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15/02/16 Market notes

Yen surges due to stock markets rise and agressive Abe rhetorics, USD falls.

Yen surges due to stock markets rise and agressive Abe rhetorics, USD falls.

Dollar gained against Japanese Yen in Asian session as Prime Minister Abe comments about volatility successfully warned investors about possible interventions and pick up on equity markets, which reduced a demand for safe heaven asset.
MSCI Asian index added 2.24% after declining 4% last week, while Japanese Nikkei 225 soared 7.3%, tech companies are best performers.
Trading data from China falls short of expectations: Country exports declined 11.2% comparing to last year. This change shows how successful were an efforts of switch of Chinese investment-stimulated model to consumption-driven, with a cutback in manufacturing.
Japanese economic data demonstrated contraction of GDP by 1.4% in the period of October-December 2015, more than 1.2% expected, mainly due to decrease in exports and a drawdown in consumer spendings.
Prime Minister Sinzo Abe raised concerns on excessive volatility on the currency market and that government will take measures to rein back Yen fluctuations if it threats further economic growth.
Abe also expressed hopes that the management of G20 will act accordingly to withstand threatening global economic setback and take necessary measures in Shanghai meeting which is to be held in next week. The rhetorics of Prime Minister boosted the depreciation of Yen which dropped against the Dollar by 0.6% to 113.92, bouncing off the 15-month low of 110.985, where Yen found itself in last week session.
PBOC took advantage of recent fall of USD and set the monthly exchange rate of USD/CNY on Monday, hoping to curb rumors about possible devaluation. The head of central bank said to Caixin interview that China will keep Yuan stable against the basket of other major currencies, eschewing from volatility control to USD.

Stay tuned for more analytics from BrokerArena.

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29/01/16 Forex education

What is Forex Trading and how it works?

What is Forex Trading and how it works?

FOREX (abbr. from Foreign Exchange) in the broad sense – an aggregate of exchange operations between large banks and other financial institutions like pension funds, insurance companies and transnational corporations. The needs to carry out such exchanges can be different – banks and companies keep reserves in different currencies for their operational needs, hedge funds buy and sell currencies to earn on fluctuations of exchange rates.

The daily volume of transactions on Forex market is incredibly high – about $5.3 trillion per day in April 2013. It greatly exceeds the turnover on stock markets – for example daily trading value of biggest stock exchange NYSE averaged only $169 billions in 2013. 

Let’s take a glance on some useful statistics related to Forex market:

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As we can notice, USD and EURO represent most traded currencies in the world with about 3/4 of daily trading volume.

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US and European banks seems to be the biggest currency traders.

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Daily trading volume has been steadily growing throughout the given period with a dip in 2001 caused by financial crisis in 1998.

So, when we hear something like “Euro became weaker against Dollar” or “Japanese Yen appreciated against Australian Dollar” it invites reasonable question:  What makes exchange rates fluctuate? To answer this question lets consider the state as a big company and national currency as its share. As logic suggests the better company performance the more value receives its shares. So basically, changes in exchange rates reflect how one company (country) outdo in performance other company (other country). 

There are tons of domestic circumstances that leave impact on a country’s economy. By and large we can divide them in two categories: Internal and External. All of them in their underlying principle contain the theory of Supply and Demand. Macroeconomic changes, geopolitical events, natural disasters can be referred to domestic factors, while changes in commodity prices (especially energy), increasing or decreasing supply or demand for certain goods can be considered as external. 

Here are two schemes that can help to understand the impact of both internal and external factors on national currency:

For Internal:

Russian Central bank decides to increase interest rate for Ruble => borrowing costs of Ruble increase (money “become more expensive”) => Russians borrow less and spend less, Foreign Investors tend to buy Ruble as it ensures more return => Amount of this currency on forex market decrease (thus the demand for it increase) => the value of Ruble increase.

For external:

China Oil consumption fall => Supply doesn’t change so world market gets oversupplied with Oil=> Price on Oil declines => Oil return for exporters like Russia drops => Russian economy deteriorates => Ruble becomes cheaper. 

Of course these two basic examples demonstrate clearly how currencies are affected by certain circumstances and describe fluctuations in their plain way, but given that the number of factors can reach thousands or millions its impossible to predict how the exchange rate will change in next 5 minutes (obviously current computational capacities are not enough to collect and analyze all information that may have impact on certain currency). Its essential to know that important economic and political events form only long-term trends in exchange rates – the wave that can  form weeks or months or even years, consisting of numerous smaller waves.

Alright, seems we’ve dealt with a notion of exchange rate fluctuations. Let’s take a look under the hood.

As you may already have guessed, forex market operates 24/5 (banks don’t work during weekends). 24/5 means that exchange rates are continuously floating from Monday to Friday. The continuity is achieved by Trading sessions, which times of operations overlap each other. Look at the picture below to get a clue on how trading sessions work:

London session is considered biggest by trading volume, second is New-York session. Asian and Australian sessions feature with lowered trading activity (amount of transactions). The overlap of London and New-York session is considered to be most active time of trading. In trading terms it means “time of best market liquidity”. 

That’s it for today. In next article we’ll get insight into how retail forex trading works and how access to biggest market in the world can be served to any trading newbie.

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29/01/16 Forex education

How currencies are traded in Forex?

How currencies are traded in Forex?

In our opening lesson “What’s Forex and how it works” I provided a brief account of main participants of currency market and what make exchange rates fluctuate. It is essential information you need to know, but not sufficient to start trading. Let’s examine exact process of how currencies are exchanged, what are costs of these transactions and how to profit from them.

First thing you need to know is that currencies are traded in PAIRS. Not in triads, quartets etc. Symbols like EUR/USD or USD/JPY mean two currencies that “compete” against each other – EUR/USD is EURO vs US Dollar, USD/JPY is US Dollar vs Japanese Yen. When you see a message that EUR/USD fell by 1% it means that EUR value decreased against USD by 1% or USD appreciated against EUR by 1%. It can sound a bit confusing so lets put it simple, considering on the of currencies as a “good”:

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A currency that comes before “/” is called “base currency” (good), currency that comes after “/” is called “quote currency” (money you pay for the good) and the number in right side is “exchange rate”. In our case EUR/USD=1.10 means that if we buy 1 EUR we pay 1.10 Dollars, if we sell 1 EUR we get 1.10 Dollars.

Consider other examples:

USD/JPY = 118.20 –  to buy 1 Dollar we pay 118.20 Japanese Yens, if we sell 1 Dollar we get 118.20 Yens.

EUR/GBP= 0.77  to buy 1 Euro we pay 0.77 pounds.

So what “EUR/USD rose from 1.10 to 1.12” exactly mean? It means that to buy 1 Euro we now need more Dollars (1.12 USD instead 1.10 USD). In other words we need to spend more Dollars to buy Euros or Euro became more expensive that USD.

When exchange rate rise = base currency become more expensive or quote currency become cheaper.

When exchange rate drops = base currency become cheaper or quote currency become more expensive.

Hope its clear. Moving further.

Now we understand which exact changes mean fluctuations in exchange rate. So if we expect that exchange rate of EUR/USD will rise how to profit from it?

The answer is – we should buy EUR/USD. When we make such transaction it means that we buy EUR and pay with USD for it. And vice versa, when we sell EUR/USD it means that we sell EUR and get USD instead.

Here are simplified calculations of what happens when you try to speculate on currencies:

For example you think that exchange rate of EUR/USD will rise from 1.10 to 1.20. You buy 100 000 EUR paying 110 000 USD for it. Then exchange rate rises from 1.10 to 1.20 and you execute reverse transaction: Sell your 100 000 EUR and get 120 000 USD instead. Net profit is 10 000 USD.

But what happens if exchange rate falls short of your expectations and drop from 1.10 to 1.00? You buy 100 000 EUR for 110 000 USD but when making reverse transaction when exchange rate dropped to 1.00 you get back only 100 000 USD. Net loss is 10 000 USD.

Here we have important conclusion: Any trade consists of two transactions, where second transaction is reverse to first.

We already know such currency pairs like EUR/USD, USD/JPY, AUD/USD. But how much pairs there are and what pairs are best to trade? Let me try to answer this questions.

Trading is possible providing that there is a counterparty willing to sell you what you want to buy and buy what you want to sell, i.e. make an exchange with you. When you want to sell EUR/USD there should be a counterparty willing to buy EUR/USD in the same amount. Same for reverse transaction. It is quite logical that the more members willing to exchange the better for every member as they can complete exchanges faster. Its called Liquidity. The bigger is Supply and Demand the better is liquidity. Did you guess which currency pair is most liquid? Of course it is EUR/USD. It means that if you decide to buy 10 000 000 EUR for USD at current exchange rate I’m pretty sure you can do that almost Instantly. But if you try to exchange 10 Million Dollars for example to Mexican Pesos it should take some more time because there’s less Supply of Pesos and probably less demand for such amount of Dollars (less number of market participants). In this case, it is said market has thin liquidity.

Returning to our main question which pairs are popular in forex and why are they and not some other:

The answer is: most popular pairs are those with best liquidity. They’re split into groups:

Majors:

EUR/USD, USD/JPY, GBP/USD, USD/CHF, AUD/USD, USD/CAD. Why are they? Because United States, European Union, Japan, Switzerland, Canada, Australia are biggest economies in the world thus has biggest Supply and Demand on their national currencies on foreign exchange market.

Next are cross pairs:

EUR/CHF, EUR/JPY, NZD/JPY, EUR/GBP, CAD/JPY. These are just some of them. Why are they called cross pairs? Because these are major currencies but not quoted in Dollar. They are less liquid than majors but enough to trade with large positions (200 000, 500 000 currency units or even more).

And last are minor pairs or so called exotics:

USD/RUB, USD/TRY, USD/NOK, USD/MXN, USD/ZAR, USD/SGD. Most of them has USD as second currency because only with USD they have adequate liquidity to make trading possible.

Okay, now we know that there are three types of currency pairs and they all have different liquidity. But what pair to choose for trading?

Actually the question is incorrect :). Quick glance may suggest that best pair to choose is EUR/USD or other majors. But its not absolutely true. For example USD/MXN may be more preferable for you because you’re living in Mexico and know your national currency – Mexican Peso (MXN) better than international traders. You can get quicker access to local news, events, government decision that may affect currency and thus USD/MXN exchange rate and turn it into your favor. In trading terminology its called “EDGE”. Having an edge means know something that other traders may don’t know and what you can use to predict the moves of certain currency. Trading knowledge, access to information and quick response are three main constituents of consistent profitable trading.

In next lesson we will study what are transactions costs – Spreads and commissions and how they connected to liquidity of a pair. We will also find out what are other expenses you can incur during your trading.

Thanks you for reading this article.

See ya next time.

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03/01/16 Market notes

Stournaras Warns on Measures as Tsipras Defiant on Pensions

Stournaras Warns on Measures as Tsipras Defiant on Pensions

Bank of Greece governor Yannis Stournaras gave a stark warning about the risk of Greece failing to reach an agreement with its creditors on a set of measures attached to the country’s bailout as Prime Minister Alexis Tsipras reiterated his government won’t succumb to “unreasonable” demands for additional pension cuts.

The European Union is now much less prepared to deal with another Greek crisis, Stournaras wrote in an article published in Kathimerini newspaper, in an unusually strong public intervention, as Europe’s most indebted state braces for negotiations with creditor institutions on a set of tough economic steps, including pension and income tax reform. A repeat of the 2015 standoff which pushed Greece to the verge of leaving the euro area would entail risks that the country’s economy may not be able to withstand, the central banker said.

After months of brinkmanship which resulted in the imposition of capital controls last summer, the government of Alexis Tsipras signed a new bailout agreement with the euro area committing Greece to economic overhauls and additional belt-tightening in exchange for emergency loans of as much as 86 billion euros ($93.4 billion). Greece will implement the agreement, Tsipras said in an interview with Real News newspaper published Saturday, adding though, that creditors should be aware that the country “won’t succumb to unreasonable and unfair demands” for more pension cuts.

Greece will reform its pension system, which is on the “brink of collapse” through “equivalent” measures targeting proceeds equal to 1 percent of the country’s gross domestic product in 2016, Tsipras said. The proposals include raising mandatory employer contributions, according to the country’s Labor Minister, George Katrougalos. Creditors oppose an increase in compulsory contributions, as they argue these create a disincentive for hiring workers and declaring incomes.

Negotiations with representatives of the European Commission, the European Central Bank and the International Monetary Fund will be “tough,” and the government is redoubling its efforts to find “diplomatic” support, Katrougalos said in an interview with To Ethnos newspaper, also published Saturday.

Stournaras warned, however, that escalating discussions to a level of European Union leaders would be “exceptionally dangerous,” at a time of open divisions within the bloc on issues ranging from immigration to banking union. Stalling negotiations would deepen recession, and lead to a tightening of restrictions in the movement of capital, according to Stournaras, who is also a member of the Governing Council of the European Central Bank. The government must implement the agreement that it negotiated last summer and parliament must back it, Stournaras said, blaming the capital shortfall of Greek lenders identified last year on the prolonged wrangling between Tsipras and euro-area states.

In addition to pension reform, creditors also asking Greece to implement more belt-tightening in order to meet an agreed primary surplus target of 3.5 percent of GDP, excluding interest payments, by 2018. According to Greece’s finance minister Euclid Tsakalotos, the International Monetary Fund isn’t convinced how the country will meet this target. The IMF doubts the efficiency of some measures already adopted and is more pessimistic on its assumptions about the Greek economy, Tsakalotos said in an interview also published Saturday in Kathimerini.

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24/12/15 Market notes

U.S. dollar drifts lower against euro, yen in pre-Christmas trade

U.S. dollar drifts lower against euro, yen in pre-Christmas trade

Investing.com – The dollar edged lower against the euro and yen in subdued trade on Thursday, with moves likely to remain limited ahead of the Christmas holiday.

A pedestrian walks past a money exchange bureau with a board displaying the exchange rate of the U.S. dollar against the Chilean Peso, in downtown Santiago October 30, 2014. REUTERS/Ivan Alvarado

A pedestrian walks past a money exchange bureau with a board displaying the exchange rate of the U.S. dollar against the Chilean Peso, in downtown Santiago October 30, 2014. REUTERS/Ivan Alvarado

Trading volumes are expected to remain light, with much of the Western world already shuttered for the Christmas and year-end holidays.

The U.S. dollar index, which measures the greenback’s strength against a trade-weighted basket of six major currencies, was down 0.27% at 98.12 during European morning hours.

The index, which has fallen back to levels seen before the Federal Reserve raised interest rates on December 17, remains well off last week’s two-week high of 99.33.

The greenback weakened followed the release of mixed U.S. economic data on Wednesday. Orders for U.S. core capital goods, a key barometer of private-sector business investment, declined 0.4% last month, while shipments of core capital goods, a category used to calculate quarterly economic growth, slumped 0.5%.

However, separate reports showed that personal spending rose for the eighth straight month in November, while consumer sentiment improved to a five-month high in December.

With the first U.S. rate hike since 2006 out of the way, the focus is now on the pace of future rate increases. The Fed, from its forecasts, is anticipating four rate hikes next year. However, the Fed funds futures currently suggests there will be just two rate increases, in June and December.

The dollar slid against the euro, with EUR/USD gaining 0.37% to 1.0952. Against the yen, the greenback dipped 0.45% to 120.38 (USD/JPY).

Trading volumes are expected to remain light as many traders already closed books before the end of the year, reducing liquidity in the market and increasing volatility. U.S. markets close early Thursday, Christmas Eve, and are shut Friday for Christmas Day.

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03/03/15 Market notes

Iran’s Khamenei Warns of Repercussions for Saudi Cleric’s Death

Iran’s Khamenei Warns of Repercussions for Saudi Cleric’s Death

Iran’s Supreme Leader Ayatollah Ali Khamenei warned of repercussions after Saudi Arabia executed a prominent Shiite cleric critical of the kingdom’s Sunni rulers.

“The divine hand of revenge will take the Saudi politicians by the throat,” Khamenei, Iran’s highest authority, said on Sunday. Cleric Nimr al-Nimr “was neither encouraging people to armed protests, nor plotting secretly, all he did was to openly criticize.”

Iranian protesters armed with rocks and firebombs attacked the Saudi embassy in Tehran on Saturday and set parts of the building on fire after the execution of al-Nimr, an outspoken critic of the kingdom’s treatment of its Shiite minority. A small group stormed the premises and several people were arrested, Tehran police chief Hossein Sajedinia told the state-run Islamic Students’ News Agency.

Al-Nimr’s execution and the ensuing protests further strained ties between Saudi Arabia and Shiite-ruled Iran. The two regional powers are on opposite sides of Middle East conflicts from Syria to Yemen. Saudi Arabia is also concerned about Iran’s growing influence after last year’s nuclear accord with world powers.

Increase Tensions

The cleric was one of 47 executed across Saudi Arabia on Saturday for terrorism-related offenses. The men were convicted of crimes including bombings that targeted the traffic department and interior ministry in Riyadh, plots to attack military airports, and other strikes on security forces.

“This sends a message of resolve and firmness in Saudi Arabia’s policy of confrontation with its two enemies, mainly al-Qaeda and Iran,” Ibrahim Fraihat, senior foreign policy fellow at the Brookings Doha Center, said in an interview. “It will also increase tensions inside Saudi Arabia because it gives the Shiite community new grievances and symbols to rally around within the country.”

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