Many experts predict that the ongoing sovereign debt crisis in the eurozone will provide some support the forex rate of the pound against the euro. As the markets continue to be concerned about the financial situations of some eurozone member states, the previous gains of the single currency may be jeopardised. The prospects for higher interest rate have their limitations and cannot provide indefinite support for the euro at face of worsening economic and liquidity issues in the region.

 

After the European leaders have resolved the terms and conditions of the emergency bailout loan for Portugal, any hope of ending the eurozone sovereign debt problems seem to have been thwarted by the latest uncertainties the Greece. This previously bailed-out peripheral eurozone state is again undergoing financial difficulties as the spreads of its government-issued bonds widened. The markets are again worried that the country may again need to restructure its debt.

 

The yield of Greece’s two-year treasury bills is rising to worrying levels, indicative that investors are dumping the government-issued bonds. More and more bond investors are losing confidence on Greek debt that they are willing to sell their Greek bond holdings at lower prices, thereby increasing the yield spread. The yield recently rose to a record high of 18.4%. This could force the country to renegotiate its borrowing terms and the country may default on its financial obligations.

 

As a result of the renewed market fears about Greece, the forex position of the single currency is now again under threat. The contagion may spread much faster and more ferocious than previously feared.

 

Both Spain and Portugal have also undergone similar dilemma yesterday. Those who are interested to make money through the forex market may not anymore have the same level confidence on the euro compared to a few days ago when the European Central Bank announced a rate hike. The resurgence of the eurozone worries provided some support for the pound-euro exchange rate. After six months of weakness, the British currency rallied for the first time against the euro.

 

Meanwhile, the Asian market situation is also experiencing some setbacks as the economic momentum of China is somewhat encountering resistance. Various economic indicators were recently published by China but the annualised consumer price index (CPI) figures caught the attention of investors and analysts. The CPI inflation data indicated a 5.4% increase on a year-on-year basis for the month of March. This was a bit higher than the 5.2% predicted figure but significantly overshoot the February CPI of 4.9%. The soaring prices of food have provided strong influence for the CPI increase. According to the official report, food prices rose to almost 12% on an annualised basis.

 

In response to the soaring inflation, the Chinese monetary policymakers are expected to further raise the base interest rates and provide boosts for the Yuan. If this trend continues, some experts believe that it could pose serious threat to the recovery of the global economy. The economic growth of China is still exceeding expectations, particularly in the retail sector, but high inflation is pressuring the Chinese central bank to resort to tighter policies.

 

 

The forex value of the British pound strengthens against the US dollar after the Federal Reserve resolved to maintain the status quo of loose monetary policies. This decision resulted in lower expectations about the greenback. Maintaining the monetary policy at status quo would mean that the base interest rates will not be raised and the quantitative easing program will be continued until its completion this June. The government will push through purchasing market assets in an attempt to provide boost for the sagging market.

 

According to the latest minutes of the Federal Reserve’s policy meeting, all of the ten members of the monetary policy committee have unanimously approved the decision to maintain the current monetary policies. Nonetheless, there was no unanimity in terms of the details about the Federal Reserve’s monetary policy for the remaining months of the current year. Opinions were divided among the members. Some members recommended a much tighter monetary policy for the remainder of the year. This prompted some foreign exchange traders to speculate against the US dollar.

 

On the other hand, the members of the Federal Reserve’s monetary committee had achieved consensus on some key economic issues. They all agreed that the rate of US inflation is still within manageable range. The committee members also concurred that the economic recovery of the United States is on the right track. Many of those who are interested to make money through the forex market have interpreted the announcement of the Federal Reserve as a signal to sell their dollar-denominated holdings. Some analysts think that it is now unlikely that the Fed will soon change its dovish monetary policies considering the strengthening but still fragile economic situation of the Unite States.

 

As a result, some forex traders bet against the dollar but the sell off volume was only moderate. Nonetheless, it was enough to weaken the dollar compared to other major currencies, which included the British sterling.

 

Meanwhile the soaring prices of crude oil continue to influence the price movements in the currency markets. The US dollar is particularly affected because of its status as the main invoicing currency for the international trade of oil. The inverse correlation between oil prices and US dollar forex value meant that the continually increasing oil prices are exerting pressure against the dollar. Other currencies are being favoured by this situation. As long as market fears over the supply of oil linger, the global prices of fossil fuel will remain high.

The forex value of the euro strengthens while the US dollar weakens mainly because of the improving economic situation in the United States. According to the latest figures, there are good prospects for faster economic recovery in the US. For instance, the February figures on consumer spending significantly increased to 0.7% from the forecasted 0.5%. On the other hand, many sceptical market analysts have pointed out that the main bulk of this rise can be attributed to the ballooning costs of wholesale energy. It should be recalled that energy cost is a significant chunk of household expense in the US.

Despite of the criticism about the recent consumer spending figures, investors reacted positively about the news but the stronger consumer spending figure also resulted in the weakening of the US dollar in the foreign exchange market. One does not need to become a forex trader to understand the inverse correlation between US equity market sentiments and the value of the greenback.

Meanwhile, the performance of the real estate property sector in the US also exceeded the forecasts. The pending home sales data for the month of February showed an increase of 2.1%. Many market analysts and investors were actually expecting zero growth in the housing sector. Most of them were pleasantly surprised by the sector’s performance.

Global investors are anticipating the busy trading session today in the US market. Various important US economic data will also be released today and will provide hints for market participants about the best investment strategies. Another important economic data due for release today is the US consumer confidence survey report. The overall optimism and appetite for risky assets are likely to improve further if the consumer confidence level overshoots the expectations.

On the domestic front, today will also be a hectic day for the release of various economic figures here in the United Kingdom. Among those that were already released earlier was the official and finalised GDP figures for the fourth quarter of 2010. Another important report will be the highly-monitored mortgage approval statistics for the month of February. Investors and analysts are expecting that the latest data would show that 46,500 new mortgages were granted approval last month. If the high figure is repeated this month, it could result to the housing sector’s significant contribution in the overall economic recovery.

Meanwhile, the situation in the eurozone may seem to be deterioration but the recent statements of the European Central Bank president may lead to the forex rebound of the euro. According to ECB President Jean Claude Trichet, the bank is likely to raise the base interest rates by next week. If Germany’s consumer price index inflation figure goes up further beyond expectations, the ECB will be forced to raise the interest rates.

The recent nose dives of global stock markets were primarily triggered by the uncertainties brought about by the catastrophe in Japan and the spreading unrests in the Middle East. Meanwhile, the forex market also became a bit more volatile in the past few days. Traders saw the considerable dips and surge of several major currencies in response to the latest developments in Asia and in the Middle East.

Based on the latest trends in the foreign exchange market, the British sterling has recently been gaining grounds after it was subjected under sell-off pressures. The pound recently rallied against a basket of other major currencies, such as the Australian dollar, the New Zealand dollar and the greenback.

The global forex market and the equity markets are continually being exposed to trading uncertainties as the Japanese nuclear crisis seems to become worse. Desperate measures are being done to almost no avail. The fuel rods of the various earthquake-damaged nuclear reactors continue to overheat and may deteriorate into full-blown meltdowns. Some of the nuclear waste storage facilities in Fukushima are also feared to be leaking dangerous levels of radiations.’

Major currencies, especially the safe-haven currencies, are likely to be affected by the unfolding developments in Japan. As the level of risk aversion in the market increases, the demand for safe-haven assets also increases. Many investors will try to protect their wealth by dumping high-risked holdings and then buying safe-haven assets such as gold, dollar and yen.

The recent massive sell-offs in the equity markets have resulted in the migration of funds to assets that are considered as hedge against market volatility. Being a safe-haven asset, the yen has dramatically gained grounds over other major currencies. The repatriation of funds from Japanese companies abroad also contributed in the rally of the yen. The yen reached its highest level against the US dollar since World War II. Nonetheless, the forex rally of the yen is not good news for the export-dependent economy of Japan. A strong yen would mean less competitive edge for the Japanese export sector.

In an attempt to stabilise the yen, the Japanese central bank resorted to quantitative easing programme. The Bank of Japan injected a total of JPY34trillion or equal to more than $430 billion into the system to provide greater market liquidity. The Bank of Japan purchased various assets, including government bonds in an effort to regain the trust of investors.

Those who intend to make money through the forex market may be prompted to sell their yen-related assets as the value of the yen falls. This will contribute to the further levelling-off of the yen back to more stable and favourable levels. In the long run, the equity market in Japan may again follow bullish trends.

Many economists agree that China is likely to become the successor of the United States as the strongest economic superpower in the world. Along with the emerging ascendancy of Chinese economy is the strengthening of the forex position of the yuan. Some even speculate that the Chinese currency may soon replace the US dollar as a strong international currency commonly used as a standard reserve and safe-haven asset.

There are several indicators that the US dollar is losing its status as a safe-haven asset. The recent credit downgrading of Greece, for instance, has again sent chills in the financial markets. Many investors are again beginning to worry that the possibility of defaulting on sovereign debts could spread in the eurozone. The fear of financial collapse in the eurozone would have immediately led to the weakening of the euro in the forex market. The US dollar, on the other hand, would have already rallied against the euro as investors took flight from potentially volatile investments.

Despite of the renewed market worries about the eurozone, the foreign exchange value of the euro remains strong against the dollar. The recent credit rating downgrade of Greece also has not prompted investors to take refuge in the safe-haven of the dollar and other dollar-backed assets.

It seems that at least in the near-term the prestige of the US currency has deteriorated as can be gleamed by the reactions of investors amid the sovereign debt issues in Europe and the ongoing political uncertainties in the Middle East.

People are wondering about the prospects of the US dollar. Those who desire to make money through the forex market may find it a bit unprofitable to buy US currency as it continues to decline. With the exception of spread-betting, the US dollar does not seem to be an attractive currency right now.

On the other hand, the weakness of the US dollar can be attributed to some ‘transitory’ factors such as the volatility of crude oil prices. Since the US dollar is being used as the invoicing currency for the international trade of oil, high oil prices would result in the depreciation of the dollar and vice-versa. The flight to ‘safe-haven’ assets has not helped the dollar simply because investors have considered the overdependence of the US economy on fossil fuel.

The so-called currency war might have already ended as many emerging economies have already given up the race to bottom as high inflation takes a foothold. Manipulating or intentionally devaluing currencies would have given competitive advantage for the nations involved but this competitive edge is not sustainable. Nations are risking domestic instability in favour of export competitiveness.

Of course, the forex weakness of the US dollar can also be attributed to the loose monetary policies of the Federal Reserve, which include the quantitative easing program and the very low interest rates. By over-flooding the markets with greater dollar liquidity, the purchasing power of the greenback was weakened in the process. If this trend continues, it will not be good for the US economy and the global economy in general simply because US dollar is considered as a global currency. Most countries have dollar reserves instead of gold reserves to back-up their economies.

On a long-term basis, the US dollar is still seen as the most stable currency and safe haven asset. There are still no competitors that can immediately topple the greenback.

However, it should be pointed out that nothing in this world last forever. Two major currencies have the potential of replacing the US dollar in the long run as a global reserve currency. The first one is the euro and the second one is the Chinese yuan or renminbi. These currencies may be considered as serious contenders but they still have a lot of hurdles that need to be overcome. The euro, for instance, is a regional currency that is technically a state-less currency. This means that the euro is on a shaky ground considering the diversity of the eurozone. Not unless, the eurozone becomes a United State of Europe, the euro will not have a strong guarantor in the forex market and global trade in general.

On the other hand, the other hand, the Chinese yuan is backed by a very strong state that has almost complete control on the foreign exchange value of the said currency. A non-free-floating currency is not ideal for reserve and international trading purposes.

Even if the euro and the yuan overcome their respective disadvantages, the US dollar will not easily lose its ascendancy. Some analysts speculate that there might be a future wherein there will be three ‘reserve’ currencies. This is far better than simply having just one international reserve currency because the values of these currencies are likely to become very stable and harder to manipulate.

Both the stock market and the forex market are set to have less volatile trading activities as the international prices of crude oil begin to regain stability. After several weeks of hyperinflationary rise in the price of oil, speculations that global oil supply will be disrupted have significantly abated. After approaching very near to their highest levels since 2008, the various oil price benchmarks reversed their upward trends and began to stabilise.

Last Thursday (February 17), the international prices of crude oil reached 30-moth peaks then they edged downwards the next day. The political turmoil in the Arab region continues to support market speculations about possibly disruptions. The crisis in Libya, for instance, remains unresolved and even has the possibility of escalating into a full-blown civil war. Nonetheless, there is some glimmer of hope as various governments in the region try to initiate reforms and introduce economic aids to their respective citizenries.

The reassurances of Saudi Arabia that it would expand its oil production to offset the oil production losses in Libya have resulted in higher investors’ confidence. These also reduced market pressures on the international trading prices of crude oil. Despite of the relatively recent oil price stabilisation trends, the foreign exchange value of the dollar remains weak against a basket of other foreign currencies.

The forex weakness of the dollar is not surprising considering the oil price hike momentum in the past few weeks since the pro-democracy uprisings in the Arab world began to spread. One does not need to become a forex trader or an economist to understand the correlation between oil price and the value of the US dollar.

Since the US dollar is being used as a major invoicing currency for the international trade of crude oil, the prices of oil ten to drop when the dollar strengthens in the currency markets. On the other hand, if the US dollar weakens, the international trading prices of oil go up. There is an inverse correlation between the two. However, the recent lethargic performance of the US dollar was also affected by the perceptions that the US economy will be badly hit by oil price inflation.

Although energy-related sector had some significant gains in the past few weeks, the general trend of the stock markets was bearish as investors took flight from risky assets. There were serious market fears and speculations that the crisis in the Arab world would be hard to contain and would result in the global disruptions of oil supply. However, the trend started to reverse as the oil price volatility showed signs of abatement last Friday. The bullish market trend continued in today’s Asian market session. The optimistic economic prospects in Japan also helped in the bullish sentiments. Japan’s recent retail trade figures for the month of January were higher than expected.

The worldwide market trends were generally bullish for the past one year. It seems that the slide last week was a short-term weakness, which may easily be offset as the markets recover from the oil price volatility. Investors are likely again to take more risk and sell-off their ‘safe-haven’ assets such as the US dollar. Consequently, the forex value of the dollar is expected to weaken further. Meanwhile, the loose monetary policy of the Federal reserve will also contribute in the weakening of the dollar.

The latest retail sales figures in the United Kingdom showed more robust performance, which helped boost public optimism about the pace of economic growth. Better prospects for economic rebound have led to the stronger forex position of the sterling, particularly against the euro. The rally of the British currency in the foreign exchange market was also further supported by the speculations that the Bank of England will soon raise the base interest rates in response to the soaring inflation.

Today’s (February 18) forex rally of the sterling has placed it trading at €1.195 from the previous value of €1.18. On the other hand, the pound also strengthened against the dollar. From the previous $1.610 level of the sterling, it is now valued at $1.620. This rally was primarily buoyed by the stronger retail sales figures. According to the Office for National Statistics, the volume of retail sales in the United Kingdom rose to 1.9%, which is comparably higher than the predicted 0.5% growth in that sector.

Currency traders reacted positively to the stronger performance of UK’s retail sector. The recent retail sales figures served as a further affirmation that the economic condition in Great Britain is significantly improving after the 0.5% contraction in the GDP during the fourth quarter of last year. Nonetheless, market analysts have cautioned equity investors and currency traders they should not over-stretch their optimism about the markets and take too much risk. It should be noted that there the monthly figures remain volatile.

As what an analyst from Commerzbank has noted, the recent robust rebound in the retail sector can be partially credited to a revising down of the dismal fourth-quarter figure in 2010. It should also be recalled that last year’s disappointing holiday season retail sales figures were also affected by the bad weather conditions. Hence, the recent retail sales data may not be sufficient to gauge the pace of UK’s economic recovery.

The current figures are only 0.5% higher than the November data of last year. This is not enough to make sweeping assumptions about the general economic status of the United Kingdom. As what the comparative retail sales growth indicates, the market trends are actually slower than they ought to be. This year’s first-quarter projections still need further data to be more definitive, especially when it comes to forecasting GDP growth.

Last holiday season, the volumes of total retail sales in the United Kingdom have significantly declined. The actual decrease 1.4% is much worst than the estimated 0.8% drop.

Despite of the various indicators of economic slowdown last year, most of those who are interested to make money through the forex market are betting on the high probability that the Bank of England will soon raise the interest rates. These speculations contributed in the recent market rally of the sterling. UK’s soaring inflation is the main factor that fuels the speculation about an imminent rate hike.

Despite of sterling’s weakening in the forex market and the depressing GDP figures, PM David Cameron’s Chancellor of the Exchequer and the Business Secretary both admitted that there is alternative plan for the UK economy. The coalition government will push-through with its original economic program, which include budget cuts for many public projects and services.

Many are fearful about the possibility that the United Kingdom will again undergo a recession. The threat of a double-dip recession seems to become more probable considering the various indicators, such as the GDP slide, the high unemployment and the soaring inflation rate. The markets are very cautious at the moment when it comes to the status of British economy.

UK’s coalition government seems to be repeating the economic policies of the Thatcher’s era. The economic motto then was ‘There is no alternative.’ As what was proven in the past, the adoption of an inflexible economic policy can prove to be disastrous. The single-minded determination of David Cameron’s coalition government in slashing the budget can jeopardise the already fragile economic recovery. One does not need to be an economist to realise the detrimental effect of government budget cuts in terms of economic growth.

If public spending is reduceed, the forex value of the sterling, the value of British stocks and the productivity of the private sector will also suffer. This is primarily because of the reduction in the demands from the public sector in terms of public constructions, basic services and other government-funded projects.

The Prime Minister has emphasized the importance of reducing the budget deficit, which the current administration has inherited from its predecessor. The Prime Minister said that slashing the deficit is necessary for economic growth. However, many experts disagree with this stance. They say that instead of stimulating growth, the budget cuts will only worsen the situation.

Given the various dismal economic figures, the coalition government is now being subjected under strong pressure to provide stimulus for the economy. The government might be persuaded to prematurely implement its economic stimulus programs. These may include both monetary and non-monetary incentives. Some recommended the exemption of smaller companies from many tedious and redundant government requirements. It can also help if some basic changes will be made to the employment tribunal law. Both legislative and financial aids can contribute in stimulating economic recovery.

The latest official GDP data from the Office for National Statistics (ONS) indicated a 0.5% negative growth for the last three months of 2010. This totally opposite from what many pundit have predicted about the economy. It really came as a shock for policymakers, experts and investors. Fears over a possible double-dip recession in the United Kingdom resonated both in the stock market and foreign exchange market.

Those who are interested in forex trading and in equity investments are now a bit cautious when it comes to British-related assets being traded in the markets. If another negative GDP growth is recorded for the first quarter of the current year, the United Kingdom would be considered to be back in recession. As the forex and domestic value of the sterling is eroded, Britain is also threatened by a period of stagflation.

If there is one positive implication of a plunging GDP, it would be the less likelihood that the Bank of England will raise the interest rates anytime soon. This would be good news for all borrowers – both ordinary individuals and businesses. Of course, it would also come as welcomed news for millions of British owners who are on variable mortgages.

It seems that George Osborne is too defensive and even in denial about the shocking GDP figure. He insisted that it can be mainly blamed on bad weather that hampered agricultural production and product distribution. However, the Office for National Statistics has clarified that even with good weather, the GDP for the fourth quarter last year would still have been ‘flattish.’

The 0.5% base interest rates being imposed by the Bank of England have been unchanged for more than one year already. The really interesting about this particular level of interest rates is that it is the lowest level in the past three-hundred years. Of course, the main objective of keeping the rates at very low level is to provide greater liquidity by encouraging borrowers to secure loans, which may either be invested or spent. On the other hand, the rising inflation is now exerting pressure on the Bank of England. Raising the interest rates will be inevitable but it should be well-calibrated. Aside from its effect on the stock market and on the forex value of the sterling, increasing the interest rates can have serious impact on the entire economy.

Bond holders and savers will be among those who will immediately benefit if the interest rates are increased. This is because the nominal income from savings and bonds will increase. On the other hand, the bond markets and the value of the sterling in the forex market will also benefit, at least in the short-term. Since the potential incomes from bonds will be higher, many investors will become interested in investing in bonds. The demand for the currency of a country with high interest rates will also increase, thereby strengthening the value of its currency.

Nonetheless, the trading trends in the financial markets are not the most important components of an economy. They are just indicators, which are sometimes over-valued. Those who want to exploit the situation and simply want to make money through the forex market will only benefit in short term because the real economic factors will eventually become obvious. Any market growth that is not backed by actual economic growth such as higher production is destined to fail. It would be just a market bubble supported only by speculations.

Although financial trading thrives in speculations and anticipations, actual wealth is not created by investors and market speculators. The sum of all goods and services as expressed in terms of GDP is the actual wealth of a nation. In the long run, higher interest rates will only become suspicious and may be associated with high investment risks without the backing of other more solid economic factors.

The profitability of the financial markets, including the forex market will only be sustainable if there is actual wealth that is created. Otherwise, unrestrained market growth will only lead to economic collapse. A very low interest rate and a soaring inflation are bad economic combination. The Bank of England has to eventually increase the interest rates to prevent a catastrophic hyperinflation scenario. On the other hand, this is a difficult balancing act because it would surely hurt the credit market as the borrowing costs will inevitably become less affordable. The current situation is pointing to an important turning point in the economy. The era of cheap loans and investment booms (fuelled by over-valued speculations) may soon give way to a more stable and regulated economic trends.

The holiday season has only given short reprieve for eurozone worries. The financial markets, including the forex market, are now again in a panic mood about the sovereign debt crisis in the eurozone. Global financial markets are particularly worried about Portugal. It is expected that before this year ends the country will soon follow the path of Greece and Ireland in seeking the help of the European Union and International Monetary Fund. Portugal may eventually need to be bailed-out.

Portugal is now under the spotlight of the global financial sector. The eurozone sovereign debt crisis is again dominating the financial news headlines. Investors in the stock market and foreign exchange market are now again in a panic mode. One does not really need to learn forex trading or become an economist to realize the serious impact of the eurozone debt crisis on the financial sector and on the global economy in general.

Many forex traders and stock market investors perceive that Portugal is creating an unsustainable balloon debt that may soon burst. The financial sector is worried about the fact that Portugal is again attempting to raise funds by borrowing. Portugal has initiated the sell of government bonds on Wednesday (January 12). It is offering ten-year government bonds, making it the first eurozone country to sell its debt early in the year. There is a distinct probability that this auction will fail considering that existing bond investors are now selling off their bond holdings.

The yield of Portugal’s ten-year bonds rose to 7% in the past two months. This meant that many bond holders are selling their bond holdings at lower prices. This implies that they do not anymore have high confidence on Portuguese government bonds. Coincidentally, the 7% increase in the bond yield is also considered as the ‘magic’ number that seems to indicate an imminent financial collapse similar to what happened to Greece and Ireland.

Unlike Greece, government extravagance and budget mismanagement are not the main problems being faced by Portugal. Before the eurozone crisis was triggered by the Greek financial meltdown, Portugal’s sovereign debt was manageable. However, the economy of this Iberian country is relatively stagnant and its private sector has large debts. The very lenient interest rates and policies of Portuguese banks have encouraged many borrowers but also created an economic bubble.

Many of those who make money through the forex market are worrying about the possibility that Portugal will eventually need to be bailed-out because of its unmanageable finances.

On the other hand, some glimmer of hope was seen when both China and Japan pledged to give their support to the economically embattled eurozone. Japan has announced that it will buy bonds issued by the bail-out funds. Meanwhile, China promised that it will continue its investments in Spanish government bonds.

In spite of the support pledges from Asia’s two largest economies and despite of the political will of eurozone policymakers, the fundamental problem of the region is not fully addressed. There is still no long-term solution and the permanent ‘bail-out’ fund available is very small to cover all possible emergency financial needs of the member states. There are three main suggestions on how to address the problem. First is to significantly increase the seed fund. Second is to issue eurozone-wide debt instruments. The third option is for the European Central Bank to initiate quantitative easing.

The forex rally of the British currency against the euro continued last Friday (January 7). The sterling was able to breakthrough the €1.20 level, which was the highest level reached by the sterling against the euro since the month of September of last year.

After posting some significant losses in the foreign exchange market during the holiday season, the sterling has steadily recovered early last week. The pound was trading at €1.16 during the New Year but it rose to €1.201 last Friday (January 7).

According to the report of Reuters, most analysts and forex traders think that the main reason behind the recovery of the pound against the euro was the selloff of funds related to the euro as investors are again in panic mode over the sovereign debt situation of the eurozone. Hence, the recent strength of the pound was significantly lifted by the weakness of the euro. Meanwhile, similar strong position was achieved by the pound against the US dollar as the latest employment figures in the US disappointed the bullish predictions of the markets.

The continued recovery of the sterling against the euro is an indication of the declining investors’ confidence on the eurozone economies. It is predicted that the single currency will slide 2.1% of its value against the British currency. This would be the largest weekly slide of the euro since the middle part of the November last year.

If a currency trader is interested to make money through the forex market, it would be a good strategy to take advantage of the forex trends of the sterling and the euro. The bullish trend of the sterling, however, is unlikely to be on a long-term basis according to some analysts.

The continued rally of the sterling is unlikely to last for long because of the recent report that the economy of the United Kingdom will be downgraded to a less important position by the year 2050. The economic experts working for PricewaterhouseCoopers have pointed out that UK is unsuccessful in establishing its presence and dominance in the emerging markets. Presently, the United Kingdom is at the number six position in terms of economic strength. It is trailing not far behind the United States, Japan, China, Germany and France. Unlike other strong and developing economies, however, UK economy is not efficiently exploiting the opportunities offered by the emerging markets.

It is predicted that by the year 2050 the economy of the United Kingdom will have been surpassed by the biggest developing economies at present, namely, India, Brazil, Russia and Mexico. This will put the United Kingdom at the ninth spot. Nonetheless, the UK economy may still have enough time to adapt.

The predictions for the forex performance of the sterling are generally optimistic for this year. Many economic experts agree that the sterling will modestly strengthen its position against the dollar and the euro. According to a survey conducted by Hargreaves Lansdowne, it is predicted that the British currency is likely to be in a bullish trend this year, which could range from €1.05 to €1.35. Most of the experts who were polled see the sterling rising above the €1.25 mark. Meanwhile, the forecasts for sterling’s performance against the US currency are also optimistic, ranging from $1.40 to $1.80.

If the Bank of England will change its current policy about the low interest rates, there would be fewer factors that will hold back the bullish trend of the sterling.

Global financial markets recently become alarmed about the soaring inflation rate of China, which is now well above the target of the government. Many investors and analysts think that the Chinese inflation is threatening the stability of the global economy. China’s inflation is now somewhere in the vicinity of 4.4%, soaring to a 25-month high. This is a 0.8% jump from last month’s inflation rate and way above the 3% target annual rate.

As pointed out by several indicators, it seems that the probability of China’s central bank raising the base interest rates is now becoming more certain. Both the forex market and the equity-bond markets are reacting. Bondholders are now selling their five-year Chinese government bonds at low prices that the bond yields are rising sharply. This is also an indicator that investors are expecting a hike in the interest rate before the present year ends.

Meanwhile, Australia’s effort to address its ballooning inflation has led to the inevitable option of raising its banks’ base interest rate from 4.5% to 4.75%. There are also similar market and economic pressures in other Western countries that may force them to raise their interest rates. Ballooning inflation is the main factor that prompts policy makers to resort to interest rate hikes. In so doing, it is expected that borrowing will be less attractive thereby leading to low financial liquidity or cash supply.

The latest economic figures from China include the foreign exchange value of the yuan that recently reached a 17-year-high against the dollar mainly because of the second bout of US quantitative easing that exerted downward pressures on the forex value of the dollar. The Cginese currency has rallied against the US currency by 25% since its 2005 landmark revaluation. Although the People's Bank of China has recently allowed the yuan to appreciate in order to pacify the aggressiveness of the US, many critics are still not contented and say that the yuan should at least rise by 40% against the dollar.

On the other hand, the Chinese government and some European governments are questioning the decision of the US Federal Reserve to again engage in a quantitative easing programme that will further devalue the dollar and possibly contribute in the further worsening of the inflation in China. The governor of the Bank of England, Mervyn King is among those who are debating against the escalating currency tensions that could possibly lead to protectionisms and global economic imbalance. He particularly referred to China and Germany because of their large trade surpluses.

It was Thursday (December 9) last week that the euro was again significantly depreciated because of the stripping of Ireland’s ‘A’ credit status. Fitch was the first credit rating agency that stripped Ireland of its high credit status. As a result, the forex value of the euro slid thereby allowing other major currencies being traded against appreciate in value. The British sterling, for instance, appreciated at €1.175.

The credit rating agency Fitch has reduced Ireland’s credit status from ‘A’ rating down to BBB+ rating. Despite of the downgrading of Ireland’s credit status, the economic prospects of Ireland were still considered as stable. According to Fitch, the downgrading of Ireland’s credit rating was primarily because of the high costs involved in restructuring and sustaining the banks of Ireland. Of course, the bailout grant for Ireland is an emergency loan that still needs to be repaid. Consequently, the overall trust of the financial markets on the eurozone has significantly weakened because of the recent bailout of Ireland.

In an official statement released to the media, the credit rating agency Fitch has said that Ireland’s former credit rating was not anymore consistent or compatible with the its capacity to pay its debts and investment trustworthiness. Meanwhile, other credit ratings agencies, Moodys and S&P have maintained their on Aa2 and A ratings, respectively. However, they are reviewing the sovereign rating of Ireland for possible downgrading.

Compared to Greece’s BBB- Fitch rating, Ireland still has advantage despite of the fact that they both needed to be bailed-out to prevent insolvency and possible spread of the sovereign debt crisis. The bail-outs of these two countries has eroded the foreign exchange value of the euro and also threatened the economic stability of the entire eurozone.

One does not need to become a forex trader to understand the negative impact of the eurozone crisis on the forex value of the euro. However, it is not just anymore just a currency exchange issue but an issue of economic and political unity of the eurozone countries and the European Union in general.

After the official bailout of Ireland, many investors and analysts are still worried about the economic stability of the region as other economically weaker countries, such as Spain and Portugal, which may eventually need to be bailed-out.

According to some economic analysts, the threat of Irish defaulting on its sovereign debt and its being bailed-out sent the wrong message to the markets not only about Ireland but about the entire eurozone.

The ongoing eurozone debt crisis is threatening to spread like wildfire. For most analysts, it is not anymore just an issue of economically weak countries defaulting on their debts. It is also not anymore just an issue of euro’s forex value. More importantly, it is already an issue of euro’s survival as a single European currency. Along with it is the threat of political and economic disintegration of the European continent.

After Ireland officially bailed-out quite recently, Italy is now being pulled into the quagmire of sovereign debt crisis. The markets are afraid of the possibility that Italy might be the next domino piece that will fall after Greece and Ireland. This of course will cause further market volatility and dimmer economic prospects for the eurozone.

As the eurozone debt crisis threatens to spread like an epidemic, the foreign exchange value of the euro further weakened against a basket of other major currencies. Meanwhile, the borrowing costs of eurozone countries that are deeply in debts soared even higher. The financial trading sector, analysts and policymakers are again fearful about the future prospects for the euro and the European Union itself. Unfortunately, the recent bailout of Ireland was not enough to boost the confidence of investors.

Instead of appeasing the already volatile financial trading sector, the recent bailout of Ireland triggered the fear that it might be leading to a domino-effect wherein Ireland is just the second domino piece to fall after Greece. The economically weakest member-countries of the eurozone seem to be next in line to be infected by the debt crisis contagion. The markets are now worried about Italy, Spain, Portugal and Belgium.

As a result of market volatility and growing unease, the international borrowing costs for the Italian and Spanish governments recently soared to their record high levels. International money markets are now imposing higher interest rates for these countries. As a benchmark, the borrowing costs for Germany compared to the borrowing costs for Italy and Spain are now at their highest levels since the euro was adopted approximately twelve years ago. The interest imposed on the German government is only 2.7%. On the other hand, Italy and Spain must pay 4.8% and 5.7%, respectively.

Although the borrowing costs for Italy and Spain are still not as high as the 11.7% imposed on Greece, these cost are still considered as precariously high for large economies. By comparison, the United Kingdom only pays 3.2% interest in its loans.

Europe’s single currency has weakened against the dollar yesterday (November 30), sliding down below the critical $1.30 level. This was the first time it dropped below this level for almost three months already. Meanwhile, it also weakened against the British sterling and the US dollar. For a period of only more than one week, the euro shed 6.5% of its forex value against the dollar.

Some economic analysts think that the worse is yet to come. This pessimistic attitude is shared by the deputy head of UBS’ global economics division, Paul Donovan. He is convinced that the ongoing eurozone crisis is hardly halfway through.

The forex value of the British sterling continued to gain strength against the euro on Wednesday (November 24). The rally of the sterling was largely propped up by the confirmed economic growth of 0.8% on the third quarter gross national product figures. On the other hand, the unrelenting public and market worries about the debt crisis plaguing the eurozone have also contributed in the strengthening of the sterling. This was through the weakening of the euro, lifting up the foreign exchange value of the British currency to €1.185.

Although the third-quarter GDP growth provided some optimistic prospects and remained relatively unchanged compared to last month’s figures, the Office for National Statistics has warned that the level of consumer confidence, as measured by their spending, is comparably lower. The Office for National Statistics has confirmed that the economic growth due to individual or household spending only accounts for a little portion of the GDP growth figures. Consumer spending declined from 0.7% to o.3%. Meanwhile, a larger portion of the GDP growth can be attributed to the improved performance of the export sector.

You do not need to learn forex trading to understand the correlation between the previous weakness of pound and the recovery of the British export sector. Although the pound is gaining strength, it has been generally weak for the past three years. This made the export goods of Britain more affordable and attractive to the overseas markets.

As the export trades went up at a faster rate compared to the imports, the trade deficit was significantly reduced from £10.9 billion to £9.7 billion in the third quarter. Lower trade deficit automatically translates to higher trade surplus, which is one of the main driving forces of domestic economic growth. The Bank of England will surely be delighted about the improvement in the export figures. The policymakers at the Bank of England have always seen lower trade deficit as a key for a sustainable economic recovery for the United Kingdom.

On the other hand, economic experts are still sceptical about the impact of the recent GDP growth figures because of the decline in the level of consumer confidence. The relatively low spending figures will serve as a serious resistance that could slowdown the economic recovery. The austerity measures of the government may also exacerbate the sluggish recovery.

The chief British economist working for IHS Global Insight – Howard Archer – has predicted that the GDP growth for this year’s last quarter will be around 0.5%. He emphasized that it is likely that there will be little boost due to consumer spending, especially on high-end goods. Hence, the overall gross national product growth for the present year would be 1.8% if the last-quarter becomes a reality.

Although the recent GDP growth rate is considered as a slowdown from the 1.2% growth rate in the second quarter, it is still comparably higher than what was previously expected.

As the probability of another round of UK quantitative easing fade away, the sterling rallied to nine-month highs against the US currency. The decision of the Bank of England to temporarily shelf QE2 has increased the confidence of traders on the forex value of the sterling. Without quantitative easing, the purchasing power of the UK currency will not be eroded.

The September to October figures for the purchasing managers’ index (PMI) have shown that there was a significant improvement in the economy. The PMI is an accurate indicator that accounts for approximately 75% of the British economy. It includes various business sectors, from the smallest to the largest businesses – from personal services (e.g., barber shops) to large banks. The PMI rose from 52.8 for the month of September to 53.2 for the month of October. This development has again disproved the forecasts of analysts and the markets in general.

There are recent figures that are providing optimistic prospects for the British economy. These include the significant and higher-than-expected recovery of the services sector. Meanwhile, the manufacturing sector also showed strong improvements in its third-quarter figures. These domestic figures and other international developments made it less probable for the Bank of England’s monetary policy committee to recommend another round of quantitative easing.

As a direct result of the shelving of the QE2 option (for the moment at least), the foreign exchange value of the sterling has appreciated against the dollar from $1.601 to $1.614. Meanwhile, the sterling also modetly gained strength against the euro from €1.142 to €1.148.

According to Peter Dixon of Commerzbank, the latest economic figures are optimistic enough that it would be somewhat redundant for the Bank of England to try to stimulate the economy by extending its quantitative easing program. There is simply no need to do that in the foreseeable future at least.

Another good economic indicator is the index produced by Markit, a data service provider firm. Based on the latest figures, there are also significant upward pressures that are being exerted on the sector that represent at least 75% of the British economy. Of course, these optimistic figures were one of the main factors that hindered a pro-quantitative easing decision from the monetary policy committee of the Bank of England.

However, the biggest factor that most probably influenced the decision of the MPC was the third-quarter data on the gross domestic products (GDP). The latest GDP figures posted gains that are higher than what was expected by the markets.

Even the lone advocate of QE2 during the last MPC meeting, Adam Posen, thinks that economic stimulus would only be necessary if the economy does not show any improvement. The austerity measures would have worsened the sluggish development but international optimism seems to support the UK economic recovery. On the other hand, there might still be some possibility of quantitative easing by next year if the economy wobbles.

The forex performance of the British currency recently strengthened because many currency traders and equity investors have regained the confidence because of the better economic figures, indicating stronger recovery. Many investors in the financial markets think that the possibility of another round of quantitative easing will become unlikely if the economy begins to show stronger recovery. According to the latest figures, the British economy posted a 0.8% growth for the third quarter this year. Although it is lower than the 1.2% growth rate for the second quarter, it is double the original prediction.

Even the credit rating agency Standard & Poor’s was also convinced of the improvement in the UK economy that its ‘negative’ rating was upgraded to ‘stable.’ The rating agency also used the government plan for budget cuts as basis. It can be recalled that the Chancellor of the Exchequer, George Osborne, recently outlined the coalition government plan to slash £81 billion from the budget as a necessary austerity measure.

The stronger-than-expected economic growth came as a good surprise both to the foreign exchange market and the equity market. It also significantly reduced the likelihood that the Bank of England will again initiate quantitative easing to provide economic stimulus. The previous quantitative easing amounted to £200 billion in investments and bank notes.

According to many economic experts, the strength of the latest economic figures meant that it would be unlikely for the Bank of England to again pump newly printed money in the economy. On the other hand, some say that the threat of another round of quantitative easing is only temporarily halted. As a result of the optimistic moods, the British currency gained strength against the dollar and the euro by more than 1% in its latest forex rally.

The recent GDP figures clearly have positive effect on the sterling. The latest GDP figures have resulted in an optimistic outlook for investors and reduced the possibility of another round of quantitative easing in the near future at least. Previously, the Bank of England’s monetary policy committee minutes of meeting for October have indicated a three-way split among the members on how to address the economy. One member favoured increasing the base interest rates. Another one favoured quantitative easing. The rest of the members, however, voted for the status quo.

According to one dissenting MPC member, Adrew Sentance, if the interest rates will be increased, it will serve as cushion against inflation, reducing it from the current 3.1% to the Bank of England’s target of only 2%. Meanwhile, another dissenter, Adam Posen favoured quantitative easing to boost the British economy.

There is a lot of chatter around about the need by the Federal Reserve in the United States and the Bank of England here to expand its Quantitative Easing operations. This a type of economic policy that Central Banks undertake when they have run out of other ideas and interest rates have fallen to near zero. In theory it is a good plan. The Central Bank buys securities from Commercial Banks in exchange for cash. The Commercial Banks, flush with cash, then lend that to you and me. We take the borrowed money and invest in businesses and generally spend. This boosts the economy in the same way as a set of jump leads helps a car with a flat battery.

All well and good I hear you say. Someone lends me money, I buy something and the economy improves. That is the theory. Well what happens if you and me have soooo much debt already that we really don’t want to borrow any more.  As you get older you realise that you do not need so many new things to survive. You manage with the things that you have. Do you need 3D televisions when you are 60? We as a population are aging fast and so we do not need as much new “stuff” as when we were younger. So we prefer to try and pay some debt back, especially when the job outlook is poor and the Government is telling us they are going to cut back so even public sector jobs will be hard to come by. What happens then? Going back to the car analogy the battery is so flat that we might get the car started but it will stall again very quickly.

Now what? The Central Bank has to change the perceptions of the public. This is what all the noise and chatter is about in the newspapers. The Central Bank has to persuade you and me to stop paying off debt and borrow more.

Is that likely? If you are convinced that inflation is coming ( a rather large IF!) you will borrow money to buy things NOW because you will have to pay more for them in the future. But if you are retired and living on a pension you are more likely to be worried that inflation will ruin your pension and so you save even more. Forget buying more stuff, you want to save to survive.

This is why the Bank of England has to become the BULLY IN THE PLAYGROUND. It has no choice. THERE WILL BE MORE QE, A LOT MORE. The Bank of England will try to force us to spend more money. Hence, Governor Bean on the radio the other day encouraging pensioners to spend their Capital.  Not sure that is either wise or acting prudently.

THE END GAME HERE IS INFLATION IS COMING – DON’T FIGHT THE BULLY. The real issue is when? Watch this space!

On the subject of Brazil, the Finance Minister was on the wires this week complaining about everyone else!

Apparently he thinks that there is a plan amongst the struggling economies of the world to export all their problems. Well if he thinks that the Brazilians need to be worried about sending our English football team over there I can reassure him now! On the other hand we do have a few other problems and I think that he has a point. The UK, via the Bank of England (those folks again!), has made no secret of their desire for a lower currency. It might not help in the long run but short term it makes our exports more competitive and makes London Real Estate look really cheap. This all goes to help the economy and it really needs that help at the moment. We are EXPORTING DEFLATION elsewhere.

This means that successful countries like Brazil, Switzerland and Australia all have rapidly rising currencies as we try to send our deflation there. This will have consequences. At some stage their economies become so uncompetitive internationally that it leads to a recession. This then leads those countries to pursue lower rates and expansionary fiscal policies to maintain growth domestically. That way the whole world ends up with economic stimulus. At different times mind you, but this is the only outcome possible.

ALL THIS WILL LEAD TO MORE CURRENCY  AND INTEREST RATE VOLATILITY. Asset prices will continue to be very choppy for the foreseeable future while we work off the problems. This is not a good time for the “Buy and Hold” type of investing.

You need to have a disciplined approach to investing.

Knowledge to Action gives you an approach that is both rewarding and disciplined. Sign up today and experience the benefits.

Think of Brazil and your thoughts turn to sandy beaches, attractive young people, carnival and rather a lot of forest. The country is exciting and vibrant – a cocktail of the exotic. In finance too there is a buzz in the air. The country has weathered the global financial crisis well. As the chart below shows the Brazilian Real has been soaring. Economic Growth is around 8% per annum and they are hosting the Olympic games in 2016. According to Bloomberg which tracks the interest rates of over 50 countries, the interest rates in Brazil are the fourth highest after Lebanon, Pakistan and Venezuela.

This optimism attracts the so-called Carry Trade investors. These investors borrow in a currency with low interest rates and invest in a country with high interest rates to pick up the difference. Hence the attraction of so-called Lula Bonds (Brazilian Real denominated bonds named after their colourful President) that currently yield around 11.7%.

There is a snag of course. The currency has to remain stable for the idea to work.  This time around the rally in world stock markets and asset prices generally has benefitted Brazil. The Real has risen (witness the chart below against Sterling).

Brazilian Real vs Sterling

However, in the world of finance there is no such thing as a free lunch. Higher yields are higher risk. When the sentiment turns against Brazil for whatever reason the correction will be sharp and dramatic. This is the way of markets – slow to rise and quick to fall. Enjoy the high rate of interest – If things go wrong I hope that you get your money back!

Will there be a fall in the fall?
Hank Haney on coaching Tiger Woods
The Yen is an absolute shame.

The Stock Trader’s Almanac, whilst being an excellent doorstop most of the time, offers some interesting insights a few times a year. One of the sweet spots for the equity markets occurs in the run-up to the October half-term and on until the end of the year. The seasonal tendency is for stocks to perform RELATIVELY poorly from about now until the kids go back to school in early November. From that point on the equity market has a bias to rally into Christmas. There have not been too many memorable crashes in May for instance but October/late September is one of the most popular “Crash” zones. In the next few weeks it is quite simply a bad time to own stocks.

Last time we posed the question that how come the market was not going down given the very bearish opinions of all the pundits? We looked at the level of sentiment and concluded that if you were bearish then in all likelihood you have already sold and were out of the market. And if everyone has already sold then who is left to sell? Therefore the market will probably rally.

Well, two weeks later and what of the FTSE now?

As you can see we concluded correctly. As always, the real issue is what to do next?

Has this bearish sentiment finally run its course? On the basis that all I hear is Governmant officals from across the world telling how we have to be cautious here then probably not. However,always thinking about the next diabolical move then might we have a pause in the rally here. The seasonal suggests that perhaps being cautious for a few weeks makes some sense. The chart above also shows that we are entering the area where sellers showed up before. Will they this time? Who knows! If we do sell off then watch for the “I told you so” comments ignoring the fact that we have rallied almost 10% in 3 weeks.Watch this space!!

Holiday is a great time for catching up and, being a golfer, I decided to read some tomes about the adventures of a certain Mr. Woods and the comments that his “friends” have made. In the chatter was an interview with Tiger’s coach, Hank Haney. He said something that really stuck with me. How do you coach the greatest player on the planet? After all he has achieved?

Tiger’s swing is not perfect. There are flaws. So Haney would email Tiger his thoughts and send a video suggesting he does this and that with his swing. Tiger apparently never used to reply, not even to say thanks. However, after Hany had made the same suggestion a number of different ways he would be with Tiger on the practice range when Tiger would announce that he had found the exact flaw that Haney had spotted and now had a fix exactly on the lines that Haney had been suggesting. At this point Haney was happy and felt he had done his job. Tough approach for him but ultimately rewarding as the pupil comes through to greater success.

The point is that when coaching you have to have the coach teach until the pupil thinks that it was their idea in the first place. ONLY BY OWNING THE IDEA CAN YOU TRULY BELIEVE.

Through Knowledge to Action's coaching scheme offers you a chance to OWN ideas. Their coaching and seminars constantly reinforce the approach needed to help you to be successful in the financial markets.

As I am finishing this week’s note I am watching the Finance Minister from Japan announcing the currency intervention that they have just undertaken to halt the rise in the Yen. This is a major message change for them and he looked worried.

Currency Intervention is when the Government sells its own currency on the FX market to prevent excessive rises. According to the chart, $1 got you over Y110 over 2 years ago. However now $1 will get you Y84.

Last time we looked at Japan as possibly our “Run to the Bunker” trade because they are the first major G7 country to have both a huge debt burden and a declining population. They need to try and avoid a death spiral. The only way out for them is to stop the value of their currency rising and boost their economy through an even larger trade surplus and rising profits. When the yen is strong, then Japanese exports become more expensive to Americans, Europeans, & other Asian Nations, so they will buy less. Letting the value of the Yen rise is not the way to get yourself out of trouble. It will make matters worse as you will eventually kill an economy that is largely based on trade. In effect, Japan is importing the deflation from abroad.

Now, Japan is a very different economy to the rest of the major developed nations. It is a society that is based on Shame rather than the traditional Anglo-Saxon one based on Guilt and Criminal Justice. This has huge implications for economic outcomes. In the Western model the Guilt based religious systems that have formed the backbone of our current society have led to an economic outcome where bankruptcy does not have a huge amount of stigma attached to it. In a Shame based culture, according to Paul Heibert (1982) “Shame is a reaction to other people's criticism, an acute personal chagrin at our failure to live up to our obligations and the expectations others have of us. In true shame oriented cultures, every person has a place and a duty in the society. One maintains self-respect, not by choosing what is good rather than what is evil, but by choosing what is expected of one. Those who fail will often turn their aggression against themselves.” So bankruptcy is a really major thing and can often lead to suicide rather than have to face ones creditors. The preferred option is always to go with a slow recovery than take sudden difficult decisions.

Ok, so what does this have to do with the Finance Minister of Japan speaking today? THE JAPANESE ANNOUNCED TODAY THAT THEY ARE TARGETING 82 YEN TO THE DOLLAR AS A FLOOR. This means they will prevent any further Yen strength by buying USD-JPY, in effect selling Yen. In all my years trading I have never, and I mean never, heard a Finance Minister from Japan announce a specific level in the currency. Why would he as it would not be possible to deal with the Shame of being wrong! The Finance Ministry then reiterates throughout the next 24 hours they will continue to intervene to prevent their currency rising to that target no matter what the amount of Yen needing to be sold. Why would they do this? This is a big risk for them. In their culture the Finance Ministry will never be taken seriously again EVER and it is all over for the Minister if it does not work.

On the other hand if a Government sells its own currency in the FX market that intervention RARELY FAILS! There are very few instances of intervention where the Central Bank has sold it currency to halt a rise where they are wrong for any length of time. The reason for this is straightforward. The Japanese Government can create as much Yen as it needs to – it simply prints it! So if international demand for Yen is greater than the supply (so the value, or price, of Yen rises) the Japanese Government can issue as much Yen currency as needed to satisfy that demand. They use the Japanese Central Bank (the BOJ) to sell the currency and buy US Dollars, Euro’s and Chinese Renminbi against it. Hey presto, the value of the Yen falls back. There are some problems with this strategy but on the whole it tends to work rather well if you are trying to stop your currency rising. Given the determination and size of the Intervention the Japanese mean business this time.

THIS IS REALLY A BIG DEAL AND MEANS THE YEN IS FOR SALE FOR THE FORESEEABLE FUTURE.

Your humble blogger…

Checking in on the Beauty Parade and the fourth Horseman
The “Third Man” would make a good trader
OMG! This might be the greatest trade
The Bear and the Bull

Lets recap a little of the last chat and see where we are in the world of equities.
Well, in the Keynes beauty contest it appears that we have come to something of an impasse in the equity market. The chart below shows how the market has gone sideways for a long time this year. So what are we thinking about what everyone else is thinking, a la Keynes?

Checking in on the Beauty Parade and the fourth Horseman.

The press would have us believe that we are descending into a “double dip” for the economy and that the 4^th Horseman has been wandering around the garden sharpening his axe. Everywhere you look there are articles saying that the economy is going to struggle and that the demand in the economy is going to decline leading to a vicious circle and a new economic malaise? Well, on that basis would it not make sense that the “news” is already in the price. Has the FTSE not discounted the current outlook?

Anyway, if the depressed outlook is in the price then the equity market should be a lot lower. By the look of things we should not be trading at 5300 on the FTSE and a PE ratio of 17 times earnings but near the lows of last year when the outlook was equally bleak.

Now, from time to time I have been known to hold my own as a chartist so the current pattern looks to me like a boring, going nowhere sort of pattern on the weekly charts (despite Wednesdays rally!). Yes, there is a risk that it will morph into something else but usually the stock market is a good predictor of the economy (about 10 of the last 5 recessions!!) and I would find it amazing if things changed and the economy led the stock market.

On this basis we can conclude that there is a huge amount of noise and not a lot of happening. Given the well-known tendency for the equity markets to decline in September and October perhaps we would upset the most people if the market did not go down but stayed exactly the same or RALLIED. Watch this space!

Don’t forget that when the market is stuck in an extended trading range there is still a lot going on in the individual stocks. A range bound market is an ideal time to look for stock picks that work. Knowledge to Action offers one of the best approaches to stock trading around. Their award winning approach uses trading strategies that are designed to help you reach your financial goals.

The “Third Man” would make a good trader.

Would Peter Mandelson have made a great trader?

The recurring theme of PM’s book is his passion for politics and his ability to come back from his mistakes. It is a testament to his self-belief and motivation that he was able to come back from the political wilderness three times to finally secure his much wished for front line political position. He continually overcomes disappointments to bounce back. This is the most important asset of a trader. There is a feeling that trading is easy and when you are making money that is true. But the true test of a trader is when things are going badly and the trader has to have the willpower to hang on despite his methods being questioned and more importantly his capital is vanishing. This is the side of trading that is often not talked about. The ability to come back from adversity. Peter Mandelson has it in spades. He would probably make a good trader.

OMG! This might be the greatest trade.

This time I would like to consider the Oh My God trade. This is the event risk trade, the unforeseen occurrence trade, the “Grab you helmet and run to the shelter” trade. We need to know the thing to do in the face of a world economic downturn. This time of year there is a chance of a financial accident and we have to consider what to do in case it might happen.

What should we look for and where?

Well, how about a demographic time bomb of too many old people and a falling population?
How about a debt to GDP ratio that makes the UK look positively frugal.
What about an economy with a falling savings rate?
What about an economy with no inflation and a Central Bank that seems to be out of options?
Sounds familiar?
THIS IS PRESENT DAY JAPAN. In serious trouble for all of the above and add a real estate market that has fallen to 1980 valuations.
AND YET ITS CURRENCY STILL RISES.

Now here is the interesting thing about the Yen. It is approaching a pretty important price level especially against the Dollar and Sterling. Back in 1995 the Dollar Yen fx rate made a bottom at 79.70 yen to the dollar. After a few years we are now approaching that level once again. We have to wait and see whether the Dollar Yen rate will retest this level and reject it by trading higher or carry on through in which case this will be an important level on the rally back up. Make no mistake this is a level for the currency that is undesirable for both the Japanese and the rest of the G7. Watch this space as we shall be following the action closely.

The Big Kahuna of a trade will be the value of the Yen falling a lot. Japan is a trading nation and cannot have all of the above problems and a rising currency as well. Just NOT POSSIBLE.

The solution to their huge debt is either Default or Devalue through hyperinflation. EITHER WAY THE YEN GETS SOLD.

So on your way to the bunker don’t forget think about what might happen to Dollar Yen and Sterling Yen fx. At least that way your last trade might be your greatest.

The Bear and the Bull

We have spoken before about the rhythm of all markets. They fluctuate from overvaluation to undervaluation with fair value being only an interesting crossing point ( a bit like the 200 day moving average which as far as I can see has no relevance apart from a line on a chart). I think that we need to all become a little more like Peter Mandelson. There has been a Bear market in equities for over 10 years and it might go on for another few years yet. Who can say and if anyone does predict a Bull market then it is only a guess so please don’t take it too seriously. However, a Bull market will come and there will be full employment again and the economy that our children inherit will go on to be a better place. We need to have a little faith and adopt a Peter Mandelson like quality about the future. The economy, like Peter, will come back. Now there is a scary thought!!

Until next time…

• Keynes was not just a great economist.
• How do beauty contests really work?
• Don't be left with the Old Maid?

Keynes was not just a great economist.

So it turns out that Keynes was not just a well known economist and the name of a town in Buckinghamshire. He was an avid investor during the 1930's and managed significant amounts of money for clients.

How do beauty contests really work?

In the 1930's in England, contests were popular in newspapers where readers would be asked to choose 6 faces from the 100 listed and everyone who picked the most popular face would be entered into a prize draw. The real secret to the game is to pick the face that you think everyone else is going to pick. This might not be the most attractive face to you but that does not matter. It is what you think everyone else believes to be the most popular face.

Keynes likened these beauty contests to trading. Here is what the master said...

It is not a case of choosing those (faces) which, to the best of one's judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. There are some, I believe, who practise the fourth, fifth and higher degrees. J.M. Keynes

Don't be left with the Old Maid?

This has been explored recently by the proponents of Game Theory. Let's have a look at how this applies to trading. The wonderful folks at CalTech have done some studies in this area.

They had some students sit in isolated booths (much like today's trading environment) and were given the ability to buy and sell a share based on prices on a screen in front of them. There were 15 trading periods and the share paid a dividend of 24 cents at the end of each period. So if you held onto the share for the whole game you earned $3.60. Everyone was given a couple of shares and some money to buy more if they wanted to and left to get on with it.

Now here is where it gets interesting. The share price for the first 13 periods fluctuated between $3.00 and $3.60 despite the fact that the share price should have declined by 24 cents in each period. Then in period 13 the share price starts to fall rapidly down to the final value of 24 cents. So what is going on?

Well, it turns out that although the students knew prices were too high as the game progressed, they always thought that they could buy some shares, collect the dividends and sell them to someone else at a higher price later. Sort of like a greater fool theory – I buy an expensive share to sell to a bigger idiot at a higher price later. At the end some of them did and they earned a lot of money at the expense of the poor folks left holding the bag. This is how stock market bubbles and crashes are created.

Our role as traders is to guess what the other participants are thinking. We have to stop caring about what we think the right price for an asset is and start thinking about what the other players think is the right price. We have to make sure that we are not stuck with the Old Maid.

Now, it wasn't always this hard. In the 1980's stocks were seriously cheap and all you had to do was buy some. Timing did not matter as valuations were historically low. Then between the crash of 1987 and the dot-com bubble of 2000 you were rewarded for buying market selloffs and holding on for dear life.

After 2000 the world changed. We are now in a time when making money is really hard. Valuations are expensive ( probably related to very low interest rates). To make money now you have to do something that sets you apart from the crowd.

This is going to be the difference between retiring one day or working forever.

You have to take control of your financial future.

You can trade part time as a serious hobby and make a go of it.

You need to look for ways to trade consistently and to make money whether the market goes up or down.

K2A gives you that opportunity...

1. Is Stephen Gerrard really worth it?
2. Why there are only 3 reasons for using money.
3. Greece has to Default!
4. Why foreign exchange trading is a must to protect your Assets.
5. How you could have turned £100,000 into £145,000 during the crash of 2008/2009.

Is Stephen Gerrard really worth it?

So, I was at the restaurant with my children when the talk turns somehow to the use of football game cards (the current fashion at school) as a means of barter. Now, the thought of using a card of Stephen Gerrard as a means of topping up my petrol tank had not occurred to me before, but it did get me thinking about the concept of money as we know it.

Why there are only 3 reasons for using money.

Money is supposed to be the most appropriate method of payment due to the 3 criteria being a Medium of exchange, a Unit of account and Store of value. I figure that most people would rather use money than have to rummage around in their pocket for an easy to counterfeit Premier league footballer card.

Money is also quite handy if you don’t know much about football which could lead to some embarrassing accidents as you try and buy your new house with an old Ronaldo card while the young sales assistant shakes his head and moves onto the couple behind you. Handily money can be easily broken up and we have some nice easy to use denominations now that the country has stopped counting in 12’s.

Finally, money is also a great store of value in that you can save it for a rainy day and hide it under your proverbial electronic blanket at the Bank, using it only when life turns tough or your kids come looking for money again.

Greece has to Default!

Now on that last point is where life has not been so easy recently. If you are Greek then I think that it is safe to assume that Money as a store of value is not so certain any more. Witness the large amount of new shops opening up in West London selling Greek goods as the well to do in Athens hedge their wealth by buying up all the real estate they can find in London. For those of you who have been living on an island in the South Pacific the last few months the Greeks are, well, "screwed". That they are in big trouble is a definite. They will probably default. They have done it more than once in the last 50 years.

Now, most well off people I know want to remain wealthy. A Greek Default leaves you as a rich Greek feeling rather less rich so you have to move offshore to protect your wealth. I think that explains why the Swiss Franc is expensive. Only a short plane ride, lovely scenery and lots of secrecy about your somewhat under taxed earnings. A pattern that has been repeated rather a lot in the southern half of the Euro area in recent months.

Why foreign exchange trading is a must to protect your Assets.

So as a store of value you have to trust your Government to do the right thing and protect the value of your hard earned currency. The risk is that they might not depreciate it through a bout of high inflation but instead they will devalue the currency and so internationally you are a lot worse off – witness the fall of the pound to 140 versus the US Dollar from the high of 2.10 only 2 years ago.

That is a staggering 30% fall in the value of your assets.

The Euro strengthened from a low of 60c versus the pound to 96c which is an even larger fall in the value of Sterling. Now if you were able to capture even two thirds of that fall then your overall assets in Sterling terms will have not lost too much of their purchasing power. The potential gain from trading the foreign exchange market is Huge! Protecting your wealth is now a global business!

How you could have turned £100,000 into £145,000 during the crash of 2008/2009.

The chart below illustrates how the value of Sterling has fallen. From purchasing 2.40 Swiss Francs in 2007 you can only buy 1.64 Swiss Francs now. Expressed differently, if you had invested £100,000 in Swiss Francs in 2007 that would now be worth approximately £145,000. Against the FTSE 100 index (now worth approx £85,000 on a comparable return basis) you are looking a very wise and astute investor.

B.Pound/Swiss Franc Exchange Rate

YOU CANNOT IGNORE THE MOVES IN THE FOREIGN EXCHANGE MARKET!

Taken together with the moves in the stock market you can’t escape the conclusion that there has to be a better way to protect your wealth. We are now, according to Simon Scharma, living in the “Age of Rage”. We have always been conditioned to a time where as children we can with a modest amount of hard work and application easily exceed the standard of living of our parents. Well that has come to an abrupt halt!

It looks like our parents have retired earlier than we are going to and the real after tax income (i.e. adjusting for inflation and higher taxes) has been falling for a number of years and it is going to fall further once Mr. Osborne is finished.

We are forced to add a second income to supplement our pension. Trading is a good way to do just that! We need to look at the movement s of Sterling against other currencies to better understand our current enormous loss of wealth in International terms.

K2A can help with that process by helping you to understand how to invest in foreign currencies.

Knowledge to Action is the largest stock market and forex training company in the UK and Europe. Knowledge to Action believes that the keys to successful trading are technique, not mystique; psychology not philosophy. According to Greg Secker, if you are an achiever, you can master it. To date, over 90,000 people worldwide have attended Knowledge to Action seminars and workshops. Knowledge to Action training has shown them how to balance risk against reward and build a secure income from trading stocks and foreign exchange.

Click here to find out more

More and more spread bettors are recognizing the great potentials of the largest global financial market, the foreign exchange market. This market has a daily turnover of approximately 1.2 trillion dollar-worth of currency transactions. It far exceeds the equity market by at least a factor of ten. Fortunes are made and lost in just a matter of seconds.

Many people regularly go to the bank when they need foreign currency when going in a vacation abroad. However, very few people are aware of the money-making potential of trading in the foreign currency market. In principle, exchanging your cash with foreign currency from in a local bank is similar to the transactions being done in the larger forex market.

Basically, currencies are traded in pairs in the foreign exchange market. Profits and losses are the results of the price differences between currencies. Profits are made if the value of a currency rises against another, such as US dollar rising against the euro. Unlike equities, not all currencies can simultaneously rise not unless they are compared to other assets such as gold.

Deciding which currency to trade against another currency will determine if you are going to profit or lose your investment. It is very important that you have up-to-date information and analytical basis when deciding. You can minimise your risks in this manner. For example, if you are a spread bettor and you see a trend that pound is likely to rise against the dollar, you can place an up bet on the sterling-dollar pair. On the other hand, if you are a regular trader, you can simply sell your pound holdings for dollar holdings.

If you are right in your forex predictions, you will win the bet multiplied by the price range movements or you can collect profits from the sell-out of your pound holdings. However, if you are wrong, your losses can be multiplied by the same leverage.

Majority of spread bettors start by speculating on major currencies. There are seven major currencies being traded in the foreign exchange market, namely, the US dollar (USD), the Canadian dollar (CAD), the Japanese yen (YEN), the euro, sterling (GBP), the Australian dollar (AUS) and the Swiss franc (CHF). These currencies serve as benchmarks for all other currencies in the world. They may be paired with each other or with other currencies. Many brokers allow their clients to bet or trade using other currency pairs.

There are several major factors that influence the price movements of various currencies. The most important factor is interest rates, which determine the liquidity of a currency. If interest rates are high, a currency is less liquid making it more valuable. Some market speculators use “carry trade” currencies to make profits. These are cheaper currencies that are borrowed by speculators and use them to invest in more expensive currencies.

If you want to become a forex trader, you must be aware about price movements and interest rate differences. You must also be up-to-date about other factors that may influence the price movements of currencies. Some of these factors include inflation rate, GDP figures, and unemployment statistics. You must focus on the countries that use the currencies that you are trading. However, world economic conditions also affect the price movements in the forex market. Price movements are usually fast and sometimes exhibit extreme peaks or lows. Hence, it is important that you issue stop loss orders to minimise the risks.

The 2010 outlook for the forex market may remain ambivalent because of two opposing trends. On one hand, there is positive GDP growth in the G20 countries. On the other hand, deficits in Europe and the US may not be immediately resolved in the short-term.

Some European countries, such as Greece, Spain and Portugal remain badly hit by debt problems. Meanwhile, the federal government of the US is also tackling deficit problems amounting to over one trillion dollars.

However, there are some notable situations in some countries using major currencies. Switzerland, for instance, has less than 1% deficit of its GDP. It also has the cleanest balance sheet among European countries. The good fiscal situation of Switzerland makes the Swiss franc favourable for investment purposes. Another major currency that is performing well is the Canadian dollar. The good performance of this currency in the forex market can be largely attributed to Canada’s low deficit and surplus trade balance.

Virtually everyone who has tried investing in financial markets would realise the great opportunities that the forex market provides. For those who are planning to become players in the currency trading market, there are several concepts and skills that they need to learn and master.

If you are interested to venture in the forex market, you probably already know something about this market. The foreign exchange market is basically a venue where foreign currencies are bought and sold. It is not a physically centralised market place but it is a virtual, worldwide market place that is made possible by the digital interconnectivity of banks, brokerage firms, corporations and other investors.

The foreign exchange market has its humble beginnings in the 1970’s when it only had daily transaction turnout of a few millions of dollars but today it now has an average worth of 1.2 trillion dollars in daily trading. Just like in other financial markets and businesses, the basic mantra is “buy low and sell high.” Profits are made from the price differences of a pair of currencies. However, profits can also be made through spread betting.

The popularity and continued growth of the forex market can be partly attributed to its simplicity. Unlike the stock or equity market, there are fewer factors to be considered in the currency market. A trader can focus in just one currency pair and there are only five major currency pairs. Since there are always price movements, there is always a good chance that profits be made. In spite of its simplicity, however, you may first want to attend a free forex seminar to be more prepared and minimise your risks.

There are several advantages when it comes to investing in the currency market. One great advantage of this market is the minimal amount of fees that an investor needs to pay. There are no commissions, brokerage fees or government fees. Another main advantage of this market is that trading can be done virtually anywhere else as long as there is access to a computer and internet connection. Finally, the lowering of the minimum required investment to open an account has opened a floodgate for many ordinary investors. A would-be investor can open trading account for as low as 300 dollars.

Even if you want to become a forex expert, there are actually very few things you need to apply in order to succeed. Aside from the “buy low and sell high” mantra, you must also learn how to interpret and predict market trends. You will need to strategise and have up-to-date information. All of these can only be possible if you have actual exposure to the market. Mere theoretical pursuits will not make you successful.

The first strategy that is indispensible in the forex market is technical analysis. You cannot rely on mere hearsays and gut feelings. You must learn how to become objective and base your decisions on facts. Another strategy that you can use is the fundamental analysis. It is the assessment of the overall situation. Its focus is beyond the price movement trends of the currencies. It considers other factors, such as politics, macro-economics and market speculations or rumours.

The foreign exchange market offers many great opportunities to earn profits. Although many recognise these opportunities, only a handful actually has the courage to invest and take on the challenges. You must take the first step to gain knowledge, skills and experience.

Although there are many trading courses you can take, having some basic knowledge about the currency exchange market will enable you to appreciate the courses better and take more advanced lessons. If you are a new Forex trader, some terminologies may still need to be familiarised and some strategies may still need to be mastered. For instance, you probably want to know more about the right approach in minimising the risks and protect your investments. This article attempts to discuss some of the important concepts that all new or would-be currency traders must know.

Price interest points

When it comes to foreign exchange trading, the earnings and values that can be traded are expressed in terms of PIPs. It is the acronym for price interest points. If the smallest US dollar denomination that has value is the penny ($0.01), the smallest unit of fund that can be traded in the Forex market is $ 0.0001 or ten-thousandth part of a dollar. This implies leverage that allows large profits with just small price movements. However, this also means that the risks are also equally great.

Although the PIP is the smallest currency unit that can be traded, its actual value is not a fixed price. Its value depends on the type of account that a trader is holding. A standard account has a PIP value of 10 units while a mini account has a PIP value of only 1 unit. This means that the type of account also determines the leveraging power of a Forex trading transaction. For instance, a standard full size US dollar account has a base value of $100,000. This means that you can leverage by one-hundred thousand times.

Financial leveraging

Foreign currency trading enables traders to leverage more funds that they actually possess but they can also potentially loss large amount of money. The losses can be multiplied by the same amount of units used for leveraging. The risks, however, can be minimised by using specific strategy and analysis. A trader must know the best time when to enter and when to exit the market by anticipating price movements.

Minimising risks

A trader can also minimise the risks by placing a stop-loss order. As the name implies, a stop-loss order prevent further losses by allowing a trader to automatically exit a trade when certain market signals are reached.

Forex trading stop loss orders must be placed below the current market price if you are taking a long position. This will allow you to buy at lower price and sell automatically when the market price drops. On the other hand, if you are taking a short position, the stop loss order must be placed above the current market price. This will allow you to automatically buy when the price rises. There are other more subtle and complicated strategies that you can learn if you take advanced trading courses.

Today, more and more aspiring traders and even seasoned investors are choosing to take a stock market course to enhance their knowledge and to prepare them in the business of trading. Because of the increase in demand for stock market training and courses, the number of individuals and companies that are offering them has also dramatically increased in recent years. Although taking a stock market course could be easy, it is important that you take some important considerations into account as you choose and attend one. Here are the steps that you should take.

1. The first would be to decide where to take your stock market course. Many colleges offer such courses and for those who do not have a day job or have time to spare during the day, it could be a good option. However, more people now prefer to take online stock market courses, because of the convenience and the practicality that they offer.

2. If you choose to take an online stock market course, you would have to go through some of the online schools or stock market websites that are offering them. Make sure to not rush the decision process, as you would not want to go for the first school that you come across. Remember that online schools differ in the style that they teach courses as well as in the kind of education that they are offering. As you go through each one, check the courses that they are offering and the topics that are covered. Also check the length of each session and what kind of training and coaching would be available to you as you learn more about trading.

3. As you go through your choices, you should also check the kind of instructors, methods and media which they have for their students. Make sure that they have instructors which are fully qualified and experienced. If possible, choose a school which has professional traders who are actually doing their own trades as their instructors and trainers. AS for the methods and media that they use for their courses, choose one which offers the latest tools and techniques that can help you learn the principles and theories a lot easier and more efficiently.

4. Once you have already chosen and have enrolled in the stock market course, attending the sessions is not the only thing you should do. You should invest a lot of your time and attention to learning more about trading through the course as well as through studying on your own, allowing you to be familiarized with the different basics not just of trading but also of marketing and finance.

5. Lastly, you should use the stock market course as a way to identify and improve your problem areas. Strengthening your knowledge and skills in trading would be the best way for you to develop a strategy which could help you get the most out of your trading experience in the stock market later on.

Through following these steps, taking a stock market course should be able to properly prepare you as you perform your own trades. By acquiring the knowledge and training through a stock market course, you should have an easier time in becoming successful in your future ventures.

The Organisation for Economic Co-operation and Development (OECD) recently announced its recommendation for an increase in the interest rate in UK to arrest the rising inflation and stabilise the markets. The organisation stated that UK must raise its interest rates before the present year ends. It also recommended that a 3.5% hike in interest rates must be implemented by the end of 2011.

Contrary to BoE’s assertions

The recommendation of OECD is contrary to the much gentler and reassuring pronouncements made by the Bank of England. The BoE has asserted that although inflation is now running at 3.7%, it is likely to fall back to a lower level without the need to raise the interest rates. It is expected that inflation will eventually drop and stabilise as new tax hikes are introduced, thereby controlling the supply of money circulating in the economy. The 3.7% inflation is also inevitably pushing the preferred consumer price index above the 2% target rate of BoE. On the other hand, last year’s record low of 0.5% interest rates was recognised for serving as buffer against economic recession.

Bank of England’s policy on low interest rates and the increased supply of money in the economy has resulted in the current high inflation. Aside from the general consumers, investors in the stock market are also being affected by the higher inflation. This is especially true for investors who have investments in fixed income securities. With rising inflation, the purchasing power of the currency is being eroded t. Commodities and assets are becoming less affordable but not necessarily increasing in inherent value. Consumers and investors are thus paying more for less.

Credibility issues

The OECD has stated in its recommendations about interest rates that the UK government now faces the serious challenge of preserving its credibility. UK’s Inflation rate may keep on rising and the inflation expectations now exceed Bank of England’s target rate. These are largely because of the expansionary fiscal and monetary policies. Although these expansionary monetary policies may stimulate trading, they also cause the prices of commodities to rise because of the oversupply of money.

The gradual increase of some parameters measuring inflation expectations indicates that there is a pressing need to increase the interest rates sooner than previously expected. The increase in interest rates must be implemented before the end of the present year. An increase of at least 3.5% must also be implemented by the end of the year 2011 based on the Bank of England’s target and projected increase of core inflation.

Analyses and predictions

The recommendations of OECD are part of the organization’s half-yearly snapshot report about the status of the global economy. Financial analyses of individual nations are also included in the report. Analyses about the various financial markets are also included in the report. Regarding UK’s performance, the OECD has stated that economic recovery is gaining traction. The recuperating fiscal situations, the improving condition of exports and the momentary revitalisation of the stock market all contributed to the recovery trend. On the other hand, the rising inflation, the government’s budget cuts and the persistent public fear over sovereign debts will slowdown this year’s economic growth.

About 1.3% growth in the GDP of the United Kingdom is predicted by the OECD for this year. Nonetheless, this would still be lower compared to the 4.9% GDP growth in 2009. The growth rate may improve by 2011 at 2.5% but this would still be lower that what the Treasury ministry has forecasted.

When the US bank Lehman Brother collapsed in 2008, panic ensued as investors seek refuge. This triggered a demand surge for gold investment, which was not surprising given the fact that gold is considered as a safe haven for investments. Every time that the global financial markets are in turmoil, investors rush to buy gold to serve as buffer against instability. The return of investment might be slow and the profits may not be great but the risks involved are very minimal when it comes to gold investments. Unlike stocks and other similar negotiable instruments, the price of gold is less vulnerable to speculations.

Triggering the gold rush

Now that the global banking system is again experiencing a crisis, gold may yet to prove to provide safer investment opportunities. The ongoing financial crisis in many European countries is now weakening investors’ confidence and driving the markets into frenzy. Many are fearful that governments may not be able to effectively manage the mounting sovereign debts and budget deficits.

The rising inflation and the lethargic economic growth have also helped to trigger the new gold rush, so to speak. Gold trading flourishes when governments, the stock market, banks and other financial institutions are in turmoil. If you are a new investor, you might want to consider investing in gold. There are several convenient options that you can choose when investing in gold. You do not necessarily have to buy and physically possess the precious metal. You can invest and trade in “proxy” gold.

Proxy gold investments

As the name suggests, proxy gold holdings cannot be seen or touched and they are mere representations of actual value expressed in numbers. Although proxy gold holdings have actual equivalent in physical gold, it is very important the dealer and the storage firm are very reliable. Otherwise, your investment will be virtually worthless.

One of the reliable dealers of precious metal is BullionVault.com, which has already attracted 18,000 new investors for the past five years. This company specialises in the online buy and sell of gold. The company now owns a total of 19.3 tons of gold and 50.6 tons of silver. The company is currently based in west London and it is among the pioneers in the use of high-tech trading platforms that bring buyers and sellers together. Real-time price fluctuations are accessible online, allowing traders to decide more effectively.

For as little as 100 pounds, investors can own “portions” of gold bars. A 0.8% dealing commission is required per trade both for buying and selling transactions. The real precious metals are stored by BullionVault on behalf of the investors. A daily list of investors and their respective holdings are published by the company. Pseudonyms are used for anonymity and security purposes.

An investment anecdote

One of the successful gold investment stories is that of John Whitehead. He is among those who have been very earnest in precious metal trading since Prime Minister Gordon Brown approved the sell of half of British gold reserves in 1999. The price of gold has quadrupled since then.

Mr Whitehead still recalls the time when investing in gold was very inconvenient. He had to buy gold coins but he was worried about the security issues involved in storage. There was also the inconvenience of not being able to immediately sell the coins because of the difficulty to find ready buyers. It was not until 2008 that he found a more convenient means of investing in gold through BullionVault.

Mr Whitehead says that he is not really very active in the buy and sell of gold but he tends to hold selling until he thinks it is the right time to make good profits. He then invests again if the prices go down. John admits that it is difficult to get the perfect timing.

Other gold-related investment opportunities

Gold-backed ETFs – There are various types of exchange-traded funds. These are basically shares that can be traded with the help of brokers. A gold-backed ETF is an ETF share that is matched with actual gold stored in a vault. Some examples of these include ETFs Physical Gold and ETFs Gold Bullion Securities. These ETFs are more stable than other types of investments. On the other hand, there are also “synthetic” gold ETFs that are matched by price movements of gold. These ETFs are relatively much riskier.

Physical gold – Physical gold investments include the actual ownership and possession of gold in form or another. The most common of which is gold coin. Although buying gold coins can be less complicated, assessing the real value of coins can be difficult. Trading them can also prove to be very challenging.

Gold mining companies – Another way of investing in gold is by buying shares from gold mining companies. Although the prices of shares may rise and fall depending on the gold demand, the returns can reach as high as 266%, such as in the case of BlackRock Gold & General.

The eurozone markets are exhibiting good signs that they are regaining vigour and stability, at least for the meantime. This might be the immediate effect of the first batch of bailout money released to aid the ailing Greek economy. The fears over the looming fiscal meltdown in Greece were pacified as the 8.5-billion euro of ten-year bonds were recently repaid. The next redemption date will be March 2011, giving enough time for Greece to prepare and pay its remaining obligations. The danger of defaulting is not anymore an imminent threat to the economy.

Regulatory surprise

Although the worst is far from over, eurozone markets have gained temporary relief. European economies now seem to have ample breathing space to allow for the austerity measures to take effect.

While the financial market was barely recovering, along came the German regulator launching a crusade against the stock market and forex market speculators. In reaction to the unpleasant surprise, the markets again switched back to panic mode. BaFin – Germany’s financial regulator – suddenly prohibited the short-selling of specific financial stocks. It also banned the use of credit default swaps or CDS in betting against European government bonds. It is ironic that the bans were immediately enforced just after the markets closed with strong gains.

Many financial experts and investors are still in shock. The logic behind the regulatory bans is something of a mystery. Apparently, there is simply no justifiable reason behind the bans. It might have been more understandable if the ban is enforced on naked shorting or the short selling of shares without first borrowing. The ban on the use of credit default swaps is also something that is debatable.

Market reactions

The need for reforms when it comes to market transparency and breaking up the banks may also be in order. However, it is really ridiculous to enforce regulations that are totally unanticipated and unnecessary on a still nervous market. The American, Asian and European stock markets successively plunged in reaction to the new regulations.

The forex value of the euro also suffered after the announcement about the new regulations was made. The euro dropped below 1.22 against the dollar. Greg Gibbs of the Royal Bank of Scotland has told Bloomberg in an interview that if investors feel that bonds and equities cannot be sold in Europe, there is hardly any option but to sell the euro to express disagreement with the new regulations.

The sudden and recent plunge in the buy and sell of stocks is indicative that investors are panicking. Many investors may be suspicious why Germany is becoming too protective about certain financial institutions. The manner and timing of announcing the new regulations can be considered as reckless because it is sending the wrong message. An overnight ban may be interpreted as a reaction to a serious and imminent threat or crisis.

Just like in other areas of expertise and professions, financial traders and investors have their own sets of terminologies. They commonly use these jargons in communicating various concepts and information pertaining to the market. Stock brokers, market analysts, economists and investors are not the only ones who need to understand the various financial trading terminologies. Journalists, would-be investors and the general public can also benefit from understanding these various trading jargons. Knowledge to Action defines some of the most important trading terminologies. We will also continue to improve this list. Here are some of the important jargons that are commonly used in the financial market:

Account risk – refers to the percentage of an account that an investor is willing to invest.

Arbitrage – is a means of profiting from price and disparities in selling or buying the same or similar trading instruments in various financial markets.

Ask price – refers to the stock or currency value that a trader agrees to accept.

Base currency – is also known as the transaction currency. It is quoted against the value of the reference currency.

Bear market – refers to a downward or falling market trend.

Breakout price – is the price movement against a specific level of support or resistance. It is usually followed by market volatility.

Bid price – is the opposite of ask price. It is the stock or currency value that is willingly paid by the broker.


Bull market – it is the opposite of bear market trend. It is an upward market trend.

Buy stop – refers to an investor’s order to buy securities when triggered when the security price reaches or exceeds the current offering.

Broker – is the person or company that offers its services as an agent for an investor in buying and selling securities. The broker works in exchange of commissions.

Contingent order – is a conditional type of order that is executed depending on another order.

Daily chart – is the graphical representations of the trades done in a day.

Daily rolling cash – is the cash that allows an investor to rollover the money for spread betting the next day.

EoD – is the acronym for End of Day, which may refer to the closing of the trading day.

EMA – is the acronym for exponential moving average. It is similar to simple moving average but reacts faster in relation to the latest price change.

Forex – is the acronym of foreign exchange or foreign exchange market where currencies are traded.

FTSE – refers to the acronym of Financial Times Stock Exchange

FTSE 100 – refers to the share index of the top 100 most capitalised British firms.

FTSE 350 – is the combined share indexes of FTSE 100 and FTSE 250 companies.

FTSE 250 – is the share index of the next 250 most capitalised UK firms.

Good for date – is the expiration date of an order as specified by a trader.

Good for the day or GFD – is the order that expires within one trading day.

Good till cancelled or GTC – refers to the order that will be maintained in the order column not unless cancelled by the trader or triggered.

Indicators – refer to numerical values that are mathematically calculated based on the volume of securities being traded. They are used to predict future market trends.

If done order – refers to a conditional instruction for a trade to be entered if certain circumstances are present.

Intra-day trading – refers to trading transactions that are done during the hours that the market is open.

LSE – is the acronym for London Stock exchange.

Level – refers to the price specified by the investor at which trading may be entered or abandoned.

Leverage – this refers to using stocks, currencies and other financial instruments to boost the probability of increasing the amount and speed of the return of investment.

Long or long position – it refers to the buying of securities with the speculative expectation that the value of the securities will rise.

Limit order – is a strategy used to make profit and improve the trading price.

Margin – is the guarantee that an investor or property owner must entrust to serve as security or collateral against the credit risk of the broker.

Margin call – is issued by the broker when it is necessary for additional money or securities to be deposited to the account of the trader in order to maintain the minimum margin.

NTR – is the acronym for notional trading requirement, which is actually just another term for margin.

Offer price – it is otherwise known as the ask price, which is the minimum price that a broker will be willingly accept for security or currency.

OHLC bar – is simply the acronym for open high low close bar. It is a popular type of chart for securities used in analysing stock market data.

Open positions – refer to the current trade where an investor is engaged.

OCO – is the acronym for one cancels the other. It is an interdependent order that will be automatically cancelled when the other order is triggered.

P&L – is the acronym for profit and loss, which provide general summary of financial trading.

Paper trading – this is a type of financial transaction that does not involve the actual exchange of money. Securities and guarantees are used instead.

Position sizing – is a concept that simply presents the quantity or amount of money being invested.

Price action – it refers to the way securities and currencies move or fluctuate in term of price value.

Resistance – is the trade barrier that hinders the price from going up.

Resting orders – these are orders being held by a floor broker which may be triggered below or above the prevailing market prize.

Short selling – is the selling of securities that a seller does not own with the expectations that the value will decrease.

Stop-loss order – is a type of order that is sold by the broker when a security reaches a price threshold. This is done to limit the losses of an investor.

Spread – refers to the discrepancy between the ask price and the bid price of a security being traded.

Stake – is the monetary value that an investor or trader is putting on a trade.

Support – is an indicator that determines the price ceiling and price floor of a currency or security. It is the level where price has greater probability to bounce.

Trade risk – it is the differential between the entry level price and the stop-loss.

Trading platform – may refer to the software provided by the broker that allows investors to manage their accounts and trade electronically.

Technical analysis – is the evaluation of the security and currency trading trends based on statistical data.

Wall Street – refers to the original location of the Stock Exchange in New York City. The name is almost synonymous with the US stock market and financial centre.