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  5. Spanish Package Deal

    · sarrafx · 28.09.2012 07:14

    So it’s now all about Spain!
     
    It still defeats me that a country getting its house in (some kind of) order prior to asking for a bailout is positive for either risk appetite or the currency.
     
    As relief rallies go yesterdays was pretty impressive but does that really now mean that the market has gone away from the technically significant 1.2930 level?
     
    It seems there is always another potential banana skin on the horizon and already today we have seen dismal growth data from France. The French economy was flat in Q2 and grew at 0.3%YoY. German retails sales for August were also worse than expected.
     
    Back to Spain though and later today we see the results of the stress tests that have been performed on their banks. Additional capital requirements of over Eur 100 bio. are already in the market but this will lead Spain closer to a bailout request.
     
    It is ironic that yesterday’s 5th austerity package drew appreciation from the market which saw Spanish bond yields drop. Prime Minister Rajoy has said that he won’t ask for a bailout unless bond yields “remained too high”.
     
    The Spanish Government will raid for the first time a decade-old pension reserve fund that invests in government debt to pay for an increase in retirement payments.
     
    The Cabinet agreed to use 3 billion euros ($3.9 billion) from the 67 billion-euro reserve fund, Deputy Prime Minister Soraya Saenz de Santamaria told reporters yesterday in Madrid. It raised pensions 1% in the 2013 budget and indicated it would compensate retirees for above-forecast inflation.
     
    “The reserve fund is there to be used,” Budget Minister Cristobal Montoro said. “Politically, it’s very important” to maintain pensioners’ purchasing power.
     
    The pension reserve invests mostly in Spanish government bonds, and accounts for about 10% of the central government’s outstanding debt. The cache that has been built up since 2000 to safeguard pensions from the aging population is being raided as the 25% jobless rate undermines the welfare system’s revenue.
     
    This adds to pressure for Spain to ask for the bailout since it means less support for Spanish debt. It is clear that if the fund is being drawn upon it won’t then be able to invest in future bond issues.
     
    What conclusions can be drawn from Spain’s 5th austerity package? Read my views here

  6. Frayed at the edges

    · sarrafx · 27.09.2012 06:38

    The President of the Czech Republic, Vaclav Klaus, is in New York for the United Nations General Assembly.
     
    In an interview yesterday he made some very valid points regarding the peripheral countries and those on the outside looking to enter.
     
    He called himself a “euro-realist,” saying he supports European integration while not embracing the shift towards “unification, centralization, harmonization, standardization” of the whole continent, including the single currency.
     
    The term Euro-Realist would be a very good term to apply to those who have the vision to turn this potentially catastrophic situation around.
     
    Realism is sadly lacking but that is the stock in trade of many politicians.
     
    The issues facing Europe do not span a single term in office for any of the leaders so they continue with short term fixes that do not hinder their chances of being re-elected.
     
    The Czech koruna was the world’s best performer against the euro in the decade ended December 2010, advancing 40%. Investor confidence in the Czech economy is reflected in the nation’s 10-year local-currency debt, which yields 2.4%, compared with 4.8% for similar-maturity Polish bonds and 7.2% for Hungary’s.
     
    I simply use that data to illustrate Mr. Klaus’ economic credentials.
     
    He feels Greece is a “victim of the monetary union” and it’s better for them to not to be in the Union. “Leaving would be a victory”. This simply illustrates the flaws in the plan and failure of the whole system. What applies to Greece certainly applies to the rest of the PIIGS.
     
    Looking at those countries with a commitment, however loose, to join the Euro, the view of those outside looking in is very interesting.
    Regional apprehension about the euro has grown with Europe’s debt crisis. While euro-zone nations purchase more than half of the exports of eastern European nations, seven of the 10 former communist countries to join the EU since 2004 have yet to adopt the currency.
     
    Poland, which three years ago shelved plans to join in 2013, deems the euro “completely unattractive,” Prime Minister Donald Tusk said in July. Hungary won’t adopt the currency before 2018, Premier Viktor Orban said in March. Bulgaria has indefinitely delayed plans to scrap the Lev, Prime Minister Boyko Borisov told the Wall Street Journal in a Sept. 4 interview.
     
    The Czech Republic has an open ended commitment to join the Euro and Mr. Klaus concluded by saying “We accepted with some reluctance the prepared conditions for our entry into the EU. We were aware of the fact that joining the euro system was one of the conditions. But we are quite happy with the fact that there was no timing.
     
    Perhaps in the year 2074 we can join the European Monetary Union as well,” he said
     
    “No one is pushing us.”
     
    What does this mean for the Euro? The conclusions I have drawn from this are here

  7. Out of Control

    · sarrafx · 26.09.2012 05:57

    Is the situation in Europe out of control?
     
    It seems that more and more issues are piling up on the already unsolved problems that have been in existence virtually since the crisis began in 2008!
     
    Greece has apparently met only 22% of its responsibilities to cut spending under the latest bailout and has asked for a two year extension to its obligations.
     
    It is hard to imagine that Greece can survive within the Eurozone given its lack of ability driven by social unrest to meet the agreements it has signed.
     
    Want to Read more? http://www.sarrafx.com/en/view-blog-article/49/Out-of-Control

  8. Has the downtrend resumed?

    · sarrafx · 24.09.2012 08:31

    The market is now well and truly over the euphoria which greeted the EBC’s bond purchase scheme. It also didn’t murder the dollar when QE3 was announced.
     
    The global economy is struggling and there are fewer and fewer bright-spots for the market to focus upon. The Aud, the darling of the risk on brigade has given way to the JPY, the darling of the risk off brigade! We can’t consider the Chf anymore as it is heavily shackled by the SNB.
     
    Now it appears as though the Euro (the darling of no one it seems) has topped out as the market continues to digest the European leader’s ability to pass up every opportunity they manufacture to set their joint economy on the right track.
     
    Read More: http://www.sarrafx.com/en/view-blog-article/48/Has-the-downtrend-resumed?

  9. What makes market?

    · sarrafx · 21.09.2012 06:41

    What makes a market?
     
    Yesterday’s blog and subsequent discussion reminded me a lot of how things used to be.
     
    It is important that we share ideas. If it takes someone to be provocative or controversial to get people talking then that is a good thing for us all.
     
    For me it is to understand the mentality and thinking of the participants in these markets but I am also trying to help to broaden the horizons of those who are new to FX or trading in general.
     
    Want to read more? Go to http://www.sarrafx.com/en/view-blog-article/47/What-makes-a-market?
  11. I have been involved in FX markets in one form or another for 25 years and believe myself to have seen most things that can occur.
    For example I was in charge of the overnight desk at a major trading bank the night that sterling left the ERM! That is the single most incredible market move I have ever seen.
    I have executed billion dollar orders manually and seen stop losses get chased by traders because they see that as a legitimate market practice.
    In this business you are always learning and as such the retail business is something I have been studying and coming to terms with for a couple of years now.
    Read More at http://www.sarrafx.c.../38/Be-yourself

  12. Delaying the inevitable

    · sarrafx · 19.09.2012 06:57

    In much the same way that markets awaited the first week of September to see the market spring back into life and into the second week for the announcements and measures that would set the tone for Q4 we now await the next peak or trough on the rollercoaster.
     
    Last weeks’ information has been digested and markets looked on Germany, The ECB and The Fed as positive for risk but not so positively that they feel we should shoot for the moon and stars.
     
    The Euro has been on a huge rally that has taken it 1100 points higher from the low seen in July. A correction of 50% of that rally would be a popular technical view and the pullback from the high has to some extent already started that move.
     
    Read More: http://www.sarrafx.com/en/view-blog-article/45/Delaying-the-Inevitable

  13. Know your market

    · sarrafx · 13.09.2012 11:00

    In the banks I have worked in, all the traders specialized in one , two or a maximum of three currency pairs and that was all they traded.
     
    The reason for this is that they got a "feel" for their market and understood what was happening, could align technical and fundamental analysis. This gave then an all round view of those currencies and was a major factor in making them money.
     
    It is important when trading currencies to have that "relationship" with the currencies you follow to build up a rapport with the market.
     
    I genuinely feel that spreading oneself thinly simply because you see a signal on a chart is not a particularly successful policy.
     
    I see a number of people talking about what I would consider "esoteric" trades in crosses like Nzd/Cad or Aud/Chf.
     
    To me that is a reason why it is so difficult to make money in these markets.
     
    It is very easy to become "married" to a trade like that and, particularly for short term traders there is plenty of opportunity concentrating on, say, Eur/Usd, Gbp/Usd and Aud/Usd.
     
    Yes these are all dollar based pairs but the opportunities from getting to know how the market for these pairs react in every situation will bear fruit in a way chasing profits from one off trades never can.
     
    It is easy and frankly glib to say that the interbank market bears no resemblance to retail but the truth is that there is only one price and that is interbank and that drives every market, cross and derivative.
     
    Not taking notice of how that market operates is a recipe for disaster.

  14. Euro Analysis

    · sarrafx · 13.09.2012 09:19

    With the event risk ahead and the market slightly in over bought zone and the monthly trend line acting as resistance further gains on close basis would be difficult.
     
    Now that the ongoing momentum took the pair towards the 1.2900 plus zone, one can expect a failure.
     
    Dollar bulls lost the plot across the board.
     
    Presently Euro price action is near 34 WMA and the Ichimoku has not thrown any change in the trend.
     
    As we have been indicating in the big picture 1.2780 is the conversion point for bulls and bears and the longer the euro bulls stay around these levels the bigger is the threat for the dollar bulls.
     
    Intra-day supports around 1.2870 resistance around the 1.2940 area are the two focal points. Bias is bullish. Near term however we would attempt on the short side as the rally is overdone.
     
     
     
     
    Strategy : Sell here and 1.2945 Stop Loss:- 1.3022 Profit:- 1.2780

  15. What is a Carry Trade?

    · sarrafx · 12.09.2012 10:42

    By early 2007, it was estimated that some US$1 trillion may have been staked on the yen carry trade.
    The risk in carry trading is that foreign exchange rates may change to the effect that the investor would have to pay back more expensive currency with less valuable currency.
    In theory, according to uncovered interest rate parity, carry trades should not yield a predictable profit because the difference in interest rates between two countries should equal the rate at which investors expect the low-interest-rate currency to rise against the high-interest-rate one. However, carry trades weaken the currency that is borrowed, because investors sell the borrowed money by converting it to other currencies.
    By early year 2007, it was estimated that some US$1 trillion may have been staked on the yen carry trade.
    Since the mid-90's, the Bank of Japan has set Japanese interest rates at very low levels making it profitable to borrow Japanese yen to fund activities in other currencies. These activities include subprime lending in the USA, and funding of emerging markets, especially BRIC countries and resource rich countries.
    The trade largely collapsed in 2008 particularly in regards to the yen.
    The 2008–2011 Icelandic financial crisis has among its origins the undisciplined use of the carry trade.
    Particular attention has been focused on the use of Euro denominated loans to purchase homes and other assets within Iceland. Most of these loans defaulted when the relative value of the Icelandic currency depreciated dramatically, causing loan payment to be unaffordable. This was also true in a number of Eastern European countries.
    The US dollar and the yen have been the currencies most heavily used in carry trade transactions since the 1990s. There is some substantial mathematical evidence in macroeconomics that larger economies have more immunity to the disruptive aspects of the carry trade mainly due to the sheer quantity of their existing currency compared to the limited amount used for FOREX carry trades, but the collapse of the carry trade in 2008 is often blamed within Japan for a rapid appreciation of the yen.
    As a currency appreciates there is pressure to cover any debts in that currency by converting foreign assets into that currency, so this can be an accelerating effect in currency valuation changes. When a large swing occurs, this can cause a carry reversal. The timing of the carry reversal in 2008 contributed substantially to the credit crunch which caused the 2008 global financial crisis, though relative size of impact of the carry trade with other factors is debatable.
    A similar rapid appreciation of the US dollar occurred at the same time, and the carry trade is rarely discussed as a factor for this appreciation.

  16. Success in Margin Trading

    · sarrafx · 12.09.2012 10:38

    Before getting started with a live account using your own funds open a demo or practice account (with Sarrafx). Use that account first of all to navigate around the site and monitor how it functions.
    Get to know the platform as you aren't really ready to trade yet understand the functionality you can't do any harm. It is more than "kicking the tyres". Hopefully going forward this will be the engine that drives your profits.
    FX margin trading and indeed all FX trading is driven by two major factors; Fundamental Analysis and Technical Analysis.
    Forex trading technical analysis is the study of charts of past price movements to determine future price action. Please take a look at our Autochartist funtionality to learn more.
    Fundamental Analysis is the study of the effect of global activity on the market. Data releases, political activity, natural disasters etc. all have an effect on the movements of currencies. An active study of various news providers like Bloomberg or Reuters will provide number of links to relevant news stories. Access to a FX economic calendar is also important. Click the link to view ours.
    Once you feel comfortable it is time to consider a first trade in the demo account.
    As you have gone along certain things will have become clear and they should form the basis of your first trade.
    As you learn more about price action you will understand what moves markets. This is something that is impossible to teach or to put a time frame upon.
    However once you feel comfortable and that doesn't necessarily mean having a run of successful trades it is time to open a live account.
    Trading with your money is VERY different from a demo account.
    Discipline is everything!
    There are five rules which will help you to become successful in financial trading and currency exchange:
    1) Only trade when you feel that its is right to take a position
    2) be disciplined with your orders.
    3) Make sure all the indicators in your strategy point to making a trade
    4) Always stick to your profit taking levels
    5) Understand why you lost money on any particular trade.
    6) Accept when you are wrong. This article contains a very sensible idea.

  17. The Concept of Leverage

    · sarrafx · 12.09.2012 10:36

    more general explanation of this term can be found in the glossary section of education corner on our website www.sarrax.com.
    In the retail foreign exchange market, the term leverage determines the amount of risk an investor is able to take as a multiple of his margin.
    Clearly, the higher the leverage, the more at risk his capital (or margin) is at.
    For example, an investor places Eur 10,000 in his margin account. At his account opening, he has specified that he wished to trade with a leverage of 1:100.
    That is to say he can trade with an open position of Eur 1,000,000 (10,000x100).
    If he were to trade Eur/Usd in an amount of Eur 1,000,000, each pip of movement in the price is Usd 100 (Eur 77).
    Therefore his total capital would be at risk if the price moved approx. 130 points against him. Obviously it is not prudent to “put all your eggs in one basket” but this simply illustrates the way risk is magnified by leverage.
    Equally, were the markets to move in the investors favour, a move of 130 points would double his money.
    This is both the beauty and reality of the retail forex market. The key to making money is to be disciplined. Refer to the five golden rules to learn more about discipline

  18. Forex Factory

    · sarrafx · 12.09.2012 10:35

    In the not so distant past before communication reached the level it is now, pricing FX transactions was extremely slow and complicated.
    For example, slang for the Gbp/Usd rate is "cable. This is because each price was made by cable (or telegraph) and as markets didn't move like they do today it could take the best part of a day to receive a request, make a price and confirm a deal.
    Contrast that with todays FX markets where trades take place in milliseconds.
    In the City of London, still the worlds largest financial market, there were over 350 banks all with trading rooms. The smallest had one or two traders trading major currencies and a money market dealer handling funding. The largest had a trader for each currency pair and one for each cross (e.g. Usd/Jpy, Eur/Usd & Eur Jpy). The correlation between what happens in the majors and crosses makes this essential in major institutions.
    A corporate desk handles all client business and there is often a separate, smaller, trading desk to handle clearing their business.
    Now there is also a desk which handles electronic business but a lot of this is covered by the two sided nature of the business.
    When you trade fx, it eventually comes to the electronic desk and is aggregated along with every other deal the banks clients are transacting.
    The market was structured in a reasonably flat manner in the past with all market practitioners having access to brokers who had live prices from banks who would "support the market".
    Voice brokers would relay the prices via a microphone which would be heard via loudspeakers on the traders desk. Voice broking gave dealers a better "feel"for the market as the movement in the market and the volume of business being transacted was often portrayed in the voice of the broker. Interbank dealers dealt far more on instinct that they do now. When the first screen based brokers were introduced, the market became more clinical and less emotional.
    As banks started to introduce their own platforms which they gave to tier two banks (non market-makers) and their clients the pyramid effect was born.
    Now the markets are driven by liquidity and they have lost in emotion is more than made up by efficiency. The pyramid structure is controlled at the top by maybe ten banks who have the ability to clear large trades amongst themselves. They in turn price markets very aggressively and second tier banks use that pricing for their own business and clients.
    Further down the pyramid come the retail clients who still achieve tighter spreads than banks were able to command five years ago.
    Liquidity and spread are the main drivers of the forex factory now but it is a more controlled market now.

  19. Experience is Everything

    · sarrafx · 12.09.2012 06:51

    Suppose for a moment you are given the opportunity to drive a two seat saloon car around Brands Hatch or Hockenheim race tracks.
     
     
    Would you opt to do it either alone or with another novice driver or would you opt to have Michael Schumacher sitting next to you?
     
     
    Of course most of us would choose Michael Schumacher. More of this later!
     
     
    The interbank market is the driving force of the price action in FX markets yet to all but a handful of retail or margin trade its workings are a mystery.
     
     
    The statistics for success in FX markets are well known.
     
     
    It is likely that those who are able to trade successfully are those who have a good knowledge of how interbank markets operate; How false breaks are created, how a trader can “spoof” the market. These are the “tricks of the trade” that have been used by traders since long before retail trading existed yet there are very few day traders who know they even exist. Some market moves are a mystery to a number of day traders yet they are “all in a day’s work” to an experienced interbank trader.
     
    Gaining an understanding of technical analysis requires some mathematical knowledge and fundamental analysis requires the trader to follow basic economics. These skills can be taught and frequently are in a number of quite expensive training modules. Even having spent a fairly large sum of money learning the basics of FX trading, the success rate among traders is still not that high.
     
     
    You can now follow other traders who are, in essence, similar to you.
     
     
    Getting back to Michael Schumacher for a moment, that is like following another novice driver like yourself as Michael stands in the pits no doubt giggling to himself!
     
     
    Just about every retail, margin or day trader lacks the one ingredient that will make them successful.
     
     
    That ingredient is interbank experience.
     
     
    Trading with Sarrafx is like having Michael Schumacher in the car with you. Our trading experience is second to none.
     
     
    Our team have been successful interbank dealers in some of the largest trading banks in the world. We can interpret price action and order flows and pass on useable, tradable knowledge to our clients to give them the advantage that no amount of study can give them.
     
     
    To trade with Sarrafx is to Trade with Awareness!
     
     
    We are Sarrafx. We ARE Different.

  20. Todays Risk/Reward Trade

    · sarrafx · 12.09.2012 06:46

    Today's Risk/Reward trade
     
    Today we see the decision of the German Constitutional Court on the legality of the ESM.
     
    Markets are on the starting blocks to buy Euro assets of every type and see the 1.30 level against the USD as ready to be broken in an instant.
     
    Being contrarian for a moment and looking at the possibilities that the court either finds the ESM illegal (unlikely) or attaches some quite major conditions (possible) where will the Euro trade then.
     
    Technically the Euro looks overbought and even in the case that the court finds unconditionally in favour of the ESM how far can the Euro go?
     
    Then what?
     
    We still have Greece, Spanish banks, unpopular austerity in a number of countries, today’s Dutch elections and many other hurdles to pass. Overnight, Moodys stated that the newly announced bond purchase scheme buys more time but is not the cure for what ails peripheral countries.
     
    So, is not the risk reward trade to be short Euros today? Albeit with a very tight stop loss!
    An upside of 1.3000 vs. a downside of at least 1.2480 seems to favour just such a trade.
    It remains to be seem what the market actually aspires to but when something seems too good to be true it usually is and there are no one way streets in these markets

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