Forex Question of the Day

Q) Hi Ed, thanks for the great insights. Question regarding timing - are there better times of the day to trade certain pairs? For example GBP/JPY appears to have tremendous moves starting at 3:30 am eastern time, hard for some of us to keep up at that hour. So are there better pairs to trade after dinner time on the east coast between 7 pm & 11 pm eastern time. I say evening because I am not a full time trader yet, still need to pay the bills with a day job. Your guidance is greatly appreciated.

Ed Ponsi) Thank you for your email. The reason why you are seeing big moves in the Great Britain Pound – Japanese Yen currency pair (symbol GBP/JPY) at that hour is because when it is 3:30 am in New York, it is 8:30 am in London. London is the world's capital of Forex trading, accounting for approximately 30% of all trading volume, and when those big traders wake up and start throwing their weight around, the market responds with volatility. Also, U.K economic indicators are often released at that time of day, adding to the overall climate of high volume and volatility.

Here's a recent example; on June 19, 2008, U.K. Retail Sales figures were released for the month of May. The record monthly increase in sales of 3.5% was far above the estimate of -0.1%, and the Pound rocketed higher against a variety of currencies, including the Japanese Yen, as a result. Please note that this chart is notated in Greenwich Mean Time, which is currently four hours ahead of New York time – meaning that the move occurs at about 4:30 am Eastern time. GMT is used frequently by Forex traders because of the international nature of the currency markets (see chart).

Does this mean that we have to get up at 4:00 am to trade Forex? No, but some people do. I used to get up very early to trade, but I think I've found a better way. Instead of focusing on time of day, I focus on price – every trade I place has a specific entry price, protective stop price, and at least one specific exit price. Since the trades are based on price and not time, I really don't care what time of day they execute – the only thing that matters to me is that I get the price that I want.

Many currency pairs are active during the Asian session, which begins around 6 to 7 pm Eastern time. For those who live on the U.S. East Coast and work normal hours, this is an excellent time of day to trade Forex. The main Japanese Yen pairs (USD/JPY, EUR/JPY, GBP/JPY) tend to be very active at this time of day, as well as major pairs such as EUR/USD and GBP/USD. The Australian Dollar and New Zealand Dollar pairs also enjoy an increase in activity. The action tends to fade after midnight Eastern (New York) time, and things get quiet until – you guessed it – around 3:00 am Eastern time, when European and U.K. traders get back in the game. Good luck!

Oil and the U.S. Dollar

Hey Everybody,

I have a great question from a reader to share with you, dealing with last week's article on the relationship between oil and the U.S. Dollar. If I didn't get to your question this week, don't worry, I'll get to it soon. Keep 'em coming. Let's get to it!

Q) Thanks for your informative article, but I'd like to ask, why have the oil producing countries been reluctant to switch from the dollar as the trading currency despite this loss of value to a more stable currency like the euro? Also some countries including China have been threatening for quite some time now to scale their USD holdings to euro, but they are not doing it. What's the big deal? If they did this the dollar would greatly appreciate.

Ed Ponsi) Thank you for your question. Actually, if China and the oil producing countries move away from the USD, this would accelerate the U.S. currency's decline. Imagine that you own tens of millions of shares of a stock that just keeps declining in value. You want to sell your shares, but you are concerned because if you begin to sell in large quantity, you will drive the price lower due to the size of your position. Also, if the market catches wind that a large seller is dumping shares, other traders will sell their shares, possibly causing the stock to collapse.

This is similar to the situation that many countries now find themselves in regarding the greenback. Many of the oil producing countries are flush with U.S. Dollars, which the U.S. has sent to them in return for their oil. China holds over 1.3 trillion dollars worth of foreign reserves, most of it in U.S. Dollar denominated assets. These countries dislike the fact that the USD keeps falling, but they are caught between a rock and a hard place – if they sell in meaningful quantity, they will depress the dollar even further, and lower the value of their holdings. Also, many of the Middle Eastern currencies, such as the Saudi Riyal, the United Arab Emirates Dirham, and the Jordanian Dinar, are pegged to or closely mimic the U.S. Dollar. So if panic selling occurs in the U.S. Dollar, these currencies will suffer as well.

In fact, while the Saudis have made it a point not to emphasize the weakness of the U.S. currency, other world leaders less friendly to the U.S. are laughing with glee at the demise of the dollar. The only OPEC countries that have officially endorsed moving away from accepting U.S. Dollars in exchange for oil are Venezuela and Iran – not exactly good friends of the United States. Iran's Ahmadinejad, who in the past has called the dollar a "worthless piece of paper," and Venezuela's Chavez want to dump the USD in part because it would injure the currency further, thus damaging the prestige and power of the U.S. If that is not a reason for the United States to protect the value of its currency, I don't know what is.

Forex Q&A With Ed Ponsi - The Oil Question

Q) Hi Ed, your articles are always eye openers; at the risk of sounding dumb I'll ask the following. I don't understand why oil prices should rise with a weak dollar. As far as I understand prices are set by supply and demand of the commodity, so where does the dollar fit in?

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The Candy Man

By cutting interest rates to the bone and pumping the markets full of liquidity, Ben Bernanke may have saved the U.S. financial system from incurring even greater damage than it has already suffered. In the process, the U.S. Dollar has been degraded to levels that have not been seen in decades. After all the damage that has been done, last week's action has traders wondering if the man who has been feeding candy to the markets is now about to sing a different tune.

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Battered and Bruised

It was a manic Monday for the British Pound, plunging hundreds of pips against major currencies on word of new troubles in the lending sector. Mortgage lender Bradford and Bingley, popularly known as B&B, is in serious trouble, and is selling off a huge chunk of its business in an effort to remain afloat. The news hit the British Pound hard, sending the currency spiraling to a 300 pip loss vs. the Japanese Yen in the space of three hours...

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