Alternate currency systems

The US received a number of advantages in being the world's reserve


currency, especially in the years following the breakdown of the Bretton


Woods system – the US cost of financing was much lower than that of other


countries, allowing it to run greater trade


and financial deficits than those possible for other


countries.

However, such a system encourages economies to run excessive deficits, leaving inflation as the


only escape. The current global currency system is unsustainable –


it has not been effective in dealing with the financial


crisis; the US has a large deficit


that it may need to inflate its way out of; and emerging economies have had the incentive to


continually undervalue their currencies against the USD to make their exports more attractive, now believing that they would


not succeed if they allowed their currencies


to appreciate naturally.

Then what is the alternative?

Restoring the gold standard is impractical – a pure gold standard tends to


be deflationary, while a not-so-pure gold standard based on derivatives could


be manipulated like the current currency system.

A global currency is another possibility, and was suggested by John Maynard Keynes. However, current problems


with the eurozone highlight how unrealistic it is to have a single


currency representing relatively independent economies, with widely varying


industries and political systems To be successful, a common


currency would require a loss of sovereign power to a certain degree, with one


agency overseeing trade policy, including limiting surpluses and monetary


policy to avoid inflationary temptations.

Another alternative was suggested in early 2011 when the IMF issued a report on Special Drawing Rights (SDR) as a replacement


for the USD as the world’s reserve currency.







In 1969, SDR's were created as a more limited


global currency. They can be converted into a required currency at exchange


rates based on a weighted-basket of currencies.


When the IMF issues funds to economies, they are typically dominated in SDRs, the largest such issue being the


equivalent of USD250 billion in April 2009 in response to the private-lending


collapse in the financial crisis.

It is argued that they would be a less volatile alternative to the dollar,


despite not being a tangible currency.







Increasing the global role of SDRs and issuing more SDRs would reduce the


current problem of recessionary bias – during and after financial crises, the


burden of adjusting to payments imbalances falls on nations running large


deficits, the US in particular – by allowing central banks to


exchange the SDRs for hard currency, rather than exchanging dollars.


This would also reduce the need for countries to accumulate reserves,


facilitating a reduction in the global imbalances that result from countries


stockpiling USDs. And, the smaller scale of SDRs would help


sustain the recovery of the global economy without leading to inflation. That


being said, the final point is dependent on the IMF members limiting the


introduction of SDRs into the market over the next few years.







If you have an opinion on the future direction of the USD, or which


currencies will perform well in the global economy, why not try forex trading? Trading is available on a range of


currencies, the most common currency pairs being the EUR/USD, GBP/USD, JPY/USD,


USD/CHF and AUD/USD.









Remember that CFDs and forex trading are leveraged products and can lead to losses that exceed your 1st deposit. CFD trading may not be appropriate for everybody, so please ensure that you fully understand the risks concerned.     

Spreads and forex trading

Currency exchange is


often advertised as being


a commission-free market, with no exchange charges, regulatory


charges or data charges.

 However, currency


exchange providers do need to


earn money somewhere, and this is


generally done through ask/buy spreads.

 The


ask/buy spread is how a currency pair is quoted; the ask


price is the price at which traders can sell the pair, while the


buy price is the price at which traders can buy the pair. If


the EUR/USD pair was quoted at 1.4441 / 1.444, traders could sell


the pair at 1.4441 and buy it at 1.4444. This is a


range of 3 pips, or 3 units of 0.0001.

 There are 3


ways in which most currency exchange


providers earn money on spreads, through


offering fixed spreads, variable spreads or a commission based on a percentage of the spread.

 In the case of the


EUR / USD forex pair, if you were trading through a currency


exchange provider that offered a fixed


spread, the quoted spread would always be 3 pips, regardless


of market liquidity.

 Currency


exchange providers that offer variable spreads


could have spreads as little as one pip, or as big


as 5. These spreads are typically


based on the liquidity of a currency pair; if


the pair is awfully liquid, the spread is


generally narrower, and if the pair is not, the spread


is generally broader. The most


commonly traded currency pairs , for example


the USD/JPY, USD/CHF, GBP/USD, AUD/USD and EUR / USD, are more liquid and have lower spreads.


By contrast, exotic currency pairs , for example the USD/ZAR, are traded less


frequently so are less liquid and sometimes have


higher spreads.







Variable spreads could also alter


at different times of the trading day or different times of


the week when the volume of fx trades is higher or lower.







Other currency


exchange providers may charge a small commission


, for example two-tenths of a pip (or 0.00002), and then pass


your order onto an enormous market maker with whom it has a relationship. Such an arrangement could end in you receiving tight spreads that only


huge traders could receive otherwise.

So which is best?

Fixed spreads may protect traders from slippage,


which is when your trade is executed at a different price to the one you were


offered, due to underlying market liquidity. You may also


always know what price you may pay for a currency pair.


But in the long run this


frequently works out to be costlier


than variable spreads.

 In the case of forex providers that charge


commissions, it is worth finding out what else


the provider is offering. If you are charged a 0.00002 commission on


your trade, but are offered a software platform that is better than most online providers, it could be worth paying the additional cost.

 Variable spreads are


attractive because they should mirror the underlying


market ; however, the


effectiveness of this depends on


how well providers can make the market.

 As currency


exchange is an OTC market, banks, the first market makers, have


relations with other banks and online currency


exchange providers, and these


relations are based mostly on the capitalisation and


credit standing of each


establishment. Foreign exchange providers that


offer variable spreads will be able to pass on more


competitive spreads to its clients if they are


well-capitalised and have a good relationship with a


bunch of credible banks.     









Remember that CFDs and forex trading are leveraged products and can result in losses that exceed your 1st deposit. CFD trading may not be appropriate for everybody, so please ensure that you fully understand the risks concerned.     

Why has the volume of fores trading gone up?

In 2010, a triennial report released by the Bank of


International Settlements said that the daily volume of foreign exchange trading was USD4.1 trillion. This was a


28% growth rate since 2007.

More recently, CLS


Bank released figures saying that the daily volume of


foreign exchange trading reached USD5.12 trillion in June


2011, breaking a previous record set in March 2010. This turnover was


Twenty p.c. higher than the same time last year.

 So why has there been


a rise in foreign exchange trading?

 The 28% increase


between 2007 and 2010 was partially credited to the


world financial crisis: as stock exchanges fell in 2008, the forex market became more popular . As currencies are


always traded in pairs, one will always be moving against another,


giving the opportunity for traders to


profit at any point, financial crisis or not.

 As for the 2011


increase, this has been attributed to the Greek crisis, as the near default increased trading on the unsteady euro.


And, although the austerity vote was passed, talks about a 2nd bailout program are still happening. Setting Greece apart, eurozone members


Portugal, Italy, Ireland and Spain also have high sovereign debt


proportions, with expectancies that Italy could be the


next to suffer following the spike in Italian bond yields on July 8, 2011.

 Another


reason for the record volume of foreign exchange


trades is the press conference held by Ben Bernanke on June 22,


2011, in which he conceded US weakness and announced


that the Fed had reduced the midpoint of


its 2011 GDP outlook growth range to 2.8% ( in


Jan it was 3.7% ), alongside enlarging its


end-2011 outlook unemployment and inflation rates. He


also announced that the 2nd round of


quantitative easing would expire at the end of the


month, and that was not likely to be followed by a 3rd round.

 Following the press


conference there was a swift fall in stock costs matched by


a rise in the USD.

 But the June rise in forex trading is not characteristic, as the


Northern Hemisphere's summer months are


sometimes a slow trading period. So it will be fascinating to see what Sep holds, as


this is historically the time when market


participants return from their summer


holidays. And it is also when the next tranche of aid will


be paid to Greece. This means that, even if the


currency market slows over the following


2 months, it is likely to come back with a


bang.    









Remember that CFDs and forex are leveraged products and can result in losses that exceed your 1st deposit. CFD trading may not be appropriate for everybody, so please ensure that you fully understand the risks concerned.     

Insure your portfolio using stock indices

Stock index CFDs


offer a handy way to hedge existing stock positions in


erratic markets; as CFDs can be traded long or


short traders are able to open a short position


on an index that is representative of their stock portfolio, knowing that any losses in


their stock portfolio will be balanced by their index CFD position.

 As an example, a


backer might hold a balanced stock portfolio across the


Australian market. He is anxious about


short term volatility and his assets


falling in value but doesn't want to


sell his positions as he expects the market to trend


up over the long term.

 As an alternative he comes to a


decision to offset possible losses by opening a short


position on the Australia 200 Index. As an index is a


probabilistic measure of the value of a


bunch of stock, it will rise and fall with the


changing cost of individual shares.

 He sells, or goes short on, numerous Australia 200 contracts, realizing


that now his share position is hedged if the market fluctuates. For


every dollar he loses on his share portfolio, he will gain a dollar on his Australia 200 position.


Similarly, for every dollar he loses on his index position,


he'll gain a dollar on his share


portfolio.

 From here there are three possible


scenarios: the stock and index appreciate in


value, the stock and index decline in


value, or the stock and index trade sideways.

 One. The stock and index go up in value




 The market continues trending upwards, and his


portfolio is soon worth another 10,000.


However, as the investor  had sold the Australia 200 with the hope that it would go down, he has made


a loss of the same quantity on that position. If he


suspects the market will continue to go up,


he could close his Australia 200 position and continue


enjoying to profits of his share


portfolio. If he still thinks there are unstable times


ahead, he could keep that position open, realizing that


any possible losses will be counterbalanced


by his share portfolio.

 Two. The stock and index fall in


value







If the investor  loses 20,000 across his


portfolio, he will make the same profit on his


Australia 200 index CFD position, which would annul


those losses. Once he believes the price has bottom out, he could close


the index position, taking those profits and holding onto the stock


until its price raises again.

 Three. The stock and index remain flat







The trader won't


have made a profit or loss on either trade.

 Index CFDs are a helpful tool


for safeguarding existing investments against price


fluctuations, and CFDs generally are a neat method to quickly diversify your portfolio with minimum


capital needs. That being said, this strategy is a


market-neutral strategy, meaning that although you will


not make a loss, you will not make a profit either


for as long as both positions are open. Hedging can lower


profit potential, but as it also


limits losses, it can reward traders with a steadier flow


of profit over time.    









Remember that CFDs and forex are leveraged products and can result in losses that exceed your first deposit. CFD trading may not be appropriate for everybody, so please make sure you understand the risks concerned.     

Improve your forex trading with panic selling

Panic selling is the


wide-scale selling of a currency pair


springing from trader fear.







 This


regularly takes place when an event


occurs , forcing forex traders to


re-evaluate the forex pair's worth ,eg a negative company statement or an


economic crisis. Regularly when the event behind the panic-selling was a predicted event


rather than an actual event ( i.e. : talk about an


investigation, rumours of poor company figures, or


an analyst opinion), panic-selling can


spring from short-term traders pushing


prices down to trigger the stop losses of weaker traders. This


creates wonderful opportunities for


traders to open positions when the price has hit rock bottom,


ready for it to rise again.

 When panic-selling, most forex traders just wish to escape from the trade


regardless of the price at which they sell.

 The


process of panic-selling

 One. An event


occurs to cause an currency pair price to speedily


drop.

 Two. A day


occurs when there's a significant


volume of selling and purchasing, as


buyers and sellers attempt to take control of the trend:


purchasers try to push the price up,


and sellers try to keep it droping. Usually


the price fall plateaus on this day.

 Three. If no


significant trend change occurs in step Two,


the currencypair price continues trending the same way,


though  at


a lower volume.

 Four. Steps


Two and Three repeat themselves until there's a


high-volume day which results in a long or short-term trend reversal.

 Five. The process


continues until a long-term trend is established.

 How to profit from panic-selling?

FX traders can profit


from panic-selling by selling currency pairs at the start of a sell-off, and purchasing


them back when the price bottoms-out, or by waiting for the price to


hit rock bottom, purchasing the pair at the low


price and selling them later once the price


is trending up again.

 The exhausted selling


model ( ESM ) uses trendlines, volume, moving averages and chart patterns to


figure out when a price has hit rock


bottom. The rules of the ESM are:

• The forex pair price must first
  
  
  speedily decline on high volume
• A volume spike will occur,
  
  
  making a new low, and seem to reverse the trend
• A higher low wave must occur
• A break of the downward trendline must
  
  
  occur ( i.e. : the price must break the trendline resistance )
• The Forty and / or Fifty day moving
  
  
  averages must be damaged
• The Forty and / or Fifty day moving
  
  
  averages must be retested and must hold

What about panic-buying?

 In


theory, panic-buying would be the exact


opposite of


panic-selling: the wide-scale purchasing of a


forex pairspringing from investor


trepidation,


with most traders just wanting to


go into the trade, not caring about the price at which they buy.

 Nevertheless it's much


more difficult to identify panic


buying than panic selling, as it is generally


assumed that traders buy based on risk and return assessment, and set stop losses and profit


boundaries when they open a trade.

 This is not


necessarily right: panic


buying happens when traders fear losing out


on the profits that everybody else is


making, and this fear hinders them from


evaluating and opening a trade based on their trading method. One example would be the


panic buying in the silver market from Jan 28 to


Apr 25 2011: buyers drove costs from


USD26.40 per oz to USD49.80 per oz, a gain of almost


90%.

 Then, in the first


week of May, over 1/2 those gains


evaporated in just 4 trading sessions. The


existence of panic buying means that traders can profit on it as


well as on panic selling if we use an exhausted buying model (


the complete opposite of the ESM ), it might make it clear


that :

• The forex pair price must first
  
  
  rapidly spike on high volume
• A volume spike will happen,
  
  
  creating a new high, and appear to reverse the trend
• A lower high wave must happen
• A break of the upward trendline must
  
  
  happen
• The 40 and / or 50 day moving
  
  
  averages must be broken
• The 40 and / or 50 day moving
  
  
  averages must be retested and must hold

To


sum up

 Panic selling ( and


panic buying ) creates great trading


chances for traders who are educated and alert.


The technical indicators in the ESM offer an


effective method for building


the best entry point for going long ( or going short, in the case of panic


buying ), and the incontrovertible fact that the model uses 1 or


2 technical indicators can protect traders from


costly mistakes.     



Remember that CFDs and forex are leveraged products and can result in losses that exceed your 1st deposit. CFD trading may not be appropriate for everybody, so please ensure that you fully understand the risks concerned.     

A beginner's guide to market bubbles

A bubble is when an asset, economy or market has a huge price spike, exceeding what is


considered to be its fundamental value by a


huge margin. Bubbles are sometimes identified retrospectively, often after


there was a crash of the cost of


the economy, market or asset in query.







The damage caused


by the burst of the bubble is dependent upon


the economic sector or sectors concerned: the


bursting of the US housing bubble in 2008 caused a world


financial crisis, because most banks and fiscal


establishments in America and Europe held many billions


of dollars worth of subprime mortgage-backed securities.

The 5 steps of a bubble

 Economic guru Hyman P Minsky identified 5 stages in a


credit cycle: displacement, boom, euphoria, profit taking and panic and this


general pattern is fairly consistent across bubbles in


varied sectors.

Stage 1 Displacement

 Displacement


happens when investors become


enthused


with something new: state-of-the-art technology in the


dot-com bubble, tulips in tulip mania ( a bubble in the 17th century where the


popularity of tulips climbed so


swiftly that tulips started selling for over ten times


the yearly salary of talented


craftsmen. Within months of the bubble bursting, tulips were selling


for One / Hundredth of their top prices ), or traditionally


low interest rates, as in the USA in June 2003, which started the


increase to the 2008 housing bubble.

Stage Two Boom

 Following a


displacement, prices start


climbing slowly. They gain momentum as more


traders enter the market, causing the


asset to draw in far-reaching coverage, then panic buying, which forces prices to record highs.

Stage Three Euphoria

 Prices


skyrocket: in the 1989 real-estate bubble in Japan, land


in Tokyo sold for up to USD139,000 per square foot. At


the peak of the web bubble in March Two


thousand, the mixed value of the technology stocks on the Naz was larger


than the GDP of most states.

 During the euphoric


phase, new valuation measures are promoted to justify the


spike in prices.

Stage Four Profit taking

 By this time,


talented traders start selling their positions and taking profits


sensing the bubble is going to burst. Nevertheless


determining the moment of collapse can be complicated and, if you miss it, you've most probably missed your opportunity to take


profits for good.

Stage Five Panic

 At that point, prices fall as speedily as


they originally rose. Traders faced with margin calls and the falling values of


their assets start panic selling: running from their


investments at any price. Supply soon overwhelms demand, and


prices plunge.

 In the 1989 Japanese


real estate bubble, real estate


lost nearly Eighty percent of its inflated


value, while stock prices fell by Seventy pc. Similarly, in October 2008, following the


collapse of Lehman Brothers, and the almost-collapse of


Fannie Mae, Freddie Mac and AIG, the SP 500 plunged nearly


17% in that month. That month, world equity markets lost


USD9.3 trillion, or 22% for their mixed market capitalisation.

Conclusion

 Being familiar with the stages of a bubble, whether it's in


the stock, forex, commodities or bonds


market, may help you identify


the subsequent one, and getting out before your profits


vanish.      









Remember that CFDs and forex are geared products and may lead to losses that surpass your first deposit. CFD trading might not be suitable for everyone, so please make sure you understand the risks involved.     

Forex Trading: Trading the AUD

According to the


International Monetary Fund, in 2010 Australia ranked thirteenth


internationally in terms of GDP, 20th


for the value of its exports, and fiftieth for the size of its


population.

Yet, in


spite of only having 0.33% of the planet's


population, the Australian dollar is among the 5 most


frequently traded currencies in the foreign exchange


market. The popularity of the Australian dollar among


foreign exchange traders is due to


geography, the land, and government


policy.

Geography



 Australia is the most


approvingly situated Western country re south-east Asia. Higher populations and growing economies have


led to an insatiable demand for


resources, and Australia's resources are the most accessible. India and China have potent


impacts on Australia's trade and business performance,


along with the value of the Australian dollar in


the foreign exchange market, with the Asian


countries importing Australian commodities and Australia importing


Indian and Chinese machinery and consumer


products.

The


land

 Australia has an


enormous range of coveted natural resources such as gold, diamonds, oil, uranium, nickel, iron ore, agricultural


goods and coal.

Government policy

 Australian government


policy has led to a stable central authority and


economy, and a lack of intervention in the foreign


exchange market, along with a Western approach to


business and regulation that has not always been


typical of the Asia-Pacific area.

 The Reserve Bank of


Australia ( RBA ) is quite conservative and does not


intermediate frequently in the foreign


exchange market. And, due to inflationary concerns, the RBA has


maintained Australia's interest rates as some of the highest in the developed


world. In foreign exchange, high


interest rates make the Australian dollar a


popular currency with traders who use the carry trade,


sometimes pairing it with a low-yielding currency like


the JPY.

 Factors that impact the Australian


dollar

 Along with


the economic and political variables that impact


foreign exchange rates, some elements are totally unique to the Australian dollar.

 Economically,


Australia stands out due to its heavy dependence on


commodities, with mining representing over Five pc of its GDP


and agriculture representing 12%. Although this


dependence led to Australia weathering the


global financial crisis better than many western economies, Australia


has never developed a robust manufacturing


sector; leading to a great amount of foreign debt,


a large current account deficit


and high interest rates.

 As Australia's


economy is driven by commodities; reports on weather, crop planting,


crops, metal costs and mine output; all


impact the Australian dollar, therefore are valuable


to fx traders trading on


the Australian dollar.

 This


dependency also makes the Australian dollar exposed to changes in the Asian markets,


especially India and China, with export


demands pushing the Australian dollar higher, only to fall when the demand


fades.

 Higher commodity


costs often create inflationary pressures in


developed countries, leading to the Australian economy


looking healthier for foreign


exchange traders when resource costs raise concerns


about the sustainability of expansion in

Japan, North America and Europe. This also makes the


Australian dollar a preferred


alternative for traders needing to go long on commodity


exposure and / or Asian resource demand.

The Australian dollar and fx

 Most major developed


currencies trend up and back down together, partly


due to trade links between them. The Australian


dollar, by contrast, enjoys some


autonomy from other important currencies: its health is


closer linked to commodity costs and commodity price volatility


is mirrored in AUD


volatility.

 This means the


AUD is likely to


continue to trade based on commodity costs, and it


is not likely to lose its


importance in the forex market, even


as the Chinese yuan becomes more important.









Remember that CFDs and forex are leveraged products and can lead to losses that exceed your 1st deposit. CFD trading may not be appropriate for everybody, so please ensure that you fully understand the risks concerned.