Author Bio

The Forex market gets a bad rap in the media and other segments of the financial markets for being risky. It’s not a deserved reputation. In fact, the volatility of currency exchange rates is markedly lower than that of most other markets.

Not surprisingly, in the five year period ending December 2010 the fixed income market represented by 2yr and 10yr Treasury Notes was the least volatile. The major US dollar exchange rates make up the next lowest volatility group. After that come the major stock indices, with small cap stocks (Russell) unsurprisingly more volatile than big cap ones (S&P 500). Oil has been comparably volatile to individual stocks, which have demonstrated the most volatility.

Clearly Forex is no more risky than other markets, and in most cases can be described as less so. In other words, when the media and others portray the foreign exchange market as highly risky they do so on a really faulty basis because the volatility readings just don’t support it. Relatively low volatility, though, does not mean there aren’t any real opportunities to profit in the foreign exchange market.

Clearly there are investment opportunities in the currency market – ones that are no more risky than playing the stock market. It’s a question of finding the way of taking advantage of them that is right for you and your financial objectives. So why do so many folks consider the foreign exchange market highly risky?

The answer is leverage. Those who call the currency market highly risky fail to differentiate between the market and the participants. It’s not that the Forex market itself is risky. It’s that traders and investors are offered the opportunity to play the market with a high degree of leverage. In the stock market leverage is limited to 2:1, meaning you can buy twice as much stock as you have cash in your account by borrowing the difference (day traders often are allowed to use somewhat higher leverage). In Forex it is possible to trade at 50:1 or higher leverage. Successful traders know how to use leverage judiciously and to their advantage – this takes experience, time and diligence. Many traders in the Forex market do not know how to use leverage to properly manage risk. This aspect of risk management is a key consideration as we review new Trade Leaders for our investment program.

Forex gets a bad rap – a big part is due to irresponsible traders who have no experience or risk management strategy. I also believe Forex gets a bad rap because of misinformation. People hear a story here or there and see liquidity and leverage and make assumptions. And, you know what happens when you make assumptions.

Are you a Smartie? Get the facts. Check out our free e-book “The Smarties’ Guide to Alternative Investing in the Foreign Exchange Market”.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Author Bio

Last week Currensee Chief Market Analyst Shaun Downey wrote a blog post titled A Maze of Counterintuitive Forces: Volatile Sideways Ahead? There were a couple of things in there that I disagreed with, so I decided to take the opportunity to present my own view point. You can decide which one you prefer, or if you think both of us have no idea what we’re talking about. J

Mortgage Rates to High
Shaun made the comment that mortgage rates remain stubbornly high and that even though they have fallen, it apparently isn’t enough to induce an increase in mortgage applications. Seeing as the rates have recently been making all-time lows, I have a hard time agreeing that they are stubbornly high.

Speaking to the mortgage applications, consider two things. First, the tax credits pulled forward a lot of home buying activity, and the numbers have been reflecting a drop off since the credit expired. That was something inevitable and very little related to mortgage rates. Second, the potential home buying public is experiencing a quartet of symptoms helping to keep their activity down. They are:

1. Fear prices may yet go lower again (or at least not rise for a while),
2. Impaired personal/family balances sheets and credit ratings,
3. Being gun shy about borrowing for anything at this point, and
4. The belief that banks just aren’t lending. Again, none of this has anything to do with mortgage rates.

Fed Capping Long Rates

Assuming you agree that rates are too high, Shaun’s solution to the problem he sees is having the Fed cap long term rates, maybe at something like 1.5% for 30-year money. If, as Shaun has suggested, mortgage rates are too high then lowering long rates would help. Standard fixed rate mortgages are closely linked to the rate on the 10-year Treasury Note. If that can be pushed down, then mortgage rates would likely follow (falling 10yr rates is exactly how mortgages have been making record lows of late). There are several problems with this plan, though.

At the top of the list is the fact that the Fed cannot simply cap long rates. There is no long-term equivalent to the discount rate they can just set at 1.5%. Long rates are determined by the market.

If the Fed really wanted to drive 30-year rates down to 1.5% it would have to embark on a massive quantitative easing (QE) program of buying Treasuries. Keep in mind the $1.2 trillion the Fed spent buying mortgage securities, plus the hundreds of billions it put in to Treasuries last year. You could maybe say that knocked 80bps off 10yr rates at the most positive. After the Fed stopped buying, the 10yr rate went right back up and eventually made a new high before it rolled over into the current downtrend, which has nothing to do with the Fed buying.

If the Fed were to go back into the market to buy Treasuries and drive long rates down to 1.5% it would send alarm bells ringing across the financial universe. The dollar would get hammered (currency traders hate QE), which wouldn’t help any other global economy, perhaps aside from China (because of the close dollar peg for the yuan). That, in turn, would likely drag on global stock markets, especially for exporters to the US.

A sharp move lower in the long end of the yield curve will also flatten it. A strongly up-sloped yield curve tends to be an economic positive. A flat, or negatively sloped curve is generally the opposite.

And then there are the bond vigilantes. These are the folks who sound the alarms and sell fixed income securities when they perceive a risk of inflation. If the Fed starts a major new QE effort you know the vigilantes will be screaming and yelling about the inflationary implications of monetizing the debt. In order to neutralize the QE the Fed would have to perform massive short-term draining similar to what the ECB has been doing to sterilize its bond purchases. That would tend to put upward pressure on short rates, getting us back to the flattening yield curve.

If the Fed didn’t do that then you get a big spike in the monetary base, which will worry the inflation hawks. The money multiplier isn’t working real well right now, but the fear will be that eventually there will be a massive explosion in M2/M3 type of aggregates as the borrowing/lending contraction loosens up, which would lead to a spike in inflation (already the fear, actually). That could end up leading to big players shorting T-Bonds and T-Notes, which would make it harder for the Fed to drive rates down – kind of like how some big players in the forex market play against central bank intervention.

And to top all of this off, anything the Fed does will tend to create market distortions. It’s happened in the mortgage market now, to the extent that the Fed has had to rearrange its holdings to allow for more supply of certain securities in the market so they can trade and be held in portfolios. If the Fed holds most of the T-Bonds and T-Notes in existence, as it would likely have to do, it will put a squeeze on those who need to hold them in their portfolios (bond funds) and others who need them for other purposes.

That said…

This is just my view on things. Feel free to tell me I’m crazy. Differences in opinion are what make the markets so interesting.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Author Bio

Here’s a scenario I’ve been thinking about the last week or so:

First, take a look at the monthly USD Index chart below. Notice how the market stalled out below the early 2009 peak. Notice also how wide the Bollinger Bands are. This could be the set up for the market to turn down at least into the middle part of the recent broad range.

Now look at the S&P 500 chart. Here too we’ve seen a recent upside failure. One could point to resistance near 1200 from a low put in during the big decent as well as another from back in 2006 during the rally. The Bollingers are flat to narrowing. If the index cannot hold above about 1040, the odds will be very good for some kind of move back toward 900, or lower.

Then there’s the 10 year Treasury Note yield chart. Here too we’re looking at a recent rejection of higher levels and the risk of a breakdown, if it hasn’t already begun. It’s not hard to imagine the rate dropping below 3% once more in the months to come.

Now the question that comes to my mind is what would be negative for the dollar, negative for stocks, and negative for US interest rates? Those three markets have not moved in tandem of late. It’s generally been stocks going one way and the USD Index and Treasury yields going the other thanks to the risk-on/risk-off nature of the market psychology. If yields are falling, it suggests economic weakness and/or expectations of holding or lower rates by the Fed. If stocks are falling it’s generally about weakness in the economy and/or corporate profits.

So what would cause the dollar to drop at the same time as stocks and Treasury rates?

The number one reason that jumps out at me is a shift away from the flight-to-quality mentality which has bid-up the dollar and a return to more normal trading. That is the type of trading which sees the dollar lower on declining Treasury rates. In other words, the risk I’m seeing in the potential price action is an economic downturn in the US.

For this scenario to develop, however, the dollar needs to continue its retracement off recent highs and stocks and yields both need to carry through with their potential bearish set-ups. It might be a while yet before we see confirmation, if it’s to come, and if any other market goes higher rather than lower it changes things all together.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.