PM Exchange - FX Educator's Ponsi discusses performing commodity currencies

ForexTV - RBNZ and RBA make FX-moving comments. USD falls. Ed Ponsi comments on the SNB intervention impacting CHF.

CLICK HERE TO VIEW THE VIDEO!!

Ed Ponsi interview in "Stocks and Commodities" Magazine

Check out this interview in the new issue of "Technical Analysis of Stocks and Commodities":

http://www.traders.com/Documentation/FEEDbk_Docs/2009/08/Interview.html

Ed Ponsi on ForexTV - July 9,2009

A currency discussion covering the Group of Eight, the IMF gdp estimates, a technical breakdown in USD/JPY, correlations between stocks and forex, and much more.

Click here to watch!

Say Hello To My Little Friend....

Minimal posting lately as I have been spending time with my lovely newborn daughter. Here she is...

Forex Hedging, R.I.P.

Forex Hedging, R.I.P.
By Ed Ponsi, FXEducator.com

New rules are about to go into effect in the Forex market; how will these changes affect you?

This is from the NFA, dated April 13, 2009:

"New Compliance Rule 2-43(b) requires an FDM to offset positions in a customer account on a first-in, first-out basis, thereby prohibiting a trading practice commonly referred to as "hedging." A customer may, however, direct the FDM to offset same-size transactions even if there are older transactions of a different size. Rule 2-43(b) is effective for any positions established after May 15, 2009. Offsetting positions that were established prior to the effective date do not have to be liquidated, but once either position is closed out after May 15, it may not be reestablished as a hedge."

http://www.nfa.futures.org/news/news...ArticleID=2 273

What does this mean to you? The NFA is banning the practice of simultaneously establishing a long and short position on a single currency pair, popularly known as "hedging." Forex brokers (referred to here as FDM's, or Forex Dealer Merchants) have allowed this practice for years, which can be useful under the proper circumstances. For instance, suppose that a trader is bullish EUR/USD in the long term, but is bearish on the same currency pair in the short term. Under the old rules, a trader could maintain a long position and a short position in EUR/USD simultaneously. The NFA is concerned that brokers have found a way to allow traders to establish a "flat" position while charging two commissions. This will no longer be allowed as of May 15.

The strangest comment I heard about this came from a message board where a poster derided the decision, saying the NFA was "favoring the brokers again." Just for the record, there never was a rule that stated FDM's had to allow their clients to establish simultaneous positions. Who do you think came up with the idea to allow traders to "hedge" in the first place? The brokers, of course, but now that option is about to disappear.
Questions of the Week

Q) Hi Ed, I have a day job from 9-6pm and won't be able to take advantage of the active movement of price during those hours. I would like some help on what markets are suitable for 7pm-12am trading and what market data is preferred. Thanks, Narendra

Ed Ponsi) Hi Narendra, thank you for your question. If you are referring to 7pm-12am Eastern time, then you could trade during what Forex traders refer to as the Asian session. Many U.S. East coast traders come home from work, enjoy dinner, and then sit down at their computers to monitor the action from the Far East, which begins around 7pm. Asian markets become active at that time because while it is evening in New York, it is also morning in Tokyo, Singapore, Hong Kong, Sydney, and other major Forex trading centers in Asia. The Japanese Yen and Australian Dollar pairs become particularly active at this time, but major pairs like EUR/USD and GBP/USD also see some volatility.

Another option is to become less of a day trader and more of a Forex swing or position trader. Taking a longer view and using longer time frames (4-hour, daily, weekly charts) allows traders to enjoy the benefits of Forex trading without being tethered to a computer. Many traders simply place entry orders into the trading platform, along with associated stop and exit orders, and might not even be present when those orders execute. If I'm using a trading strategy that requires a specific entry point, I can set up a series of One-Cancels-Other orders, also known as OCO orders. When I use this method, my protective stop and target orders are not activated until the entry is executed. When the stop and target are activated, only one or the other can be executed – as soon as this execution occurs, the remaining order is cancelled.

Because Forex is so liquid, with an estimated turnover of $3.2 trillion USD per day, the chance of having the price gap beyond your stop is greatly reduced, but it still could happen. This style of trading is not for everyone, so just like any other trading tactic, try it repeatedly in a demo account before attempting this with real money. Good luck!

Q) Hi Ed, I have never traded currencies, but I might be interested. Is there a good robot that can trade currencies for me? Or are the ads I have seen about Forex robots a scam? Thank you, John

Ed Ponsi) Hi John, thank you for your question. I'm sure you remember the old saying that if something sounds too good to be true, it probably is too good to be true. I know how great the idea sounds, that a machine will somehow place all the trades for you, but think about this – are real Wall Street traders making critical buy and sell decisions based on a robot? Have you seen anyone on the floor of the NYSE or the NYMEX or any exchange using a box with red and green arrows? The truth is, most of the outfits that sell this junk are scammers. In fact, one particularly slimy vendor is even placing ads suggesting that I recommend their software. If they have to lie to you just to get your attention, how good could the product be?

The fact is, there is no magic bullet or Holy Grail in trading. No robot or green light/red light system can beat the markets for more than a short period of time, because these programs do not adjust well to changes in the market – and markets change constantly. The only answer is to get a real education in trading. An educated trader can adjust his or her techniques and adapt to changes in the markets, and can out-trade any so-called robot. You'll have to be willing to do some work, learn techniques, and put some effort into the process, but it is well worth it. The only people getting rich with trading robots are the scam artists who sell them, so avoid this nonsense at all costs.

Forex Q&A with Ed Ponsi

Forex Q&A with Ed Ponsi

By Ed Ponsi, FXEducator.com

Greetings from New York! We have a couple of great questions for you this week, so let's get started:

Q) Hi Ed, how long would you say it could take to go from stock trading to Forex trading? Can the same technical analysis be applied?

Ed Ponsi) Thank you for your email. If you are a stock trader and you're thinking about making a switch to Forex, I have great news! Everything that you already know about technical analysis applies to the Forex market. In the currency markets, we see the same double-tops, double-bottoms, head and shoulders, and other patterns that you are used to seeing in the equity markets. We use support and resistance in the same way that other traders do, and we use moving averages, MACD, average true range, and all of the other familiar indicators. Also, the currency markets feature strong trends which can last for years, so if you are a trend trader you will really enjoy trading Forex (see figure 1).


Figure 1: Long term trends are evident on the weekly chart of EUR/USD. Source: TradeStation

How long will it take to make the switch from stocks to Forex? That answer really depends on the individual, as it could take anywhere from a few days to a few months. I made the transition from stocks to Forex a few years ago, and at first I was hesitant. After all, there are two currencies involved in every currency trade; I can remember wondering if there would be two different prices on the chart! Of course, I learned later that there would only be one price – more accurately described as the exchange rate – on every Forex chart.

It took a while for me to realize that I needed to use longer time frames in Forex than I was previously using to trade stocks. This realization was a breakthrough in my transition process; if you are trading U.S. stocks, you have exactly 6 ½ hours per day to place trades, assuming that you are not trading the pre-market or post-market sessions. This causes traders to think in terms of shorter time frames, unless they are swing traders or position traders. Forex, on the other hand, is a 24-hour market, and although movement can be sudden and dramatic, most of the activity plays out over a longer period of time. Also, keep in mind that in the Forex market, we are not trading individual companies; instead, we are trading entire economies! The fortunes of any individual company can change dramatically in a relatively short period of time (Lehman Brothers, anyone?), but the world's major economies are massive compared to individual companies, and their fates change more slowly. This creates a huge advantage for Forex traders, and is the main reason why trends in the Forex market tend to be so dramatic and persistent. Many traders like to say, "The trend is your friend," but in the Forex market, we could say that the trend is your best friend. Good luck!

Q) Hi Ed, the question I wanted to ask you relates to the strength of Asian currencies in the near and distant future, and, in particular, the Chinese Yuan. Perhaps it is fair to say that, as the Pound was replaced by the U.S. Dollar some time ago and fell sharply over a number of years, then maybe we should prepare for what currency is likely to appreciate more in the long-term against the U.S. Dollar.

The Chinese currency is not free to trade at the moment, so the question is this: what is the best way to take advantage from the likely future appreciation of Asian currencies? Would the Singaporean Dollar and the Hong Kong Dollar be a partial answer? Thank you in advance for your help.

Ed Ponsi) Thank you for your question. If you are going to play the demise of the U.S. Dollar, you're going to need patience - although U.S. spending policies that have recently been enacted will serve to accelerate this process. As you mentioned, the reserve currency of the eighteenth and nineteenth centuries was without a doubt the British Pound. The GBP gradually ceded its throne to the greenback as the U.S. economy became the world's largest in the early twentieth century. The fall of the British Empire coincided with the collapse of the British Pound.

The most likely candidates to succeed the U.S. Dollar as the world's reserve currency are the Chinese Yuan and the Euro. China's economy will become the world's largest during the next ten to twenty years; meanwhile, countries such as Poland and Denmark may be drawn to the Euro as it has weathered the current economic storm in reasonably good shape - at least so far. Many pundits originally believed the European Monetary Union would fall apart when confronted with its first major crisis, but now other countries are accelerating their plans to adopt the single currency.

There is much to like about the Singapore Dollar (SGD). Singapore does not have a central bank; instead, its currency is managed by the Monetary Authority of Singapore. The MAS is seriously committed to low inflation, and unlike many central banks, it does not manage its monetary system via interest rates. Singapore is poised to benefit from the continuing explosion of growth in China.

Another long-term play on China's growth is the Hong Kong Dollar. The HKD trades within a narrow band vs. the U.S. Dollar, and it will be extremely difficult to maintain that band if the greenback falls apart. The HKD has traded between 7.75 and 7.85 vs. the USD for years. A sudden collapse in the USD could lead to a sudden and dramatic strengthening of the Hong Kong Dollar. Both the HKD and the SGD would be good candidates to include in a diversified currency portfolio designed to protect against weakness in the USD.

Did Someone Say "Carry Trade"?

Did Someone Say "Carry Trade"?
By Ed Ponsi, President, FXEducator.com

Greetings from New York! After another great trip to the U.K., it's good to be home in the U.S.

I received quite a few comments about last week's chart showing a massive double-bottom formation on the Australian Dollar/U.S. Dollar pair (AUD/USD). As it turns out, this formation is popping up in a number of pairs involving the Aussie and also the New Zealand Dollar (NZD). For instance, here is the same bullish pattern on the NZD/USD currency pair (see figure 1).

Figure 1: NZD/USD attempts to break out from a double-bottom formation. Source: Trade Station

Compare this chart to AUD/USD, and you'll see that the New Zealand Dollar is lagging behind its Aussie neighbor, falling short of the breakout point near .6000. Why is the "Kiwi" (so-called because of the picture of a kiwi bird on the New Zealand Dollar coin) having such a tough time in comparison to the AUD? Traders believe that New Zealand's central bank, the Reserve Bank of New Zealand, isn't finished cutting rates, and expect to see a 2.5% rate after the RBNZ's next meeting on April 30th. RBNZ Governor Alan Bollard recently said that the central bank is "projecting interest rates to remain at relatively low levels for an extended period," which also helps explain weakness in the Kiwi.

We haven't discussed carry trades in quite a while, but this strategy may be coming back into vogue. Many assume that carry trades must include a short position in the Japanese Yen, but this is not the case; any currency that possesses low interest rates becomes a viable shorting candidate for this trading strategy. Current interest rates reveal a number of excellent potential candidates among the majors:

Japanese Yen 0.10%; U.S. Dollar, Swiss Franc 0.25%; Canadian Dollar and Great Britain Pound 0.5%

And which of the major currencies have the highest rates, making them appropriate for the long side of the trade? Australian Dollar and New Zealand Dollar, both currently at 3%, are the highest yielding of the majors, but as we will see, there are other currencies that currently feature higher yields.

Regarding AUD/USD and NZD/USD, suffice it to say that U.S. rates have remained below Australian and New Zealand's rates for the past decade, and there is no scenario in which I can envision the U.S. Fed Funds rate exceeding the benchmark rates of those two countries. What about AUD/JPY and NZD/JPY? Those currency pairs are looking pretty bullish, sporting – you guessed it – double-bottom formations. Here is a look at AUD/JPY (see figure 2).

Figure 2: AUD/JPY breaks out of a bullish double-bottom formation. Source: Trade Station

A quick look at the daily chart of NZD/JPY reveals a very similar situation, as the pair also has broken out of a double-bottom formation. This trade also produces positive carry, as New Zealand's benchmark interest rate is higher than Japan's (see figure 3).

Figure 3: NZD/JPY daily chart reveals another successful double-bottom breakout. Source: Trade Station

One last piece of evidence that the carry trade has returned; an equally weighted basket of currencies consisting of Turkish Lira, Brazilian Real, Hungarian Forint, Indonesian Rupiah, South African Rand and Australian and New Zealand dollars – purchased with Japanese Yen, U.S. Dollars and Euros - earned an annualized 196% from March 2 to April 10. In other words, those taking the trade were long high-yielders such as the Brazilian Real and the South African Rand, and at the same time, they were short low-yielders like the Japanese Yen and U.S. Dollar, with the added diversification of using baskets instead of individual currencies. That same trade produced a 41% annualized loss from September, when Lehman collapsed, through February. Benchmark rates in those seven "long" economies range from a low of 3% in New Zealand and Australia to Brazil's astronomical 11.25%. Here is a three-year chart of these two baskets – it appears that a bottom may be forming (see figure 4).

Figure 4: A basket chart of high-yield vs. low yield currencies shows a bounce. Source: Bloomberg.com
Paradise? Not Really…

Fiji's central bank recently slashed the country's currency value to boost exports and tourism. The Reserve Bank of Fiji appointed Sada Reddy as the bank's new governor, one day after the former central bank governor was removed. Reddy immediately announced that the Fiji dollar was to be devalued by 20%, a decision that will probably send inflation soaring.

Fiji's international credit rating was downgraded last month from stable to negative, but the currency devaluation might drive tourists to the island paradise – assuming that their finances haven't been damaged by the current worldwide economic downturn. Thanks to the devaluation, the cost of a vacation to Fiji effectively drops by 20%. However, Fiji is currently run by a military regime, which is heavily censoring news and threatening to jail and deport journalists who report on political events there. Maybe it isn't such a great place to visit after all.
Comment of the Week

Q) I just read your email and I came across your article regarding the protests and the G20 summit. Well I though it was great; I am not sure whether you or a ghost writer wrote it, but it made sense to me. I think the problem with any country that has experienced wealth for too long takes what the previous generation did for granted. I am South African and it never ceases to amaze me how socialistic Britain has become, the Polish could teach them a thing or two about communism.

Ed Ponsi) Thank you for your email. No ghost writer here, just me. It seems that people everywhere forget the lessons of history, and those who forget history are doomed to repeat it. Poland has recent memories of Communist oppression, so they don't need to be reminded of the evils of that failed ideology. Meanwhile, in the U.S. and other fortunate countries, we seem to be wandering down the path of Communism, perhaps because we have no experiences that compare to those of Poland or other afflicted countries. There is an easy way and a hard way to learn anything, and I'm still hoping we in the U.S. can learn the easy way – through the experiences of others – as opposed to the hard way, where we repeat those experiences out of ignorance or foolishness.