Tag Archive | "Financial Markets"

Tags: , , , , , , , , , , , , , , , , , , ,

Dollar will Rally when QE2 Ends


In shifting their focus to interest rates, forex traders have perhaps overlooked one very important monetary policy event: the conclusion of the Fed’s quantitative easing program. By the end of June, the Fed will have added $600 Billion (mostly in US Treasury Securities) to its reserves, and must decide how next to proceed. Naturally, everyone seems to have a different opinion, regarding both the Fed’s next move and the accompanying impact on financial markets.

The second installment of quantitative easing (QE2) was initially greeted with skepticism by everyone except for equities investors (who correctly anticipated the continuation of the stock market rally). In November, I reported that QE2 was unfairly labeled a lose-lose by the forex markets: “If QE2 is successful, then hawks will start moaning about inflation and use it as an excuse to sell the Dollar. If QE2 fails, well, then the US economy could become mired in an interminable recession, and bears will sell the Dollar in favor of emerging market currencies.”

The jury is still out on whether QE2 was a success. On the one hand, US GDP growth continues to gather force, and should come in around 3% for the year. A handful of leading indicators are also ticking up, while unemployment may have peaked. On the other hand, actual and forecast inflation are rising (though it’s not clear how much of that is due to QE2 and how much is due to other factors). Stock and commodities prices have risen, while bond prices have fallen. Other countries have been quick to lambaste QE2 (including most recently, Vladimir Putin) for its perceived role in inflating asset bubbles around the world and fomenting the currency wars.

Personally, I think that the Fed deserves some credit- or at least doesn’t deserve so much blame. If you believe that asset price inflation is being driven by the Fed, it doesn’t really make sense to blame it for consumer and producer price inflation. If you believe that price inflation is the Fed’s fault, however, then you must similarly acknowledge its impact on economic growth. In other words, if you accept the notion that QE2 funds have trickled down into the economy (rather than being used entirely for financial speculation), it’s only fair to give the Fed credit for the positive implications of this and not just the negative ones.

But I digress. The more important questions are: what will the Fed do next, and how will the markets respond. The consensus seems to be that QE2 will not be followed by QE3, but that the Fed will not yet take steps to unwind QE2. Ben Bernanke echoed this sentiment during today’s inaugural press conference: “The next step is to stop reinvesting the maturing securities, a move that ‘does constitute a policy tightening.’ ” This is ultimately a much bigger step, and one that Chairman Bernanke will not yet commit.

As for how the markets will react, opinions really start to diverge. Bill Gross, who manages the world’s biggest bond fund, has been an outspoken critic of QE2 and believes that the Treasury market will collapse when the Fed ends its involvement. His firm, PIMCO, has released a widely-read report that accuses the Fed of distracting investors with “donuts” and compares its monetary policy to a giant Ponzi scheme. However, the report is filled with red herring charts and doesn’t ultimately make any attempt to account for the fact that Treasury rates have fallen dramatically (the opposite of what would otherwise be expected) since the Fed first unveiled QE2.

The report also concedes that, “The cost associated with the end of QEII therefore appears to be mostly factored into forward rates.” This is exactly what Bernanke told reporters today: “It’s [the end of QE2] ‘unlikely’ to have significant effects on financial markets or the economy…because you and the markets already know about it.” In other words, financial armmagedon is less likely when the markets have advanced knowledge and the ability to adjust. If anything, some investors who were initially crowded-out of the bond markets might be tempted to return, cushioning the Fed’s exit.

If bond prices do fall and interest rates rise, that might not be so bad for the US dollar. It might lure back overseas investors, grateful both for higher yields and the end of QE2. Despite the howls, foreign central banks never shunned the dollar.  In addition, the end of QE2 only makes a short-term interest rate that much closer. In short, it’s no surprise that the dollar is projected to “appreciate to $1.35 per euro by the end of the year, according to the median estimate of 47 analysts in a Bloomberg News survey. It will gain to 88 per yen, a separate poll shows.”

SocialTwist Tell-a-Friend

Forex Trading Articles by Forex Blog & Online Forex Trading

Posted in Currency News & AnalysisComments Off on Dollar will Rally when QE2 Ends

Tags: , , , , , , , , , , , , , , , , , , ,

Fed Surprises Markets with Scope of QE2


For the last few months, and especially over the last few weeks, the financial markets have been obsessed with the rumored expansion of the Fed’s Quantitative Easing program (”QE2″). With the prospect of another $1 Trillion in newly minted money hitting the markets, investors presumptively piled into stocks, commodities, and other high-risk assets, and simultaneously sold the US Dollar in favor of higher-yielding alternatives.

Fed Balance Sheet 2010 QE2

On Wednesday, rumor became reality, as the Fed announced that it would expand its balance sheet by $600 Billion through purchases of long-dated Treasury securities over the next six months. While the announcement (and the accompanying holding of the Federal Funds Rate at 0%) were certainly expected, markets were slightly taken aback by its scope.

Due to conflicting testimony by members of the Fed’s Board of Governors, investors had scaled back their expectations of QE2 to perhaps $300-500 Billion. To be sure, a handful of bulls forecast as much as $1-1.5 Trillion in new money would be printed. The majority of analysts, however, New York Fed chief William Dudley’s words at face value when he warned, “I would put very little weight on what is priced into the market.” It was also rumored that the US Treasury Department was working behind the scenes to limit the size of QE2. Thus, when the news broke, traders instantly sent the Dollar down against the Euro, back below the $1.40 mark.

EUR-USD 5 Day Chart 2010

On the one hand, the (currency) markets can take a step back and focus instead on other issues. For example, yields on Eurozone debt have been rising recently due to continued concerns about the possibility of default, but this is not at all reflected in forex markets. During the frenzy surrounding QE2, the forex markets also completely neglected comparative growth fundamentals, which if priced into currencies, would seem to favor a rally in the Dollar.

On the other hand, I have a feeling that investors will continue to dwell on QE2. While the consensus among analysts is that it will have little impact on the economy, they must nonetheless await confirmation/negation of this belief over the next 6-12 months. In addition, all of the speculation to date over the size of QE2 has been just that – speculation. Going forward, speculators must also take reality into account, depending on how that $600 Billion is invested and the consequent impact on US inflation. If a significant proportion of is simply pumped into domestic and emerging market stocks, then the markets will have been proved right, and the Dollar will probably fall further. If, instead, a large portion of the funds are lent and invested domestically, and end up buoying consumption, then some speculators will be forced to cover their bets, and the Dollar could rally.

Unfortunately, while QE2 is largely seen as a win-win for US stocks (either it stimulates the economy and stocks rally, or it fails to stimulate the economy but some of the funds are used to foment a stock market rally anyway), the same cannot be said for the US Dollar. If QE2 is successful, then hawks will start moaning about inflation and use it as an excuse to sell the Dollar. If QE2 fails, well, then the US economy could become mired in an interminable recession, and bears will sell the Dollar in favor of emerging market currencies.

SocialTwist Tell-a-Friend

Forex Trading Articles by Forex Blog & Online Forex Trading

Posted in Currency News & AnalysisComments Off on Fed Surprises Markets with Scope of QE2

Tags: , , , , , , , , , , , , , , , , , , ,

Currency War Devalues all Currencies…Except for Gold


Have you ever heard currency cheerleaders rave about how unique forex is because there is never a bear market? Since all currencies trade relative to each other (when one falls, another must necessarily rise), it couldn’t be possible for the entire market to drop at once, as happens with other financial markets. The ongoing currency war might be turning this logic on its head, as currencies embark on a collective downward spiral. Profiting in this kind of market might involve exiting it altogether, and turning to Gold.

Gold Versus Global Currencies 2010

For those of you who haven’t been following this story, a handful of the world’s largest Central Banks are now battling with each to see who can devalue their currency the fastest. [Of course, this war is being couched in euphemistic terms, but make no mistake: it is indeed a form of battle]. The principal participants are emerging market economies, which worry about the impact of rising currencies on their export sectors. However, industrialized countries have also intervened directly (namely Japan) and indirectly (US, UK).

Among the major currencies, there are only a few that continue to sit on the side-lines, including the Euro (to a certain extent), Canadian Dollar, and Australian Dollar. For as long as the currency war continues, these currencies and the handful of emerging market currencies that have forsworn intervention will be the winners (at least from the point of view of speculators that deliberately bet on them).

Then there are those that believe all currencies will suffer, and that even the currencies that are still rising are actually depreciating in real terms (due to inflation). Those who harbor such beliefs will often try to short the entire currency market, usually by betting on commodities or heavy metals, of which Gold is probably the most prominent.

The price of Gold has risen more than 20% this year (in USD terms). Its backers claim that it is the ultimate store of value (where this derives from is unclear), and defend its lack of utility and inability to accrue interest by arguing that its appreciation is more than enough of a reason to own it. When you look at the performance of gold over the last five years, you begin to wonder if maybe they have a point.

Gold Prices 10 Year Chart 2000-2010
Interest in Gold as an investment has surged in the last couple years (and especially the last few months), as the currency wars have heated up and the Federal Reserve Bank contemplates an expansion of its Quantitative Easing program (dubbed” QE2″). On the one hand, the notion that the only way to defend against real currency devaluation is to own “alternative” currencies is well-founded. On the other hand, regardless of the fact that the Fed has already minted $2 Trillion in cash and that the US national debt is expanding by $1 Trillion per year, inflation in the US is low. In fact, it’s at a 50-year low, and at an annualized .9%, it’s practically non-existent. You would think that with Gold’s unending appreciation, we would be in the midst of hyperinflation, but that’s simply not the case.

In the short-term, then, there’s really not a strong fundamental basis for investing in gold. That’s not to say that it won’t continue to appreciate and that investors will continue to buy into it merely to benefit from what has become self-fulfilling appreciation. From where I’m sitting, though, there’s really no foundation for this appreciation. Consider, for example, that gold investors still have to convert their gold back into paper currency in order for it to to be “used;” otherwise, it offers no benefit to the owner except that it looks pretty (though most investors wouldn’t know, since they buy gold indirectly). Not to mention that if/when the Dollar stops depreciating, there really isn’t really a justification to buy gold as a short-term store of value.

Over the long-term, the picture is certainly more nuanced. I’m not going to explore the viability of fiat currencies here, but suffice it to say that, “Positioning for significantly higher gold prices over the long run demands a very bold strategic bet: that the global monetary system as we know it will completely break down and be replaced with a gold standard.” Regardless of the merits of this point of view, those that invest in Gold should at least understand that this is really the only justifiable reason to hold it. Those who are buying it because of the ongoing currency war will be disappointed.

SocialTwist Tell-a-Friend

Forex Trading Articles by Forex Blog & Online Forex Trading

Posted in Currency News & AnalysisComments Off on Currency War Devalues all Currencies…Except for Gold

Tags: , , , , , , , , , , , , , , , , , , ,

QE2 Weighs on Dollar


In a few weeks, the US could overtake China as the world’s biggest currency manipulator. Don’t get me wrong: I’m not predicting that the US will officially enter the global currency war. However, I think that the expansion of the Federal Reserve Bank’s quantitative easing program (dubbed QE2 by investors) will exert the same negative impact on the Dollar as if the US had followed China and intervened directly in the forex markets.

For the last month or so, markets have been bracing for QE2. At this point it is seen as a near certainty, with a Reuters poll showing that all 52 analysts that were surveyed believe that is inevitable. On Friday, Ben Bernanke eliminated any remaining doubts, when he declared that, “There would appear — all else being equal — to be a case for further action.” At this point, it is only a question of scope, with markets estimates ranging from $500 Billion to $2 Trillion. That would bring the total Quantitative Easing to perhaps $3 Trillion, exceeding China’s $2.65 Trillion foreign exchange reserves, and earning the distinction of being the largest, sustained currency intervention in the world.

The Fed is faced with the quandary that its initial Quantitative Easing Program did not significantly stimulate the economy. It brought liquidity to the credit and financial markets – spurring higher asset prices – but this didn’t translate into business and consumer spending. Thus, the Fed is planning to double down on its bet, comforted by low inflation (currently at a 50 year low) and a stable balance sheet. In other words, it feels it has nothing to lose.

Unfortunately, it’s hard to find anyone who seriously believes that QE2 will have a positive impact on the economy. Most expect that it will buoy the financial markets (commodities and stocks), but will achieve little if anything else: “The actual problem with the economy is a lack of consumer demand, not the availability of bank loans, mortgage interest rates, or large amounts of cash held by corporations. Providing more liquidity for the financial system through QE2 won’t fix consumer balance sheets or unemployment.” The Fed is hoping that higher expectations for inflation (already reflected in lower bond prices) and low yields will spur consumers and corporations into action. Of course, it is also hopeful that a cheaper Dollar will drive GDP by narrowing the trade imbalance.

QE2- US Dollar Trade-Weighted Index 2008-2010
At the very least, we can almost guarantee that QE2 will continue to push the Dollar down. For comparison’s sake, consider that after the Fed announced its first Quantitative Easing plan, the Dollar fell 14% against the Euro in only a couple months. This time around, it has fallen for five weeks in a row, and the Fed hasn’t even formally unveiled QE2! It has fallen 13% on a trade-weighted basis, 14% against the Euro, to parity against the Australian and Canadian Dollars, and recently touched a 15-year low against the Yen, in spite of Japan’s equally loose monetary policy.

If the Dollar continues to fall, we could see a coordinated intervention by the rest of the world. Already, many countries’ Central Banks have entered the markets to try to achieve such an outcome. Individually, their efforts will prove fruitless, since the Fed has much deeper pockets. As one commentator summarized, It’s now becoming “awfully hypocritical for American officials to label the Chinese as currency manipulators? They are, but they’re not alone.”

SocialTwist Tell-a-Friend

Forex Trading Articles by Forex Blog & Online Forex Trading

Posted in Currency News & AnalysisComments Off on QE2 Weighs on Dollar

Tags: , , , , , , , , , , , , , , , , , , ,

Betting on China Via Australia


There are plenty of investors that think betting on China is as close to a sure thing as there could possibly be. The only problem is that investing directly in China’s economic freight train is complicated, opaque, and sometimes impossible. The Chinese government maintains strict capital controls, prohibits foreigners from directly owning certain types of investment vehicles, and prevents the Chinese Yuan from appreciating too quickly, if at all. For those that want exposure to China without all of the attendant risks, there is a neat alternative: the Australian Dollar (AUD).

Those of you that regularly read my posts and/or follow the forex markets closely should be aware of the many correlations that exist between currencies and other financial markets, as well as between currencies. In this case, there would appear to be a strong correlation between Chinese economic growth and the Australian Dollar. If the Chinese Yuan were able to float freely, it might rise and fall in line with the AUD. Since the Yuan is fixed to the US Dollar, however, we must look for a more roundabout connection. HSBC research analysts used Chinese electricity consumption as a proxy for Chinese economic activity (why they didn’t just use GDP is still unclear to me), and discovered that it fluctuated in perfect accordance with the Australian Dollar.

Australian Dollar and Chinese electricity consumption 1990-2008
Before I get ahead of myself, I want to explain why one would even posit a connection between China and the Aussie in the first place. There are actually a few reasons. First, Australia is economically part of Asia: “Today, 43 per cent of Australia’s total merchandise trade is with north Asia. A further 15 per cent is with Southeast Asia.” Second, Australia’s economy is driven by the extraction and sale of natural resources, of which China is a major buyer and investor: “In 2008-9, China was the biggest investor in the key resource sector with $26.3bn involvements approved, 30 per cent of the total.” Third, Chinese demand has come to dictate the prices of many such resources, causing them to rise continuously. Thus, Australia’s natural resource exports to countries other than China still draw strength (via high commodity prices) from Chinese demand.

As one analyst summarized, “China is buying raw materials from Australia in leaps and bounds, and that’s what’s driving that currency’s growth.” Sounds like an Open and Shut case. In fact, this presumed correlation has become so entrenched that any indication that China is trying to cool its own economy almost always prompts a reaction in the Aussie. To be sure, warnings that China’s annual legislative conference (scheduled for October 17) would produce a consensus call for a tightening of economic policy have made some forecasters more conservative. Still, as long as the Chinese economy remains strong, the Australian Dollar should follow.

It’s worth pointing out that the correlation between the Aussie and the Chinese economy doesn’t exist in a vacuum. For example, the Australian Dollar has also closely mirrored the S&P 500 over the last decade, which suggests that global economic growth (and higher commodity prices) are as much of a factor in the Aussie’s appreciation as is Chinese economic activity. The Aussie is also vulnerable to a decline in risk appetite, like the kind that took place during the financial crisis and flared up again as a result of the EU Sovereign debt crisis. During such periods, Chinese demand for commodities becomes irrelevant.

AUD USD 2006-2010
On the other hand, part of the reason the Australian Dollar has surged 10% since September and 20% since June is because other countries’ Central Banks (such as China) have increased their interventions on behalf of their respective currencies. Australia is one of a handful of countries whose Central Bank not only hasn’t actively tried to depress its currency, but whose monetary policy (via interest rate hikes) actually invites further appreciation. As the Aussie closes in on parity and Australian exporters and tourism operators become more vocal about the impact on business, however, the Reserve Bank of Australia (RBA) might be forced to act.

SocialTwist Tell-a-Friend

Forex Trading Articles by Forex Blog & Online Forex Trading

Posted in Currency News & AnalysisComments Off on Betting on China Via Australia

Tags: , , , , , , , , , , , , , , , , , , ,

Thai Baht Rises to 13-Year High


As I pack my bags and head to Thailand for a vacation (for forex research purposes…yeah right), I thought it would be appropriate to blog about the Thai Baht’s strength. The momentum behind the Baht has been nothing short of incredible, and as often happens in the forex markets, the currency’s rise is becoming self-fulfilling. It has already appreciated 8.5% over the last year en route to a 13-year high, and some analysts predict that this is just the beginning.

THB USD Baht Dollar Chart 2006-2010

The last time I travelled to Thailand, in 2004, the Baht was trading around 40 USD/THB, compared to the current exchange rate of 30.7. That’s pretty incredible when you consider that during the intervening time, Thailand experienced a military coup and related political instability, as well as a financial crisis that dealt an especially heavy blow to the world’s emerging market currencies. And yet, if you chart the Baht’s performance against the Dollar, you would have only the faintest ideas that either of these crises took place.

To be sure, the financial crisis exacted a heavy toll on Thai financial markets and the Thai economy. Stock and bond prices lurched downward, as foreign investors moved cash into so-called safe haven currencies, such as the US Dollar and Japanese Yen. However, the Thai economy was among the first to emerge from recession, expanding in 2009, and surging in 2010. “Compared with a year earlier, GDP rose 9.1%, while the economy grew 10.6% in the first half,” according to the most recent data.  Tourism, one of the country’s pillar industries, has already recovered, along with exports and consumption. Projected export growth of 27% is expected to drive the economy forward at 7-7.5% in 2010, according to both the IMF and Thai government projections. The consensus is that growth would have been even more spectacular (perhaps 1-2% higher) if not for the politcal protests, which were finally quelled in May of this year.

Thailand GDP 2008-2010

Despite concerns about risk and volatility, foreign investors are once again pouring funds in Thailand at a record pace. Over $1.4 Billion has been pumped into the stock market alone in the year-to-date. As a result, “Thailand’s benchmark SET Index has rebounded30 percent since May…helping send the SET to its highest level since November 1996.” Capital inflows are also being spurred by Thai interest rates, which are rising (the benchmark is currently at 1.75%), even while rates in the industrialized world remain flat.  At this point, the cash coming into Thailand well exceeds the cash going out, which remains low due to steady imports and restrictions on capital outflows by Thai individuals and institutions. This imbalance is reflected in the Central Bank of Thailand’s forex reserves, which recently topped $150 Billion, more than 50% of GDP.

Anticipation is building that Thailand will use some its reserves to try to halt, or even reverse the appreciation of the Baht. After last week’s intervention by the Bank of Japan, such intervention is now seen not only as being more acceptable, but also more necessary. Due to pressure from the Prime Minister, the Central Bank has convened at least one emergency meeting to determine the best course of action. So far, members can only agree that restrictions on capital flows and lending standards to exporters should be relaxed.

For what it’s worth, Thailand’s richest man has urged the Central Bank not to act: “The effort is likely fruitless as foreign capital is expected to incessantly flood into Thailand because of the country’s healthy economic recovery and export growth. The baht as a matter of fact should become even stronger should Thailand’s politics remain in normal condition.” He is supported by the facts, which show that the Thai export sector has held up just fine in the face of the rising Baht, though perhaps only because other Asian currencies have risen at a comparable pace.

If other Central Banks were to step up their intervention – (Deutsche Bank has argued, via the chart below, that all “Asian central banks have for many years been more or less persistently in the market “stabilizing” their currencies, but with a clear bias towards preventing USD depreciation in this region”) – the Bank of Thailand would probably have no choice but to follow suit.

Foreign Exchange Reserves, Central Bank Intervention in Asia 2000-2010

Otherwise, it might not be long before the Baht clears 30 USD/THB. My next post on the Baht, in 2015, will probably be in the form of a similar lamentation…

SocialTwist Tell-a-Friend

Forex Trading Articles by Forex Blog & Online Forex Trading

Posted in Currency News & AnalysisComments Off on Thai Baht Rises to 13-Year High

Tags: , , , , , , , , , , , , , , , , , , ,

Emerging Market Currencies Flat in 2010


The recovery that emerging markets (their economies and financial markets) have staged since the lows of 2008 is impressive. In most corners of the financial markets, all of the losses have been erased, and securities/currencies are trading only slightly below there pre-credit crisis levels. Even compared to twelve months ago, in 2009, the performance of emerging market currencies holds up well. In the year-to-date, however, most of these currencies have appreciated only slightly, thanks to a particularly weak month of August.

Emerging Market Currencies

The MSCI emerging market stock index is currently down 2.5% since the start of the year. You can see from the chart above that most emerging market currencies tend to track this index pretty closely, rising and falling on the same days as the index. Interestingly, emerging market stocks appear to be much more volatile than emerging market currencies. You can also see that while the Malaysian RInggit has started to separate itself from the pack, the others have moved in lockstep with each other and are all about even for the year.

On the other hand, emerging market debt – as proxied by the JP Morgan Emerging Market Bond Index (EMBI+) has been unbelievably strong. Prior to the slight correction in the last couple weeks, the index has risen a whopping 20% over the last twelve months. On the surface, this disconnect between stocks and bonds would seem to be an anomaly, or even a contradiction. After all, if investors are only lukewarm about emerging market currencies and stocks, what reason would there be for them to get so excited about bonds.

jp morgan embi+ 2010

If you drill a little deeper, however, it all starts to make sense. Due to a weak appetite for risk, 2010 has been a favorable year for bonds, at the expense of stocks. I would have assumed that poor risk appetite would also have helped G7 financial markets, at the expense of the emerging markets, but you can see from the chart below (which shows the MSCI emerging markets stock index closely tracking the S&P 500) that this simply isn’t the case. On the contrary, this same dynamic is playing out simultaneously in emerging markets. “Today, we are favoring emerging-market debt over emerging-market equities because the debt provides us with a better risk-adjusted return,” summarized one portfolio manager.

S&P 500 versus MSCI emerging markets 2010

When it comes to debt, emerging markets have actually outperformed G7 debt, in spite of the current risk-averse climate. “Funds investing in emerging-market local-currency debt have attracted $16.9 billion of net inflows so far, more than triple the record annual intake of $5 billion recorded in 2007.” The logical basis for this shift is surprisingly straightforward: “When we look at government debt, we’re always comparing and contrasting the yields versus the fundamentals. I just don’t know why you would want those low yields from a Treasury bond in the developed world when you can get much higher yields — and in our estimation, an improving economic story — in Indonesia, Malaysia or Brazil.”

In other words, why would you want to earn 2.65% from a country (US) whose national debt is close to 100% of GDP, when you could earn double or triple that rate from investing in the sovereign debt of countries whose Debt-to-GDP ratios are sustainable?!  In addition, when it comes to investing in debt, the lack of volatility in emerging market currencies can bee seen as a plus, since it prevents the interest rates from becoming diluted. To be fair, fundamentals don’t represent the whole story: “After 2008, you really have to take liquidity into consideration. Emerging markets are going to be some of the first to freeze up in a crisis.”
Government Bond Yields Inflation 2010
In fact, some analysts are already starting to question whether the markets haven’t gotten ahead of themselves in this regard, and that perhaps we are due for a big correction: “Come September, when trading resumes in earnest, we’ll find out if the cozy emerging markets world we have experienced over the past few months was summer laziness or strong conviction.” With vacations ending and traders set to return to their desks, we won’t have to wait long to find out.

SocialTwist Tell-a-Friend

Forex Trading Articles by Forex Blog & Online Forex Trading

Posted in Currency News & AnalysisComments Off on Emerging Market Currencies Flat in 2010

Tags: , , , , , , , , , , , , , , , , , , ,

Interview with Roland Manarin: “Don’t Try to Beat the Market”


Today, we bring you an interview with Roland Manarin, founder of Manarin Investment Counsel and Manarin-On-Money. Below, he shares his thoughts on risk management and the EU Sovereign Debt Crisis, among other topics.

Forex Blog: How would you summarize your general approach to investing?

In the management of retirement assets, I subscribe to global diversification using low-cost, asset-class funds that adhere to Modern Portfolio Theory.  From an economics perspective, I follow the Austrian model.

Forex Blog:  Which risks do you currently perceive as most problematic and which are therefore most important to monitor?

There are always risks but for me a concern is the massive amount of malinvestment in the world financial system.  What’s the next spasm to show up?  A bond bubble burst?  A major shift in velocity shooting inflation upwards?  I’m no good at trading, and in today’s world I wonder if anyone is.  There is no one investment plan that is safe but some are safer than others.

Forex Blog:  What is your assessment of the sovereign debt crisis in EU?

I stress broad diversification because I think the world’s financial markets are in the hands of major risk-addicts so as an investor, I must be prepared for anything.  I could be wrong, but it appears we are nearing the collapse of the European welfare state.

Forex Blog:  Are you optimistic about the near-term prospects for US economic recovery?

I want to be but what shakes my confidence is America being on the same road as Europe.

Forex Blog:  Do you think the Fed is close to raising interest rates?

Who knows?  If you can tell me what moves Bernanke and Co. are going to make in the near term, I would feel very good about where to invest my money for maximum return.  But we don’t so everything is just a guess.

Forex Blog: Do you think there is a risk that failure to unwind its quantitative easing program could drive inflation?

I think malinvestment and currency debasement could drive inflation.

Forex Blog:  Considering the recent surge in volatility, what approach do you think Central Banks should take to managing the value of their respective currencies?  Do you think intervention is necessary/desirable?

The federal government/Federal Reserve model of intervention typically follows a simple model:  Tax, spend, borrow, print, subsidize, regulate, go broke.  I don’t think that would be desirable.

Forex Blog:  What’s your advice to investors that want to beat the market during this period of uncertainty?

Don’t try.  Few pros have the long term track record of outperforming the market.  Instead adopt a simple, diversified plan that will allow you to get through this historic turning point we are living through in fine shape.

SocialTwist Tell-a-Friend

Forex Trading Articles by Forex Blog & Online Forex Trading

Posted in Currency News & AnalysisComments Off on Interview with Roland Manarin: “Don’t Try to Beat the Market”

Tags: , , , , , , , , , , , , , , , , , , ,

Boom Time for Forex


It has been three years since the Bank of International Settlements’ last report on foreign exchange was released. Since then, analysts could only speculate about how the forex market has evolved and changed.

The wait is now over, thanks to a huge data release by the world’s Central Bank, which showed that daily trading volume currently averages $4.1 Trillion, a 28% jump since 2007. Trading in London accounted for 44% of the total, with the US – in a distant second – claiming nearly 19%. Japan and Australia accounted for 7% and 5%, respectively, with an assortment of other financial centers splitting the remainder.

This data is consistent with a recent survey of fund managers, which indicated a growing preference for investing in currencies: “Thirty-eight per cent of fund managers said they were likely to increase their allocations to foreign exchange, while 37 per cent named equities and 35 per cent commodities. Currency was most popular even though this was the asset class where managers felt risks had risen most over the past 12 months.” In short, the zenith of forex has yet to arrive.

There are a few of explanations for this growth. First, there are the inherent draws of trading forex: liquidity, simplicity, and convenience. Second, investors are in the process of diversifying their portfolios away from stocks and bonds, which have underperformed in the last few years (on a comparative historical basis). As investors brace for a long-term bear market in stocks and low yields on bonds for the near future (thanks to low interest rates), they are turning to forex, with its zero-sum nature and the implication of a permanent bull market. Additionally, programmatic trading and risk-based investing strategies are causing correlations in the other financial markets to converge to 1. While there are occasional correlations between certain currencies and other securities/commodities markets, the forex markets tend to trade independently, and hence, represent an excellent vehicle for increasing diversification in one’s portfolio.

There is also a more circumstantial explanation for the rapid growth in forex: the credit crisis. In the last two years, volatility in forex markets reached unprecedented levels, with most currencies falling (and then rising) by 20% or more. As a result, many fund managers were quite active in adjusting their portfolios to reduce their exposure to volatile currencies: “The volume growth was really a result of the volatility and the fact that you had real end users actively hedging their exposures.” Another contingent of “event-driven” investors moved to increase their exposure to forex, as the volatility simultaneously increased opportunities to profit. Moreover, these adjustments were not executed once. With a succession of mini-crises in 2009 and 2010 (Dubai debt crisis, EU sovereign debt crisis) and the possibility of even larger crises in the near future, investors have had to monitor and rejigger their portfolios on a sometimes daily basis: “If you have a big piece of news, such as the Greek debt crisis, there’s more incentive to change your position,” summarized one strategist.

What are the implications of this explosion? It’s difficult to say since there is a chicken-and-egg interplay between the growth in the forex market and volatility in currencies. [In theory, it should be that greater liquidity should reduce volatility, but if we learned anything from 2008, it is that the opposite can also be the case]. As I wrote last week, I think it means that volatility will probably remain high. Investors will continue to adjust their exposure for hedging purposes, and traders will churn their portfolios in the search for quick profits.

It will also make it more difficult for amateur traders to turn profits trading forex. There are now millions of professional eyes and computers, trained on even the most obscure currencies. As if it needed to be said, forex is no longer an alternative asset.

SocialTwist Tell-a-Friend

Forex Trading Articles by Forex Blog & Online Forex Trading

Posted in Currency News & AnalysisComments Off on Boom Time for Forex

Tags: , , , , , , , , , , , , , , , , , , ,

Forex Volatility to Remain High


With the onset of the Eurozone sovereign debt crisis this year, volatility levels in forex (as well as in other financial markets), surged to levels not seen since the height of the credit crisis. While volatility has subsided slightly over the last few months, it still remains above its average for the year, and significantly above levels of the last five years.

The spike in volatility was easy enough to understand. Basically, the possibility of a default by a member of the EU or even worse, a breakup of the Euro created massive uncertainty in the markets, spurring the flow of capital from regions and assets perceived as risky to those perceived as safe havens. As you can see from the chart below, this trend has begun to reverse itself, but still remains prone to sudden spikes.

5 Year Forex Currency Volatility Chart
While the crisis in the EU seems to have (temporarily) settled, investors are attuned to the possibility that it could flare up again at any moment. A failed bond issue, a higher-than-forecast budget deficit, political stalemate, labor strikes – all signal a failure to resolve the crisis, and would surely trigger a renewed upswing in volatility and sell-off in risky assets.

The same goes for (unforeseen) crises in other regions, affecting other currencies. Muses one analyst: “Next week? Who knows. One strong candidate is for flight out of the yen as investors start to fear there won’t be enough domestic demand for mountains of Japanese debt and foreign buyers will insist on much higher yields. Another might be that Swiss banking exposure to insolvent east European households causes another banking crisis.” Don’t forget about the UK and US, both of which have hardly put the recession behind them, and whose Trillions in debt represent powder kegs waiting to explode.

It will be months or years before these latent crises even begin to manifest themselves, let alone achieve some kind of resolution. As a result, many analysts predict that volatility will remain high for the foreseeable future: “Big and sudden currency market moves shouldn’t come as a surprise, whatever the direction…Higher market volatility should follow on from greater macroeconomic volatility. Increased economic fluctuations increase uncertainty. And there’s no question macroeconomic volatility has risen.”

In addition, there is no way for governments for Central Banks to alleviate these crises due to the “Trillema of International Finance.” Greg Mankiw, Harvard Economics Professors, explains that in prioritizing an independent monetary policy and open capital markets have forced many countries to forgo exchange rate stability: “Any American can easily invest abroad…and foreigners are free to buy stocks and bonds on domestic exchanges. Moreover, the Federal Reserve sets monetary policy to try to maintain full employment and price stability. But a result of this decision is volatility in the value of the dollar in foreign exchange markets.” While the Euro has eliminated exchange rate fluctuations between members of the Eurozone, meanwhile, there is nothing that the ECB can (or desires to) do to minimize volatility between the Euro and outside currencies.

From the standpoint of forex strategy, there are a couple of lessons that can be learned. First of all, the carry trade will remain underground until volatility returns to more attractive levels. Until then, the potential gains from earning a positive yield spread will be offset by the possibility of sudden, irascible currency depreciation. Second, growth currencies – despite boasting strong fundamentals – will remain vulnerable to sudden declines. That doesn’t mean that they should be avoided; rather, you should simply be aware that small corrections could easily turn into multi-month weakness.

SocialTwist Tell-a-Friend

Forex Trading Articles by Forex Blog & Online Forex Trading

Posted in Currency News & AnalysisComments Off on Forex Volatility to Remain High