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UPDATE 1-Japan exports show double-dip recession less likely

UPDATE 1-Japan exports show double-dip recession less likely
* Economists say return to recession unlikely due to exports

* Japan's domestic demand still a worry for the economy

By Rie Ishiguro

TOKYO, Dec 21 (Reuters) - Japan's exports rose by the most in seven years in November due to solid Asian demand, reducing worries that the Japanese economy will fall into another recession next year.

The pace of decline for exports compared to the same month a year earlier also slowed substantially from October, as stimulus measures in overseas economies bolstered demand for Japanese goods.

Strong growth in China and the rest of Asia is likely to continue to support Japan's export growth next year, economists say, and that will likely be enough to compensate for Japan's weak domestic demand and prevent the economy from experiencing a double dip.

"I'd say the recovery in exports so far this year has been close to the best scenario we had thought of at the beginning of the year," said Junko Nishioka, chief economist at RBS Securities in Tokyo.

"Given that exports are growing solidly despite the yen's rise last month, we don't need to be overly pessimistic about growth. The economy will perhaps slow down early next year but a recession is unlikely."

Exports rose 4.9 percent in November from the previous month, seasonally adjusted figures from the Ministry of Finance showed on Monday.

Compared with a year ago, Japan's exports fell 6.2 percent in November, less than the median market forecast for a 6.5 percent decline and slower than a 23.2 percent annual decline the previous month, the data showed.

Exports to Asia, which account for more than half of Japan's total exports, rose 4.7 percent from a year earlier, posting the first annual rise since September last year.

Exports to China rose 7.8 percent from a year earlier, while exports to the United States fell 7.9 percent.

Japan logged a trade surplus of 373.9 billion yen ($4.13 billion), bigger than the median estimate for a 344.5 billion yen surplus. [JPTBAL=ECI]

The rebound in exports has been a major driving force behind Japan's recovery.

But gross domestic product growth in the three months to September was slashed to just 0.3 percent, data on Dec. 9 showed, much slower than the initial estimate of 1.2 percent.

Although few economists expect another recession now that the country has pulled out of its worst downturn in decades, they say Japan's economy will likely grow very slowly in the first half of next year. [ECILT/JP]

Worries that the economy could hit a soft spot early next year have prompted policy actions by the government and the BOJ, even as much of the world is unwinding emergency steps taken after the financial crisis last year.

Prime Minister Yukio Hatoyama's government, in office for three months, unveiled a stimulus package with spending of 7.2 trillion yen earlier this month as it wants to avoid recession ahead of an upper house election next year.

The Bank of Japan, under pressure from the government to take steps on deflation, has also taken new steps.

It started a new operation and also said it is not tolerating zero inflation, let alone deflation, adding many board members think of one percent inflation as an ideal. [ID:nT374859] [ID:nT289621]

Many economists say the course of Japanese economy hinges on the strength of exports, and thus ultimately the global economy, because domestic demand is structurally weak because of the ageing population.

ECB Said to Start Consulting Banks, Investors on Collatera

ECB Said to Start Consulting Banks, Investors on Collatera
Dec. 17 (Bloomberg) -- European Central Bank officials are moving closer to forcing banks to provide more information about the collateral they give the ECB in return for loans.

ECB policy makers may today approve the start of a consultation process with banks, investors and market participants asking them to suggest how residential mortgage- backed securities can be made more transparent, according to two people involved in the process. The Governing Council meets today in Frankfurt.

The ECB is trying to better monitor the quality of the assets it’s holding in return for the funds it’s pumped into the European banking system during the crisis. European banks have created about 1.1 trillion euros ($1.6 trillion) of asset-backed securities since June 2007, which they can use as collateral for ECB loans.

The ECB’s push “will increase transparency for investors and better information will attract new investors,” said Dipesh Mehta, a London-based securitization analyst at Barclays Capital. “U.S. investors already find the European transactions hard to look at without loan by loan data.”

Banks, investors and other market participants have about two months to comment, the people said. An ECB spokeswoman declined to comment.

ECB Vice President Lucas Papademos said on Dec. 12 the bank plans to take steps to help revive the asset-backed bond market which was dormant for more than a year until September, when Volkswagen AG and Lloyds Banking Group Plc sold investors 1.7 billion euros ($2.5 billion) of the securities.

Arrears

Under the terms of the collateral consultation, officials want banks to provide information about individual loans such as the value of the property backing a mortgage, details on cash flow and whether the borrower is in arrears, the people said.

Banks in Europe have pledged about 217 billion euros of asset-backed securities as collateral at the ECB, Barclays Capital estimates.

The ECB has already tightened the rules for asset-backed securities it accepts as the central bank moves toward unwinding its emergency liquidity measures. The ECB said Nov. 20 it wants to ensure “high credit standards” are met and aims to restore “the proper functioning of the ABS market.”

Banks have used asset-backed bonds, notes secured by mortgages and credit card bills, more than any other type of debt as collateral in exchange for ECB funding.

The ECB has used money market operations as one of its main policy tools in response to the financial crisis. The ECB yesterday said it loaned banks 96.9 billion euros at its last tender of 12-month funds, more than the 75 billion euros forecast by a Bloomberg News survey of economists.

The ECB may also approve a similar consultation on the securities backed by the loans of small-and-mid-sized companies and commercial mortgages, said the people.

Spyker CEO Says EIB Loan Is Biggest Saab Deal Hurdle

Dec. 17 -- Spyker Cars NV’s plan to buy General Motors Co.’s Saab unit hinges on the European Investment Bank approving a loan before the end of December, the Dutch luxury-car maker’s chief executive officer said.

GM and Spyker are not the “potential problem for this transaction,” Victor Muller said in a phone interview from his home in Amsterdam today, adding that winning EIB support before year-end is the biggest obstacle. So far, the European Union’s lending arm has sent “neutral signals” on approving the 400 million-euro ($574 million) loan that is key to the sale and which the Swedish government must guarantee, said Muller.

“It’s mainly now down to the government agencies,” Muller said. “That’s really the main issue. We’re getting lots of support from the Swedish government.”

Spyker, the maker of $235,000 sports cars, emerged as the frontrunner to buy Saab this month after Koenigsegg Group abandoned its bid on Nov. 24. GM Chief Executive Officer Ed Whitacre said on Dec. 15 that the Detroit-based carmaker will shut the unit if it doesn’t reach a deal with Spyker by the end of this month. GM has agreed to sell technology from Saab’s 9-3 and 9-5 models to Beijing Automotive Industry Holding Co.

Koenigsegg Canceled Acquisition

Koenigsegg Group canceled its planned acquisition of Saab, saying it ran out of time because delays in closing the acquisition had “resulted in risks and uncertainties” that prevented it from implementing a new business plan for the Swedish carmaker. The EIB in August delayed a decision on whether to give Saab a loan, which it eventually granted the Trollhaettan, Sweden-based company on Oct. 21.

While the EIB approved the loan to Saab, the bank must now re-evaluate the financing with Spyker as the new owner. The Dutch carmaker is using Koenigsegg’s business plan in its bid and intends to keep Saab’s management if it buys Saab, Muller said.

“In October, the EIB approved the Koenigsegg deal, which was exactly the same deal -- the same lender, same borrower and the same business plan,” Muller said. “The only thing changed is the shareholder, so they have to do due diligence on that.”

EIB Vice President Eva Srejber said that since “this is a change of ownership” then “of course we need to analyze.”

The EIB is in contact with Saab, Spyker, GM and its adviser Deutsche Bank AG and is “working in close cooperation” with Swedish authorities, she said. She declined to comment on whether a decision would be made before the end of the year.

Profitable by 2012

Saab was to become profitable by 2012 with annual sales of at least 100,000 cars, according to Koenigsegg Group’s business plan in September.

Owning Saab would give Spyker access to a network of 1,100 dealers worldwide, Muller said. Spyker currently has 30 dealers. Spyker would also tap into Saab’s engineering resources and supplier network, which could cut costs for some parts the Dutch company uses in its cars, he said.

From Saab’s perspective, one advantage of having Spyker as owner would be to promote the Swedish company’s “independent” nature, Muller said. “That’s what’s there to be gained for Saab -- entrepreneurs at the board level,” he said.

Zeewolde, Netherlands-based Spyker shares fell 1 cent, or 0.5 percent to 2.19 euros in Amsterdam trading. The stock has gained 40 percent since the super-car maker was first reported to be interested in Saab.

No deal will be signed with GM until the EIB has decided on whether Saab can get the loan, Muller said. Spyker is also waiting for the European Commission to decide whether potential Swedish loan guarantees for the EIB funding distorts competition and for the Swedish state to decide whether it will give Saab the guarantees.

‘Blatantly Clear’

“There is very little point in signing an agreement until the time that the governmental agencies have approved the transaction,” Muller said. “Everybody knows exactly what the deadline is. There is no misunderstanding about that,” he said, adding GM’s CEO had been “blatantly clear” about a Dec. 31 deadline.

Saab is likely to win European Commission approval for the EIB loan, Johnny Kjellstroem, who is negotiating the case with the European Union’s regulatory arm on behalf of the Swedish government, said last week. It’s possible that the European Commission will reach a decision this month, he said.

The EIB supports projects throughout the European Union and borrows funds in the capital markets it then lends on to companies under favorable terms, according to its Web site.

Peru to Win More Rating Increases, Credit Suisse Says (Update2)

Dec. 17 -- Peru is poised to receive more credit-rating increases after Moody’s Investors Service moved it to investment grade because the country is posting above-average growth while keeping its budget deficit under control, said Credit Suisse Group AG and Societe Generale SA.

Moody’s raised Peru’s foreign debt rating one level to Baa3, the lowest investment-grade level, from Ba1 late yesterday, more than a year after Standard & Poor’s and Fitch Ratings made identical moves. Moody’s said Peru was able to prevent the global recession from sending the local economy into a “hard landing” by bolstering government spending.

“It sets up a trajectory for more upgrades,” Igor Arsenin, an emerging-market strategist at Credit Suisse AG in New York, said in a telephone interview. “The fundamentals look clean when compared with other investment-grade countries. It reminds everybody of the positive momentum in Peru.”

The Andean nation’s credit-default swaps trade almost on a par with Israel and Poland, countries that are rated at least four levels higher by Moody’s. It costs 1.21 percentage points to protect Peru’s debt against default for five years, compared with 1.20 points for Israel and Poland, according to CMA Datavision. Peru’s cost was 1.92 points six months ago.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a country or company fail to adhere to its debt agreements. A basis point on a contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

Commodity Savings

Peru’s “economic fundamentals are very good,” said Greg Anderson, a currency strategist at Societe Generale in New York. This “may bring another rating upgrade within a year’s time.”

President Alan Garcia this year tapped savings built up from surging commodity export revenue between 2006 and 2008 to implement a $3 billion stimulus plan. The spending program, along with record-low interest rates, helped the economy expand in August for the first time in three months.

Peru, the world’s third-biggest exporter of copper, zinc and tin, and the largest silver exporter, will post expansions of 1.5 percent this year and 5.8 percent in 2010, the International Monetary Fund forecasts.

By comparison, the IMF predicts a contraction of 2.5 percent in 2009 and an expansion of 2.9 percent next year for Latin America. The 5.8 percent growth forecast for Peru is the IMF’s highest for any major economy in the region next year.

Falling Debt

Finance Minister Luis Carranza said yesterday that the government’s efforts to cut debt helped free up the cash it needed this year to fund the stimulus program. Government debt has dropped to the equivalent of 25 percent of gross domestic product from 50 percent of GDP at the start of the decade, according to Carranza.

“This gave us greater room to implement the economic stimulus plan without difficulty,” Carranza told reporters in Lima.

The government forecasts its deficit will narrow to 1.6 percent of GDP in 2010 from 2 percent this year as tax revenue increases, Carranza said last month. Moody’s said the government’s ability to tap savings to fund its stimulus program was a “positive development.” It said the country’s vulnerabilities include its low income per capita and the “high share” of its debt that’s denominated in dollars.

The extra yield investors demand to own Peru’s dollar bonds instead of U.S. Treasuries has narrowed to 1.93 percentage points from 5.09 percentage points at the end of last year, according to JPMorgan Chase & Co.

Sol Rally

“The upgrade will allow Peru to keep its debt costs low and on a downward trend, while increasing financial and real investment flows,” Carranza said. He predicted foreign-direct investment will jump almost 50 percent next year. “Moody’s upgrade will accentuate this trend.”

The benchmark Lima General Index of stocks has surged 99 percent this year while the sol has gained 8.8 percent to 2.8815 per dollar this year.

Societe Generale’s Anderson said the economic rebound and “responsible fiscal policy” may drive the sol to 2.7 per dollar within six months.

UBS, Credit Suisse Said to Face Tougher Rules on Liquid Assets

Dec. 21 -- UBS AG and Credit Suisse Group AG may have to almost triple the amount of cash they hold in relation to customer deposits under new proposals from Swiss regulators, two people familiar with the matter said.

The two largest Swiss banks may be required to hold 45 percent of customers’ demand deposits in cash or easy-to-sell securities such as government debt, almost three times as much as under current rules, said the people, who declined to be identified because the proposals haven’t been made public. The banks, which are in talks with the regulators, are seeking to soften the requirements, the people said.

Switzerland may be the first country to introduce rules requiring banks to keep more liquid assets on hand following the global credit crisis. Forcing Zurich-based UBS and Credit Suisse to hoard more cash and low-yielding securities against a possible bank run would make them less profitable and may lead them to curb lending, analysts and bank officials said.

“Switzerland has always been stricter with its rules for the banks than other countries,” said Dirk Becker, a Frankfurt- based analyst at Kepler Capital Markets. “Stricter liquidity rules take away the flexibility of the banks in lending. That may lead to fewer loans being made and lower profitability as less interest income is generated.”

Tobias Lux, a spokesman for the Swiss Financial Market Supervisory Authority, said the new rules are aimed at boosting the banks’ short-term liquidity buffers, declining to comment on the details of the proposals.

UBS Rescue

The regulator plans to publish new liquidity management rules in the first quarter of 2010, Lux said. Banks will have to implement them in the second quarter, Swiss National Bank Vice Chairman Philipp Hildebrand said Dec. 10.

The rules as currently envisioned would only apply to the two largest banks, because of concern a collapse of either would endanger the Swiss financial system.

UBS spokeswoman Tatiana Togni and Credit Suisse spokesman Marc Dosch declined to comment.

Swiss regulators have been in discussions with banks to update liquidity rules since before the crisis. The urgency grew when credit markets froze after Lehman Brothers Holdings Inc.’s bankruptcy in September 2008. The Swiss government had to support UBS with 6 billion francs ($5.8 billion) in capital to help it spin off risky assets into an SNB fund.

UBS and Credit Suisse held almost 205 billion francs of customers’ sight deposits, or funds that can be transferred immediately and without restrictions, at the end of September. Another 199 billion francs were held in customer deposits, including call money, with a residual maturity of up to one month, according to central bank statistics.

‘Drag’

The Basel Committee on Banking Supervision last week said it plans to develop a set of minimum standards for capital and liquidity by the end of 2010, with the aim of implementing them by the end of 2012. The committee proposed introducing a minimum coverage ratio to ensure that banks can meet their liquidity needs for a 30-day period in a stress situation, as well as a ratio to measure the amount of longer-term stable sources of funding used by companies.

The new Basel rules “could be a significant drag on profitability,” Credit Suisse analysts Jagdeep Kalsi, Daniel Davies and Guillaume Tiberghien said in a note on Dec. 18. The cost of extending long-term funding and holding more liquid assets could amount to as much as 30 percent of pretax profits at European banks, they said.

In Switzerland, where the two biggest banks control about a third of domestic lending, stricter liquidity requirements would increase the cost of capital and limit the amount of loans, Hans-Ulrich Meister, Credit Suisse’s head of Swiss business, told a conference on Nov. 30.

‘Credit Crunch’

“The risk is really that we create a credit crunch,” Meister said. “Honestly what will happen is that capital is restricted, gets much more expensive and the two big banks will definitely limit their lending, especially unsecured.”

The tougher rules may also put pressure on the banks to raise fees at a time when profitability is already being squeezed at their private banking operations.

Credit Suisse’s gross margin in the wealth management business fell to 125 basis points in the third quarter from 135 basis points in the second, while UBS’s margin on assets invested by international clients declined to 83 basis points from 87 basis points, in part because of lower interest earnings. A basis point is a hundredth of a percentage point.

Leverage Cap

The regulators already introduced stricter capital requirements and a cap on leverage for the two banks. They have said that a stable financial industry is more important for Switzerland than other nations, because banks’ assets are the biggest relative to gross domestic product of any G-10 country.

To cushion the effect on banks from stricter rules, the regulators may expand the list of assets that are considered liquid, one person familiar with the matter said.

“In the last two years, the risks presented by systemically important banks to the stability of the financial system and the economy in general have become only too evident,” Hildebrand, who will become chairman of the SNB’s governing board in January, said on Dec. 10. “Another crisis is inevitable and we must be prepared for it.”

Japan’s Exports Fall at Slowest Pace in 14 Months (Update2)

Japan’s Exports Fall at Slowest Pace in 14 Months (Update2)
Dec. 21 (Bloomberg) -- Japan’s exports fell at the slowest pace in 14 months in November as demand from Asia supported the nation’s recovery from its worst postwar recession.

Shipments abroad slid 6.2 percent from a year earlier, the smallest drop since September 2008, the Finance Ministry said today in Tokyo. From a month earlier, exports rose a seasonally adjusted 4.9 percent, the biggest advance since November 2002.

Worldwide government spending has spurred demand for cars and electronics goods made by companies including Fuji Heavy Industries Ltd. and Elpida Memory Inc. The improvement in shipments may ease concern Japan’s economic recovery will stall after reports this month showed confidence among large manufacturers rose the least in three quarters and companies plan deeper spending cuts.

“Economic growth may slow in the months ahead as domestic demand remains weak,” said Yoshiki Shinke, senior economist at Dai-Ichi Life Research Institute in Tokyo. “But exports are looking solid, so Japan should at least be able to avoid another recession.”

The improvement in exports is partly due to a favorable year-on-year comparison, economists including Shinke said. In November 2008, shipments abroad tumbled 26.8 percent as global trade froze following the collapse of Lehman Brothers Holdings Inc.

The median estimate of 17 economists surveyed by Bloomberg News was for exports to drop 6.8 percent from a year earlier.

Imports Decline

Imports slid 16.8 percent in November from a year earlier, the slowest decline in 12 months, the ministry said. Japan posted a trade surplus for a 10th straight month, totaling 373.9 billion yen ($4.1 billion).

Exports are mending even as the strengthening yen erodes the value of profits companies earn abroad and makes their products less competitive. Japan’s currency traded at 90.41 per dollar at 9:57 a.m. in Tokyo from 90.46 before the report. It has weakened since hitting a 14-year high of 84.83 on Nov. 27. The Nikkei 225 Stock Average rose 0.6 percent.

Fuji Heavy, the maker of Subaru cars, expects to boost sales in the U.S. and China next year by 15,000 vehicles in each market, Chief Executive Officer Ikuo Mori said in an interview on Dec. 16.

Elpida Memory, Japan’s largest computer-memory chipmaker, may return to profit for the first time in three years, thanks to higher demand, Chief Executive Officer Yukio Sakamoto said this month.

China Growth

Exports to China and Asia both rose for the first time since September 2008. Shipments to Asia advanced 4.7 percent from a year earlier, compared with a 15 percent drop in October. Exports to China, Japan’s biggest overseas customer, climbed 7.8 percent, compared with a 14.4 percent decline the previous month.

Asian economies are benefiting from a global trade rebound that’s being driven by interest-rate cuts and more than $2 trillion in government spending worldwide. Growth in China will accelerate to 9.4 percent next year, according to the median estimate of economists surveyed by Bloomberg News.

“Exports to Asia are strong so Japan will be able to avoid a double-dip recession even though a slowdown in domestic demand is unavoidable,” said Azusa Kato, an economist at BNP Paribas in Tokyo. “Demand in Asia is strong enough to offset the adverse impact of the yen’s gain.”

U.S. Sales

Sales to the U.S. fell 7.9 percent, easing from October’s 27.6 percent decrease and automobile shipments to the nation rose for the first time since April 2008, the Finance Ministry said. Exports to Europe slid 15.9 percent after declining 29 percent.

“Exports to the U.S. have hit bottom and are starting to gradually rise,” Dai-Ichi Life’s Shinke said. “Even though it’s not as strong as Asia, it’s positive for Japan’s economy.”

Some companies are coping with the rising currency by trimming costs. Toyota Motor Corp. may avoid an annual loss if the yen trades around 90 per dollar because the automaker will postpone investments and cut costs, the Asahi newspaper reported on Dec. 16.

Japanese policy makers are trying to sustain a recovery that’s under threat from the currency’s gains and deflation. Prime Minister Yukio Hatoyama unveiled a 7.2 trillion yen economic stimulus package on Dec. 8, a week after the Bank of Japan released a 10 trillion yen credit program. The central bank said last week that it “does not tolerate” falling prices.

Export Revival

The export revival has yet to spread to the domestic economy. Large companies plan to cut spending 13.8 percent in the year ending March 2010, the second-worst projection on record, the Bank of Japan’s Tankan survey showed last week. Economic growth slowed to an annualized 1.3 percent in the third quarter, about half the pace of the previous three months.

Household confidence fell in November for the first time this year and wages have slumped for 17 months.

“Even though exports are strong, domestic demand is weaker than people expected earlier this year as employment has worsened rapidly,” said Junko Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo. “That signals the recovery in external demand and the stimulus effects won’t be enough to sustain growth.”

Japan Nov exports fall 6.2 pct year/year - MOF

TOKYO, Dec 21 (Reuters) - Japan's exports fell 6.2 percent in November from a year earlier, Ministry of Finance data showed on Monday, slightly less than economists' median forecast for a 6.5 percent fall. [JPEXPY=ECI]

Exports to Asia, which account for more than half of Japan's total exports, rose 4.7 percent from a year earlier, posting the first annual rise since September last year.

The trade balance came to a surplus of 373.9 billion yen ($4.13 billion), more than the median estimate for a 344.5 billion yen surplus. [JPTBAL=ECI]

Following is a table of the main figures. Economists' median forecasts are in parentheses: -------------------------------------------------------------- (Unadjusted, mln yen, y/y)

NOVEMBER YEAR AGO PCT CHANGE Overall balance +373,925 (+344,500) -227,505 n/a Exports 4,991,667 5,323,503 -6.2 (-6.5) Imports 4,617,742 5,551,008 -16.8(-17.9)

Forex-Swiss.com found a new way to grab money from traders

Forex-Swiss.com found a new way to grab money from traders
Bucketshop brokers have all kinds of tricks to take money from traders. Once traders get sick of the usual games involving slippage and other broker tricks, most of them will at least let you withdraw your money, minus any fees listed on the broker's website and withdrawal forms. Forex-Swiss (aka FXCH, aka Foreign Exchange Clearing House Ltd.) doesn't seem to care that undocumented fees are charged. Forex Swiss doesn't even seem to care that their math makes no sense.

If you check the reviews for Forex-Swiss at the FPA, you'll they are one of the few brokers to have earned and maintained a 1 star rating for an extended period of time. FPA member Raimundas must have missed the reviews. He opened an account. After an incident of very bad slippage cost him a lot of money, he tried to close the account. Since slippage can be so hard to prove as deliberate or not, the FPA doesn't us it as a sole reason for a scam finding. Had Raimundas been paid back in a timely fashion, that would have been he end of the issue.. Instead, delays happened and then he was paid back less than he was owed.

We in Scam Investigations have always suspected that long delays in withdrawals serve 2 purposes. First, some people don't like to fight and will give up and go away quietly. This lets the broker keep all the money. The second is that some people are grateful to get any money back, so won't question unusual fees. We already know some brokers managed to skim $10 or $20 off of wire transfer fees, but Forex-Swiss came up with something different.

It appears that it is impossible to withdraw all of your money from an account at Forex-Swiss. You have to leave $50 in to keep the account active. This is clearly stated on their withdrawal form. We think it's a little harsh, but would not pursue a case based on this. If you want to close an account, they charge $80. We could not find that on their website anywhere or on their withdrawal forms. FPA Investigator Gerard asked, and was told it was on the form. It wasn't.

We have never heard of any other forex broker charging an account closing fee. We also consider it to be very strange that the fee is larger than the amount needed to keep the account open. That means it's cheaper to leave an account open forever than to close it. We wonder if there would be a surprise “inactivity fee” to grab that last $50 later if the account wasn't used. Since the closure fee is not documented on the withdrawal forms we could find on the website, we have no choice but to consider this to be theft.

Forex Swiss also charged him 4% for a credit card withdrawal in addition to the $80. We consider this to be excessive, but not a scam all by itself. The problem was that the amount deducted from Raimundas's account balance was over $100 above what would have been deducted even with both of these fees.

Raimundas asked for explanations and links to where these fees are listed. No one would answer those questions. Forex-Swiss's representatives kept insisting the amount paid was correct. Gerard asked and was also never given a serious answer. Instead, he was given what we would consider to be a nonsensical threat...

Quote:
Be advice every time as you have sent us email with requires and we spent our time to respond to you, 50 USD investigation fee will be charging from the clients accounts and/or will be charged from your side if the client do not have enough funds left in their accounts . The proper invoices will be sent to you in order to cover our expenses.
This means that Forex-Swiss not only won't recheck their own math for a client. They also threaten to take more money from clients or to bill the FPA for trying to help traders who are victimized by Forex-Swiss's accounting department.

Gerard wrote back and promised that the FPA willl process and pay any invoices that Forex-Swiss sends, as long as Forex-Swiss pays a 200% "potential scam company invoice processing fee". 50% of the fee would be fully refundable (less any banking fees and other costs the FPA incurs) if the issue is later resolved.

Gerard gave Forex-Swiss 48 hours to either pay the money still owed to Raimundas or to show were these fees were documented and to show how the calculations could come up with the amount Forex-Swiss paid. The alternative was that he would submit his final report to the FPA Scam Investigations Committee. They did neither.

Raimundas sent them a copy of the withdrawal from downloaded from the Forex Swiss website that showed no account closure fee. Their reply included this...

Quote:
For Bank wire transfer closure account fee is 20 usd.

For Credit card transfer closure account fee is 80 usd, because credit
card banks charge 4% for withdrawal.
This means that Forex-Swiss took out 4%, then charged $80 because they took out 4%, We still don't know why they took out even more. The bank wire withdrawal form makes no mention of an account closure fee.
And there was more...

Quote:
Be advice, you will be charged 50 usd investigation fee, per every
email sent to us from forexpeacearmy or other company, in order to
cover our legal expenses.

There are also 500 usd fine fee for publishing scam about our company.
We will ask Gerard to send a link to this article to Forex-Swiss. Raimundas has already placed a fraud watch on his credit card, so they won't be able to take any more of his money. We look forward to seeing their invoice.

We can reach no other conclusion but to consider Forex-Swiss to be a scam. We warn traders to not open accounts with this Forex-Swiss. If you have an account with them, we recommend you find the fastest, cheapest way to close it immediately.

EUR/USD Outlook– December 21-25

EUR/USD Outlook– December 21-25
The Euro had a terrible week, hit by bad news and losing major support lines. The upcoming week doesn’t have too many major indicators, but they could still move the Euro. Here’s an outlook for this week’s events, and an updated technical analysis for EUR/USD – the pair is in new ground.

EUR/USD chart with support and resistance lines marked on it. Click to enlarge:

his week’s GfK Consumer Climate survey stands out. Let’s review the events. The extended technical analysis will follow:

1. German GfK Consumer Climate: Published on Tuesday at 7:00 GMT. 2000 consumers are polled about their economic confidence. This index already reached 4.3 points in September, but deteriorated since then down to 3.7 points, as confidence is fragile. It’s predicted to tick down to 3.6 points this time.
2. NBB Business Climate: Published on Tuesday at 14:00 GMT. Despite coming from one of the Euro-zone’s smaller countries, Belgium, this indicator is highly regarded, since it’s a wide survey of 6000 businesses. This indicator has improved in the past 7 months and even exceeded expectations, but it still remained in the negative zone. It reached -8.8 points last month. An improvement to -4.3 points is expected now.
3. German Import Prices: Published on Wednesday at 7:00 GMT. In deflationary Europe, each price-related figure matters. Prices of imported good surprised with a rise of 0.5% last month, after falling in the previous month. This isn’t a very stable indicator. Prices are expected to rise by 0.2% this time.
4. French Consumer Spending: Published on Wednesday at 7:45 GMT. The continent’s second largest economy has seen impressing growth in consumer spending in the past two months with a neat rise of 1.1% last month. In both months, spending has been far better than early expectations. Spending is expected to rise by 0.5% this month.
5. Industrial New Orders: Published on Wednesday at 10:00 GMT. Although being a late figure, published almost two months after the measured month ended, this is still an important gauge for the economy. The last 4 months saw a strong growth in this indicator, that exceeded expectations each time. Last month saw the “weakest” growth, with a rise of 1.5% – but this was also far better than expected.

EUR/USD Technical Analysis

From the fragile close at 1.4625 last week, the Euro went under this minor support quite soon. It later made an impressive break under the very significant support region of 1.4444 – 1.4480 and fell as low as 1.4260 before closing at 1.4342.

Comparing to last week’s outlook, we have lots of new support lines, as the pair is in a totally different ground. Let’s start with the known lines, that turned from resistance to support lines.

1.4444 is the first resistance line, and it’s a major one. This is were the Euro got stuck in the summer, on its way up, before breaking higher. This line returns to that role. The other part of the area, 1.4480, is a minor resistance line.

Looking up, 1.4626, which very temporarily stopped the pair last week, is another minor resistance line. Further up, 1.48 was the bottom border of a range for a long time, and serves as a major resistance line.

Meet new support lines

1.42 worked as a support line before the Euro broke upwards, and now works again as a support line. It was tested also during this Friday. The pair was 60 pips away.

Further below, 1.40 is a round psychological number, and was also a stepping stone for the Euro when it went up. The round number makes it a strong support line.

The most important support line is much lower, at 1.3750. This was both a resistance line in the spring and later worked as a support line in June. Something really big has to happen before this line is breached.

I continue to to be bearish on EUR/USD.

Economy picks up, but can it maintain pace?

Economy picks up, but can it maintain pace?
Over the past few weeks, there have been better-than-expected reports on employment, retail sales and inventories.

As a result, many economists think gross domestic product could easily top a 4% annual rate in the fourth quarter. That would be the faster rate of growth since the first quarter of 2006.
Some are even more optimistic. Edward Yardeni, president of Yardeni Research, has raised his fourth-quarter growth forecast to a 6.4% rate from 4.5%. This would be the fastest pace in nine years.

At some point, economists know that the boost to growth from fiscal stimulus and the inventory rebuilding will ease back. The key question remains whether the recovery can become self-sustaining before the stimulus eases.

Jim O'Sullivan, chief economist at MF Global Inc. in New York, is betting that the economy will accomplish this feat.

Companies will soon start to hire back laid-off workers, he said, boosting spending and income.

Some important voices are sounding notes of caution.

For instance, Harvard economic professor Martin Feldstein and the economic team at Goldman Sachs, both watched closely by other economists, remain pessimistic.

They believe the economy is in danger of running out of steam early next year.

"We ... continue to think that the recovery will be sluggish and that hiring will, if anything, come closer to following the 'jobless recovery' templates of 1991-1992 and 2001-2003," the Goldman Sachs team wrote in an email to clients.

This debate won't be settled this week. Instead, investors will generally be able to enjoy a feast of positive news.

The most critical data for financial markets will come on Thursday with the release of the new orders for long-lasting durable goods for November.

Economists expect durable goods orders to rebound 0.4% in November after a 0.6% fall in October.

Companies are starting to place more orders for big-ticket items, said Jonathan Basile, economist at Credit Suisse.

"Companies have found they don't have enough product on hand recently. They ran down inventories to a point where it was too low," Basile said.

Home sales remain impacted by the government's homebuyer tax credit, which was set to expire in November but has been extended until the middle of next year.

Sales of existing homes probably rose about 2.5% to a seasonally adjusted annual rate of 6.25 million, according to a survey of economists. That translates into a 37% year-over-year increase, the biggest since September 1983, economists at Barclays Capital noted. Thinking that there was a deadline, homebuyers rushed to complete their deals, analysts said. The data will be released on Tuesday.

Meanwhile, sales of new homes probably fell about 2.3% in November to a seasonally adjusted annual rate of 420,000. The tax-credit is having a more muted impact on new homes because they typically are more expensive, Barclays said. The data will be released Wednesday.

Income and spending data for November will also be released on Wednesday and is expected to be strong.

"Against all expectations, Americans still appear to be in a shopping mood heading into the holiday season," wrote Meny Grauman, economist at CIBC World Markets Inc in Toronto.

Personal income is expected to rise 0.5% in November, a faster pace than October's. That is based on a 0.6% jump in hours worked and a 0.1% gain in average hourly earnings in the November nonfarm payroll report.

Consumer spending is expected to have popped up at a 0.6% pace based on the November retail sales report that showed a stronger-than-expect increase.

Also on Wednesday, the University of Michigan and Reuters will report a revised estimate of consumer sentiment for December.

The Michigan sentiment reading jumped to 73.4 in the first half of December from 67.4 in November and close to the recent peak in September of 73.5.

Analysts polled by MarketWatch are looking for a result of 74 in the final reading of the month.

Identifying Trending & Range-Bound Currencies

The overall forex market generally trends more than the overall stock market. Why? The equity market, which is really a market of many individual stocks, is governed by the micro dynamics of particular companies. The forex market, on the other hand, is driven by macroeconomic trends that can sometimes take years to play out. These trends best manifest themselves through the major pairs and the commodity block currencies. Here we take a look at these trends, examining where and why they occur. Then we also look at what types of pairs offer the best opportunities for range-bound trading.

The Majors
There are only four major currency pairs in forex, which makes it a quite easy to follow the market. They are:

* EUR/USD - euro / U.S. dollar
* USD/JPY - U.S. dollar / Japanese yen
* GBP/USD - British pound / U.S. dollar
* USD/CHF - U.S. dollar / Swiss franc

It is understandable why the United States, the European Union and Japan would have the most active and liquid currencies in the world, but why the United Kingdom? After all, as of 2005, India has a larger GDP ($3.3 trillion vs. $1.7 trillion for the U.K.), while Russia's GDP ($1.4 trillion) and Brazil's GDP ($1.5 trillion) almost match U.K.'s total economic production. The explanation, which applies to much of the forex market, is tradition. The U.K. was the first economy in the world to develop sophisticated capital markets and at one time it was the British pound, not the U.S. dollar, that served as the world's reserve currency. Because of this legacy and because of London's primacy as the center of global forex dealing, the pound is still considered one of the major currencies of the world.

The Swiss franc, on the other hand, takes its place amongst the four majors because of Switzerland's famed neutrality and fiscal prudence. At one time the Swiss franc was 40% backed by gold, but to many traders in the forex market it is still known as "liquid gold". In times of turmoil or economic stagflation, traders turn to the Swiss franc as a safe-haven currency.

The largest major pair - in fact the single most liquid financial instrument in the world - is the EUR/USD. This pair trades almost $1 trillion per day of notional value from Tokyo to London to New York 24 hours a day, five days a week. The two currencies represent the two largest economic entities in the world: the U.S. with an annual GDP of $11 trillion and the Eurozone with a GDP of about $10.5 trillion.

Although U.S. economic growth has been far better than that of the Eurozone (3.1% vs.1.6%), the Eurozone economy generates net trade surpluses while the U.S. runs chronic trade deficits. The superior balance-sheet position of the Eurozone and the sheer size of the Eurozone economy has made the euro an attractive alternative reserve currency to the dollar. As such, many central banks including Russia, Brazil and South Korea have diversified some of their reserves into euro. Clearly this diversification process has taken time as do many of the events or shifts that affect the forex market. That is why one of the key attributes of successful trend trading in forex is a longer-term outlook.

Observing the Significance of the Long Term
To see the importance of this longer-term outlook, take a look at Figure 1 and Figure 2, which both use a three-simple-moving-average (three-SMA) filter.
Figure 1 - Charts the EUR/USD exchange rate from Mar 1 to May 15, 2005. Note recent price action suggests choppiness and a possible start of a downtrend as all three simple moving averages line up under one another.
Figure 2 - Charts the EUR/USD exchange rate from Aug 2002 to Jun 2005. Every bar corresponds to one week rather than one day (as in Figure 1). And in this longer-term chart, a completely different view emerges - the uptrend remains intact with every down move doing nothing more than providing the starting point for new highs.

The three-SMA filter is a good way to gauge the strength of trend. The basic premise of this filter is that if the short-term trend (seven-day SMA) and the intermediate-term trend (20-day SMA) and the long-term trend (65-day SMA) are all aligned in one direction, then the trend is strong.

Some traders may wonder why we use the 65 SMA. The truthful answer is that we picked up this idea from John Carter, a futures trader and educator, as these were the values he used. But the importance of the three-SMA filter not does lie in the specific SMA values, but rather in the interplay of the short-, intermediate- and long-term price trends provided by the SMAs. As long you use reasonable proxies for each of these trends, the three-SMA filter will provide valuable analysis.

Looking at the EUR/USD from two time perspectives, we can see how different the trend signals can be. Figure 1 displays the daily price action for the months of March, April and May 2005, which shows choppy movement with a clear bearish bias. Figure 2, however, charts the weekly data for all of 2003, 2004 and 2005, and paints a very different picture. According to Figure 2, EUR/USD remains in a clear uptrend despite some very sharp corrections along the way.

Warren Buffett, the famous investor who is well known for making long-term trend trades, has been heavily criticized for holding onto his massive long EUR/USD position which has suffered some losses along the way. By looking at the formation on Figure 2, however, it becomes much clearer why Buffet may have the last laugh.

Commodity Block Currencies
The three most liquid commodity currencies in forex markets are USD/CAD, AUD/USD and NZD/USD. The Canadian dollar is affectionately known as the "loonie", the Australian dollar as the "Aussie" and the New Zealand Dollar as the "kiwi". These three nations are tremendous exporters of commodities and often trend very strongly in concert with the demand for each their primary export commodity.

For instance, take a look at Figure 3, which shows the relationship between the Canadian dollar and prices of crude oil. Canada is the largest exporter of oil to U.S. and almost 10% of Canada's GDP comprises the energy exploration sector. The USD/CAD trades inversely, so Canadian dollar strength creates a downtrend in the pair.

Figure 3 - This chart displays the relationship between the loonie and price of crude oil. The Canadian economy is a very rich source of oil reserves. The chart shows that as the price of oil increases, it becomes less expensive for a person holding the Canadian dollar to purchase U.S.dollars.

Although Australia does not have many oil reserves, the country is a very rich source of precious metals and is the second-largest exporter of gold in the world. In Figure 4 we can see the relationship between the Australian dollar and gold.
Figure 4 - This chart looks at the relationship between the Aussie and gold prices (in U.S. dollars). Note how a rally in gold from Dec 2002 to Nov 2004 coincided with a very strong uptrend in the Australian dollar.

Crosses Are Best for Range
In contrast to the majors and commodity block currencies, both of which offer traders the strongest and longest trending opportunities, currency crosses present the best range-bound trades. In forex, crosses are defined as currency pairs that do not have the USD as part of the pairing. The EUR/CHF is one such cross, and it has been known to be perhaps the best range-bound pair to trade. One of the reasons is of course that there is very little difference between the growth rates of Switzerland and the European Union. Both regions run current-account surpluses and adhere to fiscally conservative policies.

One strategy for range traders is to determine the parameters of the range for the pair, divide these parameters by a median line and simply buy below the median and sell above it. The parameters of the range is determined by the high and low between which the prices fluctuate over a give period. For example in EUR/CHF, range traders could, for the period between May 2004 to Apr 2005, establish 1.5550 as the top and 1.5050 as the bottom of the range with 1.5300 median line demarcating the buy and sell zones. (See Figure 5 below).
Figure 5 - This charts the EUR/CHF (from May 2004 to Apr 2005), with 1.5550 as the top and 1.5050 as the bottom of the range, and 1.5300 as the median line. One range-trading strategy involves selling above the median and buying below the median.
Remember range traders are agnostic about direction (for more on this, see Trading Trend or Range?). They simply want to sell relatively overbought conditions and buy relatively oversold conditions.

Cross currencies are so attractive for the range-bound strategy because they represent currency pairs from culturally and economically similar countries; imbalances between these currencies therefore often return to equilibrium. It is hard to fathom, for instance, that Switzerland would go into a depression while the rest of Europe merrily expands. The same sort of tendency toward equilibrium, however, cannot be said for stocks of similar nature. It is quite easy to imagine how, say, General Motors could file for bankruptcy even while Ford and Chrysler continue to do business. Because currencies represent macroeconomic forces they are not as susceptible to risks that occur on the micro level - as individual company stocks are. Currencies are therefore much safer to range trade.

Nevertheless, risk is present in all speculation, and traders should never range trade any pair without a stop loss. A reasonable strategy is to employ a stop at half the amplitude of the total range. In the case of the EUR/CHF range we defined in Figure 5, the stop would be at 250 pips above the high and 250 below the low. In other words if this pair reached 1.5800 or 1.4800, the trader should stop him- or herself out of the trade because the range would most likely have been broken.

Interest Rates - the Final Piece of the Puzzle
While EUR/CHF has a relatively tight range of 500 pips over the year shown in Figure 5, a pair like GBP/JPY has a far larger range at 1800 pips, which is shown in Figure 6. Interest rates are the reason there's a difference.

The interest rate differential between two countries affects the trading range of their currency pairs. For the period represented in Figure 5, Switzerland has an interest rate of 75 basis points (bps) and Eurozone rates are 200 bps, creating a differential of only 125 bps. However, for the period represented in Figure 6, however, the interest rates in the U.K are at 475 bps while in Japan - which is gripped by deflation - rates are 0 bps, making a whopping 475 bps differential between the two countries. The rule of thumb in forex is the larger the interest rate differential, the more volatile the pair.
Figure 6 - This charts the GBP/JPY (from Dec 2003 to Nov 2004). Notice the range in this pair is almost 1800 pips!

To further demonstrate the relationship between trading ranges and interest rates, the following is a table of various crosses, their interest rate differentials and the maximum pip movement from high to low over the period from May 2004 to May 2005.

Using Currency Correlations To Your Advantage

To be an effective trader, understanding your overall portfolio's sensitivity to market volatility is important. But this is particularly so when trading forex. Because currencies are priced in pairs, no single pair trades completely independently of the others. Once you know about these correlations and how they change, you can take advantage of them to control over your portfolio's exposure.

Defining Correlation
The reason for the interdependence of currency pairs is easy to see: if you were trading the British pound against the Japanese yen (GBP/JPY pair), for example, you are actually trading a kind of derivative of the GBP/USD and USD/JPY pairs; therefore, GBP/JPY must be somewhat correlated to one if not both of these other currency pairs. However, the interdependence among currencies stems from more than the simple fact that they are in pairs. While some currency pairs will move in tandem, other currency pairs may move in opposite directions, which is in essence the result of more complex forces.

Correlation, in the financial world, is the statistical measure of the relationship between two securities. The correlation coefficient ranges between -1 and +1. A correlation of +1 implies that the two currency pairs will move in the same direction 100% of the time. A correlation of -1 implies the two currency pairs will move in the opposite direction 100% of the time. A correlation of zero implies that the relationship between the currency pairs is completely random.

Reading The Correlation Table
With this knowledge of correlations in mind, let's look at the following tables, each showing correlations between the major currency pairs for the month of March 2005.

The upper table above shows that over the month of March (one month) EUR/USD and AUD/USD had very strong positive correlation of 0.94. This implies that when the EUR/USD rallies, the AUD/USD will also rally 94% of the time. Over the longer term (three months), though, the correlation is slightly weaker (0.47).

By contrast, the EUR/USD and USD/CHF had a near-perfect negative correlation of -0.99. This implies that 99% of the time, when the EUR/USD rallies, USD/CHF will undergo a selloff. This relationship even holds true over longer periods as the correlation figures remain relatively stable.

Yet correlations do not always remain stable. Take USD/CAD and NZD/USD, for example. With a coefficient of -0.94, they had a strong negative correlation over the past year, but the relationship deteriorated over March 2005 for a number of factors, including the Reserve Bank of New Zealand's intentions to resume rate hikes, and political instability in Canada.

Correlations Do Change
It is clear then that correlations do change, which makes following the shift in correlations even more important.Sentiment and global economic factors are very dynamic and can even change on a daily basis.Strong correlations today might not be in line with the longer-term correlation between two currency pairs.That is why taking a look at the six-month trailing correlation is also very important.This provides a clearer perspective on the average six-month relationship between the two currency pairs, which tends to be more accurate.Correlations change for a variety of reasons, the most common of which include diverging monetary policies, a certain currency pair’s sensitivity to commodity prices, as well as unique economic and political factors.

Here is a table showing the six-month trailing correlations that EUR/USD shares with other pairs:
Calculating Correlations Yourself
The best way to keep current on the direction and strength of your correlation pairings is to calculate them yourself. This may sound difficult, but it's actually quite simple.

To calculate a simple correlation, just use a spreadsheet, like Microsoft Excel. Many charting packages (even some free ones) allow you to download historical daily currency prices, which you can then transport into Excel. In Excel, just use the correlation function, which is =CORREL(range 1, range 2). The one-year, six-, three- and one-month trailing readings give the most comprehensive view of the similarities and differences in correlation over time; however, you can decide for yourself which or how many of these readings you want to analyze.

Here is the correlation-calculation process reviewed step by step:

1. Get the pricing data for your two currency pairs; say they are GBP/USD and USD/JPY
2. Make two individual columns, each labeled with one of these pairs. Then fill in the columns with the past daily prices that occurred for each pair over the time period you are analyzing
3. At the bottom of the one of the columns, in an empty slot, type in =CORREL(
4. Highlight all of the data in one of the pricing columns; you should get a range of cells in the formula box.
5. Type in comma
6. Repeat steps 3-5 for the other currency
7. Close the formula so that it looks like =CORREL(A1:A50,B1:B50)
8. The number that is produced represents the correlation between the two currency pairs

Even though correlations do change, it is not necessary to update your numbers every day, updating once every few weeks or at the very least once a month is generally a good idea.

How To Use It To Manage Exposure
Now that you know how to calculate correlations, it is time to go over how to use them to your advantage.

First, they can help you avoid entering two positions that cancel each other out, For instance, by knowing that EUR/USD and USD/CHF move in opposite directions nearly 100% of time, you would see that having a portfolio of long EUR/USD and long USD/CHF is the same as having virtually no position - this is true because, as the correlation indicates, when the EUR/USD rallies, USD/CHF will undergo a selloff. On the other hand, holding long EUR/USD and long AUD/USD is similar to doubling up on the same position since the correlation is so strong.

Diversification is another factor to consider. Since the EUR/USD and AUD/USD correlation is traditionally not 100% positive, traders can use these two pairs to diversify their risk somewhat while still maintaining a core directional view. For example, to express a bearish outlook on the USD, the trader, instead of buying two lots of the EUR/USD, may buy one lot of the EUR/USD and one lot of the AUD/USD. The imperfect correlation between the two different currency pairs allows for more diversification and marginally lower risk. Furthermore, the central banks of Australia and Europe have different monetary policy biases, so in the event of a dollar rally, the Australian dollar may be less affected than the Euro, or vice versa.

A trader can use also different pip or point values for his or her advantage. Lets consider the EURUSD and USDCHF once again. They have a near-perfect negative correlation, but the value of a pip move in the EURUSD is $10 for a lot of 100,000 units while the value of a pip move in USDCHF is $8.34 for the same number of units. This implies traders can use USDCHF to hedge EURUSD exposure.

Here's how the hedge would work: say a trader had a portfolio of one short EUR/USD lot of 100,000 units and one short USD/CHF lot of 100,000 units. When the EUR/USD increases by ten pips or points, the trader would be down $100 on the position. However, since USDCHF moves opposite to the EURUSD, the short USDCHF position would be profitable, likely moving close to ten pips higher, up $83.40. This would turn the net loss of the portfolio into minus $16.60 instead of minus $100. Of course, this hedge also means smaller profits in the event of a strong EUR/USD sell-off, but in the worst-case scenario, losses become relatively lower.

Regardless of whether you are looking to diversify your positions or find alternate pairs to leverage your view, it is very important to be aware of the correlation between various currency pairs and their shifting trends. This is powerful knowledge for all professional traders holding more than one currency pair in their trading accounts. Such knowledge helps traders, diversify, hedge or double up on profits.

Summary
To be an effective trader, it is important to understand how different currency pairs move in relation to each other so traders can better understand their exposure. Some currency pairs move in tandem with each other, while others may be polar opposites. Learning about currency correlation helps traders manage their portfolios more appropriately. Regardless of your trading strategy and whether you are looking to diversify your positions or find alternate pairs to leverage your view, it is very important to keep in mind the correlation between various currency pairs and their shifting trends.

Trading Trend Or Range?

Whether trading stocks, futures, options or FX, traders confront the single most important question: to trade trend or range? And they answer this question by assessing the price environment; doing so accurately greatly enhances a trader's chance of success. Trend or range are two distinct price properties requiring almost diametrically opposed mindsets and money-management techniques. Fortunately, the FX market is uniquely suited to accommodate both styles, providing trend and range traders with opportunities for profit. Since trend trading is far more popular, let's first examine how trend traders can benefit from FX.

Trend What is trend? The simplest identifiers of trend direction are higher lows in an uptrend and lower highs in a downtrend. Some define trend as a deviation from a range as indicated by Bollinger Band "bands" (see Using Bollinger Band "Bands" to Trade Trend in FX). For others, a trend occurs when prices are contained by an upward or downward sloping 20-period simple moving average (SMA).

Regardless of how one defines it, the goal of trend trading is the same - join the move early and hold the position until the trend reverses. The basic mindset of trend trader is "I am right or I am out?" The implied bet all trend traders make is that price will continue in its present direction. If it doesn't there is little reason to hold onto the trade. Therefore, trend traders typically trade with tight stops and often make many probative forays into the market in order to make the right entry.

By nature, trend trading generates far more losing trades than winning trades and requires rigorous risk control. The usual rule of thumb is that trend traders should never risk more than 1.5-2.5% of their capital on any given trade. On a 10,000-unit (10K) account trading 100K standard lots, that means stops as small as 15-25 pips behind the entry price. Clearly, in order to practice such a method, a trader must have confidence that the market traded will be highly liquid.

Of course the FX market is the most liquid market in the world. With US$1.6 trillion of average daily turnover, the currency market dwarfs the stock and bond markets in size. Furthermore, the FX market trades 24 hours a day five days a week, eliminating much of the gap risk found in exchange-based markets. Certainly gaps sometimes happen in FX, but not nearly as frequently as they occur in stock or bond markets, so slippage is far less of a problem.

High Leverage - Large Profits When trend traders are correct about the trade, the profits can be enormous. This dynamic is especially true in FX where high leverage greatly magnifies the gains. Typical leverage in FX is 100:1, meaning that a trader needs to put down only $1 of margin to control $100 of the currency. Compare that with the stock market where leverage is usually set at 2:1, or even the futures market where even the most liberal leverage does not exceed 20:1.

It's not unusual to see FX trend traders double their money in a short period if they catch a strong move. Suppose a trader starts out with $10,000 in his or her account, and uses a strict stop-loss rule of 20 pips. The trader may get stopped out five or six times, but if he or she is properly positioned for a large move - like the one in EUR/USD between Sept and Dec 2004 when the pair rose more than 12 cents, or 1,200 pips - that one-lot purchase could generate something like a $12,000 profit, doubling the trader's account in a matter of months.

Of course few traders have the discipline to take stop losses continuously. Most traders, dejected by a series of bad trades tend to become stubborn and fight the market, often placing no stops at all. This is when FX leverage can be most dangerous. The same process that quickly produces profits can also generate massive losses. The end result is that many undisciplined traders suffer a margin call and lose most of their speculative capital.

Trading trend with discipline can be extremely difficult. If the trader uses high leverage he or she leaves very little room to be wrong. Trading with very tight stops can often result in 10 or even 20 consecutive stop outs before the trader can find a trade with strong momentum and directionality.

For this reason many traders prefer to trade range-bound strategies. Please note that when I speak of ‘range-bound trading' I am not referring to the classic definition of the word 'range'. Trading in such a price environment involves isolating currencies that are trading in channels, and then selling at the top of the channel and buying at the bottom of the channel. This can be a very worthwhile strategy, but, in essence, it is still a trend-based idea - albeit one that anticipates an imminent countertrend. (What is a countertrend after all, except a trend going the other way?)

Range True range traders don't care about direction. The underlying assumption of range trading is that no matter which way the currency travels, it will most likely return back to its point of origin. In fact, range traders bet on the possibility that prices will trade through the same levels many times, and the traders' goal is to harvest those oscillations for profit over and over again.

Clearly range trading requires a completely different money-management technique. Instead of looking for just the right entry, range traders prefer to be wrong at the outset so that they can build a trading position.

For example, imagine that EUR/USD is trading at 1.3000. A range trader may decide to short the pair at that price and every 50 pips higher, and then buy it back as it moves every 25 pips down. His or her assumption is that eventually the pair will return to that 1.3000 level again. If EUR/USD rises to 1.3500 and then turns back down hitting 1.3000, the range trader would harvest a handsome profit, especially if the currency moves back and forth in its climb to 1.3500 and its fall to 1.3000.

However, as we can see from this example a range-bound trader will need to have very deep pockets in order to implement this strategy. In this case employing large leverage can be devastating since positions can often go against the trader for many points in a row and, if he or she is not careful, trigger a margin call before the currency eventually turns around.

Solutions for Range Traders Fortunately, the FX market provides a flexible solution for range trading. Most retail FX dealers offer mini lots of 10,000 units rather than 100K lots. In a 10K lot each individual pip is worth only $1 instead of $10, so the same hypothetical trader with a $10,000 account can have a stop-loss budget of 200 pips instead of only 20 pips. Even better, many dealers allow customers to trade in units of 1K or even 100-unit increments. Under that scenario, our range trader trading 1K units could withstand a 2,000-pip drawdown (with each pip now worth only 10 cents) before triggering a stop loss. This flexibility allows range traders plenty of room to run their strategies.

In FX, almost no dealer charges commission. Customers simply pay the bid-ask spread. Furthermore, regardless of whether a customer wants to deal for 100 units or 100,000 units, most dealers will quote the same price. Therefore, unlike the stock or futures markets where retail customers often have to pay prohibitive commissions on very small size trades, retail speculators in FX suffer no such disadvantage. In fact a range-trading strategy can be implanted on even a small account of $1,000, as long as the trader properly sizes his or her trades.

Conclusion Whether a trader wants to swing for homeruns by trying to catch strong trends with very large leverage or simply hit singles and bunts by trading a range strategy with very small lot sizes, the FX market is extraordinarily well suited for both approaches. As long as the trader remains disciplined about the inevitable losses and understands the different money-management schemes involved in each strategy, he or she will have a good chance of success in this market. Next month, we'll examine the various currency pairs to determine which ones are best suited for trend strategy and which are best suited for range.

Bond Spreads: A Leading Indicator For Forex

The global markets are really just one big interconnected web. We frequently see the prices of commodities and futures impact the movements of currencies, and vice versa. The same is true with the relationship between currencies and bond spread (the difference between countries' interest rates): the price of currencies can impact the monetary policy decisions of central banks around the world, but monetary policy decisions and interest rates can also dictate the price action of currencies. For instance, a stronger currency helps to hold down inflation, while a weaker currency will boost inflation. Central banks take advantage of this relationship as an indirect means to effectively manage their respective countries' monetary policies.

By understanding and observing these relationships and their patterns, investors have a window into the currency market, and thereby a means to predict and capitalize on the movements of currencies.

What Does Interest Have to Do With Currencies?
To see how interest rates have played a role in dictating currency, we can look to the recent past. After the burst of the tech bubble in 2000, traders went from seeking the highest possible returns to focusing on capital preservation. But since the U.S. was offering interest rates below 2% (and going even lower), many hedge funds and those who had access to the international markets went abroad in search of higher yields. Australia, with the same risk factor as the U.S., offered interest rates in excess of 5%. As such, it attracted large streams of investment money into the country and, in turn, assets denominated in the Australian dollar.

These large differences in interest rates led to the emergence of the carry trade, an interest rate arbitrage strategy that takes advantage of the interest rate differentials between two major economies, while aiming to benefit from the general direction or trend of the currency pair. This trade involves buying one currency and funding it with another, and the most commonly used currencies to fund carry trades are the Japanese yen and the Swiss franc because of their countries' exceptionally low interest rates. The popularity of the carry trade is one of the main reasons for the strength seen in pairs such as the Australian dollar and the Japanese yen (AUD/JPY), the Australian dollar and the U.S. dollar (AUD/USD), the New Zealand dollar and the U.S. dollar (NZD/USD), and the U.S. dollar and the Canadian dollar (USD/CAD).

However, it is difficult for individual investors to send money back and forth between bank accounts around the world. The retail spread on exchange rates can offset any additional yield they are seeking. On the other hand, investment banks, hedge funds, institutional investors and large commodity trading advisors (CTAs) generally have the ability to access these global markets and the clout to command low spreads. As a result, they shift money back and forth in search of the highest yields with the lowest sovereign risk (or risk of default). When it comes to the bottom line, exchange rates move based upon changes in money flows.

The Insight for Investors
Individual investors can take advantage of these shifts in flows by monitoring yield spreads and the expectations for changes in interest rates that may be embedded in those yield spreads. The following chart is just one example of the strong relationship between interest rate differentials and the price of a currency.
Notice how the blips on the charts are near-perfect mirror images. The chart shows us that the five-year yield spread between the Australian dollar and the U.S. dollar (represented by the blue line) was declining between 1989 and 1998. This coincided with a broad sell-off of the Australian dollar against the U.S. dollar.

When the yield spread began to rise once again in the summer of 2000, the Australian dollar responded with a similar rise a few months later. The 2.5% spread advantage of the Australian dollar over the U.S. dollar over the next three years equated to a 37% rise in the AUD/USD. Those traders who managed to get into this trade not only enjoyed the sizable capital appreciation, but also earned the annualized interest rate differential. Therefore, based on the relationship demonstrated above, if the interest rate differential between Australia and the U.S. continued to narrow (as expected) from the last date shown on the chart, the AUD/USD would eventually fall as well.
This connection between interest rate differentials and currency rates is not unique to the AUD/USD; the same sort of pattern can be seen in USD/CAD, NZD/USD and the GBP/USD. Take a look at the next example of the interest rate differential of New Zealand and U.S. five-year bonds versus the NZD/USD.
The chart provides an even better example of bond spreads as a leading indicator. The differential bottomed out in the spring of 1999, while the NZD/USD did not bottom out until the fall of 2000. By the same token, the yield spread began to rise in the summer of 2000, but the NZD/USD began rising in the early fall of 2001. The yield spread topping out in the summer of 2002 may be significant into the future beyond the chart. History shows that the movement in interest rate difference between New Zealand and the U.S. is eventually mirrored by the currency pair. If the yield spread between New Zealand and the U.S. continued to fall, then one could expect the NZD/USD to hit its top as well.

Using Options Tools To Trade Foreign-Exchange Spot

Delta, gamma, risk reversals and volatility are concepts familiar to nearly all options traders. However, these same tools used to trade currency options can also be useful in predicting movements in the underlying, which in foreign exchange (FX) is the cash or spot product. In this article, we look at how volatility can be used to determine upcoming market activity, how delta can be used to calculate the probability of spot movements, how gamma can predict trading environments and how risk reversals are applicable to the cash market.

Using Volatility to Forecast Market Activity
Option volatilities measure the rate and magnitude of the changes in a currency's price. Implied option volatilities on the other hand measure the expected fluctuation of a currency’s price over a given period of time based upon historical fluctuations. Volatility calculations typically involve the historic annual standard deviation of daily price changes.

Option volatility information is readily available. IFR Markets publishes real-time volatility data on the FXCM news plug-in. The plug-in only shows current volatilities, so for forecasting market activity traders will need to keep a journal tracking historical implied volatilities.

In using volatility to forecast market activity, the trader needs to make certain comparisons. Although the most reliable comparison is implied versus actual, the availability of actual data is limited. Alternatively, comparing historical implied volatilities are also effective. One-month and three-month implied volatilities are two of the most commonly benchmarked time frames used for comparison (the numbers below represent percentages).
Source: IFR Market News Plug-in

Here is what the comparisons indicate:

* If short-term option volatilities are significantly lower than long-term volatilities, expect a potential breakout.
* If short-term option volatilities are significantly higher than long-term volatilities, expect reversion to range trading.

Typically in range-trading scenarios, implied option volatilities are low or declining because in periods of range trading, there tends to be minimal movement. When option volatilities take a sharp dive, it can be a good signal for an upcoming trading opportunity. This is very important for both range and breakout traders. Traders who usually sell at the top of the range and buy at bottom, can use option volatilities to predict when their strategy might stop working - more specifically, if volatility contracts become very low, the likelihood of continued range trading decreases.

Breakout traders, on the other hand, can also monitor option volatilities to make sure that they are not buying or selling into a false breakout. If volatility is at average levels, the likelihood of a false breakout increases. Alternatively, if volatility is very low, the probability of a real breakout increases. These guidelines generally work well, but traders also have to be careful. Volatilities can have long downward trends (as they did between June and Oct 2002) during which time volatilities can be misleading. Traders need to look for sharp movements in volatilities, not a gradual one.

The following is a chart of USD/JPY. The green line represents short-term volatility, the red line long-term volatility and the blue line price action. The arrows with no labels are pointing to periods when short-term volatility rises significantly above long-term volatility. You can see such divergence in volatility tends to be followed by periods of range trading. The ‘1M implied’ arrow is pointing to a period when short-term volatility dips below long-term volatility. At price action above that, a breakout occurs when short-term volatility reverts back towards long-term volatility.
Using Delta to Calculate Spot Probabilities
What Is Delta?
Options price can be seen as a representation of the market’s expectation of the future distribution of spot prices. The delta of an option can be thought of roughly as the probability of the option finishing in the money. For example, given a one-month USD/JPY call option struck at 104 with a delta of 50, the probability of USD/JPY finishing above 104 one month from now would be approximately 50%.

Calculating Spot Probabilities
With information on deltas, one can approximate the market’s expectation of the likelihood of different spot levels over time. When the probability of the spot finishing above a certain level, call-option deltas are used. Similarly when the probability of spot finishing below a certain level, put-option deltas are used.

The key to calculating expected spot levels is using conditional probability. Given two events, A and B, the probability of A and B occurring is calculated as follows:

P(A and B) = P(A)*P(B|A)

In words, the probability of A and B occurring is equal to the probability of A times the probability of B given the occurrence of A.
Here is the formula applied to the problem of calculating the probability that spot will touch a certain level:

P(touching and finishing above spot level) = P(touching spot level) * P(finishing above spot | touched spot level)

In words, the probability of spot touching and finishing above a certain level (or delta) is equal to the probability of spot touching that level times the probability of spot finishing above a certain level given that is has already touched that level.
Given options prices and corresponding deltas, this probability calculation can be used to get a general idea of the market’s expectations of various spot levels. The rule-of-thumb this methodology yields is that the probability of spot touching a certain level is roughly equivalent to two times the delta of an option struck at that level.

Using Gamma to Predict Trading Environments
What Is Gamma?
Gamma represents the change in delta for a given change in the spot rate. In trading terms, players become long gamma when they buy standard puts or calls, and short gamma when they sell them. When commentators speak of the entire market being long or short gamma, they are usually referring to market makers in the interbank market.

How Market Makers View Gamma
Generally, options market makers seek to be delta neutral - that is, they want to hedge their portfolios against movement in the underlying spot rate. The amount by which their delta, or hedge ratio, changes is known as gamma.

Say a trader is long gamma, meaning he or she has bought some standard vanilla options. Assume they are USD/JPY options. If we further assume that the delta position of these options is $10 million at USD/JPY 107, the trader will need to sell $10 million USD/JPY at 107 in order to be fully insulated against spot movement.

If USD/JPY rises to 108, the trader will need to sell another $10 million, this time at 108, as the total delta position becomes $20 million. What happens if USD/JPY goes back to 107? The delta position goes back to $10 million, as before. Because the trader is now short $20 million, he or she will need to buy back $10 million at 107. The net effect then is a 100-pip profit, selling a 108 and buying at 107.

In sum, when traders are long gamma, they are continually buying low and selling high, or vice versa, in order to hedge. When the spot market is very volatile, traders earn a lot of profits through their hedging activity. But these profits are not free, as there is a premium to own the options. In theory, the amount you make from delta hedging should exactly offset the premium. Whether or not this is true in practice depends on the actual volatility of the spot rate.

The reverse is true when a trader has sold options. When short gamma, in order to hedge, the trader must continually buy high and sell low - thus he or she loses money on the hedges, in theory the exact same amount earned in options premium through the sales.

Why Is Gamma Important for Spot Traders?
But what relevance does all this have for regular spot traders? The answer is that spot movement is increasingly driven by what goes on in the options market. When the market is long gamma, market makers as a whole will be buying spot when it falls and selling spot when the exchange rate rises. This behavior can generally keep the spot rate in a relatively tight range.

When the market is short gamma, however, the spot rate can be prone to wide swings as players are either continually selling when prices fall, or buying when prices rise. A market that is short gamma will exacerbate price movement through its hedging activity. Thus:

* When market makers are long gamma, spot generally trades in a tighter range.
* When market makers are short gamma, spot can be prone to wide swings.

Using Risk Reversals to Judge Market Positioning
What Are Risk Reversals?
Risk reversals are a representation of the market’s expectations on the exchange-rate direction. Filtered properly, risk reversals can generate profitable overbought and oversold signals.

A risk reversal consists of a pair of options, a call and a put, on the same currency, with the same expiration (one month) and sensitivity to the underlying spot rate. Risk reversals are quoted in terms of the difference in volatility between the two options. While in theory these options should have the same implied volatility, in practice they often differ in the market. A positive number indicates that calls are preferred to puts and that the market is expecting a move up in the underlying currency. Likewise, a negative number indicates that puts are preferred to calls and that the market is expecting a move down in the underlying currency.

Risk reversals can be seen as having a ‘market polling function’. A positive risk-reversal number implies that more market participants are voting for a rise in the currency than for a drop. Thus, risk reversals can be used as a substitute for gauging positions in the FX market.

How Can Risk Reversals Be Used to Predict Spot-Currency Movement?
While the signals generated by a risk-reversal system will not be completely accurate, they can specify when the market is bullish or bearish.

Risk reversals convey the most information when they are at relatively extreme values. These extreme values are commonly defined as one standard deviation beyond the averages of positive and negative values. Therefore we are looking at values one standard deviation below the average of negative risk-reversal figures, and values one standard deviation above the average of positive risk-reversal figures.

When risk reversals are at these extreme values, they give off contrarian signals - when the entire market is positioned for a rise in a given currency, it makes it that much harder for the currency to rally, and that much easier for it to fall on negative news or events. A large positive risk-reversal number implies an overbought situation, while a large negative risk-reversal number implies an oversold situation. The buy or sell signals produced by risk reversals are not perfect, but they can convey additional information used to make trading decisions.

Example: GBP/USD Here we see risk reversals can generate reasonably accurate signals at extreme values:

Summary
There are many tools used by seasoned options traders that can also be useful to trading spot FX. Volatility can be used to forecast market activity in the cash component through comparing short-term versus longer term implied volatilities. Delta can help estimate the probability of the spot rate reaching a certain level. And gamma can predict whether spot will trade in a tighter range if it is vulnerable to wider swings. Risk reversals are a representation of the market's expectations on exchange-rate direction. If filtered properly, risk reversals can be used to gauge market sentiment and determine overbought and oversold conditions.

Profiting From Interventions In Forex Markets

How would you like to make US$1,287 in 10 minutes? Well, if you had purchased a $100,000 lot of US dollar/Japanese yen on Dec 10, 2003 at 107.40 and sold 10 minutes later at 108.80, you could have!

1. Bought $100,000 and sold 10,740,000 yen (100,000*107.40)
2. Ten minutes later, the USD/JPY increases to 108.80
3. Sell $100,000 to buy 10,880,000 yen to realize a gain of 140,000 yen
4. In dollar terms, the gain would be 140,000/108.8 = $1,286.76 USD

So, who was on the other end of the trade taking the huge losses? Believe it or not, it was the central Bank of Japan! And why would they do this? The act is known as an intervention, but before we discover why they do it, let's quickly review the economics of the currency markets.

A Brief Economics Lesson
The entire foreign-exchange market (forex) revolves around currencies and their valuations relative to one another. These valuations play a large role in domestic and global economics. They determine many things, most notably the prices of imports and exports.

Valuation and the Central Banks
In order to understand why interventions occur, we must first establish how currencies are valuated. This can happen in two ways: by the market through supply and demand or by governments (ie: central banks). Subjecting a currency to valuation by the markets is known as floating the currency. Conversely, currency rates set by governments is known as fixing the currency, meaning a country’s currency is pegged to a major world currency (usually the U.S. dollar). Thus, in order for a central bank to maintain or stabilize the local exchange rate, it will implement monetary policy by adjusting interest rates or by buying and selling its own currency on the foreign-exchange market in return for the currency to which it is pegged, called intervention.

Instability and Intervention
Since currencies always trade in pairs (relative to one another), a significant movement in one directly impacts the other. When a country's currency becomes unstable for any reason (speculation, growing deficits, national tragedy, etc), other countries experience the aftereffect. Normally, this occurs over a long period of time, which allows for the market and/or central banks to effectively deal with any revaluation needs.

There becomes a problem, however, when there is a sudden and rapid and sustainable movement in a currency's valuation, which makes it impractical or even impossible for a central bank to immediately respond via interest rates, used to quickly correct the movement. These are times in which interventions take place.

Take the USD/JPY currency pair, for example. Between 2000 and 2003, the Bank of Japan intervened several times to keep the yen valued lower than the dollar as they were afraid of a increase in the value of the yen, making exports relatively more expensive than imports and hindering an economic recovery at that time. In 2001, Japan intervened and spent more than $28 billion to halt the yen from appreciating and in 2002, they spent a record $33 billion to keep the yen down.

Trading & Interventions
Interventions present an interesting opportunity for traders. If there is some significant negative catalyst (such as national debt or tragedy), this can indicate to traders that a currency they are targeting should be fundamentally valued lower. For example, the U.S. budget deficit caused the dollar to fall rapidly in relation to the yen, whose value, in turn, rose rapidly. In such circumstances, traders can speculate on the likelihood of an intervention, which would result in sharp price movements in the short term. This creates an opportunity for traders to profit handsomely by taking a position before the intervention and exiting the position after the effects of the intervention takes place. It is important to realize, however, that trading against a fast-moving trend (looking for an intervention) can be very risky and should be reserved for speculation traders.Furthermore, trading against a trend, especially when leveraged, can be extremely dangerous as large amounts of capital can be lost in short periods of time.

The Intervention
Now, let's take a look at what the intervention looks like on the charts:
Here we can see that between 2000 and 2003, the Bank of Japan intervened several times. Please note that there may have been more or less interventions than shown here since these interventions are not always made public. It is usually easy to spot them when they occur, however, because of the large short-term price movement, such as the one mentioned in the beginning of this article.

Trading
Knowing when interventions may occur is more of an art than a science; but, that doesn't mean there aren't clear indicators to help you. Here are some basic principles to follow:

1. Interventions usually occur around the same price level as previous interventions. In the case of the USD/JPY, this level was 115.00 – notice in the chart above that the interventions pushed the value of the dollar above that point for quite some time. But keep in mind that this may not always be true; interventions may cease if the central bank deems it unnecessary (i.e. too costly). This is also apparent where we see the value drop below 115.00.
2. Sometimes there are verbal clues prior to interventions. Japan’s former finance minister Kiichi Miyazawa was infamous for threatening to intervene on multiple occasions. Similarly, the European Union has given clues as to their possible intervention in the future. Sometimes these words alone are enough to move the markets. Keep in mind, however, that the more often traders hear these threats with no action, the less impact these threats will have on the market.
3. Analysts also often give good estimates of intervention levels. Keep an eye on foreign exchange analysts from popular banks and investment firms for a good idea of when to expect them.

Knowing these can help you determine when an intervention is likely to occur. Here is some advice for trading when an intervention is occurring:

1. Gauge the expected price levels by locating previous intervention movements. Again, we can see that most of the major interventions in the USD/JPY pair amounted to 125.00 or so, before resuming a downward course again.
2. Always keep a stop-loss point and a take-profit point to lock in gains, and limit losses. Make sure to set your stop-loss at a reasonable level, but leave enough room for the downside before an intervention occurs. Take-profit points should be set at levels previously attained by interventions.
3. Use as little margin as possible. Although this lowers you potential profit, it also reduces the risk of getting a margin call. And, since you are trading against the long-term trend, margin calls become a significant risk if an intervention doesn't occur during the time you plan.
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