken place in 2009 alone. Compare a hypothetical 4% RBA benchmark rate to the .1% in Japan and ~0% in the US, and carry traders will start to salivate.

New Zealand Dollar Rise Threatens Economic Recovery

Having risen nearly 30% against the US Dollar since March, the New Zealand Dollar (NZD or Kiwi) is now close to a 9 1/2 month high. While still far from the record highs of 2008, the currency is already erased a large portion of the losses it racked up since the credit crisis gave way to economic recession.

As part of last Friday’s coverage of the Japanese Yen, we included a chart which compared the performance of the AUD/JPY cross to the S&P 500. Even without calculating the correlation coefficient, a cursory review of the chart revealed an uncanny relationship! Unsurprisingly, it turns out the same relationship also applies to the New Zealand Dollar, whose recent performance closely mirrors US equities.

In other words, the interplay between risk appetite and risk aversion continues to dominate the forex markets, as traders move to calibrate the split of funds between so-called safe haven currencies and the riskier alternatives, among which the New Zealand Dollar is certainly counted. Much of the rally in the Kiwi, then, represents a correction, as investors acknowledge that the near 50% slide from-peak-to-trough was an overreaction.

Going forward, however, the Kiwi will have to rest on its own feet, as new themes move to the fore of investors’ minds. Specifically, they will begin to look more closely at the New Zealand economy, and demand evidence of a recovery. “Reserve Bank of New Zealand Governor Alan Bollard told a business audience the world has ‘avoided a repeat of the Great Depression. Now, we and the world, appear to be on our way to recovery. New Zealand looks likely to start recovering ahead of the pack.’ ”

At the same time, the most recent economic data showed an economy in freefall, as “New Zealand’s economy shrank for a fifth straight quarter…The economy contracted 2.7 per cent in the January-March quarter.” While forecasts vary, GDP is expected to fall by at least 2.1% in 2009, with a modest pickup expected in 2010. Investors are betting that the recovery will be driven by rising demand for commodities, which will help to buoy New Zealand exports. Once again, this conflicts with the data, which shows an annualized trade deficit of $3 Billion. Despite a fall in imports, the country is still importing more than its exporting. This could be a product of the stronger currency, which all stakeholders agree is not conducive to economic growth. In the end, the economy’s best chance for recovery lies in a resumption of debt-induced consumption and residential construction, the very forces which caused the current downturn. Says Mr. Bollard, “Reliance on past experience of strong house price inflation and easy credit will be untenable.”

Given the uncertain prospects for growth, combined with moderating price inflation, the RBNZ can be expected to hold interest rates at current levels for the near-term. “Bollard will leave the benchmark interest rate unchanged at a record low 2.5 percent on July 30, according to all 10 economists surveyed by Bloomberg.” Based on swap rates, the markets feel similarly, and are pricing a mere 25 basis point hike over the next twelve months. With such a dubious prognosis, one has to wonder whether the Kiwi’s rally is really sustainable.

How to Find a Good Forex Broker

To trade forex, you need the services of a broker. Here are some tips to help you find a select a good broker.

1. Ask friends and colleagues for references. You may not have the luxury of having a trusted person to ask their advice on a broker. If you do, take advantage of that resource. A personal recommendation can cut way down on your research time and help you avoid making a bad decision.

If the same broker is recommended more than once, obviously you will want to take that into consideration. You might decide to look no further.

2. Do online research. The internet is an excellent research tool, and you should use it to locate several contenders to serve as your broker. Compile a list of brokers that look promising, and make a comparison chart to easily compare "apples to apples".

3. Using your comparison chart, select the three or four brokers that seem to most closely match your needs.

Some brokers will naturally appeal to the needs of certain traders more than others. One potentially important factor is the number and usefulness of the "helps" that each offers. Does the company maintain a forum, and is it actively used? Does the trading interface seem easy to use? What sort of research tools do they offer, if any?

4. Once you have narrowed down your list, do further investigation on your final contenders. Consider calling them on the phone. Ask yourself if they offer enough services to help you with your forex business. Request a free trial so you can get to know their company; at the very least, ask if they have a demo account for you to try.

If you're not a native English speaker, consider whether or not the broker offers services in your main language. This can become a very important factor in making your decision. As you learn and improve your forex trading skills, you don't want to struggle with a language barrier too.

5. After you have selected your broker, it is not out the question to keep tabs on other brokers. You are not "married" to any given broker that you pick. If you want, you can invest a certain amount of time every couple of months to see if any brokers have expanded their line of services or appeal to your needs better.

After all, you will be spending a considerable of money with the broker, paying for their services through the spread prices, so you will likely want some assurance over time that you are getting the best return on your investment.

Similarly, consider periodically evaluating your experience with your broker. Ask yourself if there any "holes" in the services they have provided to you. Are there any additional services which would help you make better trades? If the answer is yes, that is a clue for specific features you may want to seek out in a different broker at some time in the future.

Selecting a forex broker is one of the most important decisions you make in your forex business, so take the time to do it right.

Start Forex Trading:A Few FX Tips

Forex trading can be rewarding in more ways than one. It can provide a nice part-time income or even give you the freedom to quit your job and work from home. Here are some steps you should take before you begin trading.

First, invest some time in learning about forex markets and trading. There are many training guides available, and you should pick up two or three and learn everything you can. Get comfortable with the terminology and calculations.

Second, save up seed capital to begin trading with. If you already have the money on hand, that's great. Resist the urge to borrow from your mortgage money or grocery budget in order to start forex trading. Only invest what you are willing to lose, especially in the beginning when you are learning the ropes.

Third, make sure you have a firm financial foundation. You want to make sure you are making investing decisions based upon sound principles and not because your car payment is due in two days. Rash decisions made out of desperation often end in disaster, so take it slowly and learn how to trade forex before you rely on the money you will earn.

You may need to continue working in your job for a while, until you are comfortable in the forex market and are earning a comfortable income. Or, you may need to go out and get a job, at least part-time. Don't worry, it doesn't have to be forever.

Fourth, decide what your working hours will be. The forex markets are open 24 hours per day, Monday through Friday; you can even work at night if you choose! If you have a job or other time commitments, take those into account as well.

Fifth, select a broker. Many forex brokers are available. Do your due diligence and research each broker that you are seriously considering. Make note of the benefits listed in their advertisements. and construct a comparison chart of the most important features. You can always change brokers later; just make sure your broker's policies and ways of doing business are compatible with yours.

Sixth, once you begin trading, keep a record of your progress. As you do research before making investment decisions, keep track of what you find and why you made specific decisions. Consider opening a Google account; you can use a separate Gmail address for all your forex-related email correspondence, clip web pages with Google Notebook, make notes in Google Docs, and do financial calculations in Google Spreadsheet.

Forex trading is quickly becoming one of the favorite ways that people are supplementing and even replacing their income. The training and tools you need are widely available. Will you be the next successful forex trader?

Brazilian Real Continues Rise on Current Account Surplus

The Brazilian currency had the sharpest rise in seven days after the country’s first current account surplus in 19 months was posted this week, pushing the national equities market up.

After 19 months in deficit, the Brazilian current account, which is the broadest measure of a country’s trading activity, had a surplus of $146 million, pushed mainly by a recovery in commodity prices together with a decrease in multinational companies profit remittances. The Brazilian real suffered drastically when the global slump hit Latin American in the second semester of the last year, losing ground against virtually all main currencies, but since economic conditions improved in the past months, mainly in Asia, the demand for commodities increased, causing the Brazilian stock market to rally and spurring demand for the national currency.

Brazil is a main exporter of grains and several metallic commodities, and the rising demand improved confidence in Brazilian markets, according to experts. Being the real a high-yielding currency, it has been favored by a new wave of risk appetite on world markets, which has also favored several Asian currencies and the euro. The recovery in the Brazilian equities market is also attracting foreign investors back to this Latin American nation, adding attractiveness to the country’s currency profile.

USD/BRL traded at 2.0054 from 2.0185. Brazil’s real also posted gains against European currencies being the EUR/BRL traded at 2.8020 from 2.8231 and the GBP/BRL at 3.2086 from 3.2147.

MACD Sample Expert Advisor

MACD Sample expert advisor is a famous sample expert advisor made by MetaQuotes software to implement a very simple MACD-based strategy of Forex trading. MACD (Moving Average Convergence/Divergence) is one of the basic financial trading indicators, which is present in every MetaTrader platform. This version of MACD Sample was optimized specifically for GBP/USD H4 chart. This expert advisor uses crosses of 4 MACD indicators and 2 moving average indicators to determine the next position's direction. MACD Sample uses a trailing stop-loss for its orders. That's why it has a very high percentage of profitable orders. But this expert advisor should be always active to stop out the losing positions in time.

My test of MACD Sample MetaTrader expert advisor showed some interest results. I used GBP/USD H4 chart (I optimized it for this combination) with 0.3 standard lots orders. The results were about $4,450 profit and about $1,030 maximum drawdown in one year period. Checking it on a three years period didn't reveal any problems for this EA.

MiniFAQ

What are the stop-loss and take-profit used by this EA?

It uses 30 pip take-profit and 60 trailing stop-loss. The average losing position is 196 pips.

How often does it trade?

On 4-hour GBP/USD chart (the optimum settings) this EA will trade about 3 times a month on average.

Download MACD Sample expert advisor

Download zipped MACD Sample expert advisor

Warning! Before you ask any basic questions regarding installation of the expert advisors, please, read this MT4 Expert Advisors Tutorial to get the elementary knowledge on handling them.

Do you have your own trading results or any other remarks regarding this expert advisor? Don't hesitate to contact me.

Discuss MACD Sample with other traders and MQL programmers on the experts forums.

Yen Declines Further as Investors Purchase Assets Overseas

The yen hit a 8-week low against the dollar and also lost ground against the euro, as Japanese investors, driven by a new wave of confidence on world markets, return to overseas investments.

The Ministry of Finance in Japan affirmed that national investors had the highest rise in foreign bonds purchases during the current month, this declaration reflected immediately in the Japanese currency market, making the yen to lose against all of the 16 most-traded currencies. The yen also lost ground against high-yielding currencies in Asia, such as the Malaysian ringgit and the South Korean won. Standard&Poor’s raised the outlook for the New Zealand’s debt rating, pushing it sharply up in the Pacific trading area.

Japanese investors are more comfortable to take riskier positions, since the global financial situation has been reporting sequential signs of recovery, the attractiveness of higher-yielding currencies is once again alluring for Asian traders. Analysts confirm that the Standard&Poor’s report on New Zealand may bring interesting profits for traders willing to enter long in the NZD/JPY currency pair. For the time being the safety profile of the yen as an investment is strongly not recommended among trading experts.

USD/JPY rose enormously from 95.15 to 96.79 and following the same trend GBP/JPY traded at 152.05 to 154.31 and NZD/JPY also rallied from 59.05 to 60.05.

If you want to comment on the Japanese yen’s recent action or have any questions regarding this currency, please, feel free to reply below.

Russia Leads World in Declining Forex Reserves

During the global economic boom and concomitant run-up in energy prices, Russia’s foreign exchange reserves exploded. The subsequent bursting of the bubble, however, proved the maxim, what goes up must come down. “After reaching a record high of $597.5 billion in early August, reserves have declined dramatically as the central bank spent more than $200 billion on propping up a depreciating ruble.”

Excluding the European Union, Russia’s foreign exchange reserves are still the world’s third largest, behind only China and Japan. By Russia’s own admission, this will not remain the case for long. If current economic conditions continue to prevail, its entire stock of reserves will be depleted within two to three years. Moreover, as its reserves have declined, the share of Euros have risen (perhaps due to the selling of Dollars) to 47.5%, surpassing the Dollar for the first time. Despite the insistence of Russian authorities that the change was inadvertent, the fact remains that the Euro currently predominates in Russia’s forex portfolio.

These two trends - declining reserves and shifting allocation - are becoming entrenched, and may in fact accelerate. A cursory skim of the most recent IMF Data on International Reserves reveals that the reported reserves of most countries have fallen over the last year, or at the very least, are not growing at the same pace. The WSJ reports that “Foreign-exchange reserves of about 30 low-income countries have already fallen below the critical value equivalent to three months of imports.”

Meanwhile, it has been highlighted elsewhere that China - which does not report its reserves and is hence not included on this list - has seen its reserves stagnate, and has hinted publicly that it is nervous about the preponderance of Dollars it holds. And suffice it to say that when China talks, people listen.

The clear implication is that the US Dollar may not hold sway as the world’s unchallenged reserve currency for much longer. It is certainly not as if this is a new possibility. After all, “The United States possesses around one-fifth of the world’s GDP, but its own paper provides around 75% of world’s exchangeable currency reserves. This is a worrying imbalance,” argues one economist.

The impetus can be found in changed economic circumstances, which previously reinforced the Dollar’s role as reserve currency, but now suggest the opposite. Declining world trade and lower current account imbalances result directly in lower reserves, as do government stimulus plans funded with foreign exchange. The pickup in risk appetite meanwhile, combined with inflationary US monetary and fiscal policy, will make Central Banks increasingly reluctant to hold Dollar-denominated assets. Finally, the locus of the global economy is slowly shifting to East Asia. This trend will probably gather momentum if and when the global economy recovers, as the rest of the world has now learned the hard way that their collective reliance on US consumers is not sustainable.

Why Forex Trading is an Ideal Home Business?

Forex trading should be considered by anyone looking to start their own home based business. In this article, we will define Forex trading; explain its advantages over other business opportunities and discuss some pitfalls to avoid.

What is Forex trading?

"Forex" is short for "foreign exchange", and refers to the trading of monetary currencies.

Many people don't realize that currencies are traded, similar to stock trading. Since the value of each nation's currency is constantly fluctuating in relationship to other currencies, there are opportunities for you to profit.

Advantages of Forex trading as a home-based business.

There are several advantages of Forex trading including:

- You can adapt your participation to your own schedule

The Forex market is open for trading 24 hours per day, Monday through Friday, unlike the stock market or any other business in which you must work around "business hours". With Forex trading, you can work in the middle of the night if you want.

- Large marketplace

Forex trading is the largest marketplace in the world. It shadows all other markets, even the stock market. That means there is opportunity for anyone to participate. The daily trading volume is nearly 4 trillion dollars!

- Low barrier to entry

It takes less than $100 to get started Forex trading. If you can scrape together that amount of cash, even if it takes a garage sale or selling some of your extra stuff on eBay or Craigslist, you can jump into Forex trading.

Some pitfalls to watch out for.

Be aware of these potential problems if you decide to enter the Forex market:

- Investing decisions based on emotion rather than logic

As with any type of investing, it's very easy to get caught up in the prospect of making big money. Place some limits on yourself so that you don't use money you need for living expenses.

- Investing without a solid knowledge of the playing field

No serious athlete would step out onto the baseball diamond or basketball court without thoroughly understanding the "rules of the game", and neither should you venture into any type of investing without the same level of understanding.

- Trading too frequently

Although there are no "commissions" when trading Forex, you will be responsible to pay the "spread", which is the variance between the ask price and the bid price. If you do very many trades, these "spreads" can really add up. Just make sure you understand the cost of your trades before you make them.

Conclusion

Forex can be an ideal avenue for you to make extra money, or even as a foundation for a home-based business. It is wide open for anyone: you don't need to have any specific credentials or background. Why not take a share of this market today?

by Garry Williams

Price Alert

Price Alert MetaTrader indicator — plays sound alerts when the price reaches certain levels that are set by the trader. There are three types of alerts: first one is used when the price rises above certain level (displayed with the green line on the chart), second one is used when the price falls below certain level (displayed with the red line on the chart), third one is used when the price reaches the certain level exactly (displayed with the yellow line). All alerts turn off when they are triggered and can be turned on again with the new values.

Input parameters:

• SoundWhenPriceGoesAbove (default = 0.0) — if price goes above this value the alert will be triggered.
• SoundWhenPriceGoesBelow (default = 0.0) — if price goes below this value the alert will be triggered.
• SoundWhenPriceIsExactly (default = 0.0) — if price is exactly at this value the alert is triggered.

This indicator can't be used as a trading system and it isn't generating any signals. You can use it whenever you wish to be notified of some new price levels. Then you can use the moment to do whatever you want with the market. You can set the input parameters to zero value if you don't want to use some of them.

Downloads:

Price Alert in .zip

Price Alert in .mq4

Discussion:

Warning! Before you ask any basic questions regarding installation of the indicators, please, read this MT4 Indicators Tutorial to get the elementary knowledge on handling them.

Do you have any suggestions or questions regarding this indicator? You can always contact me or discuss Price Alert with the other traders and MQL programmers on the indicators forums.

Tips to Make Money Fast in Forex

This is all about making a fortune with Forex. Most traders just go with the flow and make average gains, with this article you will learn what makes some traders stand out and a lot richer than others!

We are going to assume that you know how to trade, and has quite an experience in trading.

With simple changes in your trade selection, money and risk management, and mindset, you can change that average gains into larger ones!

Fast money is in Forex, it is a lifestyle. here is it how its done.

Tip 1 . Embrace Changeability and Risk With a Smile

Forex systems have instability.

If you cannot manage and calculate your risk, then don't ever think about trading in Forex. Many traders back away from forex because of this ( why do you even traded in the first place?). But taking manageable risks has its rewards.

It's just simple, you know what your losing if ever it doesn't work out, yet what you gain is unpredictable but sure is high! That is what I call excitement, my friend.

To a well-educated Forex trader, this is something you shouldn't be afraid of, might as well embrace it.

Tip 2. Trade Less, gain more

Most traders think that if they don't trade, another door has closed, or miss some move. The tendency, they trade frequently. Most of the trades that come big come a few times in a year. Focus on the trades that make the really big gains. Be alert, and informed.

Tip 3. Diversify is a no-no

Most Investors accept the fact that diversification can make money fast - in reality it does exactly the opposite.

Tip 4. Money and Risk Management

This article has been concentrating on the Big gains, because this is your money, so every penny should be controlled, this is where money management kicks in.

Control your risks, but increase your chances of success:

- Give yourself staying power by buying options at or in the money, this prevents you from getting stopped out. Many traders lose not by the market direction, but because they were stopped out by a instable move, and options will give you staying power.

- Keep your stop in its original position - until the move is well in profit, before moving it up.

- Trading fast and selectively - have the courage to trade when you feel it is good. and enjoy the cash.

Tip 5. Compound growth has its benefits

The way to make money fast in forex, is to understand the power of compound growth. For example, if you target 50% a year in your trading, you can grow an initial $20,000 account, to over a million dollars, in under 10 years.

Break the norm, and gain more. Follow some of these tips and make your way into the big gains!

by Ryan Joseph Ferrer

Euro Surges on Better Economic Indicators

EUR/USD posted a sharp gain today after declining for three days in a row as the markets gained on the better fundamental conditions. The U. S. statistics was mixed today, but still positive enough for EUR/USD to rise. It’s now trading near 1.3937.

Durable goods orders rose by 1.9% in April after decreasing by 2.1% in March (revised down from 0.8% drop). The median forecast was at 0.5% gain.

Initial jobless claims decreased from 636k to 623k last week. A drop to 628k was expected.

New home sales rose from 351k to 352k seasonally adjusted annual rate in April. But the March value came out revised down from 356k. Traders expected a growth to 360k.

Crude oil inventories decreased by 5.4 million barrels last week, following 2.1 million barrels decline during a previous week. The overall inventories are now at 363.1 million barrels.

Yesterday the existing home sales report showed a gain from 4.55 million to 4.68 million in April compared to March. The March value was negatively revised from 4.57 million. The April growth according to the average forecast should have been to 4.66 million.

STARTING FOREX TRADING

The best and most efficient way for the traders to make money is through the internet in the Forex Trading by using the online forex trading system. The forex market is the most liquid trading market and an unpredictable market in the world. But still this forex market is the best for expert traders to amass huge profits. But it doesn’t mean that a trader should be an expert to make profits in the forex markets, it is enough if he knows the basics of forex trading and a little common sense along with the knowledge of the present economy of the countries world wide. Getting started with forex has become easy, due to the advances in technology.
1. The first and foremost aspect is that a person who wants to do forex trading should choose a good Forex Broker, the forex broker should help the forex trader to have a practice account, great customer support, good charting packages and news feeds. To analyze the forex brokers, there is a report called CFD FX REPORT which reviews forex brokers and give its rankings.
2. The second aspect is that, the forex trader must fund and deposit money in his newly acquired account. Due to modernity, these days many Forex Broker Platforms make it very easy for transactions, the trader can deposit via Credit Card, direct debit, check. It is always recommended by most advisors to start with only little amount of money and after a little experiences the forex trader can increase his leverage rates later.
3. The third step is the forex broker should help to move in the right direction that suits the trader’s trading style. There are several quality Free forex charts available to indicate the trend and also there are many sites that update the Fx Rates everyday. It is important to use them regularly.

Euro Resumes Decline After Brief Pause

The one-year chart of the EUR/USD depicts a general downward trend, punctuated with steep “blips.” Every couple of months or so, it seems traders are temporarily jarred loose from their mindset of Euro bearishness, and find an excuse to bid up the common currency. Invariably, the Euro then resumes its downward course a few weeks later.

The Euro’s recent trading activity fits this mold perfectly. The global stock market rally in March was accompanied by a spike in the Euro. While equities, commodities, and even other currencies continued to rise, however, the Euro peaked after a couple weeks and has since hovered around the $1.30 mark. As one currency strategist summarized: “A breakdown of the correlation between the euro-dollar exchange rate and the S&P index indicates the currency pair ‘ has become a trade that is less about risk, a little more about euro rate specifics.’ ”

In other words, the decline in risk aversion has not expanded to include the Euro. This is somewhat surprising, since EU economic indicators have rebounded in the last month. The oft-cited German IFO index “rebounded from a 26-year low,” while “retail sales declined the least in 11 months in April after government stimulus packages improved consumer confidence.” On the other hand, EU lending activity, which is more correlated with economic growth, continues to decline. “The European Central Bank Wednesday released figures showing that banks in the currency area cut their lending to both companies and households in March.”

This is a huge problem for the EU, where the banking sector represents a comparatively important component of the economy.. “At the end of 2007, the stock of outstanding bank loans to the private sector amounted to around 145 percent of gross domestic product, compared to 63 percent in the United States.” This is belied by newspaper headlines that maintain the banking crisis is most severe in the US. In nominal terms, this might be true, but in relative terms, the EU is in much worse shape. Given that exchange rates are all relative, it is worth paying attention to this phenomenon.

The ECB is doing all that it can to help the situation, but many analysts and even some of the Bank’s own members remain critical. “The ambiguity of the ECB’s stance is not helping [the Euro," offered one analyst. The ECB's next meeting is scheduled for May 7, when economists predict the benchmark lending rate will be lowered to 1%. This will appease some investors, but not all. The head of Germany's IFO organization, for instance, has urged the ECB to slash rates down to .25%.

As ECB President Jean Claude Trichet has pointed out, lower rates will not automatically stimulate the economy: "Owing in particular to the very low rate on our deposit facility of 0.25 percent, this difference in policy rates doesn’t translate into equivalent differences in money market rates." In fact, money market rates have largely converged across the EU and US, despite the divergence in short-term rates, vindicating Trichet.

More important, then is the ECB's non-monetary initiatives. To quote Trichet again, "Comparing only the levels of policy rates without consideration of the resulting market rates and other economic variables is looking at just one part of a far broader canvas." The Economist recently published an excellent comparison of the various Central Banks' responses to the credit crisis. While some have embraced their newfound prominence, other Central Banks have shied from the spotlight, insisting that their mandates are limited to inflation targeting. The ECB probably falls into this category, as it has thus far stood on the sidelines - for better or worse- as its counterparts have turned on the printing presses and flooded their respective credit markets with liquidity. [Chart courtesy of The Economist].

This could soon change, and “A commission headed by Jacques de Larosière, a former head of both the Bank of France and the IMF, has recommended that the ECB chair a new European Systemic Risk Council made up of its member central banks and supervisors.” Not all investors are convinced that the ECB can successfully break with tradition. “Alan Ruskin, head of international currency strategy in North America at RBS Securities…recommends investors sell the euro on ‘upticks’ as the ECB abandons ‘monetary orthodoxy’ and uses unconventional measures to spur growth.”

China’s Gold Holdings Surge 76% over Six Years

Based on the title, you’re probably groaning: ‘Wait, I thought this was supposed to be a forex blog?” Bear with me, however, as this subject is extremely pertinent to forex.

Last week, it was revealed that China has been clandestinely adding to its gold reserves since 2003, to the extent that its holdings increased by 76%, to approximately 1,050 tons. The news initially sent a ripple through forex and commodities markets, which were overwhelmed by the figures involved. After analysts had a chance to gather some perspective, however, the markets relaxed. You see, although the increase seems tremendous in size, it is quite small in relative terms.

It is relatively small compared to other countries: “This places China fifth in the world, ahead of Switzerland’s 1040 tons but behind the U.S. ranked first with 8,133 tons, followed by Germany (3,412 tons), France (2,508 tons) and Italy (2,451 tons).”

It is relatively small given the six-year duration of accumulation: “I think as soon as people realized it’s not a year-on-year increase, or a quarter-on-quarter increase, people realized it should not have that big an impact.”

It is small relative to China’s mammoth $2 Trillion forex reserves: “As a proportion of foreign exchange reserves, which have risen five-fold over the same period, gold now stands at a tiny 1.6 percent, versus 1.7 percent in 2003.”

On some level, the development has at least some symbolic importance, as it demonstrates that it cannot be taken for granted that China will simply continue to plow its (dwindling) trade surplus into Dollar-denominated securities, or even currencies in general. This is underscored by the suspicious timing of the announcement; China essentially waited six years before revealing its buildup in gold, probably in order to coincide with the uproar surrounding the Dollar’s role as global reserve currency. In other words, even though China’s gold purchases in and of themselves don’t amount to much, the Central Bank of China is trying to send a message that it will defend itself against “the depreciation risk of some foreign currencies.”

The announcement also explains the recent buoyancy of gold prices. Historically, there existed an inverse correlation between gold and the Dollar. This correlation has all but broken down as a result of the credit crisis, and for the first time a strong Dollar has been accompanied by high gold prices. Part of the reason may be increased buying activity by Central Banks, including the Bank of China: “The physical market remained well-bid by an unknown buyer despite bullion prices spiking to levels that normally cooled demand…Purchases were made in Shanghai, traders said, in an effort to absorb domestic production and lessen the impact of bullion prices on global markets.”

Forex Market Background

Forex Market Background
Presented in cooperation with Forex-Training.com

The global marketplace has changed dramatically over the past several years. New investment strategies are becoming more important in order to minimize risk, as well as to maintain high portfolio returns. Among the most rewarding of the markets opening up to traders is the Foreign Exchange market. Identifiable trading patterns, as well as comparatively low margin requirements, have rewarding trading opportunities for many.

In contrast to the world’s stock markets, foreign exchange is traded without the constraints of a central physical exchange. Transactions are instead conducted via telephone or online. With this transaction structure as its foundation, the Foreign Exchange Market has become by far the largest marketplace in the world. Average volume in foreign exchange exceeds $1.5 trillion per day versus only $25 billion per day traded on the New York Stock Exchange. This high volume is advantageous from a trading standpoint because transactions can be executed quickly and with low transaction costs (i.e., a small bid/ask spread).

As a result, foreign exchange trading has long been recognized as a superior investment opportunity by major banks, multinational corporations and other institutions. Today, this market is more widely available to the individual trader than ever before.

Spot foreign exchange is always traded as one currency in relation to another. So a trader who believes that the dollar will rise in relation to the Euro, would sell EURUSD. That is, sell Euros and buy US dollars. Forex-Training.com has compiled the following guide for quoting conventions:

Symbol		Currency Pair		Trading Terminology
GBPUSD		British Pound / US Dollar		"Cable"
EURUSD		Euro / US Dollar		"Euro"
USDJPY		US Dollar / Japanese Yen		"Dollar Yen"
USDCHF		US Dollar / Swiss Franc		"Dollar Swiss", or "Swissy"
USDCAD		US Dollar / Canadian Dollar		"Dollar Canada"
AUDUSD		Australian Dollar / US Dollar		"Aussie Dollar"
EURGBP		Euro / British Pound		"Euro Sterling"
EURJPY		Euro / Japanese Yen		"Euro Yen"
EURCHF		Euro / Swiss Franc		"Euro Swiss"
GBPCHF		British Pound / Swiss Franc		"Sterling Swiss"
GBPJPY		British Pound / Japanese Yen		"Sterling Yen"
CHFJPY		Swiss Franc / Japanese Yen		"Swiss Yen"
NZDUSD		New Zealand Dollar / US Dollar		"New Zealand Dollar" or "Kiwi"
USDZAR		US Dollar / South African Rand		"Dollar Zar" or "South African Rand"
GLDUSD		Spot Gold		"Gold"
SLVUSD		Spot Silver		"Silver"

Spot Forex versus Currency Futures

Many traders have made the switch from currency futures to spot foreign exchange ("forex") trading. Spot foreign exchange offers better liquidity and generally a lower cost of trading than currency futures. Banks and brokers in spot foreign exchange can quote markets 24 hours a day. Furthermore, the spot foreign exchange market is not burdened by exchange and NFA ("National Futures Association") fees, which are generally passed on to the customer in the form of higher commissions. For these reasons, virtually all professional traders and institutions conduct most of their foreign exchange dealing in the spot forex market, not in currency futures.

The mechanics of trading spot forex are similar to those of currency futures. The most important initial difference is the way in which currency pairs are quoted. Currency futures are always quoted as the currency versus the US dollar. In Spot forex, some currencies are quoted this way, while others are quoted as the US dollar versus the currency. For example, in spot forex, EURUSD is quoted the same way as Euro futures. In other words, if the Euro is strengthening, EURUSD will rise just as Euro futures will rise. On the other hand, USDCHF is quoted as US dollars with respect to Swiss Francs, the opposite of Swiss Franc futures. So if the Swiss Franc strengthens with respect to the US dollar, USDCHF will fall, while Swiss Franc futures will rise. The rule in spot forex is that the first currency shown is the currency that is being quoted in terms of direction. For example, "EUR" in EURUSD and "USD" in USDCHF is the currency that is being quoted.

The table below illustrates which spot currencies move parallel to the futures contract and which move inversely (opposite):

Forex Symbol		Currency Pair		Futures Symbol		Directional Relationship
GBPUSD		British Pound / US Dollar		BP		Parallel
EURUSD		Euro / US Dollar		EU		Parallel
USDJPY		US Dollar / Japanese Yen		JY		Inverse
USDCHF		US Dollar / Swiss Franc		SF		Inverse
USDCAD		US Dollar / Canadian Dollar		CD		Inverse
AUDUSD		Australian Dollar / US Dollar		AD		Parallel
NZDUSD		New Zealand Dollar / US Dollar		ND		Paralle

Books about Advanced Forex Trading

Here you will find the Forex e-books that contain more advanced information than the average popular book about financial trading. In some cases, understanding these books is impossible without a lot of experience in Forex and sometimes the extended knowledge of mathematics.

Almost all Forex e-books are in .pdf format. You'll need Adobe Acrobat Reader to open these e-books. Some of the e-books (those that are in parts) are zipped.

If you are the copyright owner of any of these e-books and don't want me to share them, please, contact me and I will gladly remove them.

A New Interpretation of Information Rate — by J. L. Kelly Jr.

CCI Manual — by James L. O'Connell.

Nicktrader and Jeff Explaining Reverse and Regular Divers — from Woodies CCI Club Discussion From January 15,16 2004.

NickTrader on No Price CCI Divergence Trading — by Nicktrader.

Are Supply and Demand Driving Stock Prices? — by Carl Hopman.

The Sharpe Ratio — by William F. Sharpe.

The Interaction Between the Frequency of Market Quotes, Spread and Volatility in Forex — by Antonis A. Demos and Charles A. E. Goodhart, a scientific article from the Applied Economics.

Trend Determination — by John Hayden, a quick, accurate and effective methodology for trend determination on the financial markets.

Trend vs. No Trend — by Brian Dolan an article from TRADERS' Magazine July 2005 issue, which deals with the trend/no trend paradox encountered by many traders who think that "the trend is your friend".

A Six-Part Study Guide to Market Profile — by CBOT professionals — it describes the concept of the market profile in the smallest details.

How George Soros Knows What He Knows — by Flavia Cymbalista — the study of George Soros' market reflexivity.

Forex Newsletter

Subscribe to the EarnForex newsletter to get the regular monthly updates on the Forex market and this site. With each newsletter issue you will get the monthly events summary of each Forex traded currency, analysis of the fundamental market situation, examples of my real trades for the month and the important site updates including new ebooks, brokers and expert advisors.

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The Truth about Money Management

The new e-book (actually an article excerpt from the Futures Magazine) was uploaded to my site today. It’s about the risk control and money management in Forex and elsewhere. The whole book is only 4 pages long, but it succeeds in introducing the most important approaches to money management theory and practice. For those who are too lazy to read these 4 pages, in the end the author of this book gives 5 steps (or rules) that should be followed for the successful risk managing of the general financial trading. Download link:

• The Truth About Money Management by Murray A. Ruggiero Jr.

Yen Continues to Drop Despite Government Stimulus Plan

The Yen continues its decline against the Dollar and Euro, dipping well below 100 Yen/Dollar en route to a six-month low. Most analysts attribute this trend to a pickup in risk aversion: “Some kind of optimism is returning to the market and that’s putting pressure on the yen,” explained one analyst succinctly.

An ongoing rally in stocks and commodities is reinforcing investor attitudes that the economic recession is under control, and is stimulating risk-taking. In other words, the same forces that contributed to the unwinding of the carry trade during the beginning of the credit crisis, are now working in reverse and causing investors to flee from the Yen en masse. “As long as stocks can retain their buoyancy… risk appetite and risk-based trades will be in vogue and investors will continue to add to and rebuild yen short positions.”

According to the most recent International Monetary Market report, “Short positions on the currency have been building up for three consecutive weeks, and are now at levels last seen in the late summer of 2008,” which means the Yen’s slide has basically become self-fulfilling. From a technical standpoint, “A move above 101.00 yen was technically significant as it was a 38.2 percent Fibonacci retracement of its decline from a peak in 2007 to its 13-year low in January.” Even domestic Japanese investors have signaled their bearishness by taking advantage of last week’s Yen upswing by making “aggressive purchases of foreign bonds.”

From a fundamental standpoint, the decline in the Yen makes sense, given the abysmal economic situation in Japan. In fact, the “Minutes from the Bank of Japan’s March meeting showed members of the central bank were leaning toward cutting the bank’s economic forecast in April, and that they believed the BOJ would need to continue to provide substantial liquidity to financial markets that they see as still under substantial stress.”

The government is finally responding to the economic crisis, having most recently unveiled a $150 Billion plan, to supplement the $100 Billion initiative announced earlier this year. “If implemented competently, these steps could stabilize the domestic economy and stop the bleeding in labor markets.” At the same time, the intertwined tailspin in confidence and spending suggest that the government’s efforts could be in vain.

While equity investors have reacted positively - pushing the stock market into positive territory for the year- bond and currency traders are understandably concerned. Yields on Japanese bonds are already rising in anticipation of $100 Billion in bonds that the government will have to issue in 2009 alone. Naturally, the burden to purchase these bonds will fall on the Bank of Japan, which will be forced to print money and contribute to the further devaluation of the Yen in the process.

Ultimately, the duration of the Yen’s slide depends on the duration of the global stock market rally. If you believe that the global economy has turned a corner, then the Yen is done. If, on the other hand, you are inclined to side with George Soros, who opined recently that “It’s a bear-market rally because we have not yet turned the economy around,” then there is still cause for Yen bullishness.

Risk Aversion Returns to Forex as Hope from G20 Fades

The period leading up to the G20 meeting was generally marked by optimism and hopefulness. One commentator urged his readers: “Don’t write off the London G20 meeting. It could lay the foundations for fundamental global change, impacting currencies, gold and bond markets.”

On some level, the meeting probably did fulfill expectations. After only a few hours of discussions, the G20 agreed to “stricter limits on hedge funds, executive pay, credit-rating companies and risk-taking by banks. The summit also committed more than $US1 trillion to boost the resources of the International Monetary Fund and provide emergency cash to help distressed countries.”

Investors rejoiced and the markets rallied, with the Dow rising above 8000 points and capping “the best four-week rally since the week ending May 12, 1933.” Bulls can now retort that the stock market bust of 1929 took four years to recover, while the recession of 2008-2009 required less than one year. Forex markets also reacted “positively” to the G20 summit, lifting the Dollar above the important psychological barrier of 100 Yen/USD, and causing emerging market currencies to rise across the board.

Monday, however marked a return to business as usual: “Post-G20 euphoria, which had helped to boost market confidence about a global recovery, proved short-lived as investors once again focused on the continued risks to the banking system.” It was probably only a matter of time before investors drilled beneath the surface of the impressive-sounding G20 rhetoric and large numbers, into the nuts and bolts of the summit’s policy prescriptions. [The chart below comes courtesy of the New York Times].

The headline-grabbing $1.1 Trillion figure, for example, is somewhat misleading. Over half of the $500 Billion “pledged” to the International Monetary Fund has either not been raised or not been explicitly authorized. Then, there is $350 Billion in trade credit, most of which is either redundant or double-counted, since “trade financing is rolled over every six months as exporters get paid for their goods and repay the agencies that lent them the money.” The remaining $250 Billion is accounted for in the issuance of IMF synthetic currency to member nations. However, given that the synthetic currency derives a significant portion of its value from the Dollar and Euro, this program cannot be effective if the US and EU opt out, of which there is a real possibility.

The summit also failed to meaningfully address concerns of the continued ole of the USD as the world’s de facto reserve currency. The expansion of the IMF synthetic currency program represents an important starting point, but at this point, it looks like China and the other supporters of an alternative system will have to wait for the next G20 meeting, to be held in September.

One commentator captured this frustration quite well: “The G20 Plan…tries very hard to preserve and perpetuate the existing US helmed global financial and economic order. An act of commission, on the one hand— buttressing the IMF— and an act of omission, on the other— remaining silent on the position of the US dollar— bear testimony to this.”

IMF Currency Could Threaten Dollar’s Reserve Status

Last week, SDR became the latest addition to the growing list of forex acronyms. So-called Special Drawing Rights are a unit of account used by the IMF, “defined as the value of a fixed amount of yen, dollars, pounds and euros, expressed in dollars at the current exchange rate. The composition of the basket is altered every five years to reflect changes in the importance of different currencies in the world’s trading system.”

The sudden rise to popularity of SDRs (in spite of their 40 year history) can be attributed both to developing countries’ growing unease about the status of the Dollar, as well as to their perceived usefulness as a tool in fending off economic depression. Ignoring the latter- for the purpose of this post- let’s look, at how SDRs will impact the role of the Dollar as the world’s reserve currency.

First of all, as I noted in Tuesday’s post, the success/scope of the SDR program depends on the positions of the US and EU, the largest and most important members. In the case of the US, the most recent SDR expansion (1997) was never implemented because the US blocked it. Neither can the support of the EU be taken for granted. According to one member of the European Central Bank, “There was no examination of whether there is a global need for additional liquidity at all… One used to take a lot of time to examine something like this.”

In addition, it’s not clear what benefits the synthetic currency would yield. Asks one commentator: “What is one to tie it to?…in a world of depleting resources it is difficult to fathom how to create a list of constituents which would not constrain global growth and tie us into many years of deflation.” In other words, given that the SDRs will derive their value from underlying currencies, it doesn’t seem like the end result would be anymore stable than the current system.

China, meanwhile, has showed fervent support for the expansion in the form of a $40 Billion pledge, which is not surprising since a report issued by the head of its Central Bank provided some of the impetus. This $40 Billion is tantamount to an exchange of Dollars for a basket of currencies. The benefit to China is articulated by one analyst as follows: “ ‘We could see the IMF being put in a position where it could raise in the capital markets funds in SDR-denominated debt….The debt could be used ‘by China and other central banks to be put into their currency reserves, at the expense of the U.S. dollar.’ “

Is Gold a Hedge Against Inflation and Currency Weakness?

Until the Fed announced an expansion of its quantitative easing program two weeks ago, gold had begun to fade into relative obscurity. Sure, gold had risen in value from a low of $710/ounce back up to $900/ounce, but prices were still off 10% from the highs reached in 2008. Meanwhile, risk aversion had begun to decline and the stock market had begun to rise, such that pundits were talking more about stocks and less about gold.

Since the Fed’s announcement, however, gold has been thrust back into the spotlight. The same trading session that saw a record fall in the Dollar and a record rise in Treasury prices, also witnessed a 7% spike in gold futures prices. ” ‘Money is being pushed into the system and that’s creating the inflationary threats that the markets are contemplating…Commodities are a decent way to hedge against that potential threat,’ ” observed one trader.

Other analysts, however, caution that rising gold prices are a sign of the fear/crisis mentality, not inflation. “There are just not a lot of alternatives for global investors. You will see more and more investors moving into gold as a safe haven, and you will see more institutions putting money into commodities indexes.” In other words, gold is being driven by the safe-haven trade, which is evidenced by an increasing correlation with Treasury bonds. One commentator calls it a hedge against uncertainty: “The demand for gold is for gold coins, a massive flurry of bullion buying by ETF’s (and investors), and the institutions and traders buying the hell out of it. The reason is simple… pure fear.”

With the exception of the perennial gold bulls and conspiracy theorists, the short-term consensus is that due to “massive spare capacity now opening up in the global economy, soaring unemployment and a dysfunctional banking system – it would be very hard for central banks to generate a surge in inflation even if they wanted to.” This analyst further argues that the Fed is undertaking the expansionary program under the implicit assumption that it will have to siphon this money out of the financial system, if and when the economy recovers.

Of course, there is not even a consensus that gold is a good hedge against inflation. Mike Mish points out that the correlation between the US money supply and the price of gold is not very robust. When examined relative to a basket of currencies (rather than the Dollar), however, the relationship suddenly becomes much stronger. Especially when you filter out fluctuations in the value of the Dollar (which is affected by many factors unrelated to inflation), “gold is doing a reasonably good job of maintaining purchasing power parity on a worldwide basis.” This can be seen in the following chart:

Ascertaining a relationship ultimately depends on the time period of analysis, and the currency(s) in which prices are being tracked. Given also gold’s notorious volatility, it probably makes sense to use special inflation protected securities, rather than gold, as an inflation hedge.

ECB Prepares to Lower Rates, Euro Rally Fades

On Thursday, the European Central Bank will conduct its monthly monetary policy meeting. The consensus among analysts is that the meeting will lead to a 50 basis point cut, leaving the EU’s benchmark lending rate at 1%, a record low. Investors are also bracing for the ECB to announce certain unconventional steps, similar to the Fed’s program of quantitative easing, although not to such an extent. Analysts have speculated that the ECB “could intervene in bond markets to help ease companies’ financing problems.”

This marks an about-face from current policy and recent rhetoric, in which the ECB insisted that guarding against inflation was more important than providing economic stimulus. In fact, Jean-Claude Trichet, President of the ECB, has recently found himself on the defensive: “I don’t think it is justified to say we are doing less on this side of the Atlantic. We have automatic stabilizers,” he said during his quarterly testimony in front of European Parliament. In fact, the ECB had become an outcast among Central Banks for waiting a long time before finally agreeing to cut interest rates. Since embarking on a program of monetary easing, it has been playing catch-up by cutting rates at breakneck speed.

It appears that the ECB’s arm was twisted by the most recent economic data; a sudden drop in German manufacturing suggests that the recession is both spreading and deepening. Combined with a record drop in the EU economic sentiment, this “suggests that the euro zone economy will have contracted by roughly 2 percent quarter on quarter in the first three months of the year.” In addition, both producer and consumer prices have eased, such that inflation has fallen well below the 2% target level, and the ECB lost its last excuse for not dropping rates.

As a result both of the worsening economic situation, as well as the projected decline in yields, currency traders are once again questioning the Euro. The last couple weeks have been rife with commentary that the Dollar rally had come to an end as a result of the intensification of the Fed’s plan to use newly printed money to as a source of liquidity in the credit markets. “The dollar’s traditional trading patterns have been altered in the wake of new U.S. quantitative-easing measures. Risk appetite, stocks and funding currencies appear to hold lesser influence lately.”

This week, the narrative in forex markets favors the Dollar. It could be that the safe-haven trade has returned to lift the Greenback, but more likely is that investors are comparing economic fundamentals when making bets on currencies. One analyst summarized his firm’s position as follows: “We have argued that the leveraging-de-leveraging axis has been the key driver in the foreign exchange market. We expect a new driver, anticipated growth trajectories, to emerge…[and] for the dollar’s uptrend to resume in the second quarter.”

Korean Won Continues to Plummet as a Result of Acute Dollar Shortage

The Korean Won is among the biggest losers of the credit crisis, excluding Iceland of course. The currency has fallen 40% against the Dollar over the last year, even adjusting for a 10% rise in the last week. South Korean Finance Minister Yoon Jeung-hyun blames currency speculators, pledging that “The government will not sit idle when the foreign exchange rate is excessively tilted toward one direction or when there are speculative forces.”

Perhaps understanding that it cannot possibly hope to defend its currency against such a broad tide of determined speculators, the Central Bank of Korea has all but given up on intervening in forex markets. “South Korea was the catalyst for the shift away from defensive intervention. After spending 22 percent of foreign reserves from August to November to stem won losses, Yoon…said Feb. 25 that its weakness may be an ‘engine for export growth.’ ”

There is some plausibility to this argument, since South Korean economic fundamentals (as bleak as they are) probably don’t support such a precipitous decline in the Won. In fact some South Korean exporters have benefited from the weak currency, with companies such as Hyundai and Samsung growing revenues and increasing market share. Still, the global recession has impelled foreign consumers to cut back on spending, with the end result that “A double-digit fall in exports in the last three months of 2008 seriously undermined industrial production, [and] a 16% plunge in facility investment was an equally important factor in the 5.6% contraction in Korea’s GDP from the previous quarter.”

Ultimately, the Won’s decline is being driven by an acute shortage of Dollars. A relatively large portion of Korean public and private debt is denominated in foreign currency. The collapse in liquidity spurred by the credit crisis and consequent decline in bank lending have made it very difficult for South Korean borrowers to procure the requisite Dollars to repay their loans, causing a large imbalance in the supply and demand for the Dollar within Korea. Even more alarming is that $150 Billion of such debt will come due in the immediate future. “The government stresses that foreign debt maturing within a year amounts to 77% of its foreign exchange holdings, meaning Korea can cover its obligations. However, no other Asian nation that investors care about has such a high ratio of short-term external debt (on a remaining maturity basis) to foreign exchange reserves.”

South Korea recently extended a swap agreement with the US, which enables it to exchange up to $30 Billion in Won for Dollars. Investors are evidently hopeful that this represents a step towards easing the Dollar shortage, as the news caused the Won to appreciate by the largest margin in months. Borrowing costs for Korean firms remain high, and the odds remain tilted against them. Unless the US financial system stabilizes and/or Korea is able to run a current account surplus (as a result of increased foreign investment), liquidity will remain a problem.

Central Banks Maintain Holdings of US Treasury Securities, but For How Long?

Chinese Premier Wen Jiabao aired his country’s growing concerns about continuing to lend money to the US. Within the context of the US economic stimulus plan and other related US spending initiatives, Mr. Wen is understandably anxious about China’s vast holdings of US Treasury securities:

President Obama and his new government have adopted a series of measures to deal with the financial crisis. We have expectations as to the effects of these measures. We have lent a huge amount of money to the U.S. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried.

While the announcement represented political posturing (to an increasingly restless, domestic Chinese audience), it should nonetheless be heeded as a warning, that the US cannot expect China (and other foreign Central Banks) to fund US budget deficits indefinitely.

Let’s put aside the rhetoric for a moment, and examine the data. This week witnessed strong demand for Treasury securities, which were auctioned by the Treasury Department on consecutive days. Despite historically low yields (see chart), investors continue to snap up Treasury Bonds, mainly for the sake of risk aversion. The newly-revived issuance of 30-year bonds also went off without a hitch, and were more than 2x oversubscribed. Most relevant to this discussion is the fact the foreign Central Banks accounted for as much as 46% of demand!

The most recent Federal Reserve Statistical Release paints a similar picture. While foreign Central Banks and other international institutions reduced their holdings of US government securities slightly from the previous week, the decrease was essentially negligible. Overall, such entities have increased their holdings by at least $440 Billion over the previous year, bringing the total to approximately $3 Trillion (depending on the data source). China’s contribution remains substantial. Of its $2 Trillion in foreign exchange reserves, “Economists say half of that money has been invested in United States Treasury notes and other government-backed debt.”

However, there are a few reasons why I don’t think this trend will continue. First of all, the buildup in foreign Treasury holdings that transpired over the last decade was largely a product of unsustainable global economic imbalances, as net exporters to the US invested their perennial trade surpluses in what they perceived to be the world’s most secure investment. Temporarily putting aside whether Treasuries are actually secure, economic indicators suggest that Central Banks simply do not have the capacity to increase their holdings by much more. China’s trade surplus plummeted to $4.8 Billion last month; one economist projects a surplus of only $155 Billion in 2009, compared to nearly $300 Billion in 2008.

You can also remove from the list Japan- the second-largest holder of US Treasury securities- which is now running a trade deficit. Instead, both countries have publicly announced plans to use some of their forex reserves to fund domestic economic initiatives.

Then there is the equally unsustainable short-term buildup in US Treasuries, which is largely a product of technical factors. As I mentioned above- and which should be clear to all investors- the current theme underlying securities markets is one of risk aversion. In fact, it now appears that a bubble is forming in the bond market, and “any exodus now could spark selling across the board. Foreign debt holders would likely repatriate their funds immediately to reduce the risk of being last to convert.” As soon as markets recover- of which there are already nascent indications- investors will probably reduce their holdings of government bonds, or at least not increase their holdings.

Even the most conservative projections indicate a cumulative budget deficit for the next few years measuring in the the Trillions. Unless the risk-aversion theme obtains for the next decade, it seems unlikely that foreigners can be tapped to fund more than a small portion, leaving the Federal Reserve (with the help of its printing press) to make up the shortfall.