Russia and the Birth of the Eurodollar Market

By Marc to Market

Talk that Russia could be behind the bulk of the more than $100 bln drop in the Federal Reserve's custody holdings for foreign central banks, in the week ending Wednesday has many observers scratching their heads. This could represent about 75% of their Treasury bond holdings according December Treasury data.  

As we noted earlier, rather than selling the Treasuries, Russia probably simply transferred them from the Federal Reserve out of the US. The motivation would be the threat of sanctions following this week's Crimean referendum.

There is precedent for this kind of behavior from Russia. Recall the origins of the Eurodollar market. The Eurodollar market has nothing to do the European Economic and Monetary Union (EMU) or the euro itself. Rather the Eurodollar market refers to dollars outside the US, initially Europe.

In 1956, the US and Soviet Union opposed British and French (and Israeli) invasion of Egypt (Suez Crisis). The US threatened to sell British pounds and intensify the pressure it was already experiencing in maintaining it peg to the dollar under Bretton Woods. It also threatened to veto the UK 's request for a large IMF assistance package. Russia witnessed the US willingness to use its financial acumen to impose its will on its special ally.

At roughly the same time, a reformist government came to power in the Hungary and among other things tried to leave the Warsaw Pact. The Soviet Union invaded. Russia feared that the US would use its financial superiority against it in protest. In 1957, Russia-based Narodny Bank shifted dollars from the US and deposited them in its branch in London. Voila, the birth of the Eurodollar market.

There were other advantages of this offshore market for US dollars beyond the Soviet Union's intentions. Those dollars were not subject to US interest rate cap or regulations. These dollars, as we know with the benefit of hindsight, became the basis for a new bank credit, and a critical part of international finance.

The logic now is that Russia is bracing for the next round of sanctions. The US and Europe are reluctant to confront Russia militarily. US and Europe did not confront Russia militarily after the Soviet Union invaded Hungary or Czechoslovakia, and it wasn't that Eisenhower or Johnson (the respective presidents at the time) were weak as some claim about Obama. Nor did President Bush confront Russia with arms when it invaded and continued to occupy parts of Georgia in 2008.

To be sure, the Federal Reserve does not publish the client list of who uses its custodial services. As we noted, some suggest it could be China diversifying reserves out of dollars and ostensibly into euros, which would help explain the persistent euro strength. However, we are a bit more skeptical of China in that it has a lot on its plate presently. The timing of the drop in custody holdings makes Russia a more likely suspect. The intervention by emerging market central banks, including Russia, seem far too small to account for $100 bln+ move in a week.

Want To Become A Wolf On Wall Street ? Know These Numbers!

Elite traders are cocky. Felix Dennis perhaps said it best when he said that "Making money is certainly that one addiction I cannot shake." Dennis, like many other successful traders, believes that they will continue to make money. Their confidence comes from knowing the most intricate details about their trading. Remember that as a Forex trader you are a money manager and must keep track of how you are preforming. This can be done by reviewing your trading history and analyzing your trading journal. Thus should be done on a consistent basis. But wait, we still haven't told you what numbers you need to know ! Here are the eight metrics that each trader needs to calculate:

1. Percentage of winning trades(How many trades have you profitably close)?
2. Average Gain/Loss(The average of all winning and losing trades). If your average loss is bigger than your average gain and your winning percentage is not over 60%, you should rethink your trading strategy. 
3. Average Trade Duration(How long do you hold a trade for on average)?
4. Most Profitable Currency Pair(What is your bread and butter pair)? 
5. Drawdown (The percent decline from peak equity to a its trough)?
6. Run-up(Largest win streak in account)? 
7. Drawdown/Run-up Ratio( In dollar terms, how does your worst losing streak compare to your best winning streak)? 
8. Expectancy(Determine whether your system is profitable)? 

2014 Could Be the Year of the U.S. Dollar

The United States dollar (USD) recently posted gains against the euro and the yen after minutes from the December meeting of the Federal Open Market Committee (FOMC) were released.
The minutes indicate two major developments: First, the U.S. Federal Reserve is on track to reduce its bond purchase program at a gradual pace. Second, the Fed's outlook for the U.S. economy is positive.

The FOMC minutes were released on Wednesday, January 8th. Earlier that day, the closely-watched National Employment Report from payroll technology firm ADP was also positive as it indicated that the private sector closed 2013 by adding 238,000 jobs in December. Forex traders responded quickly to the news, which caused the USD to rise against the euro and the yen by 0.3 percent.

Quite a few forex market analysts believe that scenarios similar to the one above will be more common in the year ahead. As the world's largest economy recovers from the Great American Recession and the global financial crisis, investing in the USD is expected to be a bullish move for the first half of the year.

USD Consensus for 2014
Trading the greenback is something that just about all forex traders get into in their lifetimes. The USD is part of the currency pairs known as the forex majors, which include the EUR/USD and the USD/JPY. The forecast for the euro and the yen in 2014 is not the brightest. In fact, many analysts believe that both the euro and the yen will perform very poorly from January to June.  The EUR/USD seems to even be on a downtrend from the year 2008, continually slipping lower in price than previous years.

The European Union economies are expected to languish over the next few months. The Bank of Japan is expected to flood the market with cash for the purpose of offsetting the immediate effects of a sales tax increase. The U.S. economy, on the other hand is expected to experience a gradual recovery in terms of employment, real estate and consumer spending.

The consensus on the USD index, which is currently at about 81.14, is that it will reach 85 by December 2014. The euro, however, could drop to $1.27 by the end of the year. This is not the first time that analysts are forecasting a significant fall of the euro, but they seem to be a bit more certain this time around.

How To Create A Technical Trading Strategy!

There are several great trading strategies out there. Many traders become mesmerized by the "next great strategy" that they read on a website or  view online. Beginning Forex traders will even spend money looking for an elite strategy. FXConnection wants you to know that building a strategy can be fun, easy and painless! This post will teach you how.

First, look for an entry signal to buy or sell the specific pair that you are making the technical strategy for. It is important that you tailor this strategy for the specific pair and time frame that you are trading because pairs respond differently. The entry signal to buy or sell could be an indicator or price action.

Second, develop money management rules. Risk management is essential for successful trading. Decide where you will place your stop losses and how much capital you will risk every trade.

Third, determine when you want to close a trade. You might have different rules in place for when to close a long trade and when to close a short trade.

Fourth, determine what type of market condition the strategy works well in. For example, Range-Trading Strategies perform poorly in volatile markets, while Trend-Trading Strategies perform poorly in ranging markets.

Fifth, conduct some back testing. Find out what the average winning and losing trade were. Remember that back testing is not always indicative of future performance.

Finally, remember this. It is important to keep your strategy as simple as possible. You should be able to write out your trading strategy so that another trader could follow it without any problems. Happy Trading!

The USD/JPY Continues to Rise, but Can the Trend Continue

This past week has shown a huge positive gain for the USD/JPY pair as there was a very large increase in Core Goods inflation, backing the BoJ's financial measures, only pushing the Yen's value down even further as it continues to fight for that 2% inflation goal and the USD is said to continue higher against the Yen setting record levels and gaining over 20% against the Yen's value.

However, as we look at the USD/JPY chart below, is the dollar looking to go even higher against the Yen?Over the course of just a few days the dollar has made incredible gains, making profits for many traders.

Looking at the chart below  there are several key features that need to be noticed first and foremost.

First, looking at the Bollinger Bands set on this chart, we can see that the last candlestick drawn fell below the first deviation band level, quickly dropping downwards, looking like it found a bit of support at the 104 level before buyers stepped back in and took control of the market.  However, the Bollinger Bands show that this market is looking as though is is very top heavy, with the USD/JPY oscillating between the first and second deviation, and still looking for some sort of support.  This floor may come a bit before the 104 level, as the middle band seems to be near that general vicinity consequently the pair may find a good floor right around where the middle band of the Bollinger Bands rests.   

The interval between the upper bands and lower bands and the middle blue bands indicate the amount of volatility this pair may contain.  The interval between the lower second deviation band and the middle band is much larger than in other parts of the chart, indicating a possibly high level of volatility that this pair may contain.

Notice how wide the band actually is in the most recent areas of the chart which also questions the actual strength of the USD/JPY and whether or not it will hold this level when the markets open on Sunday. This large interval points to a high level of volatility that we see recently with this pair.

Another level that should be noted is the 103.208 level which marked the previous high the market established several months ago and is noted on the chart above by the black horizontal line.  Since as of recently this pair blasted through this 103.208 resistance level and has not really looked to form some sort of support, it may not surprise traders to see a decline to this level in the near future to form a bottom for the continuing push upwards in the future.

Ultimately though, the whereabouts with the pair in the future is unknown, though some factors point upwards while others point to a possible pullback.  However, constantly keeping up with the market is paramount as is analyzing your trades before executing them.  Proper risk mitigation is key in this subject area as the USD/JPY possibly continues higher in the coming days and increases its volatility, becoming overbought and concerning traders. Or this pair may even look to drop down and find support somewhere else, though where exactly is not known.

Managing your risks in any market whether the it continues higher or breaks down is an absolute must for smart trading and lessening your risks you take when investing in currencies.

  

Determine Your Trade Risk Before Placing Your First Trade Of 2014

Every trader has his own tolerance for risk. If you have just picked up Forex in 2014 or are a reoccurring trader who is struggling in the market, smaller lots are recommended. We recommend you start with micro lots or mini lots. When you make profits several weeks in a row, and when you feel comfortable with bigger risks, you can move to bigger lot sizes. As world renowned poet Maya Angelou once said that one is not born with courage. One develops it by doing small courageous things—in the way that if one sets out to pick up a 100-pound bag of rice, one would be advised to start with a five-pound bag, then 10 pounds, then 20 pounds, and so forth, until one builds up enough muscle to lift the 100-pound bag. In some ways courage is needed in trade risk. So it might be awhile until you are ready to trade a standard lot. 

Several factors affect how much of your account size you should be willing to risk. We recommend you risk no more than 2% of your account at first (1% would be better). Risk, in this context does not mean the size of the trade you put on. Rather it is the maximum loss you will tolerate before closing the trade. If you have a $5,000 account, we recommend you hold your losses to $100 per trade. That way, you can lose 50 trades in a row before all your money is gone. You are unlikely to lose more than 5-10 trades in a row, so this should keep you alive for a while. When you have more experience, you can risk a bit more, but at first, keep the losses small. Happy trading in 2014! 

Impact of EU's Credit Rating Downgrade

On Friday, Standard & Poor’s (S&P) downgraded the credit rating of the European Union by one notch, from AAA (its highest rating) to AA+. The S&P believes that the EU’s overall creditworthiness has started to decline as tensions rise during budget negotiations between 28 member states. Credit ratings measure confidence in the group's ability to repay its debt. When S&P lowers its ratings, it means the agency believes it has become harder for a group to repay its debt. This, in turn, can affect a country’s ability to borrow money. Essentially, a lower credit rating translates into a higher interest rate which means its cost more to borrow money!


This is not the only negative news for the eurozone. Growth is expected at 1.1% and the unemployment rate at 12.2% for 2014. Despite the news, price action in the Euro has remained relatively muted. EUR/USD saw a small decline on the weekly chart. A reversal of EUR/USD could be in store if budget negotiations continue to stall.  

Chase That Trade

Trading with your emotions in check is an absolute fundamental when you are involved in the markets.  Sometimes though, it is easy to get caught up in the whole "rush" with everyone else and look to trade even though necessary "precautions" have not yet been established.

The term "chasing the trade" essentially describes a trader who sees a price action accelerate higher and higher at which point he or she, ignoring risk and indicators saying otherwise, decides to buy into this "great" deal hoping that their trade makes profit, because everyone else is profiting from this trade too right?  So why can't you?

Chasing any trade is dangerous for that matter as usually, if you've "missed out" on the first big price move it is questionable if you will actually take a profit in the long run.  The higher the price level goes, the closer it usually gets to overbought levels.  Overbought levels must be looked at in great detail, of course unexpected moves can jolt the price higher, however the more overbought a trade becomes, the more likely a violent drop and price correction will happen, something that you may not be ready for, especially if you get in on a "late" trade still thinking you'll make a gain.

Is it wise to enter a trade late when the price has already risen fairly rapidly and it is in danger of being overbought?  Or is it better to hold back and be more risk averse?
These questions may be answered depending on what strategy you use and your investment goals you've established for yourself though adding technical indicators such as the Relative Strength Index (RSI), the True Strength Index (TSI), and even the Moving Average Convergence/Divergence indicator (MACD) to your existing strategy would definitely be a solid addition especially to counteract any trade chasing you may feel tempted to partake in.

Just remember, the higher and more dramatically a price rockets upward, more likely than not its being overbought and a pullback i.e. price correction, is just waiting to happen.