Example
01/05/2007: Gold Down 2.45%, U.S. Dollar Index Up 0.22%. Difference = 2.22%
It looks like gold has overdone it compared to the U.S. Dollar Index movement, so we expect gold to drop tomorrow to close the gap.

Results:

01/05/2007
Gold Down 2.45%, U.S. Dollar Up 0.22%,
Expectation: Gold Up Tomorrow
What Happened = Gold Up 0.55% (Profit)
Running Profit = 0.55%

01/12/2007
Gold Up 2.39%, U.S. Dollar Down 0.30%,
Expectation: Gold Down Tomorrow
What Happened = Gold Down 0.32% (Profit)
Running Profit = 0.87%

01/23/2007
Gold Up 2.29%, U.S. Dollar Down 0.11%,
Expectation: Gold Down Tomorrow
What Happened = Gold Up 0.20% (Loss)
Running Profit = 0.67%

02/21/2007
Gold Up 3.04%, U.S. Dollar Down 0.07%,
Expectation: Gold Down Tomorrow
What Happened= Gold Down 0.13% (Profit)
Running Profit = 0.80%

02/27/2007
Gold Down 3.65%, U.S. Dollar Down 0.50%,
Expectation: Gold Up Tommorrow
What Happened = Gold Up 1.11% (Profit)
Running Profit = 1.91%

03/02/2007
Gold Down 3.31%, U.S. Dollar Up 0.03%,
Expectation: Gold Up Tomorrow
What Happened = Gold Down 1.05% (Loss)
Running Profit = 0.86%

08/16/2007
Gold Down 2.30%, U.S. Dollar Down 0.12%,
Expectation: Gold Up Tomorrow
What Happened = Gold Up 0.80% (Profit)
Running Profit = 1.66%

09/06/2007
Gold Up 2%, U.S. Dollar barely moved,
Expectation: Gold Down Tomorrow
What Happened = Gold Up 0.67% (Loss)
Running Profit = 0.99%

11/15/2007
Gold Down 2.78%, U.S. Dollar Up 0.69%,
Expectation: Gold Up Tomorrow
What Happened = Gold Down 0.30% (Loss)
Running Profit = 0.69%

11/20/2007
Gold Up 2.87%, U.S. Dollar Down 0.38%,
Expectation: Gold Down Tomorrow
What Happened = Gold Down 0.44% (Profit)
Running Profit = 1.13%

We were right on 6 out of 10 trades, taking home 1.13% profit for the year. While this certainly isn’t a big amount, the fact that we only had our capital tied up for 10 days counts. Another thing to look at could be whether a stop could be used to reduce our loss on days we’re wrong.

A. Currency is traded in pairs (for example AUD/USD), the cross rate refers to how much of one currency you can buy by selling the other. If the quote for the AUD/USD is 0.94, this means I can buy 0.94 USD (94 cents) for every $1 AUD I own.

Now, lets say I believe the AUD is going to rise in value in relation to the USD based on some news I read. I could take out an AUD/USD position with a Forex Broker. In the Forex broker platform all I need to do is click BUY on the AUD/USD quote and enter the quantity I want.

Example:

BUY AUD/USD @ 0.9400
(the base currency for the AUD/USD is the AUD, so 1 mini Forex contract would result in buying $10,000 AUD)
COST = 10,000 x 0.9400 = $9,400 USD

I decide to hold the currency for 2 months, here’s what happens every day in my account:
- At the end of the day my profit/loss is calculated and added or subtracted from my account balance.
- I get credited with the difference in interest rates between the AUD/USD, currently the AUD yields 7.73% and the USD yields 3.01%. The difference therefore is 4.72%, this works out to approximately $9,400 x 4.72% / 365 = $1.22 USD per day.

Over the 2 months it turns out I was right and the AUD/USD price is now 0.9815 and I decide to close the position. I do this by clicking on the open position in my Forex broker platform and selecting close trade, or I could also do it by clicking SELL on the AUD/USD quote and entering the same quantity as I bought.

SELL AUD/USD @ 0.9815
PROCEEDS = 10,000 x 0.9815 = $9,815 USD

PROFIT = $9,815 – $9,400 = $415 + interest

Now, wouldn’t it be nice if my Forex broker let me do this for free? Of course, but that isn’t the case. In fact, my Forex broker charged me when I bought the AUD/USD through the spread. In the quote window for the AUD/USD at the time there were two prices, 0.9400 / 0.9396, the difference between the two prices is referred to as the spread and is 0.0004 or 4 pips in this case and is charged when you BUY a currency pair. This 4 pips equals 10,000 x 0.0004 = $4 and is included in the BUY price.

Currency trading can be performed 24 hours a day 5 days a week, through Forex Brokers.

The best time to trade the Forex market is when there is plenty of action and a large volume of trades, during these times currencies make their big moves providing the Forex trader with opportunities to profit.

There are several major Forex trading sessions, these are; New York, London, Sydney and Tokyo. The biggest currency moves and volume generally occur when two of these markets overlap.

The Forex Trading Hours are therefore (in EST);
New York / London – 8:00 am – 12:00 noon
Sydney / Tokyo – 7:00 pm – 2:00 am
London / Tokyo – 3:00 am – 4:00 am

The most active currency pairs in these hours are as follows;
New York/London
- EUR/USD
- USD/CHF
- GBP/USD
Tokyo/Sydney
- EUR/JPY
- AUD/USD
- USD/JPY
- AUD/JPY

Using this information you can determine which currency pairs should be traded for each trading session to maximize your chance of finding profitable trades.

The most active days for trading Forex are: Tuesday, Wednesday and Thursday. The Sunday opening and Monday are generally low volume days as traders are using the time to analyze the market and determine strategies for the coming week. Friday can also be a low volume day with most trading completed before noon, as traders close positions and knock-off for the weekend.

Forex investors have already priced in a 50 basis point cut to the value of the USD. Investors expect a 50 basis point cut will see an increase in the value of gold, while a lesser rate cut could see a correction in the price of precious metals.

With economic data today pointing towards a slowing economy with growth in private sector unemployment, there is concern that the 50 basis point cut stock market investors are hoping for may not happen.

While a falling stock market has been proven to consistently boost the value of gold, the precious metal could find itself under pressure as investors and funds are forced to close profitable positions to cover losses elsewhere.

Silver hit a 27 year high yesterday at $16.79 per ounce, with some investors cashing in on profits.

It is expected the Fed will announce its interest rate decision around 7:15 pm GMT.

The latest release of minutes from the Federal Open Market Committee meeting (FOMC) revealed that Fed officials are uncertain about the future interest rate direction and are concerned about short term inflation.

Forex Investors reacted to the release of minutes from the FOMC by continuing to reduce their USD holdings, this saw the Euro rise to a high of 1.2650 USD overnight from 1.2590.

The minutes were consistent with the Fed chairman’s Ben Bernanke’s testimony to Congress over the past two days in which he suggested that a pause in rate hikes would be a possibility if economic data continues to point towards slower growth.

Forex Investors holding USD also found little comfort in the recent Philadelphia Federal survey for July which fell to 6.0 index points, well below market expectations of 12.0 index points.

In upcoming events for next couple of weeks, the Federal Beige Book summary of economic conditions will be closely watched as will the next durable goods orders data and the next release of gross domestic product (GDP).

Though the quarter point hike in the Fed funds rate to 5.25 pct was expected, the rate-setting Federal Open Market Committee cautioned about the outlook for growth. In response to the statement, the Fed funds futures now attach a 65 pct of another rate hike in August, down on 80 pct predicted before.

‘Its accompanying statement, perceived as more dovish than expected, led to a decline in the dollar and a rally in equity markets,’ said Ian Stannard, currency strategist at BNP Paribas.

Though Stannard is ‘dollar bearish’, he said there is ‘no reason yet to expect the dollar to fall out of bed’, adding that this Friday’s crucial US labour market report has the potential to help the US currency rebound.

A number of currency watchers also think the dollar’s move lower since the Fed statement last week has been overdone.

‘Although the post-Fed trading environment has been characterised by a significant and dollar negative shift in the relative yield structure, the scale of the FX move still looks excessive,’ said Steve Pearson, currency strategist at HBOS.

Importantly, he said pressure on the dollar has been compounded by a renewed appetite for riskier assets, particularly in emerging markets. This renewed appetite has sucked out significant capital from US markets, he added.

The focus on the Fed over recent days has masked a further ratcheting up in European interest rate forecasts following strong euro zone economic news, particularly in Germany, and hawkish commentary from ECB officials, most notably from Yves Mersch, Luxembourg’s central bank governor.

Yesterday release of the euro zone manufacturing PMI survey further reinforced expectations of more aggressive tightening from the ECB.

The main PMI expanded at its fastest pace in nearly six years during June, rising to a seasonally adjusted 57.7 in June from May’s unrevised 57.0. The rise was slightly higher than anticipated. Analysts polled by AFX News had predicted a more modest increase to 57.5.

The data and the commentary have combined to reinforce expectations that the central bank will itself raise its main cost of borrowing in August by a quarter point to 3.00 pct. The ECB has raised interest rates a quarter point every three months since December. If that profile were sustained, another hike would not be due until September.

Meanwhile, the pound was solid following the news that the manufacturing sector saw output rise at its fastest rate in nearly two years during June.

The purchasing managers’ index of manufacturing activity in the monthly Chartered Institute of Purchasing and Supply survey rose to 55.1 in June from an upwardly revised 53.5 in May — the previous May figure was 53.2. The June figure was the highest since July 2004. June’s PMI surprised the market. Analysts polled by AFX News had predicted a modest decline to 53.0.

‘While the survey is unlikely to have a major impact on the Bank of England’s thinking, it modestly bolsters the case for an interest rate hike before the end of the year,’ said Howard Archer, analyst at Global Insight.

SOURCE: AFP

However, he told Reuters in an interview that a shift remains the bank’s long-term objective.
“The board is making the decision but it has not taken the decision yet,” he said on the sidelines of a conference in London.

“The UAE economy is evolving and it is important to diversify (Forex reserves). We need to diversify, not for any reason except that we have to move away from just (having) a single currency. Otherwise you get caught in the wrong corner. Diversification is a long-term objective.”

The central bank of the UAE has been keeping markets guessing about its plans to convert 10 per cent of its reserves from US dollars to euros, announced earlier this year. UAE central bank foreign reserves, which stood at $23 billion in December, are held almost entirely in US dollars.

“We do have a high ratio of dollars but this is appropriate because the US dollar is the currency for international trade and for investment,” Al Suweidi said yesterday.

The central bank controls only part of the foreign exchange reserves of the UAE. Other major holders include the investment arms of the emirates’ governments.

Some analysts say official Forex reserves make up less than 10 per cent of Gulf Arab government holdings.

The UAE is one of six members of the Gulf Cooperation Council (GCC) along with Saudi Arabia, Kuwait, Qatar, Bahrain and Oman.

SOURCE: Khaleej Times Online

JON’S COMMENT
Another bearish sign for the US Dollar as many countries now plan to diversify their Forex reserve away from the Dollar toward Euros or even Gold.

The Euro fell to 1.2637 dollars in early European trading from 1.2659 dollars late on Wednesday in New York.

The USD climbed to 115.14 yen from 114.86 yen on Wednesday.

In Asian trading, the USD had extended losses ignited Wednesday after European Central Bank chief Jean-Claude Trichet raised expectations for further rate increases in the eurozone.

Despite a slight rebound, “the dollar remains under selling pressure against the euro, pound and Swiss franc”, said Derek Halpenny, senior currency economist at The Bank of Tokyo-Mitsubishi in London.

However the US currency remains stable against the yen as speculation grows of a Japanese rate hike in July, he added.

Meanwhile sterling fell against rivals after David Walton, the only Bank of England policymaker to call for an increase in British interest rates earlier this month, died suddenly late Wednesday.

“It is with great sadness that the Bank of England has learnt that David Walton, an external member of the Monetary Policy Committee, died yesterday evening, unexpectedly and after a short illness,” the central bank said in a statement. Walton was 43.

The Bank of England’s rate-setting MPC voted 7-1 to keep British borrowing costs at 4.50 percent, minutes of the June 8 meeting showed on Wednesday. It was the tenth month in a row that the BoE froze its key “repo” rate — the rate at which the central bank lends to commercial banks.

The market meanwhile turned cautious on the yen, which had risen earlier this week as Bank of Japan governor Toshihiko Fukui sparked fresh speculation of an end to the central bank’s unconventional zero-interest rate policy.

The euro was changing hands at 1.2637 dollars against 1.2659 on Wednesday, 145.50 yen (144.74), 0.6871 pounds (0.6838) and 1.5635 Swiss francs (1.5593).

The dollar stood at 115.14 yen (114.86) and 1.2370 Swiss francs (1.2355).

The pound was being traded at 1.8393 dollars (1.8456).

SOUCE: AFP

Long standing concerns about the size and sustainability of New Zealand’s current account deficit were rekindled by the worse-than-expected data.

“The current account deficit is 9.3 percent of GDP, much too high for the market’s liking, particularly as attracting capital flows is becoming more difficult,” said Ashley Davies, currency strategist at UBS in Singapore.

The kiwi fell immediately following the release of the data, and later dropped further on comments by ratings agency Standard and Poor’s that the deficit remained a risk for New Zealand’s sovereign rating.

Investors had been expecting the current account deficit to worsen but were taken aback when the annual deficit hit a record NZ$14.54 billion ($9.03 billion) driven by poor trade performance and foreign investors repatriating hefty profits from their New Zealand assets.

Economists generally agreed that the deficit had a little further to go before it peaked, but ANZ-National Bank’s head of market economics Cameron Bagrie doubted it would be the determining factor in any further weakness in the kiwi.

“To get the second big drive lower in the New Zealand dollar from here I think is still yield-dependent, as opposed to being dictated by an imbalances theme,” Bagrie said.

Attention now turns to Friday’s first quarter growth data, with a soft number likely to be a catalyst for another lurch lower in the kiwi.

SOURCE: REUTERS

After seven consecutive sessions of gains in the dollar against the Euro, traders trimmed their positions after the Consumer Price Index data cemented the chances of a June Fed rate hike but shed little light on policy moves beyond that.

“The June rate hike was already priced in by the market,” said Marc Chandler, head of global currency strategy with Brown Brothers Harriman in New York.

“Although there’s a slight bias in the market towards another rate hike in August, the May CPI data doesn’t really help us judge what the Fed will do that far out,” he added.

“Short-term players were long dollars going into the data and got squeezed a bit,” said a currency trader with an asset management firm in New York.

The “core” consumer price index, excluding food and energy prices, rose a greater-than-expected 0.3 percent and the annual rate edged up to 2.4 percent, exceeding the upper threshold of what some Fed officials consider acceptable.

Growing expectations that the Fed will raise rates this month and possibly beyond, as well as a diminished appetite for risk, have boosted the U.S. currency this week.

Futures market have fully priced in a quarter percentage point rate hike by the Fed on June 29, the 17th such increase in two years. Traders will now look to the potential for the Fed to raise rates once again at its August meeting.

“The issue now is after June,” Greg Anderson, senior foreign exchange strategist with ABN-AMRO Bank in Chicago, said. “To be fair, the Fed doesn’t know and we don’t know. It will depend on the data,” he said.

Markets are expecting further euro zone rate hikes after the European Central Bank raised rates by 25 basis points to 2.75 percent last week, but investors have scaled back their expectations for the pace of tightening after comments by ECB President Jean-Claude Trichet following the meeting.

Fed officials including Chairman Ben Bernanke have made clear their concerns about inflation risks in the past week, cementing expectations for overnight rates to rise at the Fed’s next policy meeting on June 28-29.

SOURCE: Reuters

JON’S COMMENTS:
Well, I really thought that this news should have given the US Dollar a bit more of a break although I had a bearish view on it and knew this rally should remain fairly short lived. It really turned around quicker than I expected today so let see how it plays up in the coming days/week. My bearish dollar sentiment is surely reinforced here.

The Russian Central Bank’s move ties in with increasing signs that Middle Eastern oil exporters are also looking to diversify their reserves out of the dollar. “This is a bearish development for the dollar,” Chris Turner, head of currency research at ING Financial Markets, told the British Financial Times. “It reminds us that global surpluses are accumulating to the oil exporters,and Russia is telling us that an increasingly lower proportion of these reserves will be held in dollars. This suggests there is a trend shift away from the dollar.”

Clyde Wardle, senior Emerging Market Currency strategist at HSBC, told the paper: “We have heard talk that Middle Eastern countries are doing a similar thing and even some Asian countries have indicated their desire to do so.”

Moscow’s move was unsurprising. Russia’s $71.5billion Stabilization fund, which accumulates windfall oil revenues, is due to be converted from rubles to 45 percent dollars, 45 percent euros and 10 percent sterling. The day-to-day movements of the ruble are monitored against a basket of 0.6 dollars and 0.4 euros. About 39 percent of Russia’s goods imports came from the eurozone in 2005, against just 4 percent from the US.

The statement plays into a perception that central banks, which together hold $4.25 trillion of reserves, are increasingly channeling fresh reserves away from the dollar to reduce potential losses if the dollar was to fall sharply.
SOURCE: MOSNEWS

JON’S COMMENT
This is something I want to talk about more in the coming week. The USA was technically bankrupt in the 70’s and saved their economy by forcing everyone to buy oil on the international market using the US Dollar. But lately we have seen an increasing number of countries defying this. Iraq was one of the first to do this a few years ago with the results that we know today. Iran had plans of starting an Oil Bourse in the Middle East earlier this year which was to be dealt in other currencies and we are seeing the results of this now in the media (nuclear threat ?!?!). Now Russia has joined the ranks of other countries looking into investing more in other currencies or Gold from their massive Oil revenues. I’ll make a special report on all this soon, but my analysis is that the Dollar will be facing tough changes in the coming months/year which should result in it being even more devalued than it is at the moment.

The possibility that the Fed will raise rates for the 17th straight time to 5.25 percent sparked a round of dollar short covering, helping the U.S. currency recover from a sell-off on a soft employment report late last week.

But gains were limited as some investors worried that Bernanke’s comments did not necessarily guarantee that a rate rise is in the bag this month.

“The market is more or less split between whether the Fed will raise or not, so it’s hard to take on risk either way at this point,” said Fumihiko Kawano, forex manager at Nomura Securities.
Fed funds futures indicate a roughly 70 percent chance of a rate hike at the Fed’s two-day policy meeting that starts on June 28, up from less than 50 percent on Friday.

Traders said any recovery was likely limited with the renewed focus on a weaker dollar helping rein in the massive U.S. trade deficit and playing a role in correcting global imbalances.
“Bernanke’s comments may have triggered some short covering … but a rise in the dollar/yen to 113 yen is going to be pretty tricky,” said Nobuaki Kubo, forex planning manager at Resona Bank.

So far this year the dollar has tumbled 8 percent against the euro and 5 percent versus the yen, with the slide accelerating after the Group of Seven industrial powers called in April for China and other trade surplus countries to allow more currency strength.

RATES AND DEFICITS
Even if the Fed raises rates later this month, it would likely be the last before the central bank takes a break from the two-year run of credit tightening, just as other major central banks look set to bump up rates.

Dealers said that the dollar could face more downward pressure if the European Central Bank hikes rates at its policy meeting on Thursday, with speculation still simmering of a potential half-percentage point increase.

Most analysts expect the ECB to lift rates by 25 basis points to 2.75 percent and to signal more credit tightening is likely in store.

Global imbalances are also expected to be a focus later in the week with the release of U.S. trade figures on Friday, just as the Group of Eight finance ministers meet in St. Petersburg.
Japanese Finance Minister Sadakazu Tanigaki said the impact of high energy prices on the global economy would be a topic at the G8 meeting.

SOURCE: Reuters

JON’S COMMENT
How much further will the US extend its gain this week and could this be a good time to short the Dollar before the European Central Bank officially announce its rates hike? Even with a rate hike for the US Dollar later this month, with a likely pause afterward and some weak data, I believe the US Dollar will go back to it’s recent lows in the coming months.

Just as the Bernanke Fed is conscious of the dollar repercussions of communicating an explicit conclusion to the 2-year old policy tightening campaign, the US administration has grown conscious of the market realities acting against the US dollar, leaving it no choice but to resort to a figure of credibility. This is not to say that the US Administration will pursue a strong dollar policy in both practice and preach as was under the Clinton-Rubin-Summers years, but will instead aim at pursuing a competitive currency without lacking in confidence.

The general rationale has been for Secretaries with considerable experience in Wall Street have supported or served during a period of a strong dollar, which is in line with shoring up foreign interest in US assets. Treasury secretaries emerging from an industrial background or those with considerable policy experience have generally preferred a weaker dollar so as to boost the priorities of local industry and employment.

Considering Paulson’s international experience, his selection also reflects the White House increased prioritization to international finance considerations (pressing on China FX revaluation before the midterm elections, working with G7 on imbalances) rather than on domestic policies (failed pension privatization, passed tax cuts), a Secretary with an international pedigree would be essential.

All in all, Paulson’s role is unlikely to reverse the current and incoming currents acting against the dollar. These are:

1. The inevitable tightening from the Bank of Japan—seen as triggering further unwinding of carry trade plays from low yielding currencies;

2. Central bank diversification from away from the dollar into euros or (and) gold, as has been the case with central banks in the Middle East, Sweden and recent indications from Russia to fortify the pricing in rubles across its economy, away from dollars and euros;

3. The US trade deficit may have shown signs of stabilization, but not sufficient to assure worries of reduced interest in US assets. In March, net foreign purchases of US treasuries plummeted 86% to 3-year low of $3.1 bln amid a broad decline in demand from both official and private accounts. In addition, foreign central banks were net sellers of US treasuries for the first time in a year at $6.3 bln. Slowing US demand may reduce import growth and help stabilize the trade current account deficit, but that is unlikely to slow the necessary import of petroleum, especially as the share of these imports accounts for 14% of total imports, up from 6% 4 years ago;

4. The Bank of England’s assertiveness to raise interest rates (expected as early as June) will be the element on which sterling bulls should fall back, especially after the remarkable shift of hawkishness in the BoE’s Monetary Policy Committee;

5. Our forecast for stability in metals and emerging markets, followed by renewed bounce—all induce further dollar losses;

6. The absence of FX jawboning from the ECB coupled with the required (and expected) policy tightening. Unlike in Jan 2004 when Trichet called euro rise “brutal”, the ECB is in the midst of a growth and oil driven commitment to fight a more serious inflation threat than in Q1 2004;

7. Increased signs of a slowdown in the US economy will create fresh reasons to sell the US dollar. In addition to the looming end of the Fed’s rate hikes, the shedding of the US growth story is likely to convince dollar bulls that the situation is more than just “deteriorating sentiment” and hits at the core fundamentals of the currency.

SOURCE: MG Financial

JON’S COMMENT
What a great article that points out a lot of the problems plaguing the US dollar since a few months. Unfortunately, I don’t think the new Treasury Secretary will be able to drastically make changes which could save the downward spiral the US dollar has entered and which I believe will accelerate in the coming months as well.