Archive for the ‘Currencies’ Category

Understanding The Basic Elements of Forex Trading

Thursday, March 10th, 2011

Understanding The Basic Elements of Forex Trading

The foreign exchange market is finally beginning to garner mainstream attention.  The Bank of International Settlements estimates that the average daily volume in the fx market is around $4 trillion, which makes it by far the largest financial marketplace in the world.  Surprisingly, however, many novice investors and traders have never even heard of this market.

Until the late 1990’s, the only players allowed to execute trades in the foreign exchange market were investment banks, hedge funds, and very wealthy private investors.  Since the minimum contract size was generally $1,000,000, smaller traders were effectively denied entrance into the market.

In the late 90’s, however, this all changed.  The advance of the internet and technology led several online forex brokers to open shop and begin catering to smaller investors and traders.  This led to the birth of the retail foreign exchange market.  In this article, we are going to discuss three key elements to forex trading:  Leverage, Margin, and Equity.

Leverage

The idea of leverage in the fx market has been under intense debate over the last several years.  Since the market is decentralized and worldwide, regulation was largely absent from the fx market until recently.  In 2010, the National Futures Association instituted some major changes, one of them being a cap on leverage at 50:1.  This means that an fx trader in the United States can trade on leverage at a ratio of 50:1.  Thus, if a trader has $1,000 in his account, then he is able to leverage that $1,000 into $50,000 and trade much larger positions in EUR USD.  Until the National Futures Association passed this regulation, some brokers were offering traders up to 400:1 leverage, which means that with a $1,000 account, traders were able to control a $400,000 position in the market. Note that leverage is a two-edged sword. It will increase both losses and profits.

Margin

Margin is the life of a trader.  If a trader does not have enough margin, then he cannot open a trade.  Furthermore, if a trader has an open position moving against him, he may eventually not have enough money to act as margin, which means his account would suffer a “margin call.”

Margin is the amount of money required to open a leveraged position.  For example, if Broker ABC offers 50:1 leverage, and Bob the Forex Trader wants to open a position of $100,000, then Bob has to put up $2,000 of margin.  If Bob’s trade begins to move against him to the point where his account equity becomes less than $2,000, Bob will suffer a “margin call,” which basically means that his broker will call for more margin if Bob wants to keep the position open.

Equity

Everyone knows that one of the leading causes of business failure is a lack of initial capital, and trading is no different.  If a trader opens an account with a few thousand bucks and trades heavily leveraged positions, his chances of success are nominal.

Equity is essential to trading success.  The question many new traders have is, how much money do I need to open an account?  Well, the answer to that question is different for everyone, and it largely depends on what your goals are.  If you simply want to get some trading experience, but still have a full-time job, then a person can open an account with a few thousand bucks.  However, if you are trying to generate enough capital gains to sustain a living, then the initial account balance should be much, much higher.

Leverage, Margin, and Account Equity are three essential aspects of fx trading that every trader must be familiar with.

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China’s Renminbi Heads for Floating Exchange Rate

Saturday, January 15th, 2011

It was announced earlier this week that China has launched its Yuan for free trade in the open market. China has managed to keep the value of the Yuan, also know as the Renminbi, at a depreciated value, which some analysts argue is undervalued by up to 40%. The Bank of China’s decision to move towards a floating exchange rate, though still tightly controlled, offers hope to those who believe China’s weak currency policy is the root cause of the global economic imbalance. The gradual inflation of the Renminbi may help take away China’s disproportionate advantage in export goods and bring jobs back to the US.

Call it liberalization by a thousand cuts.

 

The Bank of China, one of the country’s main state-owned lenders, is now allowing American firms to trade in renminbi, another step in China’s effort to position the renminbi on the world stage.

 

In July, China started a renminbi settlement system for cross-border trade in Hong Kong, but it placed limits on how much currency could be exchanged.

 

Currency trading in the renminbi was already possible at other banks, but the move by a state-owned lender signals a shift in official policy.

 

The Chinese central bank bowed to international pressure last summer and agreed to make its currency more flexible; the renminbi is now allowed to move as much as 0.5 percent each day. At the same time, the country is cautiously pursuing a strategy of making the renminbi into an international exchange currency.

 

“China sees the global financial system as too U.S.-centric and dollar dependent,”’ said Robert Minikin, senior currency strategist at Standard Chartered in Hong Kong. “That created issues during the financial crisis.”

 

Now, he said, the country is trying to take a step away from that dependence. “Conditions are in place for sustained yuan appreciation against the U.S. dollar,’’ he said, predicting that it would increase by 6 percent this year, to 6.20 renminbi per dollar.

 

With a forecast for high inflation in the expanding Chinese economy, an appreciating currency could help the country dampen so-called imported inflation by making foreign goods less expensive.

 

With the Bank of China move, China is promoting the renminbi to Americans at a time when loose monetary policy on the part of the United States Federal Reserve has some concerned that the dollar’s value will continue to decline.

 

The Bank of China said in an announcement on the Web site of its New York branch that trading firms and individuals could now open accounts in renminbi, buying the currency from and selling it to the bank.

 

While the limits on personal accounts are $4,000 a day and $20,000 a year worth of renminbi, and those accounts are largely for the purposes of exchange and remittance, the bank is also soliciting business from trading firms.

 

China’s decision to keep the renminbi effectively pegged against the dollar at an exchange rate that favors its exports has long been a source of contention between Washington and Beijing. China’s trade surplus with the United States was $181 billion last year, a 26 percent increase from the previous year, The imbalance is likely to put further pressure on the exchange rate.

 

That said, the renminbi hit a new high of 6.6128 against the dollar on Wednesday, an auspicious prelude to a visit to Washington next week by China’s president, Hu Jintao.

 

Separately, the city of Shanghai said it was creating a new investment window, allowing qualified private equity firms to buy renminbi and invest in mainland companies. Reuters reported that the pilot project could grow to be worth $3 billion.

Goldman on the Irish Bailout…European Contagion

Monday, November 22nd, 2010


The Irish bailout being unveiled this week will determine the performance of both the Euro and the global equity markets.  Irish and Portuguese bond spreads had been widening over the past four weeks, since Ireland again became the focus of bearish investors.  Sources claim that the current bailout will be less than 100 billion euros, and will cover the entire country’s budget needs for the next three years.  Ireland’s current budget deficit is about 19 billion euros/year. The problem is that the Irish banking system may need more help than analysts expect.  The system has more than half a trillion in assets.  According to Reuters, the hole in the commercial real estate sector is greater than 25 billion Euros alone.  This does not include potential residential losses.

To make matters worse, a Irish debt resolution could also simply shift bearish speculation to Portugal according to Citigroup and Nomura.  According to Bloomberg, “Portugal’s bonds currently yield 6.88%, compared to 8.26% for Ireland and 11.62 % for Greece.” Growth in Portugal may slow to 0.2% in 2011, which could make the deficit worse and increase worries about the country’s sovereign debt.

Zero Hedge recently provided Goldman’s perspective on the Irish bailout: “For what it’s worth, here is Goldman’s take on the Irish bailout. Since it was Goldman’s endless currency swaps that allowed Europe to lie about their deficits and true debt levels, this should be interesting…

From Francesco Garzarelli

Earlier tonight, Ireland applied for conditional funding assistance and will therefore be the first Eurozone sovereign accessing the EU-IMF support framework instituted in May. The latest European Economics Analyst provides background. There are still several uncertainties surrounding the deal, including the government’s political support (a by-election is due this Thursday), and negotiations on the banks. The yield spread between 5-yr Irish government bonds and their German counterparts has fallen by around 100bp from the 600bp highs reached on 11 November. At this point, we see scope only for a further 50bp tightening. That said, we think that this represents an important step towards a resolution of EMU sovereign woes, and a gradual relaxation of the risk premium that has built up in Italy and Spain, and in Eastern Europe.

Main Points

According to EU sources quoted by the newswires, the size of the package will be in the region of EUR 80-90bn. But this has still to be finalized, including the implications, if any for the Irish banks’ debt.  The amount is broadly in line with our estimates, and can easily be covered. Consider that the EFSM is endowed with EUR 60bn and EFSF has borrowing capacity of EUR 428bn (the portion guaranteed by Germany and France amounts to EUR 220bn). Additional IMF funding is available for up to 50% of the total amount drawn from the EFSM/EFSF with a ceiling of EUR 250bn. Both the UK and Sweden have announced they stand ready to provide bi-lateral loans.
Discussions on the cost of funds are also underway. We expect the EFSF (AAA-rated) to borrow in the region of 2.5% at the 5-yr maturity.  Assuming the terms are in line to those applied to Greece (which should represent a ceiling, given the different credit position of the two countries), the funding cost to Ireland would be along these lines:

  • EFSM/EFSF: Up to 3-yr maturity, Euribor or fixed swap + 300bp; Above 3-yr, Euribor or fixed swap +400bp; 50bp handling fee; (3-mth Euribor is currently 97bp)
  • IMF: Up to 3-yr maturity, SDR rate + 200bp; Above 3-yr, SDR rate + 300bp; Commitment fee, 50bp (est.) + 50bp service charge; (the Euro SDR rate is linked to 3-mth Euripo and is currently around 26bp)
    Using these figures and under a no IMF funding hypothesis, the savings for Ireland relative to the secondary market rates as of last Friday’s close would be in the region of 100bp (notice that the ECB has been intervening in this market, and that this is not indicative of primary access costs).
  • Ireland April 2013 yields 6.30% (bid); corresponding Eurozone funding 2.00%+300bp=5.00%
  • Ireland April 2016 yields 7.40% (mid), corresponding Eurozone funding  2.40%+400bp=6.40%

These, we stress, should be taken as ceilings. A ballpark of 60-30 from the EFSM/EFSF and IMF would result in funding cost closer to 3.5% on a 3-yr horizon.

Broader Market Implications

As discussed in our notes over the past fortnight, and in our latest Fixed Income Monthly, EMU Spreads: Navigating the Issues, we are of the view that the activation of external help should not lead to an escalation of systemic risk as seen in the aftermath of the Greek multi-lateral ‘bail-out’. A pre-agreed institutional framework is now in place, and the ‘stress tests’ have provided information on the distribution of risks across the Euro-zone banking sector.

Other than the evolution of the Irish discussions (size of the package and terms), the near term focus will also remain the Iberian peninsula. A workers strike in Portugal this Wednesday will re-kindle the debate on the much needed structural reforms. Spain unveiled a list of these last Friday, but investors remain uncomfortable about the contingent liabilities stemming from the non-listed cooperative banks.

Our opinion is that Portugal remains a possible candidate for external help, should market pressures remain high. But its systemic relevance is much smaller than that of Ireland’s or Greece’s (the largest foreign creditor is Spain). We remain of the view that Spain is in a different debt sustainability position, and the depth of its domestic market should allow it to withstand market pressures.

We continue to recommend holding 30-yr Greek paper, and would look for opportunities to re-establish long positions in intermediate maturity Italian and Spanish government bonds relative to the ‘core’ countries.

Finally, it is worth recalling that the EFSF will not pre-fund, and its funding instruments will have broadly the same profile as the related loans to Ireland. Its issuance program could lead to a marginal cheapening of bonds issued by supra-national institutions such as the European Investment Bank, the German-based KfW and the French CADES. Note, however, that these institutions have borrowing programs of EUR 60-70bn per annum, while the corresponding annual EFSF issuance would be likely quarter of that amount.”

Morgan Stanley Sovereign Credit Outlook: Greece Fears Continue to Drive Bond Yields Higher

Wednesday, May 5th, 2010

What should have been a 1 month affair has now become a 6 month ordeal for the world credit markets.  As of today, May 5th, the European equity markets are in fact negative for the year and the world MSCI index has given up its entire gain for 2010.  It is ironic how a country that only makes up 2.3% of Europe’s GDP could cause the Euro to fall from 1.40 to 1.28 in a matter of weeks.  Euro shorts have multiplied despite efforts by banks such as Citi to put targets on the currency at 1.35+.  Commodity markets have also been roiled, with the VIX jumping 15% yesterday as well.  Worries that Portugal would be downgraded again have multiplied investor concerns.  Investors around the world wait in fear as policy measures will be discussed by Germany and other European nations on May 7th.  Riots in Greece have killed three so far in retaliation to austerity measures linked to the proposed bailout by the European Union and the IMF.

Please see Morgan Stanley’s outlook below.

Contagion Call Slides

According to Ms. Petrakis of Bloomberg, “May 6 (Bloomberg) — Greece’s Parliament will debate today the austerity measures demanded as a condition of an internationally led bailout as the nation mourns the three victims of Athens protests against the plan.

Prime Minister George Papandreou, whose Pasok party holds a 10-seat majority in the legislature, will tell lawmakers today that the wage and pension cuts are necessary to secure the 110 billion-euro ($141 billion) package and avoid default.

“No one was happy with the new measures,” Papandreou told parliament yesterday after the killings, which he called a “brutal murder.”

“We have compassion for every family who has seen their plans for the future slip seemingly further away,” he said. “But we took these measures to secure a future which might not exist otherwise.”

Greece agreed to the austerity package on May 2, pledging 30 billion euros in budget cuts in the next three years to tame the euro-region’s second-biggest deficit. Papandreou was forced to seek the aid after soaring borrowing costs left Greece cut off from markets. The measures have fueled months of protests that culminated in yesterday’s general strike. Three bank workers were killed when a small group of protesters threw fire- bombs at a bank.

Papandreou is pushing to get parliamentary approval before a European Union summit in Brussels tomorrow on the plan that will help ready the funds for distribution. The country faces 8.5 billion euros in bond redemptions on May 19.

Bonds Drop

Yesterday’s violence deepened losses in Greek debt. The yield premium investors demand to buy Greek 10-year bonds over comparable German debt, reached 719 basis points. The country’s 2-year notes yield almost 16 percent, 26 times more than Germany.

“I want to believe it is easy to overestimate this problem,” said Erik Nielsen, chief European economist at Goldman Sachs Group Inc, in a conference call yester. “One should not be overly concerned so far.”

Europe is scrambling to activate the aid package to try to stop the fallout from spreading to other high-deficit countries such as Spain and Portugal. Yield premiums on those countries’ debt have also jumped and the euro has slid more than 10 percent this year, to the lowest in more than a year.

Chancellor Angela Merkel appealed to the German Parliament yesterday to approve the nation’s share of the loans, saying the stability of the euro was at stake. Germany will pay 22.4 billion euros, almost 30 percent, of the euro-region funds offered to Greece over three years, and public opposition to the bailout is running high. German lawmakers will vote tomorrow on the aid.

Anarchists’ Blaze

The debate in the Greek parliament will be overshadowed by the violence of yesterday’s strike that turned deadly when protesters, who police described as self-styled anarchists, set fire to a branch of Marfin Egnatia Bank SA, killing two women and a man trapped inside the building.

Athens police swept through the anarchist stronghold of Exarhia yesterday, arresting 25, and detaining 70, according to a police statement. A total of 29 officers were injured in yesterday’s protests, the statement said.

Opposition leaders warned Papandreou not to try to exploit the deaths to push through the austerity measures.

“The tragic death of three people is absolutely condemned,” Aleka Papariga, the head of the Communist Party of Greece, said yesterday on state-run NET TV. “But it can’t be used by the government as an alibi for the people to accept these anti-democratic measures — measures that will come every three, six, nine months.”

More Strikes

The violence may not be enough to end the protests. Local government workers are continuing their strike for another 24 hours, with garbage collectors due to begin a walkout tomorrow morning, according to the state-run Athens News Agency. Stavros Koukos, the president of the federation of bank unions OTOE, told Alter TV that a 24-hour strike would be held tomorrow after the deaths of the three bank employees.

The bill on the measures will debated all day with a vote expected late in the day.

Elected in October on pledges to raise wages for public workers and step up stimulus spending, Papandreou revised up the 2009 budget deficit to more than 12 percent of gross domestic product, four times the EU limit, and twice the previous government’s estimate. EU officials revised the deficit further on April 22, to 13.6 percent of GDP.

Papandreou has said the austerity measures are needed to lower the shortfall to within the EU limit of 3 percent of GDP in 2014. Still, they will deepen a yearlong recession and lead to a 4 percent economic contraction this year and boost unemployment already at a six-year high of 11.6 percent.

“The greatest challenge of the days is maintaining social cohesion and social peace,” Greek President Karolos Papoulias said in an e-mailed statement. “Our country has reached the edge of the abyss. It is the responsibility of all of us that we not step forward into it.”

Vietnamese GDP Grows 5.8%, Sharp Turnaround!

Tuesday, March 30th, 2010


Economic growth in Vietnam has doubled quarter over quarter, according to the country’s officials.  The country, known to be an outsourcing hub for Chinese manufacturing firms in the Guangdong province has been growing at a rapid pace.  These numbers are especially strong given that most businesses in Vietnam close during the 10 days of Tet, the Vietnamese Lunar New Year celebration.  Analysts say that domestic demand is supporting the economy, while a weakening Dong may help boost exports.  The country has weakened its currency twice since last year.  Industry and construction accounted for 43% of economic activity this quarter.

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According to Mr. Folkmanis of Bloomberg, “Vietnam’s economic growth quickened to 5.83 percent in the first quarter from a year ago, buoyed by construction activity, tourism and banking services amid robust domestic demand.

Growth was almost twice as fast as 3.14 percent expansion in the same period last year, according to figures released by the General Statistics Office in Hanoi today. Gross domestic product expanded 5.3 percent last year, after accelerating to 6.9 percent in the fourth quarter.

“Bearing in mind that most businesses in Vietnam close in the first quarter for at least 10 days during Tet, these figures are a good base for strong full-year growth,” said Kevin Snowball, chief executive of PXP Vietnam Asset Management in Ho Chi Minh City, referring to the Lunar New Year holidays in mid- February.

Domestic demand is supporting the economy as the government tries to stimulate exports after the global slowdown reduced demand for Vietnamese-made products. A weakening dong may help boost overseas sales, strengthening growth through the rest of the year, according to Standard Chartered Plc.

Industry and construction accounted for 43 percent of the economy in the first quarter, expanding 5.65 percent from a year earlier. In the same period last year, the gain was 1.7 percent.

Services Growth

Services expanded 6.64 percent from a year earlier after increasing 4.95 percent in the first quarter of 2009. They made up 42 percent of GDP. Hotels and restaurant business advanced 7.82 percent, as the number of foreign visitors to Vietnam jumped 36 percent in the first quarter from a year earlier. Financial services grew 7.86 percent.

“Much of the growth was generated domestically, since exports were still contracting in the first quarter,” Tai Hui, Singapore-based head of Southeast Asian economic research at Standard Chartered, wrote in a research note. “The government’s 6.5 percent growth target is within reach, as exports are likely to improve gradually in 2010, becoming a more potent engine.”

The Southeast Asian economy’s full-year growth could reach 7 percent to 7.5 percent if the global economy continues to improve, PXP’s Snowball said.

Vietnam has devalued its currency twice since November. The dong traded at 19,090 as of 10:30 a.m. in Hanoi, 6.2 percent lower than before the first depreciation on Nov. 25. The benchmark VN Index fell 0.9 percent to 501.20, and the yield on the five-year note was little changed at 12.2 percent, according to Bank for Investment & Development of Vietnam.

Regional Recovery

The GDP figures come amid signs of a regional recovery. In the past week, Malaysia raised its growth forecast, Japan reported the biggest export jump in 30 years, and Taiwan said industrial production rose for a sixth month.

“We’re seeing a two-track recovery with Asia forging ahead of the rest of the world, and Vietnam has consistently been one of Asia’s fastest-growing economies,” said Matt Robinson, a Sydney-based economist for Moody’s Analytics Inc.

“Vietnam’s growth model has been focused on low costs and abundant labor, and the evidence suggests that that model has been more resilient over the past 18 months, when many people put higher-end consumer discretionary expenditure on hold,” Robinson said before the figures were released. Moody’s Analytics, a unit of New York-based Moody’s Corp., focuses on economic research and analysis.

Economic growth has been driven by foreign investment, a literate labor force and low-cost exports, according to research published by Daiwa Capital Markets last week, which cited construction as among the drivers of growth in recent years.

Construction Demand

An increase in credit growth to as much as 38 percent last year has had a “lagged effect” on the Vietnamese economy, according to Australia & New Zealand Banking Group Ltd.

Construction grew 7.13 percent, according to the figures released today.

“We’re starting to see some increased demand in the construction industry,” said Alan Young, Haiphong-based chief operating officer of Australian-listed steelmaker Vietnam Industrial Investments Ltd.”