You have heard that currency trading is a quick way to financial freedom. You see stories about the billions ,no trillions,of dollars traded each day and think you can do this,no problem. Maybe you can but first read about the past three weeks in the forex market.
January 2008 was a interesting month for currency traders. The Housing market was teetering on collapse. Lending institutions were taking huge writedowns for bad real estate loans. Brokerage firms and banks had recently fired their CEOs because of excessive losses in their Mortgage Trading units. The US equity markets were falling. Measures of consumer confidence were at levels not seen since the early nineties. And to top it off the initial report for US employment released in January for December of 2007 showed that the US economy had added only 18,000 jobs, a miniscule number.
Recession was on virtually every economist and Forex traders lips. To combat this bad news the US Federal Reserve, which had already cut short term interest rates one hundred basis points in the past four months, cut Fed fund rates another 125 basis points in January alone. This included a mid meeting cut of 75 basis points on January 22, the first time that serious an action had been taken since September 17, 2001 which was necessitated by the concern of possible financial fallout from the September 11 attacks.
Also, consider that the multiplier effects on the economy of poor housing data is truly compelling. It lends itself to purchasing fewer big ticket items like furniture, washing machines etc. and less services like landscaping and painting etc. Reduced consumer confidence means less consumer spending thereby not putting money to work in the economy. A consumer nervous about his or her finances spends less money. And of course fewer jobs created needs little or no explanation.
It seemed as if a perfect storm had brewed for the US economy. So what is a seasoned currency trader going to do given all this fundamental information? He or she is going to sell US dollars right? After all, the Fed had reduced interest rates 225 basis points in five moths. This made the dollar less attractive on a yield basis. Furthermore, fixed income markets through the Fed Funds futures contract had priced in an additional 100 basis points of rate cuts out to December of 2008. As every good forex trader knows, currency forward dealers will take this into account when rolling your positions.
Plus, given all the poor economic data,selling the dollar seemed like a sure thing. Well as the man said, other than death and taxes, there are no sure things. It is February 19 as I write this . On January 29, the night before the last rate cut by the Fed, the Euro closed at 1.4775 against the US dollar and the Japanese Yen closed at 107.10. As I write this three weeks later,the Euro is trading 1.4740 and the Yen is at 107.50 . Virtually unchanged from three weeks ago.
All this in spite of worse economic news being released in February. So What happened ? To start, currency markets might be rewarding countries that take swift action to cure what ails them instead of punishing them. For example,in addition to the monetary easing, the US has added a 150 billion dollar fiscal stimulus package. So that is a factor.
Secondly,both the Euro and the Japanese Yen have already gained almost eleven percent against the US dollar since mid summer of 2007. Also there are signs from recent economic data in Europe that growth may be slowing and that rate cuts might be in the offing. The UK has already eased. So maybe the move is over? Looking at the long term technical charts it is not over yet. But how much money are you willing to risk in case you are wrong?
This proves that currency trading is not just about buy or sell and take your profits and go home. It involves careful economic and technical analysis,risk control, discipline and most of all your time. Forex trading has its rewards but they do not come easily.
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