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The Four Most Influential Currency Pairs

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The Four Most Influential Currency Pairs

Post by Sean on Thu Sep 18, 2008 2:53 pm

Good Day Currency Traders, Very Happy

To truly understand currency trading, you need to have a least a passing familiarity with each of the various currency pairs.

Obviously these currencies trade in the same market, so they have similar trading styles, but each pair has its own distinct "personality." The professional traders use these "personalities" or attributes to their advantage when they're trading. santa

It's similar in the currency market. All the various currency pairs trade in the same market, but many still have their own distinct "personalities." The professional traders use these "personalities" or attributes to their advantage when they're trading.

The Marathon Runner of the Currency World rendeer

For instance, let me start with fastest moving currency pair of the bunch. This currency pair zips around, knocking out hundreds of pips in a day or two. It's known as the GBP/JPY (British pound/Japanese yen) pair.

So why does this pair move so fast? It's because this pair has less "trade flows" than many other currency pairs. Trade flow refers to how often countries trade currencies as they import and export goods with each other.

For instance, any pair that has the U.S. dollar has a very high trade flow, because all other nations have to trade their currencies for dollars (the world's reserve currency) to buy certain necessities.

However, Great Britain and Japan both have a lower trade flow than many other countries do. They don't have a huge amount of direct trading of goods going on, thus less "trade flow" volume. Of course, it does happen, just not as often.

In fact, a lot of the trading volume in GBP/JPY is what's known as "speculative volume." This means that currency speculators (traders) create most of the trade flow themselves when they take positions in the GBP/JPY pair based on how they believe the British pound will react in relation to the yen.

Also, long-term speculators are drawn to this pair because the GBP/JPY pays out one of the highest "daily dividends" (i.e. "rollover interest") of most any currency pair. Assuming the market goes your way, this pair pays out about US$22 each day that you hold this position on the "long side" (meaning you bought the pair).

Short-term traders love this pair for its sharp, volatile moves. With little trade flow, this pair has the potential to make large moves in a short period of time. This pair can move twice the daily amount of pips as other pairs.

The Runt of the Currency Litter cat

The USD/JPY (U.S. dollar/Japanese yen) pair constantly keeps traders guessing. Why? This pair does not move in tandem with most of the other "U.S. dollar" pairs. For instance, when the dollar is falling against the euro or Aussie dollar, it doesn't necessarily mean that the buck is going down against the yen.

The yen is unique because it's the "runt of the currency litter." The Japanese yen pays the lowest interest of any currency in the market (currently 0.5%). No one wants to own the low-yielding yen when they could earn higher profits trading stocks, commodities and higher-yielding currencies.

But when the markets turn sour, you'd think the Japanese yen was taking steroids. The Japanese yen traditionally gains strength during uncertain or volatile markets while many other currencies lose strength.

Also, this is the only pair that is known for central bank interventions. Japan's central bank wants the country's exporters to prosper. So these exporters force the yen down to a certain level. However, if the yen drops too low or rises too high to where it's trading outside of the exporter's comfort level, then the central bank steps in to "talk" the yen either higher or lower.

The central bankers at the Bank of Japan (BoJ) start talking about intervening to prop up the currency or sell it to force its value lower. Then if that doesn't work, they'll take some of their vast currency reserves and enter the market with guns blazing. They will either sell dollars and buy yen or vice versa until they force the yen back into a favorable position for their exporters.

So when the yen has moved in the same direction for a while on the charts, then Japanese traders become concerned that their central bank will intervene. This in turn makes currency speculators nervous, and the USD/JPY pair becomes even harder to trade.

As I said, the Japanese yen loves volatile markets. So lately, the yen has been skyrocketing, as stock and commodity markets have dropped all over the world. If the yen continues to rise, it's possible the central bank could intervene and force the yen's value lower to keep their exports cheap. Exporters like a cheaper yen so their exports appear "cheap" to their clientele in the outside world.

The possibility of central bank intervention keeps this pair pretty skittish, because it can move so quickly at the central bankers' whims. Also, this pair moves a lot in volatile, shaky markets, so it has the potential to rise when every other market is dropping.

Like the EUR/USD on Steroids! affraid
The GBP/USD (British pound vs. the U.S. dollar) trades somewhat like the EUR/USD pair except that it doesn't have as much "trade flow" volume as the EUR/USD.

Remember: Less trade volume = more volatility, and the opportunity for higher profits (and losses depending which way it swings). Volatile trends are exactly what you get when you trade the GBP/USD pair.

While this pair is not quite as volatile as GBP/JPY (because it has more trading volume than GBP/JPY), it is still a "high speed" currency. It moves fast and covers a lot of territory very quickly.

This is good to know because as a trader, you can trade fewer lots when pairs are more volatile than you can when trading pairs that aren't as volatile. This way they can manage their risk much better.

So if you're having problems trading GBP/USD, go back to its more stable, less volatile cousin, EUR/USD.

And Finally...the Bi-Polar Currency! Twisted Evil

The USD/CAD (U.S. dollar vs. the Canadian dollar) pair is sometimes called the "bi-polar" currency because it's driven by Canada's largest and most influential export - oil. And at other times, it takes its lead from its biggest trading partner, the United States.

The tough part is figuring out if the Canadian dollar (CAD) is trading based on oil prices or the U.S. economy. Usually, when the U.S. economy is in (or nearing) a recession, the CAD slumps because a slowdown in the U.S. usually predicts a slowdown in Canada's economy. A U.S. slowdown means Canada loses its biggest customer, the United States.

When things are on the "up and up" and the U.S. isn't facing major economic difficulties, the CAD tends to trade based on oil prices. If oil is headed higher during these times, then the CAD tends to strengthen against the dollar and bring the USD/CAD pair down.

However, the CAD tends to drop and the buck tends to rise when oil is falling (like it is right now). As a result, the USD/CAD pair heads higher.

So it's always good to keep these "inside insights" in mind when trading these currencies. It can help to give you an edge in your own currency trading.

Best Regards,


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Re: The Four Most Influential Currency Pairs

Post by Sean on Sat Oct 04, 2008 5:18 pm

The Anti-Dollar is Already in Trouble

I guess the European Central Bank is tired.

After pumping tens of billions of euro and dollars into its financial system over just the last two weeks, the ECB couldn't muster up enough energy to cut rates yesterday. The ECB left their benchmark lending rate sitting at 4.25% after they concluded their policy meeting yesterday morning.

Considering major risks of bank failures rising to the surface in Europe, a handful of investment banks took the opportunity to make their predictions yesterday. Those predictions: The ECB will cut rates before the end of the year.

It May Not Take a Rate Cut to Push the Euro Lower
Okay, so far the bank analysts who took a swing at the ECB's plans are now 0 for 1. But let's not count them out just yet...the ECB meets plenty more times before 2008 comes to an end.

But if you're banking on a rate cut to further weigh down the euro, you may not have to wait for the ECB to officially lower interest rates. The situation in Europe (though the ECB's monetary policy has not yet capitulated) will likely pressure the euro through year-end. The market is pricing this in already.

And if the dynamics supporting the dollar really gain momentum, a serious capitulation among dollar bears could extend dollar-strength well into 2009 and bring the euro all the way down to earth.

The Daily Data Says the Euro Is Breaking Down

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Check Out the Weekly: The Euro Is About to Freefall

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The euro is having trouble, as we expected it would.

The question is no longer ‘Can the euro go lower?' Instead, it's ‘How much lower can the euro go?' You might be surprised.

Have a great weekend


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Who Said the Currency Market Was Fair?

Post by Sean on Mon Oct 06, 2008 11:07 pm

Good day... And a Marvelous Monday to you! Very Happy

So, the deed is done...

The House, which voted down the bailout package last Monday, decided to go ahead and put the country in debt for another US$700 billion. Yes, I know the payouts will be in installments, but it still means we have another US$700 billion added to our debt.

And guess what? The dollar rallied on the news! affraid

More on the bailout package in a minute...On Friday, we also saw the awful Job Jamboree that reported 159,000 Americans lost their jobs during September, according to the Bureau of Labor Statistics (BLS). The job losses were all over the place, but job losses in manufacturing led the charge.

And guess what? The dollar rallied on that news too! affraid

The Dollar Can Cause a Worldwide Crisis,
and Still Be the Belle of the Ball

Okay, I'm raising the white flag folks. This credit squeeze has the whole world in a tizzy right now, and it appears to me that investors around the world have decided to reward the dollar for all these problems.

Seems awful strange to me, because dollar denominated assets are what caused this whole problem in the first place. But no one seems to care about that right now. The dollar has moved to the front of the class against the euro, and the rest of the currencies besides the Japanese yen or Chinese renminbi.

When the dollar can rally in the face of news like it received on Friday, even me, the biggest fundamental trader you've ever seen, can see the writing on the wall...

This dollar rally goes against everything I've ever known or studied regarding fundamentals. I still don't believe the dollar can maintain this strength going forward, as the funding requirements on the deficit continues to be the Sword of Damocles hanging over the dollar.

But for now I have to go sit in the corner, because I've been saying the dollar would react to all this...and so far, it just hasn't.

Now, I haven't been wrong about how all of this mess has played out. I've warned of "risk events" and we've had plenty of them. I was one of the first to bang the drum and warn of a housing bubble. I've warned of interest rate cuts, and growing debts.

In the end, I warned that the dollar would take the brunt of all these indiscretions. And it may still... But for now, the dollar is the belle of the ball. I can't tell you why, besides the fact that sentiment is working in the dollar's favor for now. Go figure.

Ding Dong, the Carry Trade is Dead!

So, as I mentioned above, the Japanese yen, and Chinese renminbi are the only currencies posting gains vs. the dollar. China, just back from a week of holidays, allowed the renminbi to gain vs. the dollar overnight. That's a good sign, considering the rumors circling about a slowdown in China.

But the Japanese yen is the big Kahuna moving against the dollar. Don't look now, but yen has a 103 handle! This begs the question: Is the carry trade truly dead in the water?

Just like the munchkins in the Wizard of Oz, we'll have to wait and see if it is truly dead. As Glenda said, "Let the joyous news be spread, The Wicked Old Witch at last is dead!"

Seriously though, the Carry Trade does truly, look dead in the water, as the credit squeeze takes its toll on this once favorite investment strategy. Carry trades are "risk trades" as I've explained a hundred times before. That's why the credit squeeze wiped them out.

Finally, the Asian currencies will be the next shoe to drop for the dollar. It looks like the carry trade is dead, and the Asian currencies, led by Japanese yen, can finally be left alone to trade straight up vs. the dollar.

So, we're taking on water with the other currencies that have been so profitable for holders for over six years now, but Japanese yen is finally cut free of the carry trade.

A Sad, Sad Day if You Live or Invest in Iceland
The credit crunch/squeeze is spreading folks. I told you about a few of the problems in Europe last week, and now a bank has failed in Iceland. Well, there's even more problems for Europe. And Iceland is looking for a bailout now from the Nordic Central Banks.

I first wrote about a banking crisis in Iceland about five months ago, and every week we send out a notice to Icelandic krona CD holders that they should probably look to do something with their krona CD's. Well, I'm afraid they will have no choice pretty soon. Offshore investments of krona are getting hammered and interest rates have gone negative.

Now we won't be able to offer Iceland going forward, if they remain negative. There won't be any dealers that will take on the risk of selling us the currency forward. It's a very sad day in Iceland, folks.

And in Europe, the rot on the vine is spreading. The Euro Summit didn't produce any real deals or solutions to their problem. They couldn't come up with a plan that would mirror the US $700 Billion bailout package. I suspect that the fact that the Euro Summit didn't produce any answers, has weighed heavily on the euro this morning.

The single unit has fallen to a 13 month low vs. the dollar. I wonder where those guys from Citigroup who were calling for a euro rally are now? I can't blame them, I would certainly like to hide under a rock (I know it would have to be a real big rock) right now and let this blow over.

There is still a lot of talk about coordinated Central Bank rate cuts happening this week, even after the European Central Bank (ECB) held rates steady last Thursday. I didn't think the ECB would see cutting rates as an option, but that was before the rot on the vine was exposed in Europe last week. Now, I'm 50-50 on the ECB participating.

At Least the Stock Jockeys Are Happy - Even If I'm NOT!
Speaking of the US$700 Billion bailout package... The stock jockeys sure loved it when the House finally approved it. But what's there to love about it? Yes, I know, King Henry and Big Ben assure us that this will unlock the seized credit markets, and get this economy rolling again.

But didn't they tell us that back in July too, when they got the president to sign US$3.9 Billion to help 400,000 home owners that would qualify? They told us then, that the mortgage bill would cure the ailing housing meltdown. These two have been so wrong about this whole mess going back to last summer when they failed to recognize that we had a housing meltdown.

The overnight markets of Asia and Europe saw stocks sell off big. So it could be that the U.S. stock euphoria over the passing of the package will be short-lived.

Don't expect this bailout package to cure what ails the economy right now folks. There are going to be more banks failing, corporations closing, and consumer bankruptcies. Banks aren't going to just open their vaults to the public today and offer loans to anyone that has a shirt and shoes on!

Hope your Monday is Marvelous!


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