Foreign Exchange

This short introduction explains the basics of trading Forex online, a brief explanation of the markets and the major benefits of trading Forex online. There are also two scenarios describing the implications of trading in a bear as well as a bull market to better acquaint you with some of the risks and opportunities of the largest and most liquid market in the world.


As an additional aid for those who are new to Forex, there is also a glossary at the bottom of this text which explains some of the terms used in connection with currency trading.

THEMES TO WATCH – UPCOMING SESSION

.US Feb. Leading Indicators (1400)
.US Mar. Philadelphia Fed (1400)
.US Fed's Tarullo to Testify on Bank Regulation (1430)
.Switzerland SNB's Jordan to Speak (1600)
.US Fed's Braunstein to Testify on Consumer Credit (1830)
New Zealand Feb. Credit Card Spending (0200)

The Fed went straight for Operation Helicopter Drop yesterday with its moves toward outright money printing via debt monetization and a massive expansion of mortgage buying. Specifically, the Fed said that it would buy $300 Billion worth of long-term treasuries (many say from China, which is looking to unload its holdings) and would increase its purchases of mortgage debt to the tune of $750 billion. We were obviously in the strong consensus that the Fed was unlikely to move straight to debt monetization at this time as the magnitude of yesterday's move was directly in proportion with the magnitude of the surprise at the Fed's renewed aggressiveness.

The announcement from the Fed is easily one of the most momentous Fed moves in recent years in terms of importance, similar to the first time the Fed cut rates back in September of 2007 and when it first discussed the idea of debt monetization in December of last year. The move across markets shows that this is a dramatic renewal of the competitive devaluation theme - a race to the bottom by many of the world's central banks in devaluing their currencies. Gold had perhaps its most dramatic day ever on this theme, as longs were apparently squeezed mercilessly before the Fed statement, only to see the Fed's moves sparking a whiplash-inducing new rally. Gold outperformance is likely to continue across the board.

One central bank most definitely at odds with the latest trend in competitive devaluation is the ECB, which is now more at odds than ever with the kinds of moves we have seen recently from the BoE, SNB and now the Fed. The brutal EUR strength will be no help to the EuroZone's economy and it will be interesting to see how the ECB reacts to the challenges posed by the pressure of competitive devaluation. The EU weaklings are all undoubtedly hopping mad at developments here.

For now, looking at EURUSD, the next obvious target for the pair is the 200-day moving average up in the 1.3900 area as our lower target guesses on this move higher were blown away by the Fed's move. While the Fed's moves are very obviously USD bearish for now, we remain very curious how the USD will perform if equities turn tail, as correlations still suggest that the USD moves with risk appetite. A look over at the S&P500 shows the average trading up against the key 800 level and the 55-day moving average slightly above there. This area and the upcoming G20 meeting are the next key pivot points. AUD is outperforming at the moment, due to widespread risk willingness and the sharp rise in metals and other commodity prices.

USDJPY has fallen sharply as one would expect with the dramatic response at the long end of the yield curve (the US 10-year note yields are now more than 50 bps lower from recent highs and are now below 2.50%, a massive drop). We suspect the JPY weakness will pivot back toward strength with renewed risk aversion some time in the near future, but in that event, the interesting JPY trades may be in the non-USD crosses, especially EURJPY and possibly even CHFJPY. Stay tuned.

Chart: GBPUSD
While, the BoE was the first to launch its debt monetization, the Fed's move has seen the USD quickly losing ground versus the pound as the race to the bottom in devaluing currencies continues. GBPUSD is now breaking up through a key descending trendline after having crossed above the 55-day moving average this morning and may be en route to a test of 1.5000 soon.

Dealing Spread, but No Commissions

When trading foreign exchange, you are quoted a dealing spread offering you a buying and a selling level for your trade. Once you accept the offered price and receive confirmation from our dealers, the trade is done. There is no need to call an exchange floor. There are no other time-consuming delays. This is possible due to live streaming prices, which are also a great advantage in times of fast-moving markets: You can see where the market is trading and you know whether your orders are filled or not.

The dealing spread is typically 3-5 points in normal market conditions. This means that you can sell US dollars against the euro at 1.7780 and buy at 1.7785. There are no further costs, commissions or exchange fees.

This ensures that you can get in and out of your trades at very low slippage and many traders are therefore active intra-day traders, given that a typical day in USDEUR presents price swings of 150-200 points.

Base Currency and Variable Currency

When you trade, you will always trade a combination of two currencies. For example, you will buy US dollars and sell euro. Or buy euro and sell Japanese yen, or any other combination of dozens of widely traded currencies. But there is always a long (bought) and a short (sold) side to a trade, which means that you are speculating on the prospect of one of the currencies strengthening in relation to the other.

The trade currency is normally, but not always, the currency with the highest value. When trading US dollars against Singapore dollars, the normal way to trade is buying or selling a fixed amount of US dollars, i.e. USD 1,000,000. When closing the position, the opposite trade is done, again USD 1,000,000. The profit or loss will be apparent in the change of the amount of SGD credited and debited for the two transactions. In other words, your profit or loss will be denominated in SGD, which is known as the price currency. As part of our service, Saxo Bank will automatically exchange your profits and losses into your base currency if you require this.

Trading History

nitially, the value of goods was expressed in terms of other goods, i.e. an economy based on barter between individual market participants. The obvious limitations of such a system encouraged establishing more generally accepted means of exchange at a fairly early stage in history, to set a common benchmark of value. In different economies, everything from teeth to feathers to pretty stones has served this purpose, but soon metals, in particular gold and silver, established themselves as an accepted means of payment as well as a reliable storage of value.

Originally, coins were simply minted from the preferred metal, but in stable political regimes the introduction of a paper form of governmental IOUs (I owe you) gained acceptance during the Middle Ages. Such IOUs, often introduced more successfully through force than persuasion were the basis of modern currencies.

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