Forex Trading Strategies Blog

While, there is a plethora of factors that govern the value of a currency, the overall economic health of a nation sets the long term perspective for the currency. However, other factors like government control may block the free movement of the currency and its trading value may not reflect its true value.

Let’s take the example of India and China. India’s currency is not fully convertible and its value is determined by a managed float. Under a managed float, the central bank of a country intervenes in the Forex markets by buying and selling foreign exchange so as to avoid sharp fluctuations in the domestic currency’s value. However, a managed float usually reflects the true value of the currency sans sharp fluctuations. In effect, the central bank soft lands the domestic currency. The strong growth that India has experienced in the last decade is well reflected in the value of its currency, which has gone up from INR 49 to the US dollar to INR 43 to the US dollar over the same period.

China on the other hand has not allowed its currency to appreciate even though their economy has posted exuberant growth. This is well reflected in the huge foreign currency reserves that the country has accumulated. The chief reason for this is that if they allow their currency to appreciate, their export produce will become more expensive for their trade partners and China will lose out substantially on their export income. Exports as of now are China’s main GDP growth driver and China is extremely averse to allow its currency to appreciate.

Viewing this in another way, China’s undervalued currency gives it an unfair trade advantage over other nations that compete for the same export market. Hence, China is facing pressure from several countries to allow its currency to appreciate and align to its market value. Of late, China has succumbed to the pressure and allowed a minor appreciation in its currency, but a huge correction is overdue.

The US dollar, considered the world’s reserve currency, is a reflection of the strength of the US economy. The US economy is the largest economy in the world and quarterly growth results tend to impact the value of the currency in the short term. Another key factor that affects the value of the dollar is the interest rates that the US Fed sets. If the Fed raises the interest rates, people would want to invest more money in government treasury bonds and the demand for the dollar goes up. People would sell other currencies to buy dollars leading to an increase in its demand. As the demand goes up, its price goes up, which gets reflected in a strengthening of the dollar. The opposite happens, when rates are reduced.

However, markets never wait till the Fed actually makes the announcement or till quarterly growth results are released. Markets factor in expected information and the dollar moves in anticipation. On Jan 27, markets factored in an anticipated strong-growth announcement and the US dollar moved upwards.

Another factor that is upping the value of the dollar is the anticipation that the Fed will raise interest rates in the coming week to 4.5 percent. However, the Fed has been raising the rates continuously for over a year and the expected medium term trend is that the Fed will not be raising rates after the next hike. This broad expectation has led to an overall dampening in the dollar through the last few months.

The Canadian dollar has fallen against the US dollar. The US dollar dropped below 1.15 against the Canadian dollar in the first time since December this week.

Yesterday, the forex market opened with US dollar trading at 1.1507 against the Canadian dollar. This is higher than the previous low of 1.1461.

The Canadian dollar has been strong lately as analysts expect the Central bank will increase the interest rates. However, this is not continued to last, and the US dollar is expected to go up towards 1.1650 cdn.

After the recent release this week, of the FOMC, the US dollar dropped the lowest in one day since Sept 11, 2001 during this week of trading.

The dollar was steady when trading began in 2006, but the looming FOMC report and subsequent hint that the Federal government has will increase interest rates, rattled investors who quickly sold the dollar before the report was released.

This did occur and the interest rate was increased by 4.25 pct. The dollar continued to remain low, especially after the release of weak economic data for the manufacturing industry, and the higher oil prices have not helped to strengthen the dollar.

After revaluation of the Chinese Yuan, the currency closed at 8.0675, as opposed to the 8.0702 it was previously trading at. The new value for the Yuan was determined after reviewing quotes from the commercial banking sector.

The Yuan has been known to fluctuate over a 0.3 percent range, and has grown 0.52 percent since the middle of summer. During this time the Chinese government appreciated the Yuan to 8.11, which was a 2.1 percent gain.

HSBC was one of the few banks chosen to submit quotes on the price of the Yuan. Its CEO Richard Yorke is quite pleased with the new value of Yuan, as he feels the new system being implemented by China is “highly efficient and smooth”. Against the Euro, the Yuan is fixed at 9.7091.

In anticipation of the Federal Reserve minutes that will be released today, the dollar dived as many investors returned to work from their holidays and began selling the dollar.

The Federal Reserve minutes is expected to be released at the FOMC (Federal Open Market Committee) meeting. It is during this meeting that market analysts have been predicting that the Feds will use these minutes to announce an interest rate hike.

The minutes combined with the release of the ISM index, which showed a decline in December from 58.1 in November to 54.2 in December, did not help to keep the dollar strong.

The euro traded against the dollar at $1.1968, which is 1.2% higher than yesterday. However, the dollar fell against the Yen by 1.3% to 116.33. However, the greatest change was seen when the dollar dropped when traded against the Swiss franc to 1.2934 francs. This was the lowest its traded at in the last two weeks.

Recent information released from Japan has shown that the country has spent large amounts of money to decrease the appreciation of the Yen.

Even though Japan has vehemently denied it, many of the forex trading analysts have pointed the finger at Japan for the country allegedly trying to hold down the value of its money.  But yesterday the Japanese finance minister announced that his government has not intervened for the past 21 months.

The information that was released showed that between 2003-2004, Japan spent over 35 Trillion Yen ($350 Billion US) in order to hold down the Yen’s appreciation versus the dollar.

This amount was purchased on the open market. However, since Japan’s influence in 2004, it seems as if there truly has been no intervention by the government against the Yen, and the Yen’s current market value is actually reflecting the state of the economy. For more information visit the article on forbes.com.

The dollar was strong today, as the world entered a New Year. However, economic analysts advised that much of the US and the UK are still on holidays and this has helped the dollar to remain firm.

However, as previously discussed in the blog, it is expected that the Federal government will announce an interest rate hike sometime tomorrow or by the end of this week, which will greatly affect the dollar. According to Michael Klawitter, strategist at WestLB, “Tomorrow’s FOMC minutes are expected to emphasize the solid growth and potential inflationary impact in the US economy, thereby leaving the door open for hiking fed funds beyond 4.50 pct,” Klawitter stated.

Other than the increase in the interest rates, the monthly ISM survey will be released outlining an increase of 200,000 jobs. This will also have an impact at value in which the dollar is traded at.

As noted in previous blogs, it will be also interesting to see how the possible upcoming announcement of an increase of interest rates by the ECB will affect the dollar and the European currencies it trades against.

In an article appearing on Bloomberg.com, the ECB member Guy Quaden has hinted as a possible interest rate hike that might soon be announced. This will be a second rate hike in a matter of months if this occurs.

Quaden outrightly stated that he feels that interest rates cannot forever remain low, but would “not return to the high rates of the 1980’s.”However, this news is not being welcomed by many people in the EU countries. Many of these countries had wanted to start the New Year in a stable manner, before the cost of borrowing is increased.

Quaden also went on to say that if the interest rates are increased, many of the European Union countries will be able to adjust, and that it was “important for the EU to keep pace with inflation.”

In an unexpected move, the Seoul Foreign Exchange Market Committee announced that it would limit access to information used by many people for Forex trading. This information instead will only be made available to banks and other select financial institutions.

This unexpected move by South Korea is in an effort to limit the volatile Korean Won. Seoul officials hope that will less information the Won will stabilize and remain a cheaper currency.

The government has also recently announced a deregulation scheme as well that was implemented today. Based on this, it raised the ceiling for overseas direct investments by Koreans to $3 million, up from $1 million.

With this announcement comes after the Won’s rise by 5% in the past 120 days. South Korean officials that in an effort to depreciate the Won, limiting access to Forex information should help. This is due to the fact that in the past many offshore traders with large amounts of cash was contributing to the volatile movements of the Won. Thus limited access only to banks for Forex quotes will decrease speculation on the fall and rise of the Won.