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.

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.

Write Out Your Trading Strategy!

Do you ever find yourself altering your trading strategy so that you can enter a trade? If so, ask yourself the following question: Is my strategy written out? Many traders begin live trading in the Forex market without writing out their trading strategy.

Before you begin trading you should comprehensively write out your trading strategy. Any trader should be able to pick up your strategy and easily follow it. When writing out your strategy remember to consider the following things: Time frame trading? Type of market? Win expectancy? Best pairs to trade? Anything pertinent to your strategy.

Writing out your trading strategy will allow you to consistently follow it! Happy Trading!

Struggling Trading Forex? Form A Trading Group!

Most beginning traders in Forex wipe out their account only to never trade again! So how can you avoid this? Start a Forex trading group!  There are four core reasons to start a group:

• To Stay Active in the Market: You can get depressed after a couple of trades that do not work out your way. Meeting with a group will remind you how awesome trading is. You will be able to feed of others success! 
• Improve Your Trading: You will be able to share your trading problems with others who may have overcome the same problem. 
• Focus Your Thinking: Do you ever find yourself getting stopped out of trades only to ask why you got in the trade in the first place? Be accountable to others by explaining your reasoning for getting in a specific trade. 
• Sharing is Caring:  Share strategies with others so that people can give your fresh perspectives on how to improve a strategy. Two heads are better than one. 

Coaching Tip Of The Week: Keep Trading Simple

Do you find yourself moving from strategy to strategy? If so, then maybe you are caught in the cycle of doom that so many traders are caught in. Many traders who are beginners in Forex constantly try new things that they read on the internet, books, Youtube, and magazines. There are searching for that “new thing” that will give them an edge on the market. Many of these traders believe that the more complex a strategy is the more pips they will be able to gain. However, in actual practice, successful Forex trading is relatively simple.

Trading is as much about money management as it is about a particular strategy or set of rules you follow. Bottom line:  A strategy is only as good as its trader.

In order to consistently win, you need to know your system, but more importantly – know yourself. The simpler your strategy is, the more likely you will be to make money with it. Your strategy should have detailed and definite rules for entry and exit. It should also include what pair(s) you will trade, what time of day you will trade, and what profit and draw down you expect.

What is the Taper, and How Does it Effect my Trading?

Fears of high volatility and price corrections in the Forex, equities, and bond markets are due to the recent "Taper" speculation set in by Fed Chairman Ben Bernanke. You ask, what is "Tapering" and why is it important? Tapering refers to the method used by the Fed to gradually decrease their monthly purchases in their recent stimulus buyback program, better known as quantitative easing (QE3). QE3 started back in the Fall of 2012, allowing the Fed to purchase $85 billion in Treasury Bonds and Mortgage Backed Securities. The purpose of this stimulus package is to promote growth in the economy by lowering interests rates.

Looking at the markets performance over the past year we can see how QE3 effected the equities.

With the Fed pumping US Dollars into the economy, the market became more comfortable with risk in equities causing this bullish uptrend and high returns. However with a possible "Tapering" ahead, we can assume that a significant correction to the downside may come. As the Fed gradually decreases the supply of US Dollars, investors will want to hold more dollars, causing an increase in demand for US Dollars with a decrease in demand in the equities market. For the Forex market, the USD will play a pivotal role in the speculation. Theoretically we can expect a spike in the USD due to speculation of decrease the supply of US Dollars in the economy (tapering).

Speculators are predicting for tapering to start in the Q1 of 2014. Therefore expect prices to correct themselves now for the events expected to happen later. 

Dollar Weaker Than Expected Due To Slow Start To US Holiday Season

The amount of of shoppers over the Black Friday weekend saw record highs, however, the amount of spending showed the first decline since 2009. American consumer spending has dropped almost 2.9% this season. What does this mean for the dollar? It does not have the strength that many think it does. This can be seen in the futures prices for the USD. It is in a down trend since the initial spike after Black Friday weekend!

Learn with FXConnection. Coming Soon!

FXConnection offers products & services that allow everyday people to learn how to trade, improve their trading, and stay connected in the Forex Markets through:

• Online Courses
• Coaching Services (1on1 and Group) 
• Social Profiles
• Social Analysis of the Markets
• and more!

 Learn the right way and Stay Connected  to the markets with FXC! Here is just a small part of what is to come. FXConnection coming soon 2014!

Where is the Market?

Are the markets all that randomized?  Some would argue that the markets move cyclically and oscillate essentially between different levels whereas others would argue that the market is based a lot off random movements, some by perception, other movements by different factors indirectly or directly affecting the economy.

The whole idea behind the fundamental and technical analysis is simple: take human emotions out of the equation and there shouldn't be any economic crises.  Sure, markets can get "unpredictable" and theories such as the Random Walk Hypothesis developed by Burton Malkiel at Princeton.  Essentially, he argues that the market is just as predictable in trending as the flipping of a coin.  Heads, well it looks like the market is up today; tails, we're down.  

There are many individuals that believe this theory, as I am sure, part of it is to be believed though are markets truly just all randomized movements?  Try arguing the Random Walk Hypothesis to Ralph Elliot, the creator of the Elliot Wave.

This strategy he developed, a strategy, is based on social behavior and places movements in the market based on this behavior.  It is a very simple strategy, impulse and corrective wave patterns.  Depending on the sequence and the occurrence of these waves, this tells the trader where the market may be residing at during one of the many stages or levels.  Its almost trying to predict the general location of the market, like Heisenburg's uncertainty principle, except for the market since the trader never fully knows where the exact placement of the market is in relation to the waves and when he does seem to know the market movement he doesn't know where it resides on the exact Elliot wave.

Needless to say, the Elliot Wave and similar strategies have been successful numerous times yet still the market has that twinge of uncertainty about it, whether it be the ECB announcing dovish policies for the Euro or the Fed's whole "To taper or not, that is the question."  The market has a certain level of plain, old-fashioned unpredictability to it and especially in highly-volatile, highly-liquid markets there is a larger element of risk that anyone should be aware of.

The markets are completely unpredictable as some would say, yet others would argue right back that not only are the markets sometimes predictable, but during those levels of predictability, profits can be made.  And those that do find accurate predictions, make a nice profit.