Wednesday, May 11, 2011

Why I Won't Support More Bailouts

Finnish 50c euro coin
Timo Soini, the leader of the Finnish True Finns Party had an excellent piece on the topic of European sovereign bailouts. The WSJ chose to edit his article to fit their standards but fortunately the blogosphere caught on to it and published the original version of his article, they even highlighted the places that WSJ edited. Here is a link to the article as it appeared before WSJ got their hands on it.

Tuesday, May 10, 2011

Greece, Drop Dread

Today's rumors and subsequent denials over another bailout for Greece have left a gaping hole in my account and I will be taking some time off to see if this situation cools off. It certainly isn't fun or profitable to trade while politicians are constantly on the wires trying to micromanage expectations of their electorate and/or financial markets. A week's worth of hard work has been flushed down the tubes and I am in no mood to try to anticipate what foolish idea politicians come up with next (only to deny it seconds later) so I am taking some time off.

Friday, May 6, 2011

More Euro Weakness?

The Spiegel story that Greece is considering dumping the euro put more pressure on the euro after a considerable correction yesterday that saw fiber slice through support in the 1.4770 area. Denials by Greece only managed to slow the decline.

Relative strength currency trading can be done either by looking at fundamentals or technicals. Right now the euro has run into some serious fundamental weakness and if politicians aren't able to calm the fears we might see renewed pressure on peripheral debt in the eurozone. In the weeks leading up the the April and May ECB meetings debt problems didn't manage to have a marked impact on the euro's strength.

The declines of today and yesterday suggest this situation could be reversing. The risk here is that if Greece exits, whose next? An exit and a subsequent devaluation would wreak havoc across the eurozone and even beyond. The coming week will tell whether the euro will be able to overcome this patch of weakness. If not, look to be selling the euro, especially on signs of weakness in the sovereign debt market.

Related stories from forexlive (an FX news blog that I follow closely):

How Commodity Weakness Influences Currencies

Following yesterday's ECB press conference where ECB President Trichet failed to mention the magic phrase 'strong vigilance', commodities took a sharp turn down as market participants had overestimated the hawkishness of the ECB head. This was exacerbated by CME's decision to increase margin requirements on silver and to increase the limit size movements of several commodities, including oil which was down over 10% during the session as was silver. The wider CRB index dropped close to 5%. Without digging too deep into the inflation story we can conclude that a sizable portion of the price of several commodities has been purely speculative.

But how will this influence currencies?
Commodities are traded in dollars, a remnant of days past when the US dollar reigned supreme over other currencies. Countries that export commodities such as oil, natural gas, copper, gold etc. receive dollars for their goods. Ten or twenty years ago these dollars might have gone to US Treasuries or other assets denominated is US dollars but with the dollar in a long term bear market commodity producing nations are diversifying away from it. The more dollars they receive for their goods, the more they need to diversify. This diversification has taken the form of buying up euros, Swiss francs, Australian dollars, Chinese yuan, Brazilian real, Canadian dollars, British pounds, Swedish krona etc.

EURUSD in green (lhs) vs OIL in black (rhs), chart from

So as the price of oil goes up, one can reasonably expect an increase in the price of various currencies such as the euro and the Aussie dollar against the US dollar as countries look to sell dollar they received in exchange for their goods. It is important to realize that this is not a one-way street, this correlation works on the way up as well as it does on the way down. In fact the moves on the downside tend to be more violent due to extreme fear and forced liquidation.

So with oil and other commodities down we can expect to see pressure on the euro, the pound and various commodity and carry trade currencies. On the flip side we can expect to see strength on the US dollar and the Japanese yen. This correlation is not 100% so due diligence is still required - ie don't jump into a fiber short just because oil is down.

Tuesday, May 3, 2011

Automating Everything, Twitter Style

I haven't been able to publish a new post for a few days now. This is all down to twitter and their automated suspension mechanism. From the start, I wanted this blog to be syndicated via e-mail, RSS and twitter so people could choose their favorite method of following my posts. However, shortly after creating my twitter account I got suspended (no reason as to why was given to me). I hadn't broken any rules nor could someone say that I was an 'aggressive follower', having only followed three people after creating my account (which is something that twitter suggests you do right after you've set up your profile). It took one complaint and four reminders to get them moving, but considering the experiences of other bloggers around the web (google 'my twitter account got suspended') I would have to consider myself one of the lucky ones. You see, not all account suspension get addressed rendering many accounts useless.

I am left wondering whether the people at twitter really care about this because this doesn't seem to be a particularly fresh issue, it's been going on for a while. I think the coders who work for twitter should take a look at this issue and solve it once and for all. It can't be that difficult. I made sure to mention this in my mostly one-sided e-mail exchange with twitter. I've done my part of notifying them, now it's up to them to fix it.

With my twitter suspension lifted I will resume posting shortly. You can follow my tweets here.

Wednesday, April 27, 2011

Basics of Trading Currencies Based On Relative Strength, Part I

Currency trading has grown exponentially over the last decade. That has given birth to a number of websites, blogs and twitter feeds that are all aimed at educating traders. Whether it's fundamental or technical trading that's being taught, more often than not the authors of trading strategies fail to mention trading based on relative currency strength. The following is an overview of relative strength trading and what you can expect to find from this blog.

Relative Currency Strength 
Trading currencies based on relative strength can be summarized as finding the strongest and the weakest currencies and playing them against each other for profit. It is a relatively straight-forward strategy that doesn't require drawing fibonacci extenstions, trendlines, support and resistance areas or the use of technical indicators. Although one doesn't have to use the above mentioned tools for analysis they should not be cast aside as they can offer valuable information about potential entry and exit points. I will be writing about combining conventional analysis methods with relative strength analysis in the future. For now, let's go back to the basics.

For a better understanding of what relative currency strength really is, let's look at an example. Imagine the following:

EURUSD is rising
GBPUSD is falling
GBPJPY is falling
EURJPY is rising

Four pairs isn't exactly enough to determine the overall strength of the currencies featured in the above pairs, but for brevity and educational purposes, this will have to do for now. With this very limited info we can determine that:

EUR is strong, because it is rising against USD and JPY
GBP is weak, because it is falling against USD and JPY

We can't say much about the dollar or the yen because they are falling against the euro but rising against the pound. It could be that dollar is standing put and only the euro and the pound are moving, but it could also be the case that the dollar is rising overall, but the euro is rising faster thus making EURUSD rise as well. The only thing we can be sure of is that the euro is the strongest amongst the four currencies and the pound is the weakest.

As far as we know, the smartest thing to do is buy EURGBP.

Pairing the strongest against the weakest is the essence of relative strength trading. It is what banks and hedge funds have been doing for years. Of course you won't read about it on most websites, because most traders are drawn to fx trading in the false hopes of making a million dollars overnight without having to do anything and so the websites cater to those false hopes. The other reason is perhaps that the brokers don't really care if you make money or not.

Why Trade Like This?
Trading currencies based on their relative strength is nothing new, however it is very different from conventional technical trading. When trading EURUSD a trader usually identifies support and resistance areas, supply and demand areas and probably has a few chart overlays and/or indicators for additional help. The trader looks to buy when the pair is strong, but since there are two currencies involved one can never be sure about the origin of the strength or weakness of the pair.

If EURUSD is rising, it could be because
a) EUR is rising, USD is not moving
b) EUR is rising, USD is falling
c) EUR is rising, USD is rising (but slower than EUR)
d) EUR is not moving, USD is falling
e) EUR is falling, USD is falling (but faster than EUR)

So we have FIVE possible explanations for the rise in EURUSD. By looking at one pair in isolation a trader is missing out on crucial information that is especially important at or near turning points. A trader who is monitoring all major crosses is more likely to get out before a reversal than a trader who has his eyes on one or two pairs only.

Pairing the strongest against the weakest is also important when it comes to making money. Specializing on one or two pairs is what most authors writing on the topic usually suggest, but that is of little help on days when your favorite pair is ranging due to lack of market interest, slowly draining your account of accumulated profits when you could be trading a pair that is showing signs of life. Monitoring all the major currencies will not guarantee you will make money, far from it, but it shows you the way in terms of what pairs to consider in the first place.

Future Plans With This Blog
In the coming weeks I will be writing about the basics of trading currencies based on relative strength, featuring example trading opportunities along the way. I will also write about forex in general. This is still a new blog and I have not thought everything through in terms of long term plans, but stick around and I'm sure you'll have a great time. Use one of the 'follow' options to get new posts delivered to your feed reader or inbox in the upper right corner of the blog.